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Calculating Correct Investment Returns?

Calculating Correct Investment Returns? The only reason people make investments is to get returns. Most people think that they know how to calculate actual returns. But many don’t use the right method to calculate returns. Using the wrong method to calculate returns can give incorrect picture of your investments. For example, a person tells you that his investments of Rs 25 lacs in stocks are now worth Rs 75 lac. He is very happy to have tripled his original investment. But when he tells you that this increase has taken place in 15 years, will you still consider it to be a good investment? We try to answer this question by understanding the 3 main ways to calculate returns Absolute returns, Compounded annual growth rates & IRR Lets use the above example to understand these methods.   Absolute Returns Absolute Return (AR) is a simple way of calculating returns. It uses point-to-point values to calculate returns within a given period. It is calculated as follows: Absolute Returns = (Final Value – Initial Value)/Initial Value...

Introduction to Fundamental and Technical analysis

Introduction to Fundamental and Technical analysis Buying or selling a stock should always be preceded by at least some or other form of rational analysis that is backed by data. This ensures that the investor or trader has done some groundwork before taking the buy / sell decision and is not just throwing darts in the dark. At a very broad level, there are two disciplines of doing stock analysis: Fundamental Analysis Technical Analysis Both are very different from each other and attract market participants of different financial profiles and time horizons.   Fundamental Analysis This analysis requires evaluation of a company’s business by analyzing its qualitative and quantitative parameters. Qualitative parameters involve rational analysis and earnings projection by analyzing key financial indicators. For this, analysts delve deep into a company’s past years balance sheets, income statement, cash flow statements, and disclosures. Quantitative parameters on the other hand require analyzing other non-financial aspects of the company like management quality, corporate governance, treatment of minority shareholders, general business practices and competitive strategy, etc. Within fundamental analysis, investors can...

Types Of Stocks

Types Of Stocks People invest in stocks to earn higher returns than what fixed income products offer. But all stocks are not same. Like the companies and businesses, the stocks of different companies also have different characteristics. In general, companies issue stocks of two types – Preferred (have priority over other shareholders) & Common stocks. In line with its name, the common stocks are the first choice of retail investors. We will be focusing on common stocks in this article. Let’s evaluate different stock classifications that are commonly used:   On basis of Market Capitalization Stocks are often classified as large caps, mid caps, small caps and micro caps on basis of their total market capitalization (Current Share Price x Total Number of Shares). Though there are no exact cutoffs about what exactly is defined as a large cap and what isn’t, investors usually categorize companies under as follows: Large-cap: Market Cap > Rs 10,000 Crore (Cr) Mid-cap: Rs 2,000 Cr < Market Cap < Rs 10,000 Cr Small-cap: Rs 200 Cr...

Impact Of Inflation

Impact Of Inflation Do you remember how much a week’s worth of grocery cost you 2 or 3 years back? Does the same amount of grocery still cost you the same? We are sure that the answer is a big and an emphatic NO! This is the impact of inflation. To put it simply, inflation is a general rise in prices of various goods and services year after year. With each passing year, inflation reduces the amount of things you can buy with a fixed sum of money. So if you were able to purchase 5 kgs of an item for Rs 200 in year 2011, chances are that you would get lesser amount (may be just 3 kgs) of the same item for Rs 200 in 2016. Causes of Inflation Sometimes, people have sufficient money and continue to buy goods and services, thereby increasing their demand. This increase in demand leads to increase in prices, and hence – inflation. At times, the prices of raw materials used in production can increase....

Diversification

Diversification Remember the old saying – “Don’t put all your eggs in one basket”? We bet you do. So what would happen if you put all your eggs in one basket? You risk losing all the eggs if that ‘one’ basket fell or is lost during transportation. Isn’t it?. Had you distributed your eggs across many baskets, you would have been reasonably sure that most of the eggs would have remained safe, even if one or two baskets were lost. This is the basis of diversification. It’s a strategy that requires you to spread your money across various investments. This is to ensure that in case one of those investment loses money, the other ones will compensate for the losses of first one. It’s very important to understand that the real goal of diversification is not to increase your portfolio’s performance (though it actually can). It’s more about protecting your money against large losses due fall in prices of an asset, where your money was over-concentrated. Lets take an example...

Active Vs Passive Investing

Active Vs Passive Investing In last few articles, we have covered topics ranging from the need for investing, diversification to importance of asset allocation. In this article, we look at two different styles of investing. Investing is the process of putting aside money in a chosen asset class today, in order to get ‘more’ money in future.Even though the goal of every investing exercise is similar, i.e. to achieve higher returns, the process/style of achieving it can be different. There are two important styles of investing: 1)Active Investing 2)Passive Investing Lets discuss these two styles in detail. Active Investing The whole purpose of active investing is to try and outperform the broader markets.To illustrate, you pick stocks on your own, you are investing actively. Since the idea of investing on your own is to get higher returns than broader markets, you would try to generate returns that are able to beat the returns given by broader market indicators like Sensex, Nifty 50, etc. It requires one to analyse companies, buy and sell shares,...