Trading & Investment FAQs
FAQs - Equities
What is investment?
Investment is putting your money in assets which provide returns over a period of time.
Why would I need professional help in investing?
There are many financial products available in the market. Knowing each product in detail is next to impossible for investors who also have a full time job or business. Professionals spend all their time in studying these products in details and understand precisely the suitability of the products for your requirement. Hence they can suggest better.
What are the different types of investments available in the market?
Market offers a wide range of investment avenues. They are equities or stocks, mutual funds, ULIP, commodities, precious metals, Government schemes, corporate debt, and bank schemes.
What are different investment approaches?
There are mainly three investment approaches. Aggressive or high risk & high return, Balanced or moderate risk & moderate return, and conservative or low risk & low returns. Aggressive approach involves investing a major part of the portfolio in equities and equity oriented mutual fund. Balanced approach involves investing in equities and debt. Conservative approach involves investing major part of the portfolio in debt.
What is aggressive or high risk & high gain approach?
Aggressive approach or high risk & high gain approach invests in assets which are risky. Risk is a measure of fluctuation in returns. The aggressive investing strategy involves investing in equities and equity oriented mutual funds.
What are the important points to keep in mind if I go for aggressive strategy?
Since you are investing in equities and equity oriented mutual funds, you have to keep the following points in mind.
1. Equities in the long run beat all other investments. Hence you should be ready to be invested in for longer period of time. In the short term equities will fluctuate in returns.
2. Understand that unless you sell off your investment, this is just the notional loss or gains.
What are the important points to keep in mind if I go for balanced strategy?
Balanced strategy is good for moderate risk takers. This strategy invests in equities and debt market. The debt market is relatively less risky. The equity investment induces risk to your portfolio. The prospect of gain and loss is lower than that of aggressive approach.
What are the important points to keep in mind if I go for conservative strategy?
Conservative strategy invests major part of the fund in debt. Risk is low in such investments but the returns are low too. The main goal of investors following conservative strategy is to protect the capital as well as to get average return.
What is risk?
Risk is essentially variability of return. For example, if Airtel stock gives 2% returns in a year and 20% in another year while ITC gives 10% in a year and 15% in another year, Airtel is riskier than ITC.
What is meant when people say stock market is risky?
As explained, stock market is made up of companies which face ups and downs in their business. As businesses fluctuate, so do the returns from the stocks. Hence stock market is called risky. On the other hand, fixed deposit gives almost same returns every year. Hence this is called less risky. Government bonds are called risk free because Governments do not default on their obligation (well, they can always print piece of papers called money and repay it).
How to choose an investment approach.
Selecting investing approach depends on your risk profile, time horizon, and expected returns. If you are in your 20s or 30s and have longer time horizon, you should invest in equities. However, if you are in 40s, you may like to invest in part equities and debt. For people who are in their 50s and 60s, conservative approach should work. These are generic rules and may not be applicable to everyone. The biggest factor that impacts your approach is your appetite for risk.
FAQs - Mutual Funds
What is mutual fund?
Mutual fund is a fund that pools money from a set of customers and invests in securities (equities and debt) based on the objective of the investment.
How does it differ from investing in stocks?
Investing in stock is risky as your fortune depends on a single stock. On the other hand, mutual funds invest in a set of stocks and hence diversify in many stocks and debt. Diversifying in different investments reduces the risks because all stocks may not move in the same direction.
What is NAV (Net Asset Value?)
NAV is market value of one unit of securities held by the fund in its portfolio. This is calculated daily.
What are growth and dividend options in mutual funds?
Mutual funds with growth options provide capital appreciation over a period of time. Mutual funds with dividend option give dividends from time to time. Usually, the NAV decreases when dividends are announced. Hence you see the NAV of dividend variant of the same fund has much lower value than the growth variant.
What are the different types of mutual fund?
Mutual funds are mainly of three types (based on proportion of stocks and debt investment); Aggressive fund, balanced fund, and conservative fund. Aggressive funds invest major portion of fund in equities. Balanced funds invest part in equity and part in debt. Conservative funds invest in debt, mainly in Government securities, high grade corporate debt, and bank schemes.
How much return can I expect by investing in mutual funds?
It depends on the nature of the fund. An aggressive mutual fund may give you returns of about 15% or more while balanced fund may be able to provide 10% and more. Conservative funds provide a return of 7% and more. However, aggressive fund is the riskiest of them all. The fluctuation in returns of aggressive fund is very wide. You may get 25% in a year while it can give -20% in some year. It all goes with high risk high reward concept.
What is money market fund?
Money market funds invest in highly liquid securities. The goal of these funds is to preserve the capital for short term. Investors usually go for money market fund for parking their money in short term.
What is Index fund?
Index fund invests in an index such as sensex, nifty, banking index etc. The NAV of such funds fall and rise with the fall and rise of the index which they track. The advantage of these funds is low management fee.
Why should I choose to invest in a mutual fund?
Mutual funds are managed by fund managers with expertise in market and investment. For a retail investor, studying market, choosing right set of stocks, and changing the set as per market condition is very difficult. Most of the investors neither have time nor expertise to do this. Mutual funds can fill the void by
- Letting you invest in a set of stocks well researched by expert fund managers
- diversifying the risk by investing in a bundle of stocks
- Since fund houses have bargaining power, they have better information about the happenings in the company. Retail investors, many times, do not get this information.
What is diversification of risks and how do mutual funds do it?
Diversification means spreading your investment in a set of securities so that fluctuation in one or few securities does not impact your investment adversely. Mutual funds invest in a set of well researched securities which helps investors minimize the impact of fluctuation in one or few securities on their investment.
Does diversification mean that mutual funds are risk free investment?
No. Diversification means the risk is diversified. The idea is simple. If I invest in a mutual fund which consists of 20 well researched companies, my risk is diversified. Hence if 10 companies’ values go down, there are other 10 companies which may go up and compensate for losses. This means your investment is relatively safer than when you invest in individual securities.
If mutual funds diversify the risk, why some funds give negative returns in some years?
We have to understand the risk here. There are two types of risk. One is systematic or market risk. Market risk is unavoidable. It impacts all the stock irrespective of the business fundamentals of the company. Some of the market risk can be 2008 market crash, 2000 dot com crash, or even 2010-2011 inflation and high rate (in a smaller scale).
The other risk is unsystematic risk or company specific risk. This is specific to a stock and the underlying business. This risk can be eliminated by diversifying into various securities.
Funds that have given negative returns or will give negative returns might suffer from systematic or market risk.
What are the risks involved in mutual funds?
There are two risks involved. One is market or systematic risk. When the whole market crashes, nobody can remain untouched. The other risk is company specific risk. This is largely eliminated by fund managers by investing in a set of well researched securities.
What are open-ended and closed-ended mutual funds?
The size of the investment is open in open ended fund. This means investors can enter and exit any time. In a closed ended fund, the size of investment is fixed.
How can I invest in mutual funds?
You have the following options:
- Go directly to the fund office, fill up the form, and invest.
- Consult a fund advisor (also known as IFA) and buy mutual funds through them. They are empaneled and authorized advisors from mutual fund houses. We are one of them and hence you can contact us too.
- Open a demat account with any of the brokers and start investing. We are sub-broker for Angel Broking and hence you can contact us too.
How should I evaluate a mutual fund?
Look at the past performance of the fund, especially the CAGR for last 5-10 years. Understand the fee structure as this will impact your returns. Compare with funds which have the similar objective. For more details, go to our analysis on how to evaluate a mutual fund.
The most important part is finding CAGR for 5-10 years. If you can invest based on this, you can avoid major mistakes.
What is SIP?
SIP or systematic investment plan is an investment plan where investors invest a certain amount of money at every interval. For example, you may invest Rs 5,000 every week in a certain mutual fund. This plan averages the price of the fund and hence your overall cost of acquisition is favourable. The advantage of this plan is that it makes investment much less risky.
You can talk to your broker and authorize to invest a certain amount at every interval. This is very easy to do.
What is net asset value (NAV) and how is it calculated?
NAV is value of the mutual fund unit at market price. This is calculated based on the price of individual securities and proportion of it in the fund.