Market Dynamics: is it the right time to buy

This information has been sourced from economictimes article,
http://economictimes.indiatimes.com/Markets/Analysis/Equity_-_Is_It_The_Right_Time_to_buy/articleshow/msid-3845314,curpg-2.cms

There are several metrics which can be observed to get a fair guesstimate about the direction market is heading towards. They are:

Earnings Approach

The current level of Sensex implies 10.0 x – 9.4 x P/E of FY09 earnings and probably around 12.5x – 11.3x of FY10 earnings.
Historically, since 1991, Sensex has traded in the range of 10-30 times one year forward earnings. So, currently the Sensex is certainly at the lower range of the historical P/E band.
Even if things are likely to be different this time due to a worldwide recession, we do not expect more than 20% downside from these levels.

Book Value Approach

The current P/BV (Price to Book Value) of Sensex is hovering around 2.3 which is in the range of historic lows of 2-2.4.
In last 18 years, whenever the P/BV ratio had drifted to around 2, it has been followed by a smart pull back. For example, in November 1998 when Sensex fell to around 2800 levels (P/BV of 2), the next six months witnessed a strong pullback rally of more than 40% pushing the index to 4000 levels.

Conversely during last 15 years, markets have fallen sharply every time the P/BV ratio has crossed 6.5. January 2008 was no exception to this rule.

Falling Yield in Equity

Historically, it has been observed that whenever Equity yield has crossed the G-Sec yield, it makes sense to invest in equities.
On the other hand, whenever G-Sec yield has reached higher than equity by 4% or more, it has been a good opportunity to sell out of equities.
In January 2008, the G-Sec yield was higher than equity by this threshold margin. Since this indicator was very accurate in predicting the peak of the bull market, it may be used as a good sign to determine the trough of this bear market. Since Equity yield has already crossed the G-Sec yield, we may conclude that we are near the bottom of the cycle as far as equity markets are concerned.

Average Quartely Balance -- How is it calculated

To understand how AQB is calculated, here are some useful links:

http://www.hdfcbank.com/personal/accounts/aqb_pop_up.htm

Futures and Options -- Let us Know

Derivatives are products that obtain their value from a spot price, called the “underlying”.In India, F&Os are the two popular derivatives instruments traded on stock exchange. While in a futures contract, you agree to buy or sell shares at a certain price in the future, the option contract gives you the right, but not an obligation, to buy (through a call option) or sell (through a put option) the underlying scrip at a specified date and at a specified price.To start trading in futures contract, you are required to place a certain percentage of the total contract as margin money.This feature of futures contract makes it a leveraged instrument since you can make a larger profit (or loss) with a comparatively small amount of capital. In India, futures contracts are available on equity stocks, indices, commodities and currency.

In options trading, you pay the premium for buying the rights to exercise your option. To take the buy or sell position on index and stock options, you are required to place a certain percentage of order value as margin money.An option can be a ‘call’ option or a ‘put’ option. A call option gives you a right to buy the asset at a given price or before a given future date. This ‘given price’ is called ‘strike price’.Similarly, a ‘put’ option gives you a right to sell the asset at the ‘strike price’ to the buyer. Thus in an options contract, the right to exercise the option is vested with the buyer and the seller has only the obligation but no rights.Since the writer of an option bears the obligation, he is paid a price known as ‘premium’.

Before venturing into unknown waters, analysts advise that you must fully understand the implications arising out of trade in F&Os. “It is trading on margin with a leverage of four-six times. You should know that in leveraged trading, the market fall is magnified to the extent of the leverage availed by you.Understanding your risk appetite and risk tolerance is important in F&Os trading,” says Sandeep Nayak, senior vice-president and head, private client dealing, Kotak Securities.The golden rule — never trade anything that you don’t understand — believe analysts, has a special significance for F&Os trading since the risk in them, with all the leverage and complexity, comes in multiple dimensions. “Unlike the cash market where your risk is limited to the amount you deploy, you can lose much more than what you’ve put in and in much more ways than a simple price move in the F&Os segment. Always think risk first and then think about returns,” cautions Nilesh Shah, CEO of Ambit Capital.

According to Shah, a first-time investor must not trade in F&Os due to the associated risks. Only after having invested in stocks for over three years, an investor should try to become a trader.“However, you must start with very small ticket sizes initially and only once you’ve gained confidence about the nature and working of these instruments should you look to increase your ticket size.You should try to seek expert advice at least in the initial part of your trading journey,” he feels. Nayak, too, feels that a first-time investor trading in F&Os is akin to an individual trying to swim in the deep end of the pool on day one of swimming class.

According to Shah, a first-time investor must not trade in F&Os due to the associated risks. Only after having invested in stocks for over three years, an investor should try to become a trader.“However, you must start with very small ticket sizes initially and only once you’ve gained confidence about the nature and working of these instruments should you look to increase your ticket size.You should try to seek expert advice at least in the initial part of your trading journey,” he feels. Nayak, too, feels that a first-time investor trading in F&Os is akin to an individual trying to swim in the deep end of the pool on day one of swimming class.

Example: On November 1, an investor feels the market will rise Buys one contract of November ABC Ltd futures at Rs 400 (market lot: 200) November 12 ABC Ltd futures price has increased to Rs 480 Sells off the position at Rs 480. Books a profit of Rs 16,000 (200x80).Options Example: On November 1, an investor is bearish on the market Current Nifty is 2,980. You buy one contract (lot size 50) of Nifty near month puts for Rs 20 each.The strike price is 2,940. The premium paid by you: (20x50) Rs 1,000.Your breakeven Nifty level is 2,920. If at expiration Nifty declines to 2,890, then Put Strike Price 2,940 Nifty expiration level 2,890 Option value 50 (2,940-2 ,890) Less: Purchase price 20 Profit per Nifty 30 Profit on the contract Rs 1,500.

Datarates provided by your body !!

Everything has the formula. How about the human body? Here is the one for human male penis…
(37.5MB x 100M x 2.25)/5 = (37,500,000 bytes/sperm x 100,000,000 sperm/ml x 2.25 ml) / 5 seconds = 1,687,500,000,000,000 bytes/sec = 1,687.5 TerraBytes/sec

And here is a conversation explaining the calculation I guess :)

1. The human cell contains 75 MB of genetic information 2. A sperm 37.5 MB.
3. In a milliliter, we have 100 million sperms. On average, one ejaculation releases 2.25 ml in 5 seconds.
Using basic math we can compute the bandwidth of the human male penis as:
(37.5MB x 100M x 2.25)/5 = (37,500,000 bytes/sperm x 100,000,000 sperm/ml x 2.25 ml) / 5 seconds = 1,687,500,000,000,000 bytes/sec = 1,687.5 TerraBytes/sec
Sweet
DoS attack!!!
a bukkake would probably be a DDoS then
11 men would give 17 petabytes/secComment:

##programming on FreeNode

How does a bank turn bankrupt

Once there was a little island country. The land of this country was the tiny island itself. The total money in circulation was 2 dollars as there were only two pieces of 1 dollar coins circulating around.
1) There were 3 citizens living on this island country. A owned the land. B and C each owned 1 dollar.
2) B decided to purchase the land from A for 1 dollar. So, now A and C own 1 dollar each while B owned a piece of land that is worth 1 dollar.
* The net asset of the country now = 3 dollars.
3) Now C thought that since there is only one piece of land in the country, and land is non producible asset, its value must definitely go up. So, he borrowed 1 dollar from A, and together with his own 1 dollar, he bought the land from B for 2 dollars.
*A has a loan to C of 1 dollar, so his net asset is 1 dollar.
* B sold his land and got 2 dollars, so his net asset is 2 dollars.
* C owned the piece of land worth 2 dollars but with his 1 dollar debt to A, his net residual asset is 1 dollar.
* Thus, the net asset of the country = 4 dollars.
4) A saw that the land he once owned has risen in value. He regretted having sold it. Luckily, he has a 1 dollar loan to C. He then borrowed 2 dollars from B and acquired the land back from C for 3 dollars. The payment is by 2 dollars cash (which he borrowed) and cancellation of the 1 dollar loan to C. As a result, A now owned a piece of land that is worth 3 dollars. But since he owed B 2 dollars, his net asset is 1 dollar.
* B loaned 2 dollars to A. So his net asset is 2 dollars.
* C now has the 2 coins. His net asset is also 2 dollars.
* The net asset of the country = 5 dollars. A bubble is building up.
(5) B saw that the value of land kept rising. He also wanted to own the land. So he bought the land from A for 4 dollars. The payment is by borrowing 2 dollars from C, and cancellation of his 2 dollars loan to A.
* As a result, A has got his debt cleared and he got the 2 coins. His net asset is 2 dollars.
* B owned a piece of land that is worth 4 dollars, but since he has a debt of 2 dollars with C, his net Asset is 2 dollars.
* C loaned 2 dollars to B, so his net asset is 2 dollars.
* The net asset of the country = 6 dollars; even though, the country has only one piece of land and 2 Dollars in circulation.
(6) Everybody has made money and everybody felt happy and prosperous.
(7) One day an evil wind blew, and an evil thought came to C's mind. "Hey, what if the land price stop going up, how could B repay my loan. There is only 2 dollars in circulation, and, I think after all the land that B owns is worth at most only 1 dollar, and no more."
(8) A also thought the same way.
(9) Nobody wanted to buy land anymore.
* So, in the end, A owns the 2 dollar coins, his net asset is 2 dollars.
* B owed C 2 dollars and the land he owned which he thought worth 4 dollars is now 1 dollar. So his net asset is only 1 dollar.
* C has a loan of 2 dollars to B. But it is a bad debt. Although his net asset is still 2 dollars, his Heart is palpitating.
* The net asset of the country = 3 dollars again.
(10) So, who has stolen the 3 dollars from the country ? Of course, before the bubble burst B thought his land was worth 4 dollars. Actually, right before the collapse, the net asset of the country was 6 dollars on paper. B's net asset is still 2 dollars, his heart is palpitating.
(11) B had no choice but to declare bankruptcy. C as to relinquish his 2 dollars bad debt to B, but in return he acquired the land which is worth 1 dollar now.
* A owns the 2 coins, his net asset is 2 dollars.
* B is bankrupt, his net asset is 0 dollar. ( he lost everything )
* C got no choice but end up with a land worth only 1 dollar
* The net asset of the country = 3 dollars.
************ **End of the story; BUT ************ ********* ******
There is however a redistribution of wealth.
A is the winner, B is the loser, C is lucky that he is spared.
A few points worth noting -
(1) When a bubble is building up, the debt of individuals to one another in a country is also building up.
(2) This story of the island is a closed system whereby there is no other country and hence no foreign debt. The worth of the asset can only be calculated using the island's own currency. Hence, there is no net loss.
(3) An over-damped system is assumed when the bubble burst, meaning the land's value did not go down to below 1 dollar.
(4) When the bubble burst, the fellow with cash is the winner. The fellows having the land or extending loan to others are the losers. The asset could shrink or in worst case, they go bankrupt.
(5) If there is another citizen D either holding a dollar or another piece of land but refrains from taking part in the game, he will neither win nor lose. But he will see the value of his money or land goes up and down like a see saw.
(6) When the bubble was in the growing phase, everybody made money.
(7) If you are smart and know that you are living in a growing bubble, it is worthwhile to borrow money (like A ) and take part in the game. But you must know when you should change everything back to cash.
(8) As in the case of land, the above phenomenon applies to stocks as well.
(9) The actual worth of land or stocks depend largely on psychology.

Stop Loss Trigger ??

I started trading today on the BSE. Here is something I need to know.

Stop Loss Trigger Tool

The Stop Loss Trigger Tool is actually a bit of a misnomer.

This tool is most useful in protecting your profits on an open position. The Stop Loss order is a conditional order to either Buy or Sell.

The condition being that the order is activated only when that stock trades at a specific price defined by you. As is the case in any order, you will have to specify the quantity and the limit price (or market price) at which you want the order to be executed.

And in addition you will have to specify a Trigger Price.

Only if the Exchange records a trade at the price defined as Trigger price by you, will your order will be activated.

In case you choose to use a Limit price (as opposed to market price) for your Stop Loss order, you must remember the following guideline :

- For a Buy order, the limit price must be greater than or equal to the trigger price.

- For a Sell order, the limit price must be less than or equal to the trigger price.

If, for a stop loss order to buy, the trigger price is 93.00, the limit price is 95.00 and the market (last trade) price is 90.00, then this order will be released into the system once when the market price reaches or exceeds 93.00. This order will be added to the order queue at the exchange with the time of triggering as the time stamp, as a limit order to buy at Rs95.00. Till such time that the order is triggered it will stay in a separate queue at the exchange which is not visible to other market participants.

Remember even the stop loss tool is valid only for a trading day. If your stop loss order is not triggered during the trading day, it shall lapse automatically at the end of the trading session.

When do you use a Stop loss order?

The Stop Loss order is a great way for a trader to manage his exposure in the market. Lets us say that a trader wants to buy ABC company at Rs100 because he expects the price to rise to Rs120 in a short time. But he does not want to take an unnecessary risk and hence he wants to exit the trade (sell his shares) in ABC company if the price drops below Rs95.

So he first buys 100 shares at Rs100. Then to protect himself against an unexpected movement and limit his losses he would punch in a stop loss sell order for 100 shares of ABC Co. with a trigger price of Rs95. He could choose to sell with a limit price of his choice or at market price.

So if the shares of ABC drop to trade at Rs95 his order is immediately triggered and pushed into the queue for execution.

This system finds similar application in the case of short positions.

Disclosed Quantity :
The system provides a facility for entering orders with quantity conditions: DQ order allows the member to disclose only a part of the order quantity to the market. DQ (Disclosed Quantity) should not be less that 10% of the Order Quantity and at the same time should not be greater than or equal to the Order Quantity.

Planting the seeds of Love

The things we have loved and tended continue to thrive, even when we can no longer care for them.

I go grocery shopping nearly every day. We go every two weeks for a full order, but it seems I always need something just when I am about to prepare dinner. I'm not sure if I'm just absent-minded, or if I really go to the store because I meet people there. A little of both, I guess.

This day would not disappoint me. I was trying desperately to find a tomato that looked like I just picked it off the vine in my garden. In reality my garden failed miserably this year. It was all my fault. I just didn't take care of it. But now I wish I had. The prices of fresh vegetables are high and the quality low.

In frustration I finally grabbed the best one I could find. Backing away from the counter with my meager selection in hand, I wasn't paying attention.

"Oh, I'm so sorry!" I said as I nearly fell over a woman in an electric scooter. Many stores have started providing them as a courtesy to those who have difficulty getting around. I see them everywhere.

Well, except for this one, and it was right behind me.

"Oh, that's okay. I'm used to it. They need to put horns on these things," she said with a smile. "We are positioned a bit lower and somewhat out of view. They are also so quiet that often times people just don't hear us coming. But I don't know what I'd do without one."

"I was so wrapped up in trying to find a good tomato," I said.

She nodded. "The prices keep going up, too. I used to grow my own. The best in the neighborhood. But this year I just couldn’t do it any more."

"Well, I grew cherry tomatoes this year. They weren't supposed to be. They were Big Boys that never grew up," I said, laughing. She then maneuvered her way closer to find one for herself. "I'm sorry for your challenges. It must be frustrating," I added.

"Well, it all requires a change in attitude. I could spend my time thinking about what I can't do any more, or spend it on what new things I can do."

Then backing up and turning her cart so she could face me, she continued. "Sure, I loved gardening. Besides my vegetables I also planted many flowers. I learned all the tricks of the trade to make them bloom bigger and better each year. I thought my garden would look so bleak, but it's wonderful. You see, even though I can't do all the things I once did, the flowers can. The perennials keep doing what they know how to do best. They came back again all on their own. All those years of love and attention kept them strong, so my work paid off. It's like raising my children. I did all the work and now they will take over from here."

"I love your attitude," I said. "But tell me, what new thing have you discovered? You said you need to focus on new things you can do."

"Well, I can go to the grocery store and make new friends by running into perfect strangers with my cart," she said, grinning.

"Or they can fall over you when they aren't paying attention," I put in.

"What I've discovered is I can't grow flowers any more, but I can paint them. Since I can't get around as much and they are just sitting there, we are a perfect match. The annuals, the flowers I won't see in my yard because they need to be replanted each year, are as much a part of my memory as the sunsets."

"Oh, another sunset lover."

"Yes, but the great part about sunsets is, you not only remember how beautiful the sunset was, you remember when and where you saw it."

"And the flowers?"

"When I hang my flower paintings on the wall, the fresh scent lingers in my soul from years of loving them up close. Again just like raising kids," she said.

"Just like meeting you, my friend. You added beauty to my day and will brighten the dark corners of my memory just when I need it most," I told her.

The tomato was perfect with dinner.

Source: http://www.beliefnet.com/nllp/Inspiration.aspx?WT.mc_id=Inspiration03&date=10-05-2008

!! Engineer is King !!

Take 1
Two engineering students were walking across campus when onesaid, "Where did you get such a great bike?"
The second engineer replied, "Well, I was walking along yesterday minding my own business when a beautiful woman rode up on this bike. She threw the bike to the ground, took off all her clothes and said, "Take what you want."
"The second engineer nodded approvingly, "Good choice; the clothes probably wouldn't have fit."


Take 2
An architect, an artist and an engineer were discussing whether it was better to spend time with the wife or a mistress.
The architect said he enjoyed time with his wife, building a solid foundation for an enduring relationship. The artist said he enjoyed time with his mistress, because of the passion and mystery he found there. The engineer said, "I like both." "Both?" Engineer: "Yeah.
If you have a wife and a mistress, they will each assume you are spending time with the other woman, and you can go to the lab and get some work done."


Take 3
A pastor, a doctor and an engineer were waiting one morning for a particularly slow group of golfers.
The engineer fumed, "What's with these guys? We must have been waiting for 15 minutes!"
The doctor chimed in, "I don't know, but I've never seen such ineptitude! "
The pastor said, "Hey, here comes the greens-keeper. Let's have a word with him." [dramatic pause] "Hi George. Say, what's with that group ahead of us? They're rather slow, aren't they?"
The greens-keeper replied, "Oh, yes, that's a group of blind fire-fighters. They lost their sight saving our clubhouse from a fire last year, so we always let them play for free anytime." The group was silent for a moment.
The pastor said, "That's so sad. I think I will say a special prayer for them tonight."
The doctor said, "Good idea. And I'm going to contact my ophthalmologist buddy and see if there's anything he can do for them."
The engineer said, "Why can't these guys play at night?"

Ouch!!
Traditionally engineers have been viewed as geeks or nerds who do nothing but study strange kinds of things and manufacture big machines and buildings. Even nowadays when some coaching institute puts up an ad showing engineering aspirants they would put up posters of people with formal boring shirts and a metallic cap which the mechanics wear in garages. Whereas the doctors they'll show are all smart and dashing with matching colourful shirts inside their white aprons.
I mean why such discrimination against engineers. They would make serials like sanjeevani and dhadkan for doctors. Do only doctors have the charm to woo girls. And engineers are all boring people found glued to their computer screens or buried inside a pile of machines.
Come on, engineers are not like that. At least not what I've seen and known.
Then who are engineers and what are engineers. Well understanding this species is extremely difficult. However the common characteristics are:
Extreme
Whatever they do has to be on an extreme. No study for the 4-5 months of the semester and no sleep for the 4-5 days before the exams. The same student who you'll find with his torn jeans and the college t-shirt jumping out of the class(or rather bunking out of the class), impressing the panel of interviewers from the very best companies of the world.
The same stud whom you found half-conscious and fully drunk lying outside the hostel gate in the garden, can stun a gathering full of scholars while delivering a speech on consiousness.
Adaptive
Engineering students are supposed to be the most indisciplined and rude fellows on campus who are always clumsily dressed. But what happens to these guys/gals when they hit the corporate floor. They are the most smartly dressed people and present the face of India Inc.
They are as comfortable in the college-side khokha(dhaba) eating maggy sitting on the mat as they are while having lunch with their clients in a 5-star hotel.
Matter-of-factly
The 4 years of engineering teaches engineers how to learn. Learn different concepts, languages, techniques and anything else. Engineers are basically learners. Engineers doing well in CAT and other entrances are not because they are engineers but because they are good learners and can adapt to the changing situations.

To the optimist, the glass is half full. To the pessimist, the glass is half empty. To the engineer, the glass is twice as big as it needs to be.

Investment Banking - What do they do

An investment bank uses its proprietary book (own money) to lend others and invest. It started with the subprime crisis. Banks like Lehman, buy mortgage loans from other banks, and then package them to sell bonds against the loan pool. Often they add cash to make the loan pool more attractive, so that the bonds can be sold at a higher price.

Suppose mortgage was earning 6%, these bonds are sold at 4%. The difference is the spread which the investment bank earns. By selling these structured bonds, it raises money and frees capital. But when homebuyers started defaulting, these bonds lost their value. It all began like this, and then the virus spreads across markets.

3 Ways to Persuade

Aristotle (right) says, "Calm down, Plato.Campaign rhetoric isn't that bad."
The U.S. presidential campaign is kicking into high gear. That means both sides will be pulling out all of the rhetorical stops to try to persuade folks to pick their candidate. So, for a little perspective on the art of persuasion, we're turning to a political commentator unlike any on TV. We're turning to famous Greek philosopher Aristotle (384-322 BC). He wrote the book on rhetoric--called The Art of Rhetoric--way back in the 4th century BC. We asked Aristotle, how should those politicians persuade? He told us that, aside from "tortures, depositions, and the like," there are only three ways: logos, pathos, and ethos. In English, you might say logic, emotion, and character. Put it all together, and you get a reasonable argument, passionately made, by a person you trust.

Logos

Logic is an obvious one. After all, who isn't a sucker for irrefutable facts, verifiable numbers, and the inexorable march of reason across the course of a well-constructed speech? In fact, for many thinkers, including Aristotle's mentor, Plato, logos is the only legitimate way to win friends and influence people. The rest is sophistry. Logos was even more persuasive to ancient Greek philosophers, because they had a pretty expansive notion of what logos was. It could be the simple reason in the words of a speech, or it could mean the supreme reason of the universe, which all rational appeals naturally plugged into.

Pathos

Still, unlike old Plato, Aristotle was willing to look beyond strictly rational appeals. He recognized that people "do not give judgment in the same way when aggrieved as when pleased"--especially, he snobbily wrote, "audiences of limited intellectual scope and limited capacity to follow an extended chain of reasoning." Enter pathos. Let's face it, said Aristotle. If you really want to persuade people, sometimes you have to resort to emotional appeals. It's why campaigns try to wrap themselves in the flag and make you fear the other guy. It's why a winning smile and puppy-dog eyes work magic in getting your way. It's why lawyers have the saying "If the facts are on your side, pound the facts. If the law is on your side, pound the law. If neither is, pound the table." Of course, emotional appeals can take more subtle forms, too. Aristotle pointed out that eloquence itself is a kind of emotional persuasion. "Style makes the matter more persuasive," he wrote, "for the mind is tricked as though the speaker were telling the truth."

Ethos

For a reason-loving philosopher like Aristotle, admitting the power of pathos had to be hard enough. But he goes even further with ethos. "Character," he wrote, "contains almost the strongest proof of all." Quite simply, it matters who's trying to persuade you. If the person trying to sway you shows "common sense, virtue, and goodwill" (for Aristotle, an ethical trifecta), then really, aren't you more likely to believe what that person says? Aristotle thought so, and so thought that persuasive attempts must work to "establish the speaker himself as being of a certain type"--namely, the type of person you'll believe. Sometimes ethos is the only thing that matters. If, based on arcane medical tests, one doctor says you need immediate surgery, and another says you don't, how are you going to decide--except by judging who seems more credible? Similarly, lawyers put dueling experts on the stand, and politicians put dueling wonks on TV. Their reasons are obscure and technical, and only ethos makes the sale. That's why the old vaudeville philosophers used to say, "If you can fake sincerity, you've got it made."

Rohtang Tour

I went to visit Rohtang Pass while I was in Manali in month of August, 2008. It was a very unique experience for me. I was there with my mother and my maternal uncle and we enjoyed each and every bit of this journey and stay. Though I just wished if I was there with my friends as it would have been a different experience altogether. I do have many memorable moments from that journey. More than words, let's use snaps to go through the tour.



Roads on each turn seemed to end in the middle of the way. Sun was playing hide and seek that day, but it was a quite enjoyable weather while we were moving towards Rohtang.

In-Progress, keep visiting for new information and snaps !!

Systematic Investment Plans aka SIP

Systematic Investment Plans (SIPs) are much misunderstood. For one, investors often mistake SIPs as an investment avenue rather than a mode of investing in mutual funds. Then there are investors who invest in SIPs expecting quick results without fully appreciating the need to invest via SIPs for the long-term.

In an earlier article, we discussed how SIPs are perceived incorrectly by many investors as standalone investments. This explains why one of the most common queries we receive on the website is – which is the best SIP? Unfortunately, these investors have not been educated by their investment advisors about SIPs i.e. SIPs are only a mode of investing and not an independent investment avenue.

Minimum tenure of an SIP
Another misconception investors have about SIPs is with regards to the minimum tenure. Most fund houses have a minimum SIP tenure of 6 months. This leads investors to believe that 6 months is the ideal time frame for investing via SIPs (just like a lot of investors invest Rs 5,000 in mutual funds simply because that is the minimum investment amount for several mutual fund schemes).

In our view, investors should ideally invest via SIPs over at least 2-3 years. This way they can exploit the most critical benefit of an SIP – rupee cost averaging. Let’s understand how this is possible.

For an SIP to deliver the goods, it must witness a falling market. This way the investor can average out his cost of purchase. If the investor does not witness a downturn, i.e. he is only exposed to a market rally, the average purchase cost of his SIP will rise over a period of time.

SIPs in a rising market

Month of investment	NAV (Rs)	No. of Units
January	11.00	45.45
February	12.00	41.67
March	12.50	40.00
April	12.90	38.76
May	13.25	37.74
June	13.40	37.31
Avg. purchase cost of 6 SIPs	Rs 12.45

In the above table the average purchase cost of the SIP is Rs 12.45. Clearly, the SIP has not worked in the investor’s favour. Why is that? Because if he had instead invested lumpsum in January, his purchase cost would have been Rs 11.00 as opposed to the average purchase cost of Rs 12.45 over a 6-month period.


SIPs in a falling market

Month of investment	NAV (Rs)	No. of units
January	11.00	45.45
February	12.00	41.67
March	12.50	40.00
April	12.90	38.76
May	13.25	37.74
June	13.40	37.31
July	12.10	41.32
August	11.20	44.64
September	10.30	48.54
October	10.10	49.50
November	10.50	47.62
December	10.20	49.02
Avg. purchase cost of 12 SIPs	Rs 11.50

However, if the investor had opted for a longer investment tenure of say 12 months, he could have benefited from greater fluctuations in the mutual fund’s NAV. These fluctuations which arise over a market cycle lower the average purchase cost of the SIP over the long-term.

This is apparent from the above illustration. As is evident from the table, if the investor had taken an SIP for 12 months (instead of 6 months) his average purchase cost would have declined to Rs 11.50. Compare this with the average purchase cost of Rs 12.45 for a 6-month SIP.

It can be argued that there is no way for the investor to know when there is likely to be a turnaround in the markets (in this case a downturn). That is exactly our point. Since the investor does not know when markets will fall (and lower his average purchase cost), he must opt for a longer SIP tenure. Or at least he must manage his investments in a manner so that when his existing SIP terminates without witnessing a dip in stock markets, he can extend it further. This way should the markets fall, his SIP can benefit from a dip in the mutual fund NAV which in turn will lower his average purchase cost.

Points to remember before opting for an SIP

1) Ironically, while SIPs are meant to eliminate market-timing, investors must opt for a long-enough SIP tenure so as to ‘time’ the market downturn.

2) SIPs are equally beneficial in a falling market. Most investors believe that lumpsum investments (as opposed to SIPs) prove more beneficial in a falling market. This is only partly true. Having an SIP in operation during a falling market can ensure that investors stand to benefit should markets fall even further.

Health Insurance -- An Insight

Health insurance is a catch-all term that covers three distinct policies.

1. Mediclaim Policy
2. Hospitalisation Policy
3. Critical Illness Policy

Lets understand a little bit about each one of them.

Mediclaim Policy
This health policy reimburses you the actual hospitalisation cost for treatment of any disease and is offered only by non-life insurers.

Hospitalisation Policy
In this health policy, you primarily get a daily allowance for every day spent in the hospital. Some policies also provide higher daily allowance for stay in intensive care unit (ICU).
Others have a provision for lump sum payment if you undergo any of the surgical procedures covered in the policy.

Critical Illness Health Policy
This policy is in a way a specification to any of the above two policies. The next type of health insurance covers critical illness. Given the increased stress and strain of modern life combined with unhealthy and sedentary lifestyles, most of us are prone to serious illness.

But advances in modern medicine ensure that most of us survive these. This, however, comes at a cost and makes a serious dent in our ability to pay, either from salary or business. This is where a critical illness cover can step in and pay off a lump sum benefit.

Most life insurers have for long offered these covers as riders (riders are covers for additional risks or to enhance the existing risk covers). Now, these critical illness covers are also being offered as standalone policies for specific illnesses like cancer . These policies are recommended for salary earners.

A relevant question would be whether one would need a hospitalisation policy if s/he already has a Mediclaim policy?

A Mediclaim policy only reimburses the expenditure incurred in the actual treatment of the disease/illness at a hospital. The policies offered by life insurers are actually an addition and not replacements for Mediclaim policies. It can not be replaced by any other kind of policy.

Under the umbrella of Hospitalisation and Critical Illness Policies, Life-Insurers provide excellent products. Such policies should be a necessary part of your risk cover portfolio.

Policies offered by life insurers (Hospitalisation and Critical Illness Policies) cannot be cancelled during their tenure.
Non-life policies (Mediclaim Policies) can be cancelled.

Also, policies issued by life insurers guarantee a cover during their entire tenure.

For more information, you might find these links pretty useful while deciding which one to choose:
http://www.apnainsurance.com/index.html

Trip to Manali - Details of Journey by Road

Well, to start with, after I did all my research about travel options, among air, rail and road. There were 3 airlines, Indian Airlines, Spice Jet and Jagsons Airways providing flights from Delhi to Bhuntar, airport in Kullu. Information on net told me that airport to Bhuntar is 55 kms. However, when I discovered that Bhuntar was on my way from Kullu to Manali and taxis were pretty easily available from Bhuntar to Kullu.

As far as train is concerned, I think we need to change the train somewhere in between as it is only Narrow Gauge in Kullu. So this idea did not suit me as I was going with my mom and uncle who are quite aged to change trains along with the luggage.

Next option was by road using either Volvo or private taxis. There are sevearal sites where you can book a cab from delhi to manali. However, I found them quite expensive @12000/- for a trip. I just felt that spending more on my journey part rather than on my accomodation and sight-seeing would not be a right thing.

Hence I decided to finalise with Volvo buses. I got good reviews from several people who told me that it is quite comfortable for aged people. And since I had never tried it myself, I thought to give it a chance.

There were many avenues to book Volvo buses from Delhi to Manali, some of them are:

http://www.volvo.com/bus/india/en-in/
http://www.volvobusesindia.com/ (I booked through this one as rest were going full !!)

My experience with Volvo's though was quite mixed one. Some key things which I would remember next time I use volvo to travel for long distances (meant over-nite) are:

1. You should choose the first 4 seats which are normally numbered as 1,2,3,4. Usually there are 2 drivers in each bus so that one can drive and other can sleep for the rest of the journey. Hence one seat is normally reserved for a driver. But this is not necessary and if there are no other seats, this seat can be given to passenger, but it depends and is discretionary to the driver and staff on board.
2. You should keep necessary stuff with you in handbags as luggage would get locked in the rear compartment just like it happens in airlines.
3. You should carry some woollens to use in nights as you never know if temperature falls outside the bus and ACs start working more efficiently :). Some travel operators do provide blankets which are quite sufficient in normal conditions.
   

Bad part of our journey:
We did face quiet tough times as our bus got stuck in a landslide near chandigarh. We were not really stuck in landslide but we could not move ahead Keerat Pur Sahib, 50kms from Chandigarh as the highway was supposedly closed due to landslide farther up the road. And hence several buses were there in the queue before us and most of the tourists were just standing on the road. Since it was 6 in morning, most of them were stretching and busy getting fresh. After an hour or so, we all realised that if we do not go back to local bus stand some 3-4 kms below the point where we were stuck, we might not able to move from there at all. This was due to the fact that line of buses behind us had already started increasing and was not stopping as more and more buses were enqueing.
Hence we came back to Keerat Pur Bus Stand and then had breakfast and ladies could freshen themselves and get food for children & infants. Next we started to talk to different people trying to find out ways to get manali. I saw some Tata Sumos standing at the bus stand . I went to a guy and found out the price he would charge for taking a cab full of us to Manali from that place. He told me it would cost me around 5500/- for a cab. I was not qutie convinced as I didn't know what to do. So I just came back and waited for drivers to tell if they got any news about road getting cleared from their colleagues up on the hill. Drivers normally have few of their colleagues coming back from the other side.
After talking to them, I could make out that they were not quite optimistic of getting this route cleared soon. Btw, tata sumos would have taken another route to Manali. Basically we went through
Chandigarh --> KiratPur Sahib --> Ropar --> Nangal --> Una (we enter HP) --> Badsar --> ShahTalai (distt BilasPur) --> Barthin (distt BilasPur) --> Prinni Nagar --> Sundar Nagar --> Ner Chauk (distt Mandi) --> Mandi Proper --> Pandoh dam --> Bajoura --> Bhuntar Airport --> Shamshi Main Market --> Kullu --> Katrain --> Manali.
Basically we had circled around the Gobind Sagar Lake to avoid the main chandigarh - Manali Highway which was blocked due to landslide.

So somehow we reached Manali at around 9:45 PM. Luckily the hotel manager was quite a nice person, Mr. Lalit. He was waiting for us and the cab driver, Monty just came withing few minutes at the bus stand to pick us up.

We reached our hotel, Dreamland which was around 2kms away from the main market and bus stand.

While coming back, I asked the hotel manager to book the front seats in the volvo bus. Charges were same, 1000/- per seat. Till our return date, government had permanently closed Chandigarh-Manali highway due to landslides. So the drivers chose to go via Simla. We left at around 7 in evening and I slept for almost all the night part of my journey. We were at Ambala at around 7 in morning. We had taken a hault at Ambala to get freshen up and have some thing to eat. Then we reached Delhi at around 12 and reached home till 3.

Read next blog for my experience and learnings during my stay at Manali.

=== Your Opinion Matters ===

Gold ETF versus Buying Gold for Investment

While individual gold holdings are the highest in India, most of it is in the form of jewellery. But jewellery is an uneconomic method of holding gold as on selling jewellery you will lose up to 10 per cent of the gold value and also the making charges that you paid during the purchase.

“Those who want to buy gold for investment, prefer buying medallions and bars — this category has been growing in India over the past few years,” informs Mr Shah. Although coins and bars do not attract making charges, the sale discount is still there if the gold is not hallmarked. Hallmarked gold attracts the lowest discount and can be sold at 1-2 per cent lower than the market value.

Gold jewellery is not as good a investment as it is not as liquid as bars or gold funds, points out financial planner Gaurav Mashruwala. If you are saving to buy jewellery it makes sense to buy gold coins. These coins are accepted by jewellers in return for gold used in jewellery. If you intend to sell the coins, you may have to take a discount of up to 4 per cent, irrespective of how pure are the coins/bars.

But if you are holding a large quantity of gold, you will have to make provisions for storage and insurance as there is a security issue in keeping gold at home.

Gold ETFs are quite similar to mutual funds. The money you invest in gold ETFs is used to purchase physical gold of equivalent value. The advantage of ETFs are that the fund house that issues the gold ETF takes over the responsibility of storage and insurance of this gold. Gold ETFs are also tax efficient unlike physical gold. “While physical gold is considered a long-term investment, only if you hold the same for three years, gold ETFs acquire this status after one year,” says Mr Mashruwala.

In short, selling gold within three years of purchase will attract capital gains tax. Moreover , holding large quantities of physical gold can attract wealth tax, while gold in demat form does not. This apart, the spread between the buy and sell prices pertaining to gold ETFs is less than that of physical gold.

In other words, while your jeweller could sell you a gram of physical gold at Rs 105 and buy the same at Rs 95, you can buy a unit of gold ETF at Rs 101 and sell it at Rs 99. “Doing an SIP in gold would be the best option in the current scenario,” reckons Pritam Patnaik, AVP, Kotak Commodity Services.

The two gold ETFs that are more than a year old — Gold Benchmark ETF and UTI Gold ETF — have delivered more than 40 per cent returns in the last one year. In case of others too, the returns have been positive for most months, in contrast with equity and debt funds that have posted negative or mediocre returns. However, the two world gold funds, which invest in stocks of gold mining companies, have had to suffer a fate similar to other equity funds. “It is advisable that you invest in gold as a commodity. Gold funds basically invest in gold mining companies. If you buy a gold fund, you actually invest and take a risk on that company and not on gold," adds Mr Gopkumar.

Every number is special !!

http://www.stetson.edu/~efriedma/numbers.html

Speech from Chetan Bhagat to Symbiosis MBA Fresh Batch

Good Morning everyone and thank you for giving me this chance to speak to you. This day is about you. You, who have come to this college, leaving the comfort of your homes (or in some cases discomfort), to become something in your life. I am sure you are excited. There are few days in human life when one is truly elated. The first day in college is one of them. When you were getting ready today, you felt a tingling in your stomach. What would the auditorium be like, what would the teachers be like, who are my new classmates - there is so much to be curious about. I call this excitement, the spark within you that makes you feel truly alive today. Today I am going to talk about keeping the spark shining. Or to put it another way, how to be happy most, if not all the time.

Where do these sparks start? I think we are born with them. My 3-year old twin boys have a million sparks. A little Spiderman toy can make them jump on the bed. They get thrills from creaky swings in the park. A story from daddy gets them excited. They do a daily countdown for birthday party – several months in advance – just for the day they will cut their own birthday cake.

I see students like you, and I still see some sparks. But when I see older people, the spark is difficult to find. That means as we age, the spark fades. People whose spark has faded too much are dull, dejected, aimless and bitter. Remember Kareena in the first half of Jab We Met vs the second half? That is what happens when the spark is lost. So how to save the spark?

Imagine the spark to be a lamp's flame. The first aspect is nurturing - to give your spark the fuel, continuously. The second is to guard against storms.

To nurture, always have goals. It is human nature to strive, improve and achieve full potential. In fact, that is success. It is what is possible for you. It isn't any external measure - a certain cost to company pay package, a particular car or house.

Most of us are from middle class families. To us, having material landmarks is success and rightly so. When you have grown up where money constraints force everyday choices, financial freedom is a big achievement.

But it isn't the purpose of life. If that was the case, Mr Ambani would not show up for work. Shah Rukh Khan would stay at home and not dance anymore. Steve Jobs won't be working hard to make a better iPhone, as he sold Pixar for billions of dollars already. Why do they do it? What makes them come to work everyday?

They do it because it makes them happy. They do it because it makes them feel alive. Just getting better from current levels feels good. If you study hard, you can improve your rank. If you make an effort to interact with people, you will do better in interviews. If you practice, your cricket will get better. You may also know that you cannot become Tendulkar, yet. But you can get to the next level. Striving for that next level is important.

Nature designed with a random set of genes and circumstances in which we were born. To be happy, we have to accept it and make the most of nature's design. Are you? Goals will help you do that.



I must add, don't just have career or academic goals. Set goals to give you a balanced, successful life. I use the word balanced before successful. Balanced means ensuring your health, relationships, mental peace are all in good order.

There is no point of getting a promotion on the day of your breakup. There is no fun in driving a car if your back hurts. Shopping is not enjoyable if your mind is full of tensions.

You must have read some quotes - Life is a tough race, it is a marathon or whatever. No, from what I have seen so far, life is one of those races in nursery school. Where you have to run with a marble in a spoon kept in your mouth. If the marble falls, there is no point coming first. Same with life, where health and relationships are the marble. Your striving is only worth it if there is harmony in your life. Else, you may achieve the success, but this spark, this feeling of being excited and alive, will start to die.

One last thing about nurturing the spark - don't take life seriously. One of my yoga teachers used to make students laugh during classes. One student asked him if these jokes would take away something from the yoga practice. The teacher said - don't be serious, be sincere. This quote has defined my work ever since. Whether its my writing, my job, my relationships or any of my goals. I get thousands of opinions on my writing everyday. There is heaps of praise, there is intense criticism. If I take it all seriously, how will I write? Or rather, how will I live? Life is not to be taken seriously, as we are really temporary here. We are like a pre-paid card with limited validity. If we are lucky, we may last another 50 years. And 50 years is just 2,500 weekends. Do we really need to get so worked up? It's ok, bunk a few classes, goof up a few interviews, fall in love. We are people, not programmed devices.

I've told you three things - reasonable goals, balance and not taking it too seriously that will nurture the spark. However, there are four storms in life that will threaten to completely put out the flame. These must be guarded against. These are disappointment, frustration, unfairness and loneliness of purpose.

Disappointment will come when your effort does not give you the expected return. If things don't go as planned or if you face failure. Failure is extremely difficult to handle, but those that do come out stronger. What did this failure teach me? is the question you will need to ask. You will feel miserable. You will want to quit, like I wanted to when nine publishers rejected my first book. Some IITians kill themselves over low grades – how silly is that? But that is how much failure can hurt you.

But it's life. If challenges could always be overcome, they would cease to be a challenge. And remember - if you are failing at something, that means you are at your limit or potential. And that's where you want to be.

Disappointment's cousin is frustration, the second storm. Have you ever been frustrated? It happens when things are stuck. This is especially relevant in India. From traffic jams to getting that job you deserve, sometimes things take so long that you don't know if you chose the right goal. After books, I set the goal of writing for Bollywood, as I thought they needed writers. I am called extremely lucky, but it took me five years to get close to a release.

Frustration saps excitement, and turns your initial energy into something negative, making you a bitter person. How did I deal with it? A realistic assessment of the time involved – movies take a long time to make even though they are watched quickly, seeking a certain enjoyment in the process rather than the end result – at least I was learning how to write scripts , having a side plan – I had my third book to write and even something as simple as pleasurable distractions in your life - friends, food, travel can help you overcome it. Remember, nothing is to be taken seriously. Frustration is a sign somewhere, you took it too seriously.

Unfairness - this is hardest to deal with, but unfortunately that is how our country works. People with connections, rich dads, beautiful faces, pedigree find it easier to make it – not just in Bollywood, but everywhere. And sometimes it is just plain luck. There are so few opportunities in India, so many stars need to be aligned for you to make it happen. Merit and hard work is not always linked to achievement in the short term, but the long term correlation is high, and ultimately things do work out. But realize, there will be some people luckier than you.

In fact, to have an opportunity to go to college and understand this speech in English means you are pretty darn lucky by Indian standards. Let's be grateful for what we have and get the strength to accept what we don't. I have so much love from my readers that other writers cannot even imagine it. However, I don't get literary praise. It's ok. I don't look like Aishwarya Rai, but I have two boys who I think are more beautiful than her. It's ok. Don't let unfairness kill your spark.

Finally, the last point that can kill your spark is isolation. As you grow older you will realize you are unique. When you are little, all kids want Ice cream and Spiderman. As you grow older to college, you still are a lot like your friends. But ten years later and you realize you are unique. What you want, what you believe in, what makes you feel, may be different from even the people closest to you. This can create conflict as your goals may not match with others. . And you may drop some of them. Basketball captains in college invariably stop playing basketball by the time they have their second child. They give up something that meant so much to them. They do it for their family. But in doing that, the spark dies. Never, ever make that compromise. Love yourself first, and then others.

There you go. I've told you the four thunderstorms - disappointment, frustration, unfairness and isolation. You cannot avoid them, as like the monsoon they will come into your life at regular intervals. You just need to keep the raincoat handy to not let the spark die.

I welcome you again to the most wonderful years of your life. If someone gave me the choice to go back in time, I will surely choose college. But I also hope that ten years later as well, you eyes will shine the same way as they do today. That you will Keep the Spark alive, not only through college, but through the next 2,500 weekends. And I hope not just you, but my whole country will keep that spark alive, as we really need it now more than any moment in history. And there is something cool about saying - I come from the land of a billion sparks.

Thank You.

"Insurance is a subject matter of solicitation." ???

This has something to do with the following concept behind the insurance:

(1) The Insurer (i.e. insurance company) and Insured (i.e. an individual) enter into a legal contract. The Insured pay a premium to the Insurer and in return the Insurer assures the Insured to compensate him against the losses or hazards mentioned in the contract.

(2) The Insured has an insurable interest in the subject matter (i.e. some property or life of certain individual). This means that the Insured stands to gain if the subject matter is protected against the hazards and will stand to lose if any damage is caused to the subject matter.

(3) Though the Insurer assures the Insured to compensate against certain type of losses, he do not assure to compensate 'all' the losses. In any case the Insured stand to lose 'something' in case of loss of damage to the subject matter. (For example, one can not get a property insured at a higher amount than its actual value and then stand to gain from insurance claim in case the property is damaged. This will be a breach of contract.)

(4) Even after entering into insurance contract with Insurer, the Insured will take all reasonable and appropriate steps for the safety of the subject matter. For example, if a house is insured against theft, fire, etc, the Insured party can not delibrately or negligently expose the house to such hazards.

(5) The Insurer approaches, prompts, lure (???) the Insured to enter into the insurance agreement. However, the Insured party is supposed to reveal all relevant information related to the subject matter in 'good faith'. For example, in case of life insurance the Insured is supposed to expressely reveal to the Insurer of any health complications, etc that he is aware of and that may have some impact on the insurance contract. (The insurance premium is decided keeping in view possible risk, so if some factors are concealed, it will impact the amount of premium.)

Technical Risk Ratios for Portfolio Planning

There are five ratios referred to while creating and maintaining efficient portfolios.

1. Alpha,
2. Beta,
3. Standard deviation,
   
4. R-squared, and
   
5. The Sharpe ratio.

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Alpha
A measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a mutual fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a fund's alpha.

A positive alpha of 1.0 means the fund has outperformed its benchmark index by 1%. Correspondingly, a similar negative alpha would indicate an underperformance of 1%.

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Beta
A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.

Beta is calculated using regression analysis, and you can think of beta as the tendency of a security's returns to respond to swings in the market. A beta of 1 indicates that the security's price will move with the market. A beta of less than 1 means that the security will be less volatile than the market. A beta of greater than 1 indicates that the security's price will be more volatile than the market. For example, if a stock's beta is 1.2, it's theoretically 20% more volatile than the market.

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Standard Deviation

Standard deviation is a statistical measurement that sheds light on historical volatility. For example, a volatile stock will have a high standard deviation while the deviation of a stable blue chip stock will be lower. A large dispersion tells us how much the return on the fund is deviating from the expected normal returns.

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R-squared

R-squared values range from 0 to 100. An R-squared of 100 means that all movements of a security are completely explained by movements in the index. A high R-squared (between 85 and 100) indicates the fund's performance patterns have been in line with the index. A fund with a low R-squared (70 or less) doesn't act much like the index.

A higher R-squared value will indicate a more useful beta figure. For example, if a fund has an R-squared value of close to 100 but has a beta below 1, it is most likely offering higher risk-adjusted returns. A low R-squared means you should ignore the beta.

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Sharpe Ratio

The Sharpe ratio tells us whether a portfolio's returns are due to smart investment decisions or a result of excess risk. This measurement is very useful because although one portfolio or fund can reap higher returns than its peers, it is only a good investment if those higher returns do not come with too much additional risk. The greater a portfolio's Sharpe ratio, the better its risk-adjusted performance has been.

A variation of the Sharpe ratio is the Sortino ratio, which removes the effects of upward price movements on standard deviation to measure only return against downward price volatility.

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Financial health of a company: some tips

We started off by eliminating all those companies that had recorded less than 15% growth in net sales and PAT in any of the past three years.

Further, we filtered companies on the basis of debt-to-equity ratio and return on capital employed (RoCE). While a high debt-to-equity ratio indicates that a company may not be able to generate enough cash to satisfy its debt obligations, a low leverage ratio increases a company’s potential to raise funds.

Hence, we selected companies which had a debtto-equity ratio of less than 1.5. In order to carry sustainable operations, it is necessary for a company to operate at an RoCE which is well above its cost of capital. Only those companies with an RoCE of more than 15% could make it to the next stage.

The final criterion was to do away with all companies whose three-year average net cash flows from operating activities was less than 50% of their reported cash profit.

Behavioral Economics Podcasts

To view some relevant podcasts for Consumer Behavior, visit:

http://www.marketingprofs.com/events/4/podcasts/?adref=emA24468

Ensure that you have enough bandwidth to see a smooth video.

Cheers,
Sachin

SIP + Insurance but Not ULIP

A number of mutual fund companies have tied up with insurance companies to offer long-term investment plans that offer you an insurance cover for the residual part of your entire investment plan. If you die part of the way through the plan, then your survivors will get not just the principal and returns of the amount that you have invested, but also the amount that you had not yet invested, but intended to.

Because this product is so unusual, it's probably not quite clear how this works, so let me explain through a detailed example. Let's say that a forty-year old person decides to invest Rs 20,000 a month till he is fifty-five years old. This amounts to investing Rs 2.4 lakh a year, or Rs 36 lakh over the entire fifteen year period. He decides to invest this money in a Systematic Investment Plan of an equity fund. Based on past experience, he expects to earn an average of perhaps 15 per cent a year on the investments he makes.

He starts investing and for five years, everything is fine. His has invested Rs 20,000 a month for five years, which comes to a total of Rs 12 lakh. His investments have yielded an average of about 15 per cent a year and are now worth a total of Rs 17 lakh. At this point, an unfortunate mishap occurs and he passes away. Normally, that would be the end of the investment plan. Of the Rs 36 lakh he originally intended to invest, he could invest only Rs 12 lakh before he died.

However, if this person had invested in the insured investment products that I'm talking about, then this would not be the end of the story. The 24 lakh that he couldn't invest because he died will be paid to his family by the insurance company. So his family gets the Rs 41 lakh which is Rs 17 lakh (the current value of the 12 lakh that he was able to invest), plus the 24 lakh that he intended to invest but couldn't because he died. His family could then invest the money and thus make sure that the financial plan is not disrupted. This isn't like a normal insurance where the amount you are insured for stays constant. Instead, the amount insured keeps decreasing. At any point, this amount is equal to what remains out of the original investment plan that the investor signed up for.

The obvious question is who pays for the insurance. After all, if the insurance company is covering the risk of the investor's death, then the investor must be paying the premium somehow. The answer is that this premium is paid in the form of an extra one per cent load that is deducted out of the money that is invested. Normally, fund companies charge a load of 2.25 per cent out of the investment you make. In the case of this product, this load is one per cent more. For Rs 20,000 a month, that comes to an extra Rs 200, which would strike most of us as a fair price to pay for the peace of mind that this product offers.

What is interesting is that there is no lock-in and there's no obligation. If you want to pull out of the scheme at any point then you can just stop investing and withdraw your money. Such product, with minor variations, are offered by a number of fund companies including Kotak, DSPML and Reliance.

The obvious downside is that this product ties one to a particular fund company for a long period of time. I think that's where one should spread the risk a bit by splitting one's investment across funds from different companies.

Few things to know before you decide your SIP + Insure

1. Is there a minimum amount that has to be invested in the SIP?

2. Must the SIP be of a certain tenure?

3. Are all equity schemes of AMC, eligible or is it offered only on certain schemes?

4. Will the insured amount be given to the nominee or be used to continue with the SIP so that the investment plan continues?

5. Will all the insurance expenses be borne by the AMC?

6. Is there any age limit to avail of this scheme?

How Big is Large -- Know your Home

The Milky Way's Astronomical Numbers

100,000 - Diameter of the Milky Way, in light-years. It's also around 1,000 light-years thick, and that's just the main stellar disk. One light-year is a little less than 6 trillion miles (10 trillion km), so we're talking about a very big disk. In fact, if our solar system was just the size of a coin in your pocket, the Milky Way would still be the size of the United States. 26,000 - Distance from our solar system to the Milky Way's center, in light-years. Astronomers think our solar system completes an orbit around the galaxy's center once every 225 to 250 million years. That means it was just one "galactic year" ago when the dinosaurs began to appear on Earth. 2.6 million - Low-end estimate of the number of suns it would take to equal the mass of the supermassive black hole that lurks at our galaxy's center. The sun is roughly 333,000 times more massive than Earth. So, it would take at least 858 billion Earths to equal that black hole's mass. Of course, no one can see the black hole. But astronomers theorize that such massive monsters lurk at the hearts of most galaxies. 200-400 billion - Number of stars in the Milky Way. That number is staggering enough. But consider this. Most astronomers say there are at least 100 billion other galaxies out beyond ours. Big as it is, our little corner of the universe really is just that. The Milky Way is but a drop in the bucket.
--Steve Sampson

Warren Buffett's 6 smart tips on investing

Not all businesses are created equal

Buffett is often heard saying that of the thousands of businesses around, there are only a handful of businesses that pass through his screen test. He calls these businesses 'franchises' and believes they should have the following attributes

Buffett says, "An economic franchise arises from a product or service that:
(1) Is needed or desired,
(2) Is thought by its customers to have no close substitute, and
(3) Is not subject to price regulation."

If the company under evaluation has enjoyed a long track record of greater than average returns on capital as well as profit margins then there is a good chance that the company qualifies for the definition of a 'franchise.'

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Price is what you pay, value is what you get

Identifying a strong Indian 'franchise' is one thing and valuing and investing in it is another. Even the best 'franchises' bought at expensive valuations will not do the trick. So how does one value a 'franchise'? Mr. Buffett has this to say on valuations.

He says: "The value of any stock, bond or business today is determined by the cash inflows and outflows - discounted at an appropriate interest rate - that can be expected to occur during the remaining life of the asset. Note that the formula is the same for stocks as for bonds."

The technique Buffett has mentioned about is also popularly known as the discounted cash flow, or the DCF.

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Ignorance is bliss

While DCF can be performed on all companies, the result the technique spews out may not be reliable in a lot of cases. So, what is the solution? Simple, ignore such companies! Don't trust us? Let us see what Buffett has to say on the problem.

He says, "What counts for most people in investing is not how much they know, but rather how realistically they define what they don't know. An investor needs to do very few things right as long as he or she avoids big mistakes."

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Tackling the 'forecaster' in you

You've identified a strong Indian 'franchise' and you've performed DCF on it. Your DCF based valuation gives you a valuation that is 10 per cent higher than the current market price. Sensing opportunity, you are ready to take the plunge aren't you?

Yes, if you believe you are the perfect 'forecaster' of a firm's cash flows. However, Buffett thinks that he is not and, hence, he relies on a concept called as 'Margin of Safety' (MOS). What is this MOS? Let us hear in his own words.

He says: "We insist on a margin of safety in our purchase price. If we calculate the value of a common stock to be only slightly higher than its price, we're not interested in buying. We believe this margin-of-safety principle, so strongly emphasized by Ben Graham, to be the cornerstone of investment success."

When you buy, please ensure that your DCF-based value per share is at least 50 per cent higher than the current share price so that even if your assumptions turn out to be little aggressive or something unexpected happens to the company, the loss of your initial invested amount is minimized.

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The all-important 'SELL' decision

That solid 'franchise' that you bought two years ago and the one that had a strong margin of safety has given you attractive returns and now you wish to dump it. Dump you should if you've found another equally attractive opportunity in another equally strong 'franchise.'

But that is seldom the case. Furthermore, selling involves transaction costs. For these very reasons, Buffett is against the concept of selling strong 'franchises' unless their performance looks weaker from a long-term perspective. This is what he has to say on the issue.

"If the work is done right while investing in a stock, the time to sell it is never." Furthermore, he adds, "Our holding period is forever."

In Buffett, we have someone who has walked the talk and has remained invested in business for years together. Indeed, the urge to sell is very high, but you would do your investment returns a world of good, if you continue to stick with good, solid 'franchises' for years together.

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The golden rules

Having taken you through the entire process of investing, which probably comes closest to the way Buffett does it, we would like to sign off with two of his rules that we believe can transform you into a much better investor.

They are:

Rule #1: Do not lose money; and

Rule #2: Always remember the rule #1.

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Stop Loss Trigger Details

With the introduction of compulsory Rolling Settlement from July 2, 2001 the trading period (T) has been reduced to one day. Obligations are netted and determined on the basis of trades done on the trading day (T). The obligations have to be settled on the second working day after the trading day in a T+2 rolling settlement scheme. Thus, there is a settlement everyday and all orders are good for day in the cash segment of the market.

With the Good For Day Tool, you can tell us for how long you want us to keep trying to fulfill your order during a trading day. If your order doesn't get executed before the close of trading today, the order automatically lapses. The order option is typically useful when you are placing a limit order to buy or sell, because you believe the price of a particular stock will fall or rise within a trading session. And needless to say, the "We will try" is merely an expression. In reality, everything is done seamlessly by the system, untouched by human hand.

Stop Loss Trigger Tool
The Stop Loss Trigger Tool is actually a bit of a misnomer.This tool is most useful in protecting your profits on an open position. The Stop Loss order is a conditional order to either Buy or Sell.The condition being that the order is activated only when that stock trades at a specific price defined by you. As is the case in any order, you will have to specify the quantity and the limit price (or market price) at which you want the order to be executed.And in addition you will have to specify a Trigger Price.

Only if the Exchange records a trade at the price defined as Trigger price by you, will your order will be activated.

In case you choose to use a Limit price (as opposed to market price) for your Stop Loss order, you must remember the following guideline :

- For a Buy order, the limit price must be greater than or equal to the trigger price.
- For a Sell order, the limit price must be less than or equal to the trigger price.

If, for a stop loss order to buy, the trigger price is 93.00, the limit price is 95.00 and the market (last trade) price is 90.00, then this order will be released into the system once when the market price reaches or exceeds 93.00. This order will be added to the order queue at the exchange with the time of triggering as the time stamp, as a limit order to buy at Rs95.00. Till such time that the order is triggered it will stay in a separate queue at the exchange which is not visible to other market participants.Remember even the stop loss tool is valid only for a trading day.

If your stop loss order is not triggered during the trading day, it shall lapse automatically at the end of the trading session.

When do you use a Stop loss order?

The Stop Loss order is a great way for a trader to manage his exposure in the market. Lets us say that a trader wants to buy ABC company at Rs100 because he expects the price to rise to Rs120 in a short time. But he does not want to take an unnecessary risk and hence he wants to exit the trade (sell his shares) in ABC company if the price drops below Rs95. So he first buys 100 shares at Rs100. Then to protect himself against an unexpected movement and limit his losses he would punch in a stop loss sell order for 100 shares of ABC Co. with a trigger price of Rs95. He could choose to sell with a limit price of his choice or at market price.

So if the shares of ABC drop to trade at Rs95 his order is immediately triggered and pushed into the queue for execution. This system finds similar application in the case of short positions.

EBITDA ratio explained

EV/EBITDA ratio is the Enterprice Multiple: A ratio used to determine the value of a company. The enterprise multiple looks at a firm as a potential acquirer would, because it takes debt into account - an item which other multiples like the P/E ratio do not include. A low ratio indicates that a company might be undervalued. The enterprise multiple is used for several reasons:1) It's useful for transnational comparisons because it ignores the distorting effects of individual countries' taxation policies.2) It's used to find attractive takeover candidates. Enterprise value is a better metric than market cap for takeovers. It takes into account the debt which the acquirer will have to assume. Therefore, a company with a low enterprise multiple can be viewed as a good takeover candidate.Keep in mind that enterprise multiples can vary depending on the industry.

Therefore, it's important to compare the multiple to other companies or to the industry in general. Expect higher enterprise multiples in high growth industries (like biotech) and lower multiples in industries with slow growth (like railways). P/E is the Price to Earnings Ratio, also known as the price multiplier: It is a valuation ratio of a company's current share price compared to its per-share earnings. Its formula is:Market Value Per Share/Earnings Per Share (EPS)It basically tells you how much an investor is willing to pay for a dollar of earnings. For example, if a companyés shares are traded at $25 and its last 4 quarters earnings per share was $2, then the P/E ratio is = $12.In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. However, the P/E ratio doesn't tell us the whole story by itself. It's usually more useful to compare the P/E ratios of one company to other companies in the same industry, to the market in general or against the company's own historical P/E. It would not be useful for investors using the P/E ratio as a basis for their investment to compare the P/E of a technology company (high P/E) to a utility company (low P/E) as each industry has much different growth prospects.

P/E Ratio Simplified Contd...

Know what you're looking at.

• A P/E ratio represents a company's recent stock price, divided by its earnings per share (EPS). When you see P/E ratios listed for companies, they're often "trailing," meaning that the stock price is divided by the EPS for the four most recently completed quarters. So if a company has earned $1.25 per share over the past year, and it's trading for $40 per share, its trailing P/E would be 32 (40 divided by 1.25). Meanwhile, you can also often find "forward" P/Es, which use the expected EPS numbers for the coming four quarters. So if a company whose stock is trading at $40 per share is expected to earn $1.50 per share, its forward P/E would be 27.
  
• Check the difference between trailing and forward P/E numbers. If the forward P/E is lower, that means future earnings are expected to be higher than the recently completed annual earnings. If the forward P/E is higher, it means the company is expected to earn less over the coming year than it did in the past year -- not a great sign, in general.
  
• Remember that the P/E isn't everything. Other metrics are also worth considering. Many people would reasonably argue that the P/E isn't even all that valuable, since a company, via accounting tricks -- legal and otherwise -- can manipulate earnings to some degree. If you find a company with a low P/E, try to determine why it's low. See whether the company has encountered any problems recently, and determine whether those problems will likely be temporary or permanent. Many lenders, for example, are being pressured by issues surrounding subprime lending these days.
  
• Understand that P/Es vary by industry. Steelmakers, for example, will usually sport seemingly low P/Es, as will automakers and others, especially those in capital-intensive fields. Software makers and other "lighter" businesses tend to have higher P/Es. So don't assume that a steel company with a P/E of 18 is more attractive than a software maker with a P/E of 25.
  Compare a company's current P/E with its historical P/E. A glance at Nucor's historical P/Es, for example, suggests that this might be an attractive time to buy, with a relatively low price compared to earnings. (This is a good time to visit our CAPS stock-rating community, too, to see what others think of the opportunity.)
• http://economics.about.com/cs/finance/l/aa030503b.htm

P/E Ratio Simplified

The price-to-earnings ratio (P/E) is probably the most widely used -- and thus misused -- investing metric. It's easy to calculate, which explains its popularity. The two most common ways to calculate it are:
P/E = share price divided by earnings per share
P/E = market capitalization divided by net income
The share price is the market capitalization divided by the number of shares, so the results should be identical. Share price and the market cap are easy to find in the quote section of any financial website. The earnings are usually taken from the trailing 12 months (TTM) and can be found by checking the income statement for the past four quarters. A P/E using TTM figures is often called the current P/E.
Another variation is the forward P/E, which is calculated using analyst future earnings estimates, rather than actual historical earnings. Most financial websites give both the current and forward P/E. I find forward P/E a useful guide for cyclical companies, companies coming out of negative earnings, and those that have significant one-time charges embedded in current earnings. You may also encounter the dilutedP/E, which accounts for a company's diluted shares.
You'll often find slightly different P/E values for the same company on different financial sites. Why? Because some sites normalize earnings for one-time items, which distorts the P/E ratio. These small variations are immaterial.

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In essence, the P/E tells us how much an investor is willing to pay for $1 of a company's earnings. The long-term average P/E is around 15, so on average, investors are willing to pay $15 for every dollar of earnings. Another useful way to look at this: Turn the P/E ratio around to look at the E/P ratio, which when expressed as a percentage gives us the earnings yield. For instance: 1/15 gives us an earnings yield of 6.67%.

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Before you get carried away ... The "P" in the P/E ratio is determined at any given point by the market value of the company or its shares. Built into this market price are the future expectations of the company's growth. If Google (Nasdaq: GOOG) has a P/E of 54.8, and Motley Fool Inside Value pick MittalSteel (NYSE: MT) has a P/E of 8.2, does this tell us whether Mittal is a better value than Google?
Maybe, but maybe not. For starters, analyst expectations for Google's earnings growth over the next five years range between 23% and 62%; estimates for Mittal are currently hazy because the company is in the process of merging with competitor Arcelor. Mittal, or the combined Arcelor-Mittal entity, is unlikely to grow at more than 10% over the same time period. So clearly, future growth expectations significantly affect the significance of the P/E ratio.

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Apples to apples As you'd expect, different industries have different average P/E ratios. Mittal is in the steel industry, which typically has low P/E ratios. Other steel-industry giants like Korea's Posco (NYSE: PKX) and Japan's Nippon Steel generally sport P/Es in the single digits. Steel is a commodity, and the industry is highly cyclical. Clearly, it's important to understand the industry when comparing P/E ratios -- industries with higher perceived risk attract lower P/E ratios.

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Investment returns also affect the P/E ratio. If I can buy shares in a company with a return on equity (ROE) of 30%, then with all other things being equal, I should be willing to pay more per dollar earned than for a company with an ROE of 10%. Consider Hewlett-Packard (NYSE: HPQ) and Coca-Cola (NYSE: KO). Both currently have a P/E around 21, yet analysts expect Hewlett Packard to grow earnings at 13%, vs. 8% for Coca-Cola. Coke, however, has an ROE of 30.4%, vs. just 13.3% for Hewlett-Packard. In other words, in the past year Coke returned more than $0.30 for every $1 of shareholders' equity, while HP returned just over $0.13. Be careful in using ROE for companies with a high debt load, because it will be inflated. In that situation, using return on invested capital (ROIC) would make for a more accurate comparison.

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Counting earnings Earnings are an accounting figure that includes non-cash estimates. Since earnings are covered by U.S. generally accepted accounting principles (GAAP), you might expect all reported earnings to conform to the same template. This is certainly not the case -- companies have plenty of latitude under GAAP to manipulate earnings, employing either an "aggressive" or "conservative" approach. Some companies, such as General Motors (NYSE: GM), have massively underfunded pension and health-care obligations that aren't reflected in their income statements.

Companies sometimes have true one-time events that can affect net earnings either positively or negatively. If a company sells a division for substantially more than its book value, the difference will be recorded as a positive in net earnings. This will distort the P/E and render it useless as a measure of value. In this case, we'd adjust the net earnings to arrive at a more useful P/E. A wide gap between current and forward P/E is a good sign that there may be a one-time event included in net earnings.

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Follow the cash Many Fools (myself included) prefer to use free cash flow (FCF) for valuation. FCF can also be manipulated, but it's more difficult to fake cash. Over the long term, a well-run company's FCF should be approximate to earnings.
Just because a company has a low P/E does not mean it's a good value. Companies have a low P/E for a reason, and the trick is finding out whether that reason is likely to be short-term or permanent. Conversely, not all companies with a high P/E are overvalued. It may be counterintuitive, but a cyclical company will usually have a high P/E at the bottom of the cycle, where earnings fall much faster than the share price because the market accounts for the cyclical nature of the company.

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Fun with P/Es My favorite use of the P/E ratio is to compare the current P/E of a company with its historical averages. (To do so, I generally use a subscription service, Capital IQ, which gives me the past years' average annual P/E ratios. You can also use the free MSN Money Central 10-year ratio.) I then average the annual P/E figures (taking out excessively high or low "outliers") and compare this figure with the current P/E ratio. If the current P/E ratio is significantly less than the average, it could indicate that by historical standards the stock is undervalued. You can do the same thing with price-to-book (P/B) and price-to-sales (P/S) ratios.

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There are drawbacks in any historical comparison of P/E ratios. During market bubbles, P/Es can be inflated for extended periods of time. Caution should be used, particularly with average P/E values from the late 1990s. P/E ratios are also generally higher in a low-interest-rate environment because a company's cost of capital is lower, and also because investors are more likely to take on the risk of owning equities when bond yields and fixed income rates are low.
The price-to-earnings ratio is a useful measure, but it must be used with many other metrics to accurately assess a company's worth.

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