Benefits of stock split for ordinary investors

With the stock markets reaching dizzying heights, stock prices of many top companies have become unaffordable for many small investors. In such a situation, these investors have just 2 options: either wait for the markets to crash, which can be a very long wait or buy when a company goes for a stock split.

What is a stock split? How does it benefit small investors? In a stock split, the total number of free shares of the company is divided into bigger number of shares, without impacting the shareholder’s equity or the stock’s overall market value. E.g. if the company announces 5-to1 stock split, it means that for one share of the company that each shareholder holds, he now gets 5 shares. He doesn’t have to pay anything to avail of these 5 shares.

Also the market value of the share will be divided by 5. E.g. if the market price of the share is Rs 1000, the new market price of the share now becomes Rs 200. Moreover the company’s market capitalization now becomes 5 times it original market capitalization. The company can achieve this without diluting its equity.

Normally companies take this step if they think that the price of their share has gone so high that many small investors are reluctant to pay the price. With this step, the company brings the stock price within the reach of ordinary investors. HDFC took this step some time back.

An investor gains by buying the shares of good companies at low prices, as stock split doesn’t  affect the company’s performance. However it is important not to get swayed by the stock split when making investment decisions. Instead it is crucial to focus on company performance, management reputation, company’s growth prospects, future plans and its position vis-à-vis its competitors.

Tips to lower your EMIs in case of cash crunch

Job layoff, medical crisis or any unforeseen emergency tends to scuttle our budget. In this case, it can play havoc with our monthly installments of our loans. This can be particularly disastrous if the loan is home loan, as it can lead to loss of your home. So if you are in this situation, or credit card debt, which can easily spiral out of control; here are some tips to beat the cash crunch.

  • Sell off some of your assets.
  • Pay part amount of the total EMI to lower the interest due.
  • In case of a credit card debt, convert it into a personal loan due to its lower rate of interest.
  • Avail of loans against assets like FDs, gold and shares and property.
  • But if all these fail, the last option is to seek help from the debt counseling centers or approach the bank directly. Most banks are willing to help out customers in distress to recover at least a portion of their dues.

How to select the best EMI option for you?

We all know that when we take a loan, we have to pay it back in monthly installments, also called as equated monthly installments or EMIs. But do you know there are 2 types of EMIs? Are you aware about how to select the most suitable one for you? Well, here is what you need to know about EMIs

There are 2 types of EMIs: flat rate EMI and reducing balance EMI. In case of the flat rate EMI, the interest is charged on the total loan amount. The principal and the interest is spread over the entire tenure of the loan. The figure that is derived is your EMI. In case of reducing balance EMI, you pay the interest on the outstanding balance. This balance can be calculated on the daily basis, monthly basis or yearly basis.

Of these, flat rat EMI works out to be quite costly. This is because you pay the interest on the entire sum. As a result, even if you have managed to pay a part of the amount, you still have to pay the interest. Reducing balance method is cheaper as you pay interest only on the unpaid part of the loan. Ideally opt for daily reducing balance system or monthly reducing balance system.

Tips to get good returns safely

Think good returns and safety are a misnomer? Think both these words don’t go hand in hand? Then think again. It is possible to get good returns without taking undue exposure to risk. Here is how.

  • Company FDs: The FDs offered by the companies offer higher returns as compared to the bank FDs. However they are also riskier than bank FDs. So always select the FDs that carry at least A+ ratings or those offered by top corporates like Tata Motors, HDFC etc. It will ensure your capital is safe.
  • PPF: PPF is one of the best means of earning good returns safely. You not only get 8.5% interest on the corpus invested, it is also completely tax-free for you. Both the interest earned and capital withdrawals do not attract any tax, thus increasing your returns.
  • PO Monthly Income Scheme: Here you not only get an interest of 8% per annum, you also earn 1% bonus at the end of the term This interest will be credited to your bank account, every month, thus giving you a monthly income. It is ideal for retired people or people looking for additional income.
  • FMPs and short-term income funds: These are excellent alternatives for people eager to take slightly higher risk in order to earn higher returns. You can expect a return of 8-8.5% for a period of 1-3 years.

 

While all these means offer good returns, always remember that it is the ultimate combination of equities, gold and debt that will help you achieve the highest possible returns.

Tips to shop online securely

Today online shopping has grown by leaps and bounds, due to higher penetration of Internet. This has allowed people living in any parts of the world buy items from any other part. However this has necessitated the heavy use of credit cards, thus giving rise to frauds and scams.

So if you are scared of using your credit card online but want to shop online, here are some tips to do your online shopping safely.

  • Always buy from secure sites. These are the sites whose web address ends with https instead of http. Also ensure there is a padlock symbol at the bottom of the browser. This means this site is very secure and you can go ahead and shop online.
  • Avoid posting your private details like our bank account number, credit card number etc. on public sites.
  • Read the privacy policy of the site. If you are uncomfortable with policy, it is advisable to shop elsewhere.
  • Keep your browser, antivirus and firewall regularly updated. This will prevent worms, viruses and hackers getting access to your personal data, thus compromising your security.
  • Use secure payment methods like Paypal and credit card as they offer higher protection than debit cards and bank transfers.
  • Read your credit card statement carefully. If you note any discrepancy in the bill, bring it to your bank’s notice immediately.
  • Avoid shopping in insecure places like cybercafés and any other public computers. Your data is far more likely to be compromised if you do so.

 

These are some simple tips that can help you  shop online safely.

Why fund ratings should not lure you?

It has become common nowadays for mutual fund industry to lure gullible investors by giving star ratings to their funds. Gullible investors who don’t know better fall prey to these ratings and end up investing in these funds, only to regret later on. This is because star ratings have no meaning when it comes to investing. Here are the drawbacks of star ratings for the funds.

  • Variations in rating system: The rating agencies use different rating parameters to rate the funds. This can create inconsistency in the rankings of the funds. So a fund may get higher ranking in the ratings but may give poorer returns than its peers. Also just insisting on the ratings will make the investor ignore the consistent performers.
  • Expensive proposal: Fund ratings keep on changing. Now if you keep on focusing only on the star ratings then, you will end up churning your mutual fund portfolio regularly, thus making you pay STT and other duties. Besides you also end up losing the appreciation of your investment amount.
  • Suitability: While funds across all categories do get five star ratings, all of them may not be suitable for everybody. E.g. if you have a low risk appetite, then mid-cap funds are a strict no-no for you. So even if these funds do have five star rating, they will not be suitable for you.

 

So instead of concentrating on the ratings, it is advisable to focus more on the fund performance, your risk appetite, time horizon and fund management. This will help you earn substantial returns over a long time.

Benefits of SIP for long-term investors

Financial advisors are harping on the importance of Systematic Investment Plan (SIP). But what is SIP and how does it benefit you? Should you opt for it?

The term SIP stands  for Systematic Investment Plan. In this you invest a particular sum at regular intervals. This interval can be daily, monthly quarterly or half-yearly. This sum can be as low as Rs 100.

Why opt for SIP? SIP lets you balance out the no of share or mutual fund units that you purchase. E.g. if your Rs 100 lets you buy 2 units of a mutual fund when the markets are high, you can get 3 units when the markets fall. This means you even out your investments.

Studies have shown that those who opt for SIP earn far higher returns than those who make lump sum investments. Also since you are investing small sums, you are not taking a major risk if the markets crash.

However SIPs don’t work in rising markets. If the NAV or share price keeps on increasing, you will not get any substantial returns.

SIP is suitable for those who have a steady source of income. If your income flow is irregular, then go for lump sum option, to prevent being charged for SIP bounce.

Why emotional investing is dangerous for your wealth?

The markets are going up and you see all and sundry investing in stocks. Next day the markets crash and everybody panics and starts rushing out from the markets, thus aggravating the market conditions. US economy is down in dumps and the FIIs start pulling out their money, so even your neighborhood uncle withdraws his money from stock markets.

This type of investing is called as emotional investing where human emotions like euphoria, panic, greed and fear impact the decisions made by the investors. But not many know that emotional investing is bad for your wealth. Here is why.

When emotions take over he person’s rational thoughts, he cannot think clearly. He is easily swayed by the emotions and takes decisions that his emotions tell him to do. He doesn’t realize that markets work in cycles. What goes up comes down and vice versa. So if you manage to hold on though the tough times and avoid over exposure to stocks when the markets go up, you can easily make money in the stocks.

Unfortunately not many understand this principle. They lose focus when they get emotionally charged. They make wrong decisions and so don’t make money in the stock markets. So if you don’t get swayed by your emotions, you can rest assured that market movements will not affect the value of your investments in the long run.

Will going green improve your financial health

‘Green’  is the new buzzword in all the businesses today. Financial industry is no exception. But then how does going green improve your finances? Will ‘green’onomics really make you rich? Let us see the answer to this question.

While solar power may work out cheaper in the long run, its initial costs are quite prohibitive. You may have to spend anywhere from 1-3 lakhs just to get it installed initially. It is due to this that solar power generation has caught on in India. Moreover during rains, solar power my not be adequate. So you may have to install an electric generation as a backup. Also you’ll have to wait for 10 years before you can recover your costs. Not to mention, the  rapid advances in technology will make your current solar power generation equipment obsolete.

However you can opt for energy-efficient appliances, like acs, light bulbs and other electrical and electronic equipments. They will save you a lot of money as they tend to use lesser power but will not impact the performance. Here the benefits are immediate. So you can definitely choose this option.

You can also opt for public transport or car pool to reduce your transportation costs. This will immediately lower your transportation costs.

So when it comes to going green, find out your costs, the time required for you to recover them and their pros and cons. This will give you an idea of how much you will earn and how quickly.

Should you invest in PSU Funds?

Mutual fund houses are quite adept at catching latest fad in the market and launching new funds based on the fad. Once such fad they have capitalized on is the government’s plan to divest its stake in government-owned companies or PSUs, and introduced mutual funds, called as PSU funds.

PSU funds are those mutual funds that invest in scrips of government-owned companies. These include companies like BHEL, NTPC, IOC, SBI etc. Many fund houses mislead customers by telling them that they will be filthy rich by investing in these companies. But is it true? Will the customer benefit from investing in these funds?

The answer – no. When choosing a company for investment, you have to look at its merits. You need to consider its present and past performance, its growth prospects, its comparison with peers, dividend payout etc. This is applicable even for PSUs. All of them are not gems. You should be able to separate wheat from chaff.

While PSU companies do have an edge when it comes to policy making, there is a major drawback as the government holds a dominant stake, and so can force these companies to bend to the whims of the ministers and MPs and MLAs. Moreover some companies do not have quality customer service, slow decision making etc. All these will impact the functioning of these companies.

Hence it is advisable to give these funds a miss. Instead go for pure diversified fund that will help you get higher returns.

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