Investment Ideas

Investments when entire Stock Market is Under or Over Valued

Should management proceed with investing in a project with a satisfactory NPV (Net Present Value) if it has sufficient funds to do so, and if (a) the entire stock market is significantly undervalued and may well rise by 25 or 30% over the next year, or (b) the entire stock market is significantly overvalued and may well fall by 25 or 30% over the next year?

In case (a), it could be argued that management should postpone the investment for a year, and invest the cash in a general portfolio of shares, realize them after a year, then take up the postponed investment, and use the capital gain either for future investment or a special dividend payment to shareholders.… Read the rest

Abey Francis

Role of Financial Statements Analysis in Making Investment Decisions

One of the most important long-term decisions for any business is investment with the aim of making gains in the future. Investment decisions are concerned with the use of funds including buying, holding or selling and each decision could be vital to a firm. A careless decision may result in a long-term loss or even worse, bankruptcy. Therefore, an in-depth understanding and analysis is necessary for a high quality investment decision process. This is also even more critical to investors who invest in stock of company or shareholders. Financial statement analysis is critical in making effective stock investment decisions. By study the balance sheet, income statement, cash flow statement and statement of owners’ equity separately and combined, an analyst might have a good sense of a company’s overall financial picture; therefore, the investment decisions are likely to be reasonable and profitable.… Read the rest

Abey Francis

Margin Trading or Buying on Margin

Buying on margin means borrowing money from a broker to purchase stock. Margin trading allows one to buy more stock than normal. To trade on margin an account is required. The margin account is a credit based account. In an account one can avail loan to buy stocks. Marginable securities act as collateral for the loan. Securities traded in the margin account are the marginable securities. Like any other loan there is interest charged on the amount borrowed. One should read the margin agreement and understand its implications. One is required to maintain an equity amount that ranges from 50-90%.… Read the rest

Abey Francis

Liquid Mutual Fund Schemes

The objective of liquid mutual fund schemes  is to invest in short-term money market instruments of good credit quality. The fund predominantly invests in money market instruments and provides investors the returns that are available on these instruments. The investment portfolio is very liquid, and enables investors to hold their investments for very short horizons of a day or more. The liquid funds are normally open-ended. It provides with the following options/schemes, which are sub-products within the liquid fund.

  • Overnight Option (Growth): This option is meant to be used by investors with very short-term investment horizon and is fully invested in the call money market.
… Read the rest
Abey Francis

Balanced Mutual Funds

Mutual funds that invest both in debt and equity markets are called balanced mutual funds or simply balanced fund. A typical balanced fund would be almost equally invested in both the markets. The variations are equity funds that invest predominantly in equity (about 70%) and keep a smaller part of their portfolios in debt securities. These funds seek to enhance the income potential of their equity component, by bringing in debt. Similarly, there are predominantly debt funds (over 70% in debt securities) which invest in equity, to provide some growth potential to their funds. A balanced fund also tends to provide investors exposure to both equity and debt markets in one product.… Read the rest

Abey Francis

Types of Debt Mutual Funds

Debt mutual funds are those that predominantly invest in debt securities. Since most debt securities pay periodic interest to investors, these funds are also known as income funds. However, it must be remembered that funds investing in debt products can also offer a growth option to their investors. What is more important is that the portfolio is predominantly made up of debt securities. The universe of debt securities comprises of long-term instruments such as bonds issued by central and state governments, public sector organizations, public financial institutions and private sector companies; and short-term instruments such as call money lending, commercial papers and certificates of deposits and treasury bills.… Read the rest

Abey Francis