Adopt a safety-first principle in debt funds

At present you should stick to funds that avoid both duration risk and credit risk ? Debt funds are sold to investors as a less risky alternative to equity funds. However, investors should not make the mistake of equating these funds with instruments like fixed deposits where there is no risk of loss of capital. In debt funds, investors can suffer erosion of their capital, owing to a variety of risks. The first type of risk in debt funds is interest-rate risk. When interest rates are falling, prices of bonds rise. This results in capital gains within mutual fund portfolios, which boosts their returns. But when interest rates are rising, prices of bonds within debt fund portfolios decline. Such losses are higher in case of bonds of longer tenure, and lower in bonds of shorter tenure. Over the past year and a half, interest rates have been on the upswing in India. In such a scenario, investors should stick to debt funds that have a low average maturity. Liquid funds, ultrashort term debt funds, and short-term funds are some of the categories of debt funds that investors should stick to in a rising interest rate environment. The second type of risk that debt funds face is credit risk. When a bond that is held within a mutual fund portfolio gets downgraded, or defaults, the net asset value (NAV)of the fund declines. This is what has happened in the case of IL&FS and its group companies. This company and its subsidiaries currently have a total debt burden of around Rs. 90,000 crore. Of this mutual funds hold around Rs 2,282...

Keep your SIPs going

It is when the markets decline that you reap the real benefit of SIP by being able to buy more units of a fund Recent news reports suggest that one in three SIP-related request this year has been for closure of SIP accounts. Earlier, a report from UBS had also warned that SIP-based inflows into the equity markets could stall if historic returns turn negative. With the markets turning volatile, there is very much a risk of that beginning to happen now. Whatever others may do, you should not stop your SIPs as this could do a lot of damage to your long-term investment plans. Novice investors, who entered the equity markets in the past couple of years, when there was a bull run in progress, are most likely to stop their SIPs when the markets decline. These are usually investors who have not fully understood the risk in equities. They have not internalised the reality that equity markets tend to be highly volatile in the short term. But if they hang on to their investments, they will be rewarded with high returns in the long term. Many investors also tend to stop their SIP investments because there is a mismatch between the ideal investment horizon for equities, and the time horizon with which they entered this asset class. The ideal time horizon should be at least 7-10 years. If you came into the markets expecting to make money within a year or two, you are likely to be perturbed by the interim volatility in the markets. Recalibrating your time horizon will enable you to deal with markets turbulence better....
Avoid NFOs, stick to tried and tested funds

Avoid NFOs, stick to tried and tested funds

If you go to the Association of Mutual Funds in India (Amfi) website, you will be able to see the list of new fund offers (NFO) that are currently available (https://goo.gl/rMMLio). Your friendly neighbourhood mutual fund agent may also be pestering you to buy a hot new fund which, according to him, has great prospects. Before investing in an NFO, you should do a little research. An NFO is basically a new fund that a fund house has just launched. Such launches are typically accompanied by an advertising and marketing blitz. Often, mutual fund agents are offered high upfront commissions on these new products, which is why they urge you to buy them. The biggest drawback of buying a new fund is that it does not have a track record. In an existing fund that has been around for a long time, you can check how it has performed vis-a-vis its benchmark and also compared to its category peers. If the performance is sound, and the fund manager who was responsible for earning these returns is still there at the helm, you can invest in such a fund with a certain degree of confidence. Since an NFO does not have a track record, investing in it is akin to taking a blind bet. In bullish market conditions, certain sectors tend to outperform others. In such an environment, fund houses launch NFOs for sectoral and thematic funds. Investing in such NFOs can be even more dangerous than investing in the NFO of a diversified equity fund. When the hot streak of that sector ends, such sectoral and thematic funds take...
Taxation Simplified for Traders

Taxation Simplified for Traders

Taxation Simplified for Traders: It’s Time To File Your Tax Return Taxation in leu of gains from trading or investing in shares is somewhat complex. SAS Online has made an attempt to simplify it for the taxpayers. Before you can figure out how much to shell off as the tax you must first decide whether you are a trader or an investor. Trader or Investor If you buy stocks with an intention to earn from dividends then you are an investor. A trader buys stocks to profit from price rises. Long-Term &Short-Term Gain If a listed security is held for less than 12 months and then sold, the consequent gain/loss is considered to be short-term capital gain/loss. If the holding period is above 12 months, long-term capital gain/loss arises. Speculative and Business Income Intra-day trading or same day buying and selling of any share is interpreted as speculation income.It involves no actual deliveries of stocks. Trader can gain or lose. Loss can only be offset against speculative gains. Income from trading F&O(futures and options), intraday as also overnight, on all the exchanges is considered as non-speculative business income. How to Calculate Turnover Turnover refers to the profits and losses that are incurred after the settlement of the trading account. In a financial year, if your turnover is over Rs.1 crore, then your books of accounts mandatorily have to be audited  Audit Requirements An audit is mandatory if you have business income and the yearly business turnover crosses Rs. 1 crore. For digital transactions, this limit is Rs 2 crores. All equity transactions are digital. For equity traders, an audit is mandatory(sec...
4 Money Management Rules

4 Money Management Rules

Dear Trader As trading is an enterprise to make a profit in an atmosphere of wide-ranging probabilities, a flexible approach is a must. Therefore, the following four rules are not supposed to be taken as sort of traffic rules that need strict adhering to. They are more like a checklist of do’s and don’ts – a bit like the routine a pilot goes through before pressing the ignition button. Nevertheless, a new trader would do himself a great favour by sticking to them as the traffic rules for a while. CAP rule Count All Pennies involved in the total monetary value of the instrument to be traded beforehand. Especially the hidden ones that come up gift-wrapped in the form of Leverage, because Leverage is the real villain responsible for dispatching the trading capital on the road to hell more than often.     Let’s say, for example, that a nifty contract can be traded MIS for under 20,000 and as NRML for about 50,000. Now, this 20k leverage is the 25th part of approx. Rs. 500,000, the actual value of 75 shares of Nifty. The leverage thus is 25 times. So a trader with 100,000 trading capital can easily trade 3-4 contracts in one go, right? Wrong. What gets forgotten is that one Nifty contract will move with the full weight of 500K, not with that of 20K. That is, loss and profit will be calculated in terms of full value, not in terms of leverage. One simple rule to follow to save yourself is to make sure you never lose more than 2% of your capital on a...
“Do Not Exercise” Option’s

“Do Not Exercise” Option’s

Dear Trader, If you are active in the F&O segment of the stock market you must be knowing that you have to pay higher STT on options that are In The Money (ITM) on expiry.  A call option is said to be In The Money when its strike price is below the market price of the underlying asset. The reverse is true for a put option – strike price exceeds the market price of the underlying asset. How much do you pay as STT? Take the example of a trader who bought a call option with a strike price of 600 @ Rs.2.50 as he expected that the underlying security will close above 600 for the day and suppose it did close above 600 say at 603. Suppose he bought 2000 units of the call option at Rs.2.50, shelling off Rs.5,000 as premium. By normal calculation the profit should be Rs.{ (603-600)*2000 ( QTY bought) -5,000(premium paid to buy) }= Rs.1,000. However, when he received the contract note, he will see that the actual profit received by him is much less than this. The reason being higher Security Transaction Tax (STT) being charged on exercised options. The rate of STT on exercised options is 0.125% of the full value of the contract. STT on Exercised options on Expiry of Options = 0.125 % * (Strike Price + Premium) * Quantity So in the above mentioned example, the STT would be Rs. 2000 x (600+2.50) x 0.125% = Rs. 1,506.25 So he actually ended up making a loss of Rs. (1506.25-1000) = Rs. 506.25. Such huge differences in STT were troublesome for...