Why you should be careful while investing in NFO?

Posted on June 10, 2009September 9, 2019 by Jagoinvestor

Here comes a new NFO!!!

In this post we will discuss why one should really be cautious about NFOs and why in general its better not to invest in any NFO. Have you heard about NFOs and IPOs hitting the markets while markets are doing bad? Why is it so? this is a question we must answer to.

NFO

The reason why most of the NFOs and IPOs hit the markets when markets are doing extremely good is to exploit the emotional buying of investors. Its a common thing that investors tend to get in rising markets then falling markets.

So when markets are flying high and all kinds of NFOs with fancy names (some good funds and some junk funds) will hit the market claiming how different they are and how they are ought to be a huge success.

If you are a new reader , you may like to read some terms and terminologies

Understanding NFO’s

No Proven Track Record:

Every NFO will come with its own idea and logic, but investing is never easy and you can see true colors only after few years. They can be success or failure!

So why to go for something which can either fail or succeed, instead why not go for some existing fund which already has proven its mettle, which has given superb returns over long term and has excellent management. These funds have high probability to continue their performance.

Its like: what would you prefer? Take risk of marrying someone you don’t know or someone who is already a good friend and you know him/her over years?

Cheap NAV at Rs 10:

Most NFO offer comes with NAV of Rs 10 and the biggest myth of investors is that its a cheap fund and hence better than a fund with NAV of 20 or 100. NAV growth is nothing but growth of investments and it does not matter what NAV rate is! Rs 10 NAV mutual funds and Rs 100 NAV mutual fund will grow with same rate if their investment quality is the same. There is no reason to invest in a fund that has low NAV.

Myth of High Dividend from Low NAV Fund:

Majority of our “Educated” Agents will tell you that buying low NAV fund will help you in getting more Dividend (if you choose Dividend option) because Dividend is declared on number of Units held. So you will get more units of mutual funds if you invest in low NAV funds!

Whatever he says is true, but he himself does not know that it’s the investor’s money coming back to him and NAV value will again go down by that much value. So in real money terms, there is no benefit of dividend option. See difference between growth and Dividend options

Agents will market it very well and try to push the NFO’s for Sale:

Everyone wants to make money! What other product can be better for a mutual funds agent than an NFO!!! Agents get High commission on selling NFOs and hence they will do anything to sell it. They will spend money aggressively for Marketing as its taken back from Investors eventually and not the AMC. Caution, Be-aware!

Does that mean all NFO’s are Bad?

No! Every existing mutual funds was NFO once upon a time. You should go through the NFO Offer prospectus to find out whether the offer seems interesting and logical enough for you to invest in it. Only then you can go for it. But just understand that only a handful of all NFO’s become good funds.

So out of 1000 mutual funds only a few like 20-30 will be extremely outstanding funds. So the decision is yours! Do you want to take the chance? Or you want to wait and let it show its true colors before you get into it.

Which is the new hot NFO in the Market?

Reliance Infrastructure Fund is the new name in the market these days. All the things which I talked above applied to this too. Before Investing in it read about it in acute detail. I will provide my short view on this.

Reliance Infrastructure Fund is a Sectoral Fund (Infrastructure). This sector looks attractive over next few years. The picture would be more clear after the Budget is out because that’s when we exactly know what is Govt plan in this particular sector.

If its a bad news then the stocks in these sector will take a hit and suddenly it can become a reason for suicide for its investors. Why not wait till the budget and then 😉

We also have some good Infrastructure funds in the market with proven record like UTI Infrastructure Fund and TATA Infrastructure Fund. It depends on you now what you want to do? The Fund will also put money in derivatives segment, which can again make the fund more risky and rewarding. Read more about Reliance Infrastructure Fund NFO details.

Conclusion: Investing in NFOs can be like shooting in dark for retail investors! A better idea for them is to invest in something which has more probability of performing well. NFOs can be extremely successful because of their unique idea or investing style but its too tough to choose them successfully. Better to avoid them!

Here are my 2 day trek pics , Have a Look. I am putting the best Pic taken by me 🙂

Before anyone asks, I must tell that its taken by a normal point and shoot camera 🙂 Its just a result of Interest and Willingness to take some good pic + Macro Mode 🙂

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“Value Investing” vs “Growing a Tree”

Posted on June 8, 2009August 19, 2019 by Jagoinvestor

Investments are similar to small plants; they need time to grow and flourish. Most of the investors make a common mistake of not giving enough time to their investments to grow and take a good shape.

If you think about how you plant a sapling and manage it well for years so that it can become a fully grown tree so give you the fruits, the process of investing through shares and mutual funds is the same way.

Lets take each case and see the similarities between these two concepts.

Growing Tree

You take a small plant (or a sapling), put it in soil and then water it, monitor it, take the weeds out, clean the plant and take care of it from pests which might be destroying your plant. It takes patience for the plant to grow and become a full grown tree. Then it servers you with the fruits which you deserve for your hard work and patience.

Imagine a different scenario: Now, you pick up a plant and put it in soil, 10 days later you go to see it expecting that you will get some fruits out of it. Obviously, you will be disappointed! It can’t give you any fruit and you think that either something is wrong with the plant or the soil is not the right type.

You take the plant out and put another plant, again 10 days later you come to see the plant, nothing happens. You take it out and put another and another and another and then you realize its not working. Now you think that the culprit is the type of soil, you take the same plant out of the soil and put it at another place which you think has better soil. But nothing happens there too!

Because your concentration and focus is on wrong things. It will definitely not grow if you don’t give it enough time to settle. It’s roots need to get hold of the soil, adapt to the conditions.

There will be different cycles of weather which will challenge and threaten the plant growth and you will have to take care of those scenarios. But one thing is sure that you have to give enough time to it.

Making Investments

When you invest in a share for Long term, the biggest mistake you tend to do is not give enough time for it to grow! If it does not move up quickly or as per your expectation, then you tend to think that you have picked a wrong share. You redeem your investment and again invest money in some other “better looking” share.

This keeps on happening, the prices of the share moves up, then down and it is never ending cycle. The volatile movements in share price gives sleepless nights to the investor and makes them believe that their investment might go in loss and hence its a good idea to liquidate it and finally shareholder sells it and takes the money out; Then again buys some other share.

This buying and selling goes on and on and one! The investor never gives one share enough time to grow. I am not saying that buying any arbitrary share and keeping it for long term will make you profits.

Picking good fundamentally strong stocks is a separate topic in itself. Here we are discussing about the scenario where assuming the investor has put his money in good stock but he just needs to give enough time to let it grow.

Later if the investor looks back and analyses his previously picked stocks, he will find that most of them have gone up or has crossed more than his expected levels. He then realizes that the only thing he missed was to give enough time for his investments and sit back tight without doing anything.

CASE STUDY

Imagine a person who invested Rs 10,000 in Wipro in year 1999 . What do you think the stock prices were in next 3 months or 6 months. What if the investor had sold the shares within a year because of a small loss or some good profit. In 1 or 3 yrs he might have got excellent returns ,which is fine. But the best returns comes when you give an excellent stock enough time. What do you think the stock was worth for in 28-29 yrs.

Rs 10,000 invested in 1979 was worth 200 Crores in next 28-29 yrs. The pick was good, no doubt! but it was the patience that got rewarded in the end.

What is it that makes it difficult for investors to keep patience with there investments?

Right from our birth, we are taught that life is ALL about winning, getting right and not making mistakes, being perfect. This has got inside our brains and its just not acceptable for us to be wrong, we want to achieve success, and be right.

When you invest in a share and it goes up in price, the first thing which comes to every mind is, “I should book it now and take the profit, else it can again go down and I may go in loss”. Actually in our mind we are saying “I should be out of this investment so that I can show others that I made a winning investment, or else I will make a loss and hence be called a loser”.

Have you faced this situation?

When you buy something at Rs 100 and it goes to Rs 99. Its so difficult to sell the share at Rs 1 Loss (that’s 1%). You just want it to come to Rs 100 back and then sell so that you are a winner and not a loser. But you only find it dropping further to Rs 90 and then Rs 80 and so on .. you are just helpless about the whole scenario.

Investments and Trading is not about Winning, its about making money and losing a little in case you are losing. Stop thinking in terms of Winning and Losing!!!

Think in terms of Keeping your losses at minimum and once you are in profits, let it run till you find a reason to sell the share. Selling a share just because its in profit is not a wise thing to do! You can make some profits out of it, but wealth is created by letting your profits run and run for a long enough time.

Note : This article from me was also appeared on Valuenotes.com .

Everything you want to know about Super Annuation

Posted on May 13, 2009August 22, 2019 by Jagoinvestor

The only schemes that comes in your mind when it comes to retirement benefits are EPF, NPS & PPF. But there is one more scheme i.e. Super Annuation about which lot of people don’t even know. And those who know about it they don’t know how much corpus they have as their super annuation.

In this article I’m going to tell you what is super annuation and how to check your superannuation balance if your employer maintains it with LIC.

Super Annuation

First of all I would like to share with you an important thing, which one of my friend Subbu has figured out himself . Credit goes to him.

A lot of employees do not care to check there Superannuation amount, or they are not even aware that it exists. Knowing the amount of your superannuation can be helpful, because then you know that you have that much saving and hence when you plan your investments, you can factor in this information and take better decisions . This small amount make big chunks of your portfolio .

What is Superannuation?

Superannuation is a retirement Benefit by employer . It is a contribution made by employer each year on your behalf towards the group superannuation policy held by the employer. This is an important part of creating wealth for your retirement .

Features of Super annuation :

a) Superannuation Fund is a retirement benefit given to employees by the Company.

b) Normally the Company has a link with agencies like LIC Superannuation Fund, where their contributions are paid.

c) The Company pays 15% of basic wages as superannuation contribution. There is no contribution from the employee.>

d) This contribution is invested by the Fund in various securities as per investment pattern prescribed.

e) Interest on contributions is credited to the members account. Normally the rate of interest is equivalent to the PF interest rate. Read what is EPF and PPF ?
f) On attaining the retirement age, the member is eligible to take 25% of the balance available in his/her account as a tax free benefit.

g) The balance 75% is put in a annuity fund, and the agency (LIC) will pay the member a monthly/quarterly/periodic annuity returns depending on the option exercised by the member. This payment received regularly is taxable.

h) In the case of resignation of the employee, the employee has the option to transfer his amount to the new employer. If the new employer does not have a Superannuation scheme, then the employee can withdraw the amount in the account, subject to deduction of tax and approval of IT department, or retain the amount in the Fund, till the superannuation age.

Source : https://www.citehr.com

What happens with your superannuation after your retirement?

Once you get retired you can use the amount of your super annuation in 2 ways, either withdraw the total amount which will be completely taxable if withdrawn at once, or withdraw 1/3rd of it which will be tax free and convert the 2/3rd amount in regular pension scheme.

Tax will be applicable on the remaining 2/3rd of the superannuation amount and returns on it.

What happens if you resign?

This is the concern of most of the people today. When you resign the job, you can transfer your Super Annuation from your current employer to new employer and can continue it till your retirement.

If your new employer does not have the superannuation scheam, then you have 2 options, either withdraw all the money on which tax will be applicable, Or let it be in your superannuation fund and use it after your retirement as per the above mentions tax rules.

How SuperAnnuation is calculated?

The interest rate on Super annuation is similar to the interest rate applicable on PPF. Whereas the returns may differ depending upon the underlying insurance company and the superannuation scheam that your company has taken.

The interest in calculated and deposited to your account yearly. This is the interest paid by the insurance company and also your employers contribution.

Super annuation chart:

[su_table]

Years of Employment	Amount of Super Annuation
Less than 1 year	NIL
Between 1 and 2 years	50% of the contribution + interest earned
Between 2 and 3 years	75% of the contribution + interest earned
More than 3 years	100% of the contribution + interest earned

[/su_table]

Interest Earned :

This is interest paid by LIC every year on the contribution by employer.

Rules of Superannuation on Maturity

Once the employee completes 3 years of service and works till his/her retirement, he/she can make use of superannuation balance as a form of pension. He/She can withdraw 1/3rd of the accumulated balance after retirement and the rest can be availed as monthly pension till end of life.

Steps for checking Superannuation balance online?

1. Go to licindia.com

2. Register for a user id and password.

3. Login.

4. Click on ‘Group Scheme Details’ tab.

5. Click on ‘member’ radio button.

6. Get the group policy number for super annuation from your company’s payroll department and enter ” in the policy number text box and click ok. (Talk to your finance department for getting the group policy number , this will be unique for all the employees of a company).

7. It will ask for LIC Id no and Date of Birth fields.

8. To get LIC Id no, call LIC branch with which your employer has a super annuation account and inform that you are calling from your company and provide your name to the LIC official. They will give your LIC ID No.

9. Since most companies had not furnished the date of birth details to LIC, enter ’01/07/1960′ / ’07/01/1960′ (forgot the order, try both n check) in the date of birth field.

10. You will get the policy enrolled and you can click on the policy number to view the details. The details will contain the accumulated balance till the last financial year. It also shows contribution made by your employer i the current financial year.

Are you able to see Superannuation Balance for yourself ? Were you aware of it ? Please share with us in comments section . Also please share if you find any discrepancies with the steps .

3 M’s of Successful Trading

Posted on April 14, 2009July 21, 2019 by Jagoinvestor

In the last Article , we had seen an Introduction to trading . In this section we will see what are the 3 M’s of Successful Trading as per Dr Alexander Elder .

I will give brief introduction of each of it , Its your responsibility to take it further and learn it in detail . take this as just a starting point .

The 3 M’s are :

MIND
METHOD
MONEY

MIND

This part of Trading is most important . It deals with Psychology . When one enters Trading business , he/she has some beliefs about the environment, about markets. They have to understand the importance of Discipline, How people think , how greed and fear affects investors. There are sub-parts to this

# Individual psychology of traders : You have to understand how to control Fear and Greed . How you should take rational decisions and not fall pray to your emotions while trading .

# Mass psychology of the markets : You also have to understand how mass psychology works . Why most of the people do what they do .

# The rules for maintaining personal discipline : You also have to understand the importance of Self Discipline, why you must be always consistent with your trading . You must never violate your rules . because in long run your discipline in one thing which will make you most money , not your knowledge or your skills .

METHOD

This is the part which deals with your knowledge about market , technical analysis , other tools which you can use to make Entry and Exit from any trade . This part is perceived to be the most important aspect and most of the people run after these a lot , but these are the least important part of your trading . Let us see part of this .

#Technical indicators :

These deals with the tools available for making decisions , for example , MACD, RSI , Stocastics, OBV and other 200 weird words.

#The best chart patterns :

Then you must know different types of patterns, which gives some idea about future action and how masses are thinking, some examples can be double top, Head and shoulder pattern etc.

#Developing a trading system :

Then finally after you are done with knowledge part, you should build up your trading system. what is trading system ? Its your rules for buying, selling, booking profits and cutting losses.

For learning on some technical tools you can see my series of articles on “How to be a better than average Investor”

MONEY

Now this part is an amazing one and my favorite 🙂 . What this determines is how will you manage your money , it decides how much money will put in market at any given time , and how much loss will you take maximum on any given trade . How much will be your maximum loss on any one trade, things like that .

Basically this part decides how long can you in the game of trading if things would go wrong . This part is extremely important . Without proper money management no can can survive for long in Trading . Lets see some basic and widely accepted views .

# The 2% Rule for individual traders :

This rule days that on any given trade your loss should not exceed 2% of total capital . So if you have Rs 1,00,000 , first time your loss should not be more than 2,000 . This rule makes sure that even if you make long series of loosing trades , still you are in the game .

Even if you make 10 consecutive loosing trades , your overall loss will be 18.3% , Though this will be rare , still you take care of this situation .

# The 6% Rules for every trading account :

This rule says that your monthly loss should not cross more than 6% in a month . Sometimes when you trade it may happen that there is some problem with your analysis or some issue between you and market which can not be explained , you keep trying to win , but don’t succeed, that time you have a great urge to revenge trade and get your money back .

The best thing at that time is to stop and get some rest , go for vacation and come back with fresh mind . This rule will make sure that if your chemistry with market doesn’t fit , you stop after loosing 6% of your capital . You can choose your own percentage amount .

I would like to choose 12% for me . it all depends on your risk appetite and stubbornness 😉

You might be interested in my previous money management example

# Essential record keeping for success :

This part says that you should always keep all the information regarding each trade . Buy price , sell price , date of purchase , how many days you carried , Reason for buy , reason of sell , what you learned from the trade , chart at the time of buying , charts at the time of selling etc etc .

Why do you do this ?

Record keeping makes sure that any day you can go back to your records and see what kind of mistakes you have done, why some trade failed , why you succeeded in some trade ? you can get lots of information from your records , you need to analyse your performance over days/months/years .

Its extremely important , after a series of trades when you look back to your records , you may be able to find out some pattern , some particular aspect or mistake which you do with each loosing trade and hence can take corrective measures .

So, finally we are done with 3 M’s of successful trading . Professor Van Tharp , in this legendary book “Trade your way to Financial Freedom” talks about how the weightage they would give on these 3 M’s .

According to him in Trading the importance factor is like this

Mind : 60%
Money : 30%
Method : 10%

Its totally opposite of what people perceive it to be , general people think that having all market knowledge and technical analysis is most important .

Nothing is far from truth , It wont be too ambitious to say that you can make money in market by simple coin toss if your have sound money management Techniques and Great control over your self , you need to cut your looser short without any emotion and let your profits run till they can by sitting tight and doing nothing .

Conclusion

So finally if you want to start learning Trading , Work hard on your Psychology part and money management techniques , Technical analysis and other knowledge is important but not vital !! .

Some other article’s you might be interested in :

– Options Trading
– Trading , What is it ?
– Swing Trading Presentation by Mr. Sudarshan Sukhani

you might also be interested in simple technical analysis example given by me with charts at my analysis blog

Why you should Plan your Taxes at the start of the Year?

Posted on April 10, 2009July 21, 2019 by Jagoinvestor

Most of the people take care of there 80C at the end of the year around Jan-Mar . Ideally it should be at the start of the year . Let us see why its should be done at the start of the year itself to plan your taxes.

Plan your Taxes

Following are the 4 most important reasons for Planning your Taxes in start of the year .

Easy on Pocket :

If you plan your taxes at the start of the year , you can then put small amount of money each month . Otherwise you will have to cough up all the money at the end of the year , which can be little difficult on the pocket .

For example :

If you want to invest 60k for this year … you have two choices , either plan your taxes in advance and invest 5k per month, or invest 60k at the end.

No Headache last moment: Another important point to consider is the tension and headache you go at the last moment because of the rush , there is sudden confusion at the end on what to take , where to go , where all the money will come from and all those things .

planning the taxes in the start of the year ensures that you do in correctly and without and headache for the last moment .

Correct products :

If you plan your taxes in the start of the year , you can do your research well and plan for products which you actually need and then go for it . I have seen most of the people taking all kind of wrong products which they don’t need, because there is just no time to think about your requirement , you just have to “invest to save tax” .

Conforms with principle of “Investing Early” : Also when you plan our taxes early you are putting your investments early, that way you are ahead of most of the other people .

Conclusion

An important aspect of Financial planning is to plan your taxes early . Why procrastinate when you know you have to do it anyways … Best of luck .

I have written a series of 4 articles which talks about “Buying Stocks Smartly”

You can read them here : Part 1, Part 2, Part 3 , Part 4

Don’t buy “Return of Premium Term Plan” – It does not make sense!

Posted on December 22, 2020October 22, 2021 by Jagoinvestor

Does it makes any sense to buy “Return of Premium Term Plan”?

The one-line answer is “NO – it does not make sense”

A “Return of Premium Term Plan” or TROP as its called – pays back all your premiums at the end of the period, whereas the plain term plan doesn’t return back anything. Before we get into the analysis further, I want you to know why these return of premium term plan came into existence!

Term Insurance with Return of Premium

Why the Return of Premium Term Plan came into existence?

Term plans have become very popular in the last few years. We are seeing so many advertisements screaming about term plans importance. However, a lot of investors who don’t understand term plans fully, still feel a pinch that their premiums get “wasted” if nothing happens to them.

They equate “paying premiums” as “losing premiums” if they dont die. They compare it with an investment policy (read traditional insurance plans) where they get back there a sum assured towards the end of the policy.

Insurance companies sensed this behaviour and they introduced something called “Term Plan with Return of Premium” which can now proudly tell customers that they have nothing to lose. They get claim money on death, and if they don’t die, they get back all their premiums paid. Many investors who do not understand the time value of money concept fall for a product like this, as to human mind “getting back all your premiums” sounds very attractive offer.

Now, let’s talk about why it does not make sense as a product.

Return of Premium Term plan has an extremely low return

The premium for the TROP (return of premium term plan) is higher than the plain term plan and it can be 2x-3x times the normal premium in some policies.

So basically, you are paying an extra premium for getting your premiums back after 30-40 yrs!

Let’s look at an example of a 30 yr old male, who wants to buy a 1 crore term plan till 60 yrs of age (for 30 yrs tenure). In which case the premiums are as follows (Example is of Max Life Term Plan as on 21st Dec 2020)

[su_table responsive=”yes”]

Type of Plan	Yearly Premium	Details
Simple Term plan	Rs 9912	One has to pay Rs 9912/yr for 30 yrs for Rs 1 crore cover. You don’t get back anything at the end on survival
Return of Premium Term Plan	Rs. 17,969	One will have to pay an extra amount of 8057 for 30 yrs (apart from 9912) and will get back Rs 5.01 lacs (this is all premiums paid excluding the tax amount) at 60th year

[/su_table]

If you look at the example above, you can see that in both the plans you are paying Rs 9912 for the Rs 1 crore cover. Only difference is that in second policy, you are paying an extra Rs 8057 to get back Rs 5.01 lacs (excludes the taxes part) at the end. This is the only difference between the two versions.

So internally, the term plan with return of premium is simply a bundled product of a normal term plan and an investment policy. If we ask what is the return of this investment policy where you are paying Rs 8057 per year and getting back Rs 5.01 lacs after 30 yrs.

The answer is 4.05% CAGR.

Yes, its barely above saving account rates and a little below a normal fixed deposit interest.

I did the same analysis for the tenure of 40 yrs and 50 yrs policy (read why you should not take such a long tenure term plan) and the IRR return was 3.92% and 3.00% respectively, which means that if you buy the policy for a longer tenure, the return gets lower and lower and the product becomes even worse.

Below is the IRR return calculated in an excel sheet for your reference

return of premium term plan irr return

Note : The above calculations are done in Excel for just one company plan, however similar kind of numbers are expected from other companies return of premium term plan. Please do IRR calculations yourself if you looking at other companies plans.

Return of Premium Policy ties you up with the product

What do you do, if you want to stop a “Return of Premium Term plan” in-between? Let’s say after 10 yrs?

It will not be as simple as a normal term plan, because, with the return of premium policy, your mind will tell you that you just have to continue it for another 20 yrs and you will get back all your premiums. Very smartly, the insurance company has converted a pure term plan into an “investment policy cum term plan” with very bad returns.

so the better alternative than a “term plan with return of premium” is to buy a simple term plan (here are 20 checklists before buying term plan) and invest the extra amount in another investment products like PPF, FD’s, Equity mutual fund or debt mutual fund and you will have better flexibility and returns.

Check out this video from Subramoney talking about this product

What happens if you stop paying a premium for Return of Premium Term plan?

There is an option to get a surrender value if you stop paying the premiums in between. Just like traditional plans, there is the concept of “Guaranteed Surrender value” in these kinds of policies which comes into picture once you have paid 3 yrs premium. However, the amount you get back is a fraction of what you have paid. There is a percentage assigned for every year which tells what part of the premium paid will you get back if you surrender the policy in a year. Below is a snapshot of the chart taken from Max Life Brochure

Surrender value chart of the max life insurance return of premium term plan

So, as per this chart – if one wants to surrender the policy in 10th year, they will get back only 55% of the premiums paid (excluding premiums).

Some other Info

The TROP gives you income tax benefits as per sec 80C
There is an option to pay premiums on a monthly, quarterly or yearly basis
There is also an option for limited pay (pay in 10 yrs) or in one single premium

Conclusion

So TROP is a very carefully designed product which favours the insurance company but makes the product look very good and works on the psychology of the investor. Better stay away from it. The best idea is to buy the simple term plan with the lowest premium.

If you have already invested in this kind of plan, then you need to evaluate what will make sense for you!

Do let us know if you liked the article and does it make sense to you? Share in the comments section!

How to use Support and Resistance to Buy or Sell Stocks

Posted on April 2, 2009July 21, 2019 by Jagoinvestor

This is Part 2 of the How to become a better than average Investor series, see Part 1

In the last post we discussed the importance of Fundamental and Technical Analysis. Now we will see one of the most simple, easy and powerful thing called Support and Resistance.

This is for people who have no idea about what is it and have at most heard about it.

Let us see both of them one by one.

Support :

Support for a price is a price area where there are lots of buyers ready to buy the stocks rather than sellers. At that price point, the general perception is that its a good buy, and lots of buyers come to buy it. Hence buyers outnumber sellers and there is a higher possibility that prices will bounce back from that point . This is a point where Buying has less risk.

In other words, at support levels demand is thought to be strong enough to prevent the price from declining further. Please understand that Support point is not a place from where it will for sure bounce back, Its only the higher probability that it will bounce back.

Also understand that its not exactly a fixed price which should be considered as Support, generally its a range like 98-100 or 560-570 ..

Which point is Support point : Every Low made by the price can be considered as Support Area.

Let see Example :

Support Example 1 : Below chart is for Jaiprakash Associates (click to enlarge), It made a low of Rs.53 (closing price) on 27th Oct 2008 and then bounced up from there.

Now Rs.53 is the support point, Prices went up from that point and after reaching Rs.90, it again started heading down, You can clearly see in charts that it reached Rs.53 levels, but could not break down from that point and again bounced back from there.

It was a very good “BUY” around Rs.53. Understand that buying around Rs.53, is only a less-risky trade, not a “no-risk” trade. Prices can break down from there also.

Support Example 2 :

Below is a chart of RPL. Here you can see that prices made lows of Rs 70 around Dec 1, 08. That became a support point, and then prices reached thought levels around first week of Mar 09, It bounces back from that point, It was a less risk trade around Rs.70.

Resistance : Resistance is just opposite of Support, At this price levels there are more sellers than buyers and with high probability prices reverses from this point. At this point there are enough sellers in the market to prevent it from rising further.

Resistance point is the High made by a price. All the high’s will act as some kind of resistance points.

Lets see examples :

Resistance Example 1 :

Below is Reliance Charts, You can see that reliance made a high of Rs.1400 around Dec 2008, After that you can see how it reversed from that point 2 times in Jan and Feb 2009. It was a wise decision to sell at those points.

You can also find many examples like this if you investigate yourself. Try to see other charts if you are interested, you can look at charts at ichart.in or https://www.bazaartrend.com/index.php , find yourself)

Important Note : When prices are near Support or Resistance levels, you should be more alert. It does not mean that you just jump onto market and buy or sell, Be patient to see the actual price reversal, Though you will loose some part , that would be a better trade.

Also there are several other factors which should be considered, but for now lets not touch upon them. lets keep it simple for readers.

Lets also look at some important points

Break Down :

Always remember that when prices don’t hold support and break them and fall further, it tells that buyers are not strong enough and Sellers have taken over them and prices will make new lows, When support is broken, Sell further.

Example : Below is the chart of RPL, which shows how it broke down its support point and then made further lows.

Break Out :

When prices don’t hold resistance points and break them on upside, prices then indicate that they are going to make new highs. Better to buy at that point.

I have put a post on my analysis blog for Reliance Break out : please see it :
https://manishanalysis.blogspot.com/2009/04/reliance-break-out-target-1800.html

Some Other points to remember :

1. Support and Resistance points are places where you should be more alert and look for other signals to buy or Sell, just don’t buy because prices have reached near support, buy it when it starts rising and there are positive signals.

2. Support once broken becomes Resistance for next time, and Resistance once broken becomes Support point for next time, use this knowledge. See : https://candlestickmania.blogspot.com/2008/07/resistance-becomes-support.html

3. Many times there are false breakout and breakdown, So it will many times happen that you get out at important levels and miss the large movement, that’s fine, you can always enter after getting out.

4. This is most important point, Everything I talked about in this article can increase your chances of making more money in trading, but remember that you are dealing in Markets, and if you don’t control your GREED and emotions, your failure is guaranteed.

Use strict Stop losses and use Money management techniques (it means not putting all your money at once, if you have 10 lacs, put only 1 lac, don’t be greedy enough, else someday you markets will punish you badly, then no Technical analysis or any thing will help. have good amount of cash with you always ).

All technical Analysis and knowledge are of no help if a person cant control his greed and emotions in Market. TA and your knowledge will contribute not more than 20% of your success in long run.

This was end of Part 2 of this series, In next port (Part 3) we will see how to find support and resistance levels using TRENDLINES. wait for it.

Comments please, Its sometimes disheartening to see no comments after I put up a post after some hard work. I don’t want “good post or Great Article kind of comments, but at least share what you have learned and ask questions, make it little interactive please.

Question for you all :

Question 1 : Do you think this support or resistance thing works , or can you add anything else how to buy or sell and what things to observe at support and resistance levels , which can make buying and selling more successful?

Question 2 : What do you think about Chambal Fertilizrs at this point , see the charts at : https://www.bazaartrend.com/index.php?symbolname=CHAMBLFERT (click on the upper left button to make it full screen).

Suggest what should be done at this point of time ?

I came across very nice video, about difference between winning and success, a worth watch. See it below

Note : All the things discussed here are available on net with great detail. learn more of it yourself.

Fundamental Analysis and Technical Analysis , What and When !!

Posted on March 30, 2009March 4, 2020 by Jagoinvestor

I am starting a series of articles that will deal with “How to invest in stocks efficiently”. This post is Part 1.

There are two important questions which you have to answer when you want to buy shares? They are “What to buy” and “When to buy”?

Fundamental analysis

You may be familiar with Fundamental Analysis, Fundamental Analysis answers the question “What to buy” ? . It a study of companies Financial statements, cash books, markets study to find out the future prospects of a company. It answers the question “Will this company is a good buy for long term”? , “Will it be more valuable than what it is now ” etc, etc ”

But !!, Even though you have picked up some excellent companies for your long term investments, That’s not the end of the story. Now the biggest challenge and question you have is “When to buy it”?

You should not just go the next day and buy the share, that’s not the right approach. There can be a price area where buying is best in terms of risk/reward .

Technical analysis

Technical Analysis is the study of charts, price and volume patterns and other indicators derived from price and volume. Technical Analysis gives us hint on what can happen in the future, understand that it only gives you chances, not a guarantee.

So everything should be taken with crossed fingers, Decisions are taken on the basis of TA only increases your risk/reward scenario.

I will give you an example :

Reliance is a very good long term Investment (do your own analysis to find out why, but it is :).

On Feb 1, 2009, Ajay and Robert want to invest Rs 1 lac in Reliance for the long term. Both of them understand that Reliance is a truly long term buy. Ajay invests in Reliance on Feb 1, because share is going up and he feels its a good time to enter others. He buys the stock at Rs 1360.

After some days Stock starts falling and reaches around Rs 1,150. Roberts buys the stock at that time.

see the chart here

Here you can see that Robert has got the stock at a 15% lower price, which means his profits will always be more than Ajay’s by that much. What did Robert do? Robert used simple Technical Analysis concepts and entered in the stock with better prices, It does not mean it will always happen, but there are good chances for getting a better price.

In the above case of Reliance, there is no significant price difference, but there can be cases, where there can be drastic differences, and it would be really worth using basic Technical Analysis.

Don’t be scared, I will tell you some very basic things of technical Analysis in some of the next post.

I will talk about

Part 2: Support, Resistance
Part 3: Trend Lines
Part 4: Simple Oscillators to use for short term investments.

Watch out for the second part soon.

Please share any real-life example which happened with you, May be we all can try to find out what could have been done to make a better entry or exit from the stock.

cheers 🙂

How to use losses to reduce income tax?

Posted on March 23, 2009July 21, 2019 by Jagoinvestor

Are losses good? Do they have any benefit?

When you make a loss, do you feel it has nothing to provide or not at all beneficial. The answer is NO! Losses are bad, but our tax laws gives us a way to utilize them in such a way that we can reduce our income tax liabilities.

reduce tax

Let’s see how 🙂 , don’t worry, we will start from scratch and will explain in detail so that everyone can understand .

Let us talk about capital gains in detail today and let us understand how should we utilize it to minimize our tax liability. Things we will discuss would be stocks, mutual funds, Gold , Debt funds, Real Estate etc.

Understanding Terms and Rules

Capital Gains and Loss : Any profit or loss arises from the sale of capital assets is capital gain or loss. Capital Assets Include Shares, Mutual funds, Real Estate, GOLD etc.

Short Term Capital Loss and Profit : STCL for Equity (shares and mutual funds) is when you sell them at loss before 1 yr, for Real estate, GOLD its 3 yrs.

Long Term Capital Loss and Profit : LTCG for Equity is when you sell it after 1 year, for Real estate, GOLD its 3 years.

Following is the chart showing the tax treatment and time frame for short term for each asset class. Click on the chart to enlarge it.

General and Carry forward Rules :

Short-term capital loss can be set off against any capital gain (Long-term or Short-term)
Long-term capital loss can be set off only against long-term capital gain.
A long-term capital loss will have no value in a case where the long-term capital gain is exempt from tax. For example, In case of shares or mutual funds after 1 year, LTCG is exempt from tax, so If you hold a share for more than 1 year and then take a loss, That LTCL will have no benefit. This loss cannot be set off against any other income.
A capital loss can be carried forward for next 8 years.

How can you utilize the losses ?

As we know that capital losses can be offset with capital gains, we can utilize this advantage to reduce the tax liability.

The main idea is to create losses to offset any profits. There may be the cases where there is an investment on which you are losing, but still you have not booked the loss, but you can book it and use this loss to offset a profit on which you may have to pay the tax.

Let us see some examples

Example 1 :

Ajay had invested Rs.5 lac in GOLD in 2005 and currently in 2009 he sold it for Rs 10 Lacs, Now he made a profit of 5 lacs and it will be considered as a LTCG, as its after 3 yrs. and it will be taxed at 20% indexed (If you don’t know what is indexed, just forget it, don’t worry ). The tax would be around Rs 1 lacs.

Now Ajay also had invested Rs.10 Lacs in Unitech Shares in Apr 2008. His investment has come down to Rs.4 lacs now. But he thinks that it will go up and he wants to keep it and not sell.

Good !! I appreciate his belief that it will go up again. But what is stopping him from selling it today and then again buying it next day.

Watch this video to know 7 ways to save your tax:

What will happen if he does that ?

If he sells his shares and takes a loss of Rs.6 lacs, He now has made a STCL of Rs.6 lacs and law says that he is allowed to offset it with any STCG or STCL. So now he can offset his 5 lacs profit with this 6 lacs loss and hence, he can save his tax of that 1 lac which he had to pay, also he can carry forward a loss of remaining 1 lac which was not offset.

He can again buy his favorite Unitech share the next day. The only loss he will make is the brokerage charges and any fluctuations which may occur in prices, which will not be much, may be it has gone down and he can buy them later at better prices.

So the point is to generate the loss by selling a losing investment and again buying it back in some days. This will help you cook up the loses which then you can offset with existing profits and hence reduce your tax liabilities.

Example 2

Robert had invested 5 lacs in mutual funds in early 2008 or end of 2007 and currently has a good loss of 2.5 lacs (1 yr is still not complete). This is currently every one state, most of the people have burnt their fingers and made huge losses.

Now he is sad that he made losses, He also had bought some shares before some months and made a profit of 50k. Let us also assume that next year his mutual fund will rise to 4 lacs from current 2.5 lacs, which he sells next year.

Now he has 2 choices to make, let us see 2 cases.

Case 1 : He does not book the loss and holds it .

In this case, he will have to pay profit of 15% STCG on his profit of 50k, and next year he will have his current investment at 4 lacs. When he sells it, it will be a loss of lac which will be LTGL (because he had held it for more than 1 yr).

Case 2 : He books the loss of 2.5 lacs and then again buys it back the same day or next day .

In this case, he has made a STCL of 2.5 lacs (bought at 5 and sold at 2.5), Now he can offset his 50k profit with this loss. Then he would not have to pay the tax and he can then carry his loss of 2 lacs carry forward.

Next year, he sells his mutual funds for 4 lacs and makes a STCG of 1.5 lacs (because he has re-bought this mutual fund and 1 yr is still not complete) .. But he can offset this profit of 1.5 lacs with the carried forward loss of 2 lacs, and still carry another 50k worth of loss forward.

So what’s the advantage of case 2 ?

The advantage is that you can save tax on the existing profit and also generate STCL which you can take forward and save tax on future profits.

There are many people who make losses and don’t bother to show it in their returns, if they don’t show it in returns then they will not be able to use it for offsetting purpose in future. Note, The way I have shown the examples have their own benefit and problems, Its you who have to decide what you want and how to utilize the tax rules to your advantage.

Its smart use of knowledge, not cheating 🙂

I wish you have got some knowledge out of this article, please put your comments/corrections/suggestions so that we can do more discussion.

Also, don’t forget to put your vote on the poll at the top of this page.