Key Ratios to check before buying stocks.

So, there is a lot confusions between retail investors about how to pick good stocks or what are key ratios to be checked before investing in any particular stock. There is no particular key metric by which you can decide the particular script is good or bad. Having said that there are some ratios or key metric by which you can identify how company has performed in a particular year and on basis of that you can invest. 

1. EBITDA: Earning before Interest, Tax, Depreciation and Amortization represents the core profit of the organization. It represents the variation income and includes certain non-cash expenses. It can also be viewed as an proxy to cash flow statement. 

2. EBIT: Earning before Interest and Tax represents the overall operating profit after deducting the non cash expenses. EBIT is used to analyze the performance of a company's core operations without the costs of the capital structure and tax expenses impacting profit. 

3. Stock Turnover Ratio: Stock Turnover Ratio indicates in how many days inventors is sold/used/replaced. Stock Turnover Ratio is in Days format. Company having lesser STR indicates inventory is being sold or used at a faster pace. 

4. EPS: Earning per share is total profit divided by total no. of outstanding shares. For example, Company A has its stock price as 100 Rs and EPS is 10. It means investor is willing to pay 100rs in order to earn additional 10rs for each share. 

5. Acid-test Ratio: Acid Test ratio is also quick ratio. Acid Test ratio helps in identifying how capable is current asset to pay current liability. Formula of Acid test ratio is Current Assets - Inventory/ Current Liability. It indicates the ability of a company to pay its short term liability.  

6. Receivables turnover Ratio: Receivables turnover ratio is used to identify how efficiently company collects its payment from clients. If company have high account receivables and company is not able to collect its payment, eventually it will lead to loss as debtors can turn into bad debt. In every business collecting payment from clients is the crucial role.

What is Alternate Investment Fund?

If you're looking to gain exposure to a variety of securities and assets, it's advisable that you invest in an Alternate Investment Fund. These funds are typically composed of at least one hedge fund, one bond fund, and one money market fund in order to offer investors diversification. However it is not uncommon for these funds to contain other types of investments such as futures and commodities.

Alternate Investment Funds typically pay interest based on their average daily net asset value on a quarterly or annual basis. If you are able to choose the specific assets of the fund, then you may be able to direct your money into certain investments. For example, you may perhaps want to invest in a money market fund that is comprised of U.S. Treasury bills, but instead you decide to invest in an Alternate Investment Fund that contains corporate bonds and short term notes.

There are a few things to consider when purchasing shares in Alternate Investment Funds.

You must be able to afford the full amount of the fund's minimum investment.

The alternate fund's net asset value will most likely always be lower than that of its underlying investments.

All about Mutual Fund and it's working.

 Mutual Fund is a collective pool (hence the word mutual) of money given by investors with a common objective for purchasing securities (via the fund). The collective pool is formed by the investors in a Mutual Fund, they are regulated in India by the Securities and Exchange Board of India (SEBI). Those new to finance, planning, and investing often hear the term “Mutual Fund” and ask “what is a Mutual Fund?”, "which are the Best Mutual Funds?", "what are the types of Mutual Funds", "what are the companies?", "how to invest in Mutual Funds?" etc. Mutual Funds today are becoming more common with investors and have in recent years become an avenue by which investors can participate in the debt and equity markets.

How Mutual Funds work

Mutual Funds are a vehicle that collects money from investors to buy securities. These investors have a common objective, and this pool of money is advised by the fund manager who decides how to invest the money. With good fund management, the Mutual Fund manager (or Portfolio Manager) generates returns for the investors, which are passed back to investors. Mutual Funds are a regulated industry, there are various rules, guidelines & policies for the mutual fund companies, the fund managers, and specifically the funds being managed. These regulations are formed by the SEBI who is the regulator for Mutual Funds.

MUTUAL FUNDS: MINIMUM AMOUNT

Mutual funds offer investors a route to save money and earn returns over time. One can invest in a lump sum or a fixed amount monthly, more commonly known as a Systematic Investment Plan (SIP). Using a lump sum or SIPs, they inculcate the habit of savings. Investors can start investments with amounts as low as INR 5000 and in the case of SIPs as low as INR 500. There are various mutual fund calculators, available which help first-time investors decide what amount to start off with. These mutual fund calculators help investors kick-start investments.

Mutual Funds: Systematic Investment Plans (SIPs)

Mutual Funds offer a route called the "Systematic Investment Plan" or SIP where investors can choose to put in a fixed amount of money every month in a scheme of a mutual fund. SIPs are a very convenient way for investors to invest since after the first investment, subsequent investments are automated and the investor can sit back and relax. Systematic investment plans ( SIPs) also offer rupee cost averaging and there are many benefits of SIPs.

Mutual Fund: Types

They invest in equity and debt markets mainly. There are various types of mutual funds, equity funds which can be the large-cap funds, mid-cap funds, small-cap funds, or multi-cap, these are for investors wanting to take exposure to the equity markets. Then there are debt funds, which invest in debt instruments. For the investors in the middle who want to be on the fence, there are balanced funds or hybrid funds. Balanced funds invest both in equity and debt. Apart from these basic types, there are many other types, like liquid funds, ultra-short funds, short term, long term, Gilt, MIPs, etc.

Mutual Fund Companies

There are 44 Mutual Fund companies in India (called Asset Management Companies “AMCs”) that provide mutual fund schemes in which investors can invest. These Mutual Fund companies are regulated by SEBI. Many big companies with the likes of Reliance Mutual Fund, ICICI Prudential Mutual Fund, Birla Sunlife Mutual Fund, DSP Blackrock Mutual Fund, etc are in this business for many years and are established, players.

How to Invest in Mutual Funds

How to Invest in Mutual Funds? There are various avenues to invest, one can go directly to fund houses, also one can use the services of a broker or distributor or one can even use a financial advisor. There are many advantages of using the services of a distributor, instead of going to different AMCs, making the process cumbersome one can use a distributor who can help interact and do the purchases & redemptions with all of them and make the process easy for the investor. Today, investors can also make the purchase of mutual funds online and be sitting at home to complete the entire process.

Mutual Fund NAV

The industry is very transparent; funds are required to publish their prices daily. The price is known as the Net Asset Value (NAV). All mutual funds are required by SEBI to publish their NAVs daily. The NAVs are published on the websites of most AMCs as well as at the website of AMFI to ensure transparency.

Mutual Funds: Index Funds

Today, there are many index funds also available on the mutual fund platform. These are offered by various mutual fund companies. Other than index funds, there are various Exchange Traded Funds (ETFs) also available on the mutual fund platform. Nifty ETFs, Gold ETFs, etc to name a few are all available in the fund's form.

Best Mutual Funds

Investors are always searching for the top mutual funds or best mutual funds to invest in. How to select the best mutual fund is another exercise in itself. One needs to look at various things like the goal for investing, fund house, mutual fund rating, and over this follow a disciplined approach. Only then can one try and select the best mutual fund.

Mutual Funds Ratings

Mutual fund ratings today are provided by many players like CRISIL, ICRA, MorningStar, etc to name a few. Mutual fund ratings usually take in several quantitative as well as qualitative factors to arrive at the final rating. The Mutual Fund rating is a good starting point for an investor in selecting the scheme.

Today, mutual funds have become an important route for retail investors, and choosing the best fund is very important for investors. Investors should always do their bit of research in understanding which funds to invest in and choosing the right distributor/advisor to help them on this journey.

Risk Profile-based Investment Options.

 

W

e should keep in mind, Investments and Savings are two different things altogether. If you are Saving part of your salary or income it is not your investment, investment is what you applied to earn for yourself. Investments are made to meet Long term Goals, whereas Savings are used to meet short-term goals. Every middle-class person has some needs or targets that they want to achieve. But due to a lack of financial knowledge and management, they just work for money, and even if they put their savings into a bank account or fixed deposits, it will not help them to reach their financial targets. Everybody earns and saves money by keeping it aside in their pocket, or somewhere where it is safe, instead of investing, your money doesn't work for you henceforth your money will never grow. Now, comes the question Why to invest? There are multiple reasons why one should invest.

Reasons why we need to invest?

• If money is lying in your savings account, it gives us a minimal return
• Inflation decreases our purchasing power every year.
• Our financial goals change very often
• Our tax structure is different from other countries
• Our medical costs are rising
• Expenses towards our children's education are rising every year

Investment simply means employing cash or assets to increase its current value or generate profit. In Layman Language, investment can be said as money used to make more money. Anything which gives you returns is “Investment”. 

The investment ensures present and future long-term financial security. The money generated from your investments can provide financial security and income. Not investing, or not doing it properly can mean a longer working life. When taking investing seriously, the returns generated from your investments can provide financial stability in the future. By making investments, you are also saving and accumulating a corpus for a rainy day. Apart from that, making regular investments force you to set aside a sum regularly, thereby helping you instill a sense of financial discipline in the long run. 

 

How does the risk profile decide what is the best way for people with different risk profiles to invest?

 

Before investing in any financial instruments. An investor should always check his risk appetite. Investing in the financial market carries some inherent risks, which can be classified into systematic and unsystematic risks.  

Systematic Risk: Systematic risk is also known as undiversifiable risk. The risk cannot be avoided or cannot be predicted before its occurrence. Systematic Risks include corporate interest rate changes, inflation, recessions, and wars.

Unsystematic Risk: Unsystematic risk is a company-specific or industry-specific risk. These risks are diversifiable. If an investor owns just one stock or bond and something negative happens to that company the investor suffers great harm. But if an investor owns a diversified portfolio of 20, 30, or 40 individual investments, the damage done to the portfolio is minimized. Unsystematic risks include business risk, financing risk, credit risk, product risk, legal risk, liquidity risk, political risk, operational risk, etc. Unsystematic risks are considered governable by the company or industry.

 

There are mainly three main types of risk profiles of investors

Conservative: Low Risk Capacity + Low Risk Aversion = Conservative Investors.

Investors with low willingness and risk-taking ability and who want their capital to be safe, less bothered about the rate of return on their capital are known as Conservative Investors. Equity is not recommended to such investors. These investors are advised to invest in Debt Funds and Bank FD’s.

Moderate: Medium Risk Capacity + Medium Risk Aversion = Moderate Investors.

Investors who are moderate in their risk-taking ability, who are willing to take a certain amount of risk to get higher returns. Are ready to accept short-term losses to gain higher returns in the long run. We call this type of investor moderate investors.

Aggressive: High Risk Capacity + High Risk Aversion = Aggressive Investors. 

Investors having high risk-taking ability and willingness are defined as Aggressive investors. Aggressive investors get a higher return as compared to all other types of investors. They invest a large amount of their capital in Equity.

 

Investment options based on their Risk

 Equity: In the context of stock market investments, equity refers to the shares in a company’s ownership. On investment in a company’s stocks, Investors can earn profit via capital gains or stock price appreciation. Further, investing in a company’s shares also bestows an individual with a right to vote in matters about the Board of Directors.

Investing in equity shares is popular among individuals because they are high-return investment options. However, despite their potential to bear high returns, they also expose an individual’s investment portfolio to a certain degree of risk.

 Mutual Funds: Mutual fund is a financial instrument made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets. Risk appetite in Mutual funds ranges from high to medium depending upon the scheme investors opting for.

The investor owns units, which represents a portion of the holdings of the fund. The income/gains generated from this collective investment are distributed proportionately amongst the investors after deducting certain expenses, by calculating a scheme’s “Net Asset Value”(NAV).

 Fixed Deposits: Fixed deposits can also be said as a traditional investment option. A fixed deposit investment scheme is provided by Banking and Nonbanking financial institutions. The fixed deposit has fixed tenures and a fixed rate of interest which investors will be earning. It can be said as fixed deposits are very safe to invest in.  

 

Conclusion: It can be concluded as People should invest in any of the financial instruments to meet long-term goals. Before parking money, one should always research and diversify their investment as per their risk-taking appetite and depending upon their expectation of earning gains or profit concerning the level of risk they are taking. Equity is advisable for high-risk takers (aggressive investors), mutual funds is a good option of investing for moderate risk takers and Fixed deposit can be said for conservative investors.