Value Investing – An Underdog Strategy

"Price is what you pay; value is what you get. Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down." says Warren Buffett explaining his penchant for value based investing. Warren Buffett is an ardent follower of value investing and most of his investment strategies are rooted to this form of investment. The concept of value investing was introduced by Benjamin Graham and David Dodd in 1928, which was later discussed in their book on “Security Analysis”.

What is value based Investing? 

Value investment is identifying stocks that look under priced based on some form of fundamental analysis.  It may include identifying stocks that are trading currently at discounts to their book value, stocks that give good dividend yields, have low Price-to-Earnings multiples or have low Price-to-Book ratios. It definitely doesn’t mean buying cheap stocks. Buffett simply described value investing as buying securities that are trading below their intrinsic value. Value investment is dependent on quantitative data. It is more or less more acceptable as it draws trends from historical data.

How do we get our stock pick for value based investment?

Some of key pointers to look for a potential value stock are as follows:

·         Stable and predictable cash flows with limited risk

·         Low valuation at discounted future cash flows

·         High entry  barriers in industry

·         Strong historical performance

·         Low price ratios compared to industry standards

Why do people avoid value investing?

Basically value investing is a result of investors becoming over negative about any particular stock. It is a situation when the market players’ oversize the problem /risks attached to any security and refuse to believe it to be a good investment. People don’t want to buy these stocks that don’t have attractive tags or command low recognition in markets. Psychologically they find it more risky than investing in much stronger valuation and popular companies.

People like to invest in companies that have done well in the past in both stock market and have strong financial performance. But one must remember that these anticipated good performances come with high valuations leading to high fancy prices. These fancy prices then lead to terrible losses.

Thus, we can say identifying value stocks is difficult as most of investors are against it. It is like taking a contrarian approach to current tide. Money needs time to grow and although, value investing might not sound an exciting investment opportunity, it is the right approach to build wealth.

“Investing is for making your money grow. It is not for excitement. Value investing may sound boring but that is the only way you grow your wealth in stock markets.” Parag Parikh, PPFAS Mutual Fund.

ITR forms - Filing made simpler....

With increasing importance of filing the Income Tax returns on time and with  filing facility made simpler online, every individual wants to contemplate filing returns on his own. It is not a difficult job considering the income tax portal made simple and with online help manuals in multiple languages. There are few simple IT return forms online, amongst which we just have to select in the right one and submit. 

A few starters to be kept in mind before preparing to file your returns:

a)   All tax payers having income above Rs 5 lakhs has to compulsorily file their returns online.

b)   It is necessary to keep your PAN CARD number and Income Tax E filing password handy.

c)   All it is not necessary to attach any investment proofs to the online file.

d)   In case of no digital signature of the tax payer, a physical copy of form ITR V needs to be sent to the Bengaluru address of Income Tax.

e)   It is now mandatory to link your Aadhar card to your IT returns.

For the Assessment Year 2015-16, the following forms can be used appropriately to file your Tax returns.

For Individuals or HUF

Form No	Income included	Rules to  use the form
ITR 1	· Salary income · Income from only one house property · Income from other sources (except lottery and races)	· This form cannot be used if you have any asset outside India · Exempted Income more than Rs 5000 (like agricultural income) · Any capital gains not exempted under Income tax
ITR 2A	All of income under ITR 1 plus ·  Income from more than one property ·  Exempt income beyond Rs 5000 ·  Capital gains allowed if Securities Transaction Taxation paid ·  Income from lottery and horse races also allowed after making proper disclosure.	·         This form cannot be used if you have any asset outside India
ITR 2	All of income under ITR 2A plus ·  Foreign assets/income	·         This form is not helpful to be filled by people earning income from business or profession ·         Partners of a firm
ITR 3	All of income under ITR 2 plus ·  Income from partnership/LLP firm with earnings only in form of interest, commission or salary to partners.	·         This form is not helpful to be filled by proprietary business owners.
ITR 4	All of income under ITR 3 plus ·         Income from proprietary based business

A detailed study of the appropriate form application can be clarified at the income tax portal link at https://incometaxindiaefiling.gov.in/e-Filing/Services/DownloadItrLink.html

Happy Independence Day!!!!

Happy Independence Day to all our readers. It is a long weekend and with 69^th independent year completion , our country is moving more towards a more dynamism and adoption of new policies like GST. (Finally... it is like amendment long waited in constitution). For most of us, this day is not more than another holiday. It is a chance to prepone our Rakhi celebrations and save our PL leaves on 18 August. Some of us, who have always been on the chill side of life have pre-planned this long weekend holiday and enjoying it in full strength. A very few of us, sit back and relive those moments of independence. Those stories, fights and entire set up looks good only in our school books and later in our libraries. We are only interested in them when any leading Bollywood director makes a biopic on some forgotten national hero. Till then we think its' best to enjoy our today.

Think about it.....

Does not thinking about our country on Independence day makes us anti national? No, absolutely not. But talking about it and discussing it with our next generation makes us happy and fill our hearts with pride about our ancestors. It gives a new hope for better tomorrow. It encourages the young lot to fight for something and feel determined to achieve it. It transfers the good karma to them.

So why are we talking about all this today?

We are talking about all this today is to make you realize that we too should be working on our independence- OUR FINANCIAL INDEPENDENCE. So, when we look back at our lives we have our hearts filled with pride and determination in our children's eyes to achieve something. We have to just sow simple seeds of hard work and financial discipline to earn the fruits of happy, financially fulfilling retired life. It doesn't take much of efforts to forego some small happiness now to enjoy a bigger goal tomorrow. It might be a tough and tiring road ahead but the destination would be definately reached. 

 

Some small deeds to achieve your Financial Independence

a) Start saving early. Start with small regularly savings and slowly accentuate them to achieve your goals.

b) Savings doesn't equal to investment. So, identify your goal nature and duration and invest it in appropriate avenue.

c) Nominate and give away in will your assets and earnings to your loved ones at earliest to let them enjoy the same after you.

d) Never forget to pay off your liabilities at first over spending them on unnecessary wants.

Life is short and needs to be enjoyed. Go out and live it to your fullest. After that remember to fulfill your responsibilities towards your loved ones so that they remember you with pride and want to emulate your path. Lives can have Bright Future when you burn all the lamps on the path.

Happy Financial Independence Day to all of you.

From Team Saarthi

Arbitrage Funds - Balance your Risk & Gains

Sometimes we are tempted in taking a little risk for that extra dollop of cream. We don’t mind diving more than few times in wrong kind of investment as  long as we are assured to earn profit in at least 1of 10 times. It’s a bad ratio absolutely if it means you are risking your goal corpus to get the extra something over your normal return. So today we would discuss one such product which gives you an opportunity to earn just a little more with our risks calculated and reduced to lowest. 

What is Arbitrage Fund?

Arbitrage is basically when you get an opportunity to earn profit between two different markets due to inefficiency in market pricing.

It is a mutual fund category that capitalizes on the difference between price of equities in the cash and derivative markets for generating returns.

So how does the Arbitrage fund work?

Let’s take an example: At the start of August, Fund A buys Infosys Ltd shares (INFY) for Rs. 1,000/share and sells INFY August futures at Rs. 1,020. This strategy envisages that you expect the stock price to fall in future.

Type of Instrument	Scenario I	Scenario II
Price on settlement	1040	970
Cash Segment (profit/loss)	40 (1040-1000)	-30(970-1000)
Future Segment (profit/loss)	-20(1020-1040)	50(1020-970)
Profit / loss on purchase of stock future	20	20

In Scenario I, when the price of stock on settlement date if the price of any particular stock increases to the purchase price, the envisaged strategy is proven wrong and the investor would make loss in future market, although in cash market it would be a profit. However, since the profit earned is more than the loss on future, overall the investor makes profit. 

Similarly in scenario II, the price of stock has fallen and the investor makes profit in the future market and loss in cash market. However, the total gain is similar as in Scenario I. 

So, irrespective of whether a particular stock price rises or falls, the price risk is hedged and the consumer losses are almost negligible.

Taxation in an Arbitrage Fund

·     Arbitrage funds are categorized under equity mutual funds for taxation purpose.Hence, like any equity based mutual funds, any holding beyond one year is considered as long term and tax free. For short term, i.e. within a year’s time frame, is taxed at 15% flat.

·         Also, dividend received is tax free in hands of investors.

Summarize, the Arbitrage Fund – 

·         Ideal investment to take benefit for short term period, recommended holding more than a year to avoid taxation.  

·         It can be seen as an alternative to short term debt funds to park funds. Although, it is advised that not more than 5% of your total portfolio should be parked in it.

·         It is used as a hedge instrument and not seen as a wealth making tool. So if in case you want to park your contingency funds in this particular type of mutual funds, it can be used over liquid funds.   

Some of the leading Arbitrage Funds are as follows: 

Fund	Launch	Expense	1-Year	Net Assets (Cr)
		Ratio (%)	Return (%)
Indiabulls Arbitrage Fund - Regular Plan	Dec-14	1.06	6.85	173
IDFC Arbitrage Plus Fund - Regular Plan	Jun-08	0.95	6.71	375
HDFC Arbitrage Fund - Wholesale Plan | Invest Online	Oct-07	0.75	6.64	2,083
Edelweiss Arbitrage Fund - Regular Plan	Jun-14	1.05	6.64	1,122
Kotak Equity Arbitrage Fund Regular Plan	Sep-05	1.14	6.49	3,633
ICICI Prudential Equity Arbitrage Fund	Dec-06	0.96	6.44	4,593
L&T Arbitrage Opportunities Fund - Regular Plan	Jun-14	0.84	6.43	238
Invesco India Arbitrage Fund	Apr-07	1	6.41	605
UTI SPrEAD Fund	Jun-06	0.86	6.32	672
DHFL Pramerica Arbitrage Fund - Regular Plan	Aug-14	1.22	6.31	745

(Source – www.valueresearchonline.com)