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FED Rate Hike And Its Effect on Global Markets

US bonds are believed to be the safest debt instruments in the world. If there is a hike in the interest rate there, that will definitely affect the global markets in proportion. Here, markets mean not only the bond markets, but also include currency, derivative and equity.


What is ‘FED Rate Hike’

Us Fed plays the similar role in the US, as that of the Reserve Bank of India in India. The US Monetary Policy is determined and decided by a committee called ‘The Federal Open Market Committee’. The committee-meet has so much global importance that, investors, analysts and policy makers, unanimously cross their fingers and wait for the result. That’s the impact of FED rate has on Global Markets.

Queries Details
Headquarters

Established

Chair

It’s a Central bank of

Currency

Reserve requirements

Bank rate

Interest rate target

Interest on reserves

Interest paid on excess reserves?

Eccles Building, Washington, D.C., U.S

December 23, 1913 (104 years ago)

Janet Yellen

United States

United States dollar
USD (ISO 4217)

0 to 10%

0.6% to 1.50%

1.25% to 1.50%

1.25%

Yes

US, being the world’s biggest economy, Federal Reserve of US and its actions has the capacity to stir the Global Markets. The dollar being the world’s reserve currency, decides the value of other world currencies against its value. FED rate hike /cut has the power to control its value in global markets.
US Fed Rate Hike – means, Federal Bank of US is willing to provide the banks of US with the hiked interest rates, for their lending and borrowing activities. Which, in turn, leads to hiked /increased interest rates on bonds, saving deposits, loans etc.

Due to rise in interest rates in the US, the value of Dollar becomes increased, making it more attractive to the investors, in comparison with others currencies, including Rupee.

 

Hedging With Derivatives | An Advanced Stock Investment Strategy

This article is of little use to those investors who are expert derivative traders and know, how to use hedging for their portfolio against market risk. But, of utmost know to factor to the investors, who are away from the derivative segment and are likely to know about. Let’s read.


What is Hedging and Who is a Hedger

A strategic trading strategy in the derivative market, to protect the value of equity portfolio against price fluctuations is called hedging. When there is an uncertainty in the price movement of any stock, stock investors can hedge the price of a stock from a fall, by participating in the derivatives market. And, such investor is then called to be a Hedger.

Hedging is nothing, but securing the price of a stock by speculating market movement. In other words, it’s an advanced equity investment strategy, where the equity investments are protected in the market fall /fall in the price of a stock scenario. Hedging gives a sort of ‘peace of mind’ to the equity investors, by ensuring a more predictable outcome.

Hedging of a Stock doesn’t give more outcome, but it definitely gives a more predictable outcome.

What Are The Types Of The Risks Associated With Any Stock

While buying a stock every investor thinks and hopes that, it will move forward and there will be a hike in the stock price. But, nobody can make sure that the price hike is definite. There are certain risk factors, that may restrict the stock price, and push it down.

The stock price is always a function of many risk factors, which will decide its future. Some are specific to the particular stock and sector. And some are global. Market risk is considered as an external risk factor that will equally affect the entire industry. For example, currently the Diamond Industry, is facing such a type of Market Risk. Which is unavoidable by all the stocks of various companies that belong to this industry.

How To Hedge A Stock

Hedging is an art of ensuring the return of an equity investment apart from market risk. This is done by participating in the derivatives market, and execute exactly the opposite trade. That means, the trade which  opposite to the trade in equity segment. By doing so, one can ensure the return from either the equity /derivative market, as the two segments move in opposite directions. In this form, one can bypass the risk to those who are willing to bear it.

There are two types of derivative contracts, that help the investors to hedge their investments in the cash segment, that is equity. They are Futures and Options.

For example Mr. A holds 100 shares of a company XYZ. If the buy price is Rs. 10 per share, and the stock price is hovering around Rs 10 and Rs.12, for a month. Then Mr. A speculated the price movement towards negative direction. And, he decided to liquidate his holding predicting its future fall. But, his advisor and friend, Mr. B suggested him to hedge his holding  to ensure his future earnings at the cost of the premium to be paid to buy a contract in the derivatives segment. So, Mr. A postponed the idea of selling the shares at the current market price. And, decided to sell the stock at the expected Rs. 15 after 3 months.

Even though there are many contracts to hedge the stock value in derivative segment, the best one is the PUT Option, which he can utilize to sell his stock after 3 months and at the strike price.

Put Option gives the buyer to sell the stock  during a predetermined period and at the predetermined strike price, which is usually above the market price.

The cost of buying a Put Option increases with strike price. That means, higher the strike price, the higher the cost. So, it is always advisable to choose the strike price moderately to hedge the stock.  So, Mr. A chose to buy the 1 ATM Put of 100 shares with the 3 month expiration period.  He paid Rs. 100 towards premium and his strike price was Rs.11

As per his expectation the price of his stock fell to Rs.10. And, Mr.A exercised his option to Put his quantity of 100 shares at Rs. 11 each. The amount he received was Rs. 1100. So, the loss is only the amount that was paid towards commission while buying the stock. In India the Futures and Options, of all the listed stocks expire on the last Thursday of the contract month. If that Thursday is declared to be the holiday, the expiry day will be the preceding Wednesday.

If you like my article, leave your comment. I value your comments, and try to rectify my defaults.

Happy Investing!

 

The Best Mutual Funds | How To Select

Plenty of Mutual Fund offers. Plethora of information. But, of no use. When it’s time to invest, it’s a common man’s common problem to choose the right one. Try to investigate. Most of the people are stuck in Funds, that were performed well in the past. But currently, not even meeting the benchmark index. All this happens, only when the investor lacks proper knowledge about guidelines, that need to be followed, while investigating into the Mutual Funds.


It’s simple, to pick a well suited Mutual Fund, that matches our requirements. Fund houses are ready with variety of Mutual Funds, that are well tailored to match the financial requirements of people from all walks of life. They are well planned and designed, keeping in mind the financial obligations of different streams of investors. So, it’s our choice to pick the right one to meet our financial goals.

Here are certain guidelines to come up that winner to suit to your financial goals. Let’s Beat the Benchmark Index like a Pro.

Know Your Goals, Risk Profile And Investment Horizons Before Choosing A Mutual Fund

The goal or the investment objective should be the first criteria while choosing the mutual fund for your investment. Goals can be classified as high, medium and low in terms of capital gains. Risk and return go hand in hand. High goal seekers with aggressive return expectations are compulsory to invest in equity oriented mutual fund schemes. These are comparatively riskier than other types of funds, with huge return opportunities. Debt funds are always there for risk averse medium and low goal investors.

A picture of a man's hands , calculating mutual fund returns and writing on a sheet.

An investor with long-term investment period is best to choose a long-term capital growth equity or balanced fund. A young investor with long-term goals, which would probably be high falls in this category. But, an investor with near and medium-term targets are better to engage with short-term debt oriented mutual fund schemes.

What is the category to select?

Debt? Equity? Or Hybrid? Your age, risk taking capacity, investment horizon and future targets are the factors that decide upon the category.

Check Back The Fund Managers Past Performance

Few funds are managed by an expert team. And, few are by a single star fund manager. In the first case, where there is an expert team to manage  the fund the performance would be very clear and peaceful.

Whereas, the fund managed by a single expert manager, we need to look his / her past performance track record. This facilitate us to guess his /her future performance.

Consistency Is The Main Criteria

Duly have a check on the fund performance during those market fall periods. If the fund had done well even in the bear phase, we can say that it has beaten the index.  Otherwise, if had done well in the bull market, and became dull during the fall, it’s a type of fair weather friend. Keep it away.

Consistency in performance is the symbol of its stamina to win. One can be sure to assume that it will beat the Index in the future too. Good to look for the consistency in performance, over longer periods like 3, 5 and 10 years. Have a look at NAV’s of past years. Look for its growth percentage.

Know About The Fund House’s Pedigree

The track record of a fund house is as important as any other factors that help us in selecting a good mutual fund. Try to identify, fund houses with a strong presence and excellent track record in the financial world. Such fund houses have their own investment experiences as well as efficient processes. Consistency in returns is the main feature of these schemes. Sustained performance over a long period of time results in consistent returns.

Make Use Of Statiscal Measuring Tools /Metrics

There are certain risk measuring statistical tools, that may otherwise indicate the investment risks associated with their returns. These indicators make use of historical data for the analysis of not only mutual funds, but also the stocks and bonds.

These ratios simply compare the mutual fund return with the market benchmarks.

Alpha (α)

The simplest definition of an alpha would be the excess return of a fund compared to its benchmark index. If a fund has an alpha of 10%, it means it has outperformed its benchmark by 10% during a specified period.

Beta (β)

Beta measures the mutual fund’s performance-swing /volatility, compared to a benchmark.

For example, a fund with a Beta of 1 means it’s NAV will move 10% upside↑ /downside ↓ in respect of the benchmark index.

High Beta – For aggressive goal seekers with risk taking capacity for the possible high returns

&

Low Beta – For less aggressive, risk averse investors, who are seeking for stable returns.

Standard Deviation (σ) (SD)

It’s the statistical return measuring method. It actually measures the deviation of returns from their mean value. In Mutual Funds, Standard Deviation  is used to measure the possible deviation in returns from its historical mean value.

Assume that a Mutual Fund with an Average Rate of Return of 12%. And a Standard Deviation of 3%. Then,  this Mutual Fund has the possibility of giving returns which will vary from 9% – 15%.

So, it is most obvious that, risk taking investors will prefer to choose funds with high Standard Deviation (SD). And risk averse, the funds with low SD.

Sharpe Ratio

One of the most popularly considered and used indicators to measure, Risk Vs Return is Sharpe Ratio. It was developed by Nobel Laureate William F.Sharpe. Hence is known as Sharpe Ratio.

Each investment in the Mutual Fund Portfolio comes with its own degree of risk. Returns should always be in proportion to the amount of risk taken by any investment. Only such investments are worth buying.

Sahrpe Ratio measures the excess return per unit of risk taken over the risk-free return. Here, risk-free return is the return given by risk-free instruments like Treasury Bills and Government Bonds

Sharp Ratio (S) = (Mean Portfolio Return-Risk Free Rate) /Standard Deviation of the Portfolio Return

Symbolically,

(S) = rp – rf /σp

The Sharpe Ratio tells, how well the Mutual Fund has performed in proportion to the risk taken by it.

The higher the Sharpe Ratio, the better would be the ‘risk-adjusted- return’ of the Mutual Fund Portfolio

A good mutual fund is one which gives better returns than its peers for the same kind and amount of risk taken.

Loads and Charges

As said by the American Science Fiction Writer and Novelist, “Nothing of Value Free…..”, applies to Mutual Funds also. As an investor, it is very important to know the charges levied by the Mutual Funds. Less or more, directly or indirectly all those Fund Managing and Distributing expenses are collected from the investors anyhow. But, where the care should be taken is to select the Mutual Fund that charges less.

There are two types of fee that an investor need to pay as one time payment. They are broadly,

Loads

Entry Load

This load is levied at the time of buying the Mutual Fund Units. Actually, this entry load is collected by selling the units at a higher price than the existed unit price. So, the purchasing price hikes. But, this load has been abolished by SEBI in August 2009. So, no need of worrying about it.

Exit Load

This load is a factor of the holding period. If an investor stays invested till the end of the holding period, as mentioned in scheme related documents, it is exempted. No exit load is charged.

Before the holding period, it will be charged at the rate as mentioned in the scheme related documents. Usually, the percentage of charging varies from 0.5% – 3%. And, this charge is collected by the fund, by buying back the units at the lower than the current NAV.

Hence, if the investor is not sure about the holding period, better to choose a scheme with lower exit load.

Charges

Transaction Charges

These are also one time charges, to be paid by the investor at the time of purchasing the scheme. These are collected by the fund to pay to the intermediary /distributor. Hence, is also known as a Sales Load.

This fee is applicable for the investment amount of over Rs.10,000/-.

Rs.100/- for the SIP commitment of Rs. 10,000/- or above. These charges are deducted over 4 installments starting from the 2nd installment to 5th installment.

Recurring Charges

These expenses are charged on a daily basis and is deducted from the net asset value. The daily NAV is declared after deducting /adjusting these expenses. There are certain guidelines and mutual funds can’t charge more than the stipulated fee structure.

Even though, the fee structure is regulated, it varies based on the Net Assets of the Mutual Fund. More the net assets held by the fund, less are the recurring expenses and vice versa.

Expense Ratio

When you come up with Mutual Funds of similar nature, the next step is to consider their expense ratios. It’s better to choose the fund with low expense ratio. This will benefit you in the long run.

The whole fixed expenses of the Mutual Fund are spread out equally over the investors. In the case of funds with higher asset base, these expenses are spread over the large number of investors. Hence, the higher is the Assets Under Management, the lower is the ‘Expense Ratio’ or ‘Expense to Assets Under management Ratio’.

So, it is advisable to choose funds with high ‘Assets Under Management (AUM)’, and avoid the funds with less Asset Base /Assets Under Management.

Portfolio Turnover Ratio

The total cost incurred by the scheme is a function of the turnover ratio. The greater the ratio, the more is the cost charged by the fund. So, a fund with the lower turnover ratio is preferable over the fund with a higher turnover ratio.

Return On Debt (ROD) | Its Impact On The Company Performance

‘Return On Debt’. Spells short. But it’s as important as any other financial ratio, and also tells a  lot about the financial health of a company. Especially when there are big number of debts that peeps out of the balance sheet. So easy to analyze, but difficult to manage, ROD ratio has its own impact on any company’s performance.


Let’s try to have a few important points – What it may otherwise indicate the impact of ROD on any company’s performance as well as on our returns.

What Is ‘ROD’ Or The ‘Return On Debt’ Ratio

The ROD is a financial ratio, that compares the company’s net earnings to its long-term debt.

‘Return On Debt’ = Net Earnings / Net Long Term Debt

Here, debt means either taken /issued by the company. And sometimes the both the cases. And this ‘long-term-debt’ is in various forms and in distinctive interest rates depending on the creditor or the issuer. Anyhow, what we need to calculate is the ratio of the net earnings of the company to its net debt.

This ratio shows the amount of net earnings that is generated, for each coin that a company holds in debt. And, this ROD can either be positive /negative.

A positive ROD has been always beneficial to the company. And, it indicates that some income is being generated by the debt issued /taken by the company. Where as a negative ROD is a threat.

We can locate the long term debt data on the balance sheet as well as the notes to financial statements. The information explains the amount of debt taken out /issued and the number of years related to it.

How Important Is ‘Return On Debt’ In Any Company’s Financial  Analysis

Mostly, the ratio of ‘ROD’ is not used in the simplest financial analysis. But, it’s an important calculation that needs to be performed, while evaluating company’s solvency. It is generally used by the owners of the company while making a decision on, which financing sources would be better for the company.

It’s common to carry a certain amount of debt by any company. But, the amount should be limited. The more the debt to its earnings level, the more the credit risk’ is.

Moreover, companies carrying a significant amount of debt related to capital and/or assets are more prone to economic downturns during a decline in earnings.

 

Value Stocks | Hidden Gems For Value Investing

Good Management and Coprporate Governance. Hopeful Sector. Upcoming Industry. Analysis Says – The Company Fundamentals are Strong. Excellent future prospects. Technicals are suggesting to buy. Yes. Definitely the stock falls in the ‘Value Stocks’ category.


The secret of many people to become millionaires! The success mantra of many Mutual Funds to out-perform! Value investing is nothing but chasing those hidden gems to own. Just invest and forget to hug your future fortune. That’s what ‘The Value Investing Is!

What Are ‘The Value Stocks’

All those stocks that tend to trade much below their intrinsic value can be considered as ‘Value Stocks‘. These stock’s current market price don’t match with either the fundamentals of the company or its earning levels. And, thus considered to be an undervalued stock by the ‘Value Investors’.

How To Spot A Value Stock

If the company is paying good dividend, earning levels are excellent and sales growth rate is OK, but the stock is available at low price. We can exactly say that the stock is a value stock.

Other characteristics would be, high dividend yield, low P/E (low price to earnings ratio) and low P/B (low price to book value)

Why To Invest In Value Stocks

As the value stocks /securities are trading at a lower price than how the company’s performance may otherwise indicate, there will be a breaking down point in the near or the far future of every value stock. Difficult to guess, but sure to be assessed. The target price will be at least its intrinsic value.

Investing in a value stock is an attempt to capitalize on market inefficiencies. By investing in a value stock, we can make sure that, we are going to encash the inefficiency of the market to recognize the stock’s underlaying value.

How To Invest In Value Stocks

Just spotting a stock with the required ratios is not enough to decide upon that the stock is undervalued and can invest without any further investigation. Of course, this would be the first step to develop a rough list of stocks – that may be our best choice of value picks. So, just the screen test and making a list of stocks that we expect to be undervalued is over.

Apart from this there are two more steps of analysis required to be done before investing. They are ‘Qualitative Analysis’ and ‘Quantitative Analysis’.

What Is Qualitative Analysis

The entire analysis of the company, side stepping the financial ratio analysis (quantitative analysis) is called the qualitative analysis. Here there are no financial ratios not their analysis. But, it involves analyzing the company in the vague light of distinctive practical matters, which directly or indirectly affect the company’s performance  and its stock value anyhow.

Factors like industry to which the company directly /indirectly related to, future scope of that industry, company management, corporate governance, company competitiveness with its competitors, government subsidies, quality of the goods produced, climatic conditions and finally the demand for its products /services etc, need to be analyzed in depth before deciding upon the stock to be a Value Stock. Unlike quantitative analysis, qualitative analysis needs more attention and is very time consuming.

Qualitative Analysis is best made by the investors, that is relevant to them. The companies they worked for, goods they sold once or well known with the products and their demand are best to be chosen for analysis.

It’s wise to buy companies, that you understand better

– Warren Buffet

What Is Quantitative Analysis

There is a myth among the common investors that ‘The Quantitative Analysis, is a little bit difficult ratio analysis performed by the expert analysts. But, the existed IT tools made it a crazy one minute analysis done by any common people. No financial expertise is required.

Once the ratio analysis is over, the next step is to analyze the impact of their values. All the investors with basic knowledge of how these financial ratios should be for the company’s out-performance in the near future, are said to be in good position in value stock picking.

Other Strategies To Invest In Value Stocks

Few value investors opt to invest in stocks of companies whose products or services have been in demand for a long time and are likely to be continued.

Innovation‘ – This sounds like a synonym of development. And of course the stepping stone of true development. But, this would be a great threat to certain companies and sometimes the whole industry too. History witnessed a few long-standing companies and industries victimized by new innovations. Their products /services became obsolete and the companies lost forever. Here, what we need is critical thinking skills. If there is a proof that, the company has been in the business for a longstanding period and has the ability to fast adapt the new changes and innovations, then we can be free to choose such businesses for further analysis. At this point it may be worthwhile to analyze management and the effectiveness of corporate governance to determine how the company reacts to new innovations and changing environments. Investment in such a business is considered to be always safe and  fruitful.

That’s all. Thank for reading this topic.

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