Where do the Mutual Funds Invest? How to check it

The mutual funds are required to disclose full portfolios of all of their schemes on half-yearly basis which are published in the newspapers. Some mutual funds send the portfolios to their unitholders.

The scheme portfolio shows investment made in each security i.e. equity, debentures, money market instruments, government securities, etc. and their quantity, market value and % to NAV. These portfolio statements also required to disclose illiquid securities in the portfolio, investment made in rated and unrated debt securities, non-performing assets (NPAs), etc.

Some of the mutual funds send newsletters to the unitholders on quarterly basis which also contain portfolios of the schemes.

Where can an investor look out for information on mutual funds?

Almost all the mutual funds have their own web sites. Investors can also access the NAVs, half-yearly results and portfolios of all mutual funds at the web site of Association of mutual funds in India (AMFI) www.amfiindia.com. AMFI has also published useful literature for the investors.

Investors can log on to the web site of SEBI www.sebi.gov.in and go to "Mutual Funds" section for information on SEBI regulations and guidelines, data on mutual funds, draft offer documents filed by mutual funds, addresses of mutual funds, etc. Also, in the annual reports of SEBI available on the web site, a lot of information on mutual funds is given.

There are a number of other web sites which give a lot of information of various schemes of mutual funds including yields over a period of time. Many newspapers also publish useful information on mutual funds on daily and weekly basis. Investors may approach their agents and distributors to guide them in this regard.

What is Technical Analysis? How is it different from Fundamental Analysis?

Technical Analysis is a method of evaluating future security prices and market directions based on statistical analysis of variables such as trading volume, price changes, etc., to identify patterns.

A stock market term - The attempt to look for numerical trends in a random function. The stock market used to be filled with technical analysts deciding what to buy and sell, until it was decided that their success rate is no better than chance. Now technical stock analysis is virtually non-existent. The Readers Submitted Examples page has more on this topic.

Research and examination of the market and securities as it relates to their supply and demand in the marketplace. The technician uses charts and computer programs to identify and project price trends. The analysis includes studying price movements and trading volumes to determine patterns such as Head and Shoulder Formations and W Formations. Other indicators include support and resistance levels, and moving averages. In contrast to fundamental analysis, technical analysis does not consider a corporation's financial data.

Technical analysts study trading histories to identify price trends in particular stocks, mutual funds, commodities, or options in specific market sectors or in the overall financial markets. They use their findings to predict probable, often short-term, trading patterns in the investments that they study. The speed (and advocates would say the accuracy) with which the analysts do their work depends on the development of increasingly sophisticated computer programs.

Technical Analysis supposes markets have memory.If so, past prices, or the current price momentum, can give an idea of the future price evolution. Technical Analysis is a tool to detect if a trend (and thus the investor's behavior) will persist or break. It gives some results but can be deceptive as it relies mostly on graphic signals that are often intertwined, unclear or belated. It might become a source of representiveness heuristic (spotting patterns where there are none)

Technical analysis has become increasingly popular over the past several years, as more and more people believe that the historical performance of a stock is a strong indication of future performance. The use of past performance should come as no surprise. People using fundamental analysis have always looked at the past performance of companies by comparing fiscal data from previous quarters and years to determine future growth. The difference lies in the technical analyst's belief that securities move according to very predictable trends and patterns. These trends continue until something happens to change the trend, and until this change occurs, price levels are predictable.

There are many instances of investors successfully trading a security using only their knowledge of the security's chart, without even understanding what the company does. However, although technical analysis is a terrific tool, most agree it is much more effective when used in combination with fundamental analysis.

Fundamental Analysis

Fundamental analysis looks at a share’s market price in light of the company’s underlying business proposition and financial situation. It involves making both quantitative and qualitative judgements about a company. Fundamental analysis can be contrasted with 'technical analysis’, which seeks to make judgements about the performance of a share based solely on its historic price behavior and without reference to the underlying business, the sector it's in, or the economy as a whole. This is done by tracking and charting the companies stock price, volume of shares traded day to day, both on the company itself and also on its competitors. In this way investors hope to build up a picture of future price movements.

You’re Trading Cost – Break up of brokerage you pay to your broker

There is no denying the fact that earning from stock market is an art, not just speculation, forecasting and analysis. Whether you are a retail investor or a big fund, one question you should ask yourself is “what is your trading cost”?.  How much part of your earning are you passing on to your broker in the form of commissions because it really affects your “profit margin”.

If you are already familiar with stock market, there is a small homework for you. Check out the contract note you have received from your stock broker. Or else, if you plan to enter into stock markets and seeking for a broker, exercise your mind a little to know the net brokerage being charged by your broker and study the various commission components. The reason is simple; the amount you pay to your broker may make difference your winning or loosing in the trade. Confused??…It is a common mistake that novice traders execute trade assuming they are earning atleast meagre profit margin, but if all the components including brokerage, taxes, and stamp duty are accounted for, the profit margin comes out to be negative. Isn’t it strange? Yes, so we are here to understand the computation of the net trading amount you pay to your broker.

RATES OF BROKERAGE

There are many brokers charging different rates of brokerage. For example, ICICI Direct charging @.75% and HDFC charging @ .5% of trading amount. However the net trading cost is computed as below:

Trading cost = Brokerage + STT + Stamp duty + other charges

So in addition to brokerage, there are below costs accounted in net amount:

1.     STT – Sale transaction tax is imposed on the sale/purchase of securities by retail/institutional investors and is charged on total turnover (cost of each share * no. of shares). For delivery of shares it is charged at .125%. For intraday selling of shares, it is charged @.025%. For buying, there is no tax for intra day trades. Currently government is under consideration to remove/reduce STT because since it was introduced in 2004, the cost of transaction of trades has drastically increased. This leads to loss in business as Indian markets are becoming less competitive compared to other emerging markets.

2.     Stamp duty: Stamp duty is also charged on total turnover. For delivery of shares it is charged at .01% and for intraday it is charged at .002%.

3.     Other charges: it includes below component:

a.   Transaction charges: For trading of shares at NSE, it is charged @ 0.0035% while for BSE, it is charged @ 0.0034%.

b.   SEBI turnover charges: For equity transaction, this remains NIL but for derivative transactions, it is charged @ 0.0002% of total turnover.

c.   Service Tax: Service tax is charged on all the components

So net brokerage will be calculated as below:

Net brokerage = Brokerage + STT + Stamp duty + Other charges

So next time you trade, try to find out how much earning have you shared with your broker.

What is NET ASSET VALUE?

The Term Net Asset Value (NAV) is used by investment companies to measure net assets. It is calculated by subtracting liabilities from the value of a fund's securities and other items of value and dividing this by the number of outstanding shares. Net asset value is popularly used in newspaper mutual fund tables to designate the price per share for the fund.

The value of a collective investment fund based on the market price of securities held in its portfolio. Units in open ended funds are valued using this measure. Closed ended investment trusts have a net asset value but have a separate market value. NAV per share is calculated by dividing this figure by the number of ordinary shares. Investments trusts can trade at net asset value or their price can be at a premium or discount to NAV.

Value or purchase price of a share of stock in a mutual fund. NAV is calculated each day by taking the closing market value of all securities owned plus all other assets such as cash, subtracting all liabilities, then dividing the result (total net assets) by the total number of shares outstanding.

Calculating NAVs - Calculating mutual fund net asset values is easy. Simply take the current market value of the fund's net assets (securities held by the fund minus any liabilities) and divide by the number of shares outstanding. So if a fund had net assets of Rs.50 lakh and there are one lakh shares of the fund, then the price per share (or NAV) is Rs.50.00.

What is Forex Trading?

Wikipedia defines Forex Trading as “The foreign exchange market (currency, forex, or FX) trades currencies. It lets banks and other institutions easily buy and sell currencies.”

With the current economic scenario, increasingly more folks see themselves prepared wherever they have to help make additional funds to carry on living to their standards. Additionally, there are individuals who learn how to make very good utilization of present day condition and help to make a continual income. It doesn’t matter the truth, you ought to learn how to trade the Currency trading, considering that this turned out to be to be the most effective way to gain a little extra money, and get a good profit while doing so.

The Forex markets is known for a three trillion US dollars trade every single day, therefore being the biggest tradable market on the globe. Simply because, or even better mentioned thanks, to the belief that most trades are usually speculative, any kind of real movement of foreign exchange is small – this really is these people key to getting a huge profit having a small investment.

Forex market doesn’t trade on the central exchange, the interbank marketplace staying the actual place exactly where deals happen, therefore two entities may trade with out going trough an exchange. In Simple terms, trading in currencies indicates buying one foreign currency while at the same time selling another.

If you would like to learn to trade the forex and try to get a profit, you have to learn how to get the best trades possible, the quickest possible way. For this reason it is recommended to gather all of the knowledge you are able to. There are many available resources on the internet that you need to use and there are also tools which will help you trade 24 hours a day, five days a week – like Forex robots.

What is Assured Return Scheme?

In Mutual Funds, Assured Return Schemes are those schemes that assure a specific return to the unitholders irrespective of performance of the scheme.

A scheme cannot promise returns unless such returns are fully guaranteed by the sponsor or AMC and this is required to be disclosed in the offer document.

Investors should carefully read the offer document whether return is assured for the entire period of the scheme or only for a certain period. Some schemes assure returns one year at a time and they review and change it at the beginning of the next year.

WHAT IS A STOCK BROKER?

Are you wondering what a stock broker is and what they do? Here’s your answer.

A stock broker is a person or a firm that trades on its clients behalf, you tell them what you want to invest in and they will issue the buy or sell order. Some stock brokers also give out financial advice that you a charged for.

It wasn’t too long ago and investing was very expensive because you had to go through a full service broker which would give you advice on what to do and would charge you a hefty fee for it. Now there are a plethora of discount stock brokers such as Scottrade http://www.scottrade.com now you can trade stocks for a low fee such as $7 total.

I can think of three different types of stock brokers.

1. Full Service Broker - A full-service broker can provide a bunch of services such as investment research advice, tax planning and retirement planning.

2. Discount Broker – A discount broker let’s you buy and sell stocks at a low rate but doesn’t provide any investment advice.

3. Direct-Access Broker- A direct access broker lets you trade directly with the electronic communication networks (ECN’s) so you can trade faster. Active traders such as day traders tend to use Direct Access Brokers

So as you can tell there a few options for a stock broker and you really need to pick which one suits you needs.

How does one trade in shares ?

Every transaction in the stock exchange is carried out through licensed members called brokers.

To trade in shares, you have to approach a broker However, since most stock exchange brokers deal in very high volumes, they generally do not entertain small investors. These brokers have a network of sub-brokers who provide them with orders.

The general investors should identify a sub-broker for regular trading in shares and palce his order for purchase and sale through the sub-broker. The sub/broker will transmit the order to his broker who will then execute it.

What are active Shares?

Shares in which there are frequent and day-to-day dealings, as distinguished from partly active shares in which dealings are not so frequent. Most shares of leading companies would be active, particularly those which are sensitive to economic and political events and are, therefore, subject to sudden price movements. Some market analysts would define active shares as those which are bought and sold at least three times a week. Easy to buy or sell.

What is a Share ?

In finance a share is a unit of account for various financial instruments including stocks, mutual funds, limited partnerships, and REIT's. In British English, the usage of the word share alone to refer solely to stocks is so common that it almost replaces the word stock itself.

In simple Words, a share or stock is a document issued by a company, which entitles its holder to be one of the owners of the company. A share is issued by a company or can be purchased from the stock market.

By owning a share you can earn a portion and selling shares you get capital gain. So, your return is the dividend plus the capital gain. However, you also run a risk of making a capital loss if you have sold the share at a price below your buying price.

A company's stock price reflects what investors think about the stock, not necessarily what the company is "worth." For example, companies that are growing quickly often trade at a higher price than the company might currently be "worth." Stock prices are also affected by all forms of company and market news. Publicly traded companies are required to report quarterly on their financial status and earnings. Market forces and general investor opinions can also affect share price.

Quick Facts on Stocks and Shares

• Owning a stock or a share means you are a partial owner of the company, and you get voting rights in certain company issues
• Over the long run, stocks have historically averaged about 10% annual returns However, stocks offer no guarantee of any returns and can lose value, even in the long run
• Investments in stocks can generate returns through dividends, even if the price

What is a Mutual Fund?

Mutual Fund is a investment company that pools money from shareholders and invests in a variety of securities, such as stocks, bonds and money market instruments. Most open-end mutual funds stand ready to buy back (redeem) its shares at their current net asset value, which depends on the total market value of the fund's investment portfolio at the time of redemption. Most open-end mutual funds continuously offer new shares to investors.

Also known as an open-end investment company, to differentiate it from a closed-end investment company. Mutual funds invest pooled cash of many investors to meet the fund's stated investment objective. Mutual funds stand ready to sell and redeem their shares at any time at the fund's current net asset value: total fund assets divided by shares outstanding.

In Simple Words, Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document.

Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with quantum of money invested by them. Investors of mutual funds are known as unitholders.

The profits or losses are shared by the investors in proportion to their investments. The mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time. In India , A mutual fund is required to be registered with Securities and Exchange Board of India (SEBI) which regulates securities markets before it can collect funds from the public.

In Short, a mutual fund is a common pool of money in to which investors with common investment objective place their contributions that are to be invested in accordance with the stated investment objective of the scheme. The investment manager would invest the money collected from the investor in to assets that are defined/ permitted by the stated objective of the scheme. For example, an equity fund would invest equity and equity related instruments and a debt fund would invest in bonds, debentures, gilts etc. Mutual Fund is a suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.

What is a Bull Market?

There are two classic market types used to characterize the general direction of the market. Bull markets are when the market is generally rising, typically the result of a strong economy. A bull market is typified by generally rising stock prices, high economic growth, and strong investor confidence in the economy. Bear markets are the opposite. A bear market is typified by falling stock prices, bad economic news, and low investor confidence in the economy.

A bull market is a financial market where prices of instruments (e.g., stocks) are, on average, trending higher. The bull market tends to be associated with rising investor confidence and expectations of further capital gains.

A market in which prices are rising. A market participant who believes prices will move higher is called a "bull". A news item is considered bullish if it is expected to result in higher prices.An advancing trend in stock prices that usually occurs for a time period of months or years. Bull markets are generally characterized by high trading volume.

Simply put, bull markets are movements in the stock market in which prices are rising and the consensus is that prices will continue moving upward. During this time, economic production is high, jobs are plentiful and inflation is low. Bear markets are the opposite--stock prices are falling, and the view is that they will continue falling. The economy will slow down, coupled with a rise in unemployment and inflation.

A key to successful investing during a bull market is to take advantage of the rising prices. For most, this means buying securities early, watching them rise in value and then selling them when they reach a high. However, as simple as it sounds, this practice involves timing the market. Since no one knows exactly when the market will begin its climb or reach its peak, virtually no one can time the market perfectly. Investors often attempt to buy securities as they demonstrate a strong and steady rise and sell them as the market begins a strong move downward.

Portfolios with larger percentages of stocks can work well when the market is moving upward. Investors who believe in watching the market will buy and sell accordingly to change their portfolios.Speculators and risk-takers can fare relatively well in bull markets. They believe they can make profits from rising prices, so they buy stocks, options, futures and currencies they believe will gain value. Growth is what most bull investors seek.

What is a Bear Market?

The opposite of a bull market is a bear market when prices are falling in a financial market for a prolonged period of time. A bear market tends to be accompanied by widespread pessimism.A bear market is slang for when stock prices have decreased for an extended period of time.  If an investor is "bearish" they are referred to as a bear because they believe a particular company, industry, sector, or market in general is going to go down.

What is a Demat Account and How to open a Demat Account in India?

Demat Account Definition

Demat refers to a dematerialised account.

Though the company is under obligation to offer the securities in both physical and demat mode, you have the choice to receive the securities in either mode.

If you wish to have securities in demat mode, you need to indicate the name of the depository and also of the depository participant with whom you have depository account in your application.

It is, however desirable that you hold securities in demat form as physical securities carry the risk of being fake, forged or stolen.

Just as you have to open an account with a bank if you want to save your money, make cheque payments etc, Nowadays, you need to open a demat account if you want to buy or sell stocks.

HOW TO OPEN A DEMAT ACCOUNT?

Opening an individual Demat account is a two-step process: You approach a DP and fill up the Demat account-opening booklet. The Web sites of the NSDL and the CDSL list the approved DPs. You will then receive an account number and a DP ID number for the account. Quote both the numbers in all future correspondence with your DPs.

So it is just like a bank account where actual money is replaced by shares. You have to approach the DPs (remember, they are like bank branches), to open your demat account. Let's say your portfolio of shares looks like this: 150 of Infosys, 50 of Wipro, 200 of HLL and 100 of ACC. All these will show in your demat account. So you don't have to possess any physical certificates showing that you own these shares. They are all held electronically in your account. As you buy and sell the shares, they are adjusted in your account. Just like a bank passbook or statement, the DP will provide you with periodic statements of holdings and transactions.

Is a demat account a must? Nowadays, practically all trades have to be settled in dematerialised form. Although the market regulator, the Securities and Exchange Board of India (SEBI), has allowed trades of upto 500 shares to be settled in physical form, nobody wants physical shares any more.

So a demat account is a must for trading and investing.

Most banks are also DP participants, as are many brokers.

You can choose your very own DP.

To get a list, visit the NSDL and CDSL websites and see who the registered DPs are.

A broker is separate from a DP. A broker is a member of the stock exchange, who buys and sells shares on his behalf and on behalf of his clients.

A DP will just give you an account to hold those shares.

You do not have to take the same DP that your broker takes. You can choose your own.

Banks are also advantageous because of the number of branches they have. Some banks give the option of opening a Demat account in any branch, while others restrict themselves to a selected set of branches.

Some private banks also provide online access to the Demat account. So, you can check on your holdings, transactions and status of requests through the net banking facility. A broker who acts as a DP may not be able to provide these services.

DEMAT ACCOUNT OPENING COST AND OTHER CHARGES

The cost of opening and holding a Demat account. There are four major charges usually levied on a Demat account: Account opening fee, annual maintenance fee, custodian fee and transaction fee. All the charges vary from DP to DP.

Depending on the DP, there may or may not be an opening account fee. Private banks, such as ICICI Bank, HDFC bank and UTI bank, do not have it. However, players such as Karvy Consultants and the State Bank of India charge it. But most players levy this when you re-open a Demat account, though the Stock Holding Corporation offers a lifetime account opening fee, which allows you to hold on to your Demat account over a long period. This fee is refundable.

Annual maintenance fee: This is also known as folio maintenance charges, and is generally levied in advance.

Custodian fee: This fee is charged monthly and depends on the number of securities (international securities identification numbers – ISIN) held in the account. It generally ranges between Rs. 0.5 to Rs. 1 per ISIN per month.

DPs will not charge custody fee for ISIN on which the companies have paid one-time custody charges to the depository.

Transaction fee: The transaction fee is charged for crediting/debiting securities to and from the account on a monthly basis. While some DPs, such as SBI, charge a flat fee per transaction, HDFC Bank and ICICI Bank peg the fee to he transaction value, subject to a minimum amount.

The fee also differs based on the kind of transaction (buying or selling). Some DPs charge only for debiting the securities while others charge for both. The DPs also charge if your instruction to buy/sell fails or is rejected.

In addition, service tax is also charged by the DPs.

What does the term “Margin Trading” mean?

Many times you would have come across a term Margin trading. What is trading on margin and how is it different from normal trading is what is explicated here.

‘Margin” means borrowing money from your broker to buy a stock. Now the question is why would you borrow? Investors generally go for trading on margin so to increase their purchasing power so that they can own more stock without fully paying for it. That means you will pay a part of the buy price and the broker will lend you the difference.

For the loan you have taken –

• You will pay interest in addition to the usual fees.
• Broker will hold the stocks as collateral and has the right to sell that as well in case buyer doesn’t meet certain obligations as per margin rules and agreements.

Let us understand this with an example:

Suppose you wish to buy a stock with market price of Rs 50.  Under margin trading, you would be paying Rs 25 in cash while remaining 25 Rs will be lent to you by the broker (Assuming the initial margin requirement with your broker is 50%). How does this help? Let’s see.  Suppose the price of the stock rises to Rs 75.

In case of Margin trading – Your return on the investment is 100% because you paid Rs 25.

In case of normal trading – Your return on investment is 50% because you paid Rs 50.

However there is also an equal probability of higher loss for trading on margin. Suppose the stock price falls to Rs 25. If you fully paid for the stock, you lost 50 percent of your money. But if you have traded on margin, you lost 100 percent. And on the top of that you are supposed to pay interest for the loan you have taken from the broker along with the broker’s commission. Moreover if the investor doesn’t maintain minimum margin in his account the broker will have the right to sell all your stocks without notifying you. By this you would even loose the chance to make up your losses when the price goes up later. Below are certain terms that would make the concept more clear.

Initial margin: The proportion of total purchase price an investor is supposed to deposit for opening a margin account is referred as its initial margin and is generally 50% of the total value.

Maintenance margin: In order to keep the margin account open for doing margin trading, it is necessary to maintain minimum cash or marginable securities which is called the maintenance margin. This is just to prevent an investor from incurring a level of debt that he would not be able to repay.

Margin call: If your account falls below the maintenance margin, your broker will make a margin call to ask you to deposit more cash or securities into your account. If case you fail to meet the margin call, your broker will sell your securities so to make up for the stipulated maintenance requirement.

Lastly, for novice traders it is very important to have a realization that trading on margin can help you magnify your profit and at the same time multiplies the associated risks.

What are Tax Saving Schemes?

In India, Tax Saving Schemes schemes offer tax rebates to the investors under specific provisions of the Income Tax Act, 1961 as the Government offers tax incentives for investment in specified avenues. e.g. Equity Linked Savings Schemes (ELSS).

Pension schemes launched by the mutual funds also offer tax benefits. These schemes are growth oriented and invest pre-dominantly in equities. Their growth opportunities and risks associated are like any equity-oriented scheme.

What are Load Funds / No Load Funds?

A Load Fund is one that charges a percentage of NAV for entry or exit. That is, each time one buys or sells units in the fund, a charge will be payable. This charge is used by the mutual fund for marketing and distribution expenses. Suppose the NAV per unit is Rs.10. If the entry as well as exit load charged is 1%, then the investors who buy would be required to pay Rs.10.10 and those who offer their units for repurchase to the mutual fund will get only Rs.9.90 per unit. The investors should take the loads into consideration while making investment as these affect their yields/returns. However, the investors should also consider the performance track record and service standards of the mutual fund which are more important. Efficient Mutual funds may give higher returns in spite of loads.

A no-load fund is one that does not charge for entry or exit. It means the investors can enter the fund/scheme at NAV and no additional charges are payable on purchase or sale of units.

Volatility of Stock Markets and its causes

Volatility is one of the best phenomenon without which stock markets will loose its charm. It is the tendency of fluctuation of market indices over a period of time; more is the fluctuation, higher is the volatility. The ups and downs of stock prices is what that adds spice to the market behaviour. This see-sawing effect has its own implications, both good and bad. Good, because prudent investors taking advantage buy on dips and sell on highs for profit booking. On the flip side, greater volatility lowers investor’s confidence in the market prompting them to transfer their investment in less risky options due to unexpected market behaviour.

Having observed the past major events of volatility, one can realise the root cause as “unanticipated information” breaking out in the market. When this news stabilises, volatility vanishes because the uncertainty related dies out.

Few examples from recent past:

•    Govt announced buying of shares/bonds of Indian companies through

      participatory notes (PN).

•    CRR and repo rates hike by RBI.

•    Satyam fiasco and Lehman’s bankruptcy news.

•    Stringent IPO regulations.

•    US recession fear. Jan 21, 2008 saw biggest ever fall of 1408 points

      due to volatility on account of US fears of recession.

Now the question arises how this uncertainty leads to such aftershocks in market.

Firstly, investments by FIIs have a major influence on movement of SENSEX which came into limelight during general elections of 2004. Owing to fear of reforms due to new government there was continued selling pressure by FIIs resulting in sharp decline in the index. Later on when the news regarding these reforms stabilised, FIIs started buying back the shares they sold earlier. Thus aiming at profit booking and balancing the portfolio, FIIs keep relocating their funds from time to time. For example if they find govt policies not in their favour, they would withdraw their investments from Indian markets and invest in some other market leading to sudden crash in index.

Secondly, Indian markets are sensitive to global markets. It has been observed that many times if NASDAQ closes high, SENSEX opens in green. So an unwanted news broke out in US may show its effects in Indian markets leading to intra-day volatility.

Thirdly, company specific news may cause volatile sessions in the market. From recent example of Satyam computers ltd, markets were highly volatile due to investor’s sentiment being in dilemma and anticipations about the future of company and related conglomerates.

Fourthly, Political news and news related to finance tend to affect market sentiment. Like RBI declaring CRR hikes, lowering interest rates prompt investor to relocate their investments accordingly. Likewise, news related to scams and frauds also create panic amongst investors making the markets volatile.

Volatility in acceptable limits is a sign of healthy markets as it leads to correction if there is overvaluation of prices. At the same time there is huge risk associated. The crux is that whatever you have in your portfolio of stocks, wind may start blowing against you anytime. So to play safe keep a margin to bear the volatility risk and don’t put all your eggs in same basket as the basic rule of portfolio management says.

Understanding IPO Grading

IPO grading is a unique concept involving an independent agency that is free from bias and with the available tools for assessing the investment attractiveness of an equity security.  IPO grading is a service aimed at facilitating the assessment of equity issues offered to the public, says SEBI.  IPO grading can act as an additional decision-making tool for them.  The idea is that IPO grading will help the investor better appreciate the meaning of the disclosures in the issue documents, collapsing all of the above information into a single digit.  Thus, IPO grading could be seen as an added investment guidance tool seeking to hide the ignorance of the above factors and still help the investors make an informed decision.  Grading of IPOs in terms of their fundamental quality will enable investors steer clear of unsound offers.  IPO grading in general would be a relative assessment of the fundamentals of the equity security by credit rating agencies registered with SEBI. 

But IPO grading is totally unheard of anywhere else and is a First-From-India initiative.  The grading, to be done by the SEBI-registered credit rating agencies, would be applicable to all IPOs for which offer documents are filed after April 30, SEBI said in a circular.  SEBI does not play any role in the assessment made by the grading agency.  The grading is intended to be an independent and unbiased opinion of that agency.  The company needs to first contact one of the grading agencies and mandate it for the grading exercise.  Though this process will ideally require 2-3 weeks for completion, it may be a good idea for companies to initiate the grading process about 6-8 weeks before the targeted IPO date to provide sufficient time for any contingencies.  IPO grading is a service aimed at facilitating the assessment of equity issues offered to the public, says SEBI.

IPO grading is the grade assigned by a Credit Rating Agency registered with SEBI, to the initial public offering (IPO) of equity shares or any other security which may be converted into or exchanged with equity shares at a later date.

The grade represents a relative assessment of the fundamentals of that issue in relation to the other listed equity securities in India. Such grading is generally assigned on a five-point point scale with a higher score indicating stronger fundamentals and vice versa as below.

IPO grade 1: Poor fundamentals

IPO grade 2: Below-average fundamentals

IPO grade 3: Average fundamentals

IPO grade 4: Above-average fundamentals

IPO grade 5: Strong fundamentals

IPO grading has been introduced as an endeavor to make additional information available for the investors in order to facilitate their assessment of equity issues offered through an IPO.

IPO Grading is not a recommendation to invest

Even if a Company is Graded 5 (i.e. with strong fundamentals), IPO grading is not a recommendation to invest in the graded instrument. It does not a comment on the price of the graded security or its suitability for a particular investor. It does not comment on issue price, likely price on listing or movement in price post listing.