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Give yourself a financial check-up

November 3, 2011 Leave a comment

Every day we hear people talk about quarterly reviews of companies, the balance sheet, the result season, etc. If company reviews are so important, then why not the review of an individual’s financial situation? In fact, taking stock of your current financial situation should form an integral part of your personal introspection regimen.
But this should not be just a one-time process — it is important to review your current financial situation on an ongoing basis.
Let us see why this is important:
Life is dynamic! No one knows what tomorrow holds. Everyone’s dreams, needs, and aspirations keep on changing with different stages of life cycle or circumstances in life. These circumstances could be anything like:
Marriage: Brings about a very big change in life. An individual’s expenses suddenly double up and likewise the income too doubles in many cases. Hence, not only is it important for accounting the increased expenses but also to take into consideration the increased income if any.
Not only will marriage bring about a change in your finances but also in your goals. Goals like buying a house, planning for kids and their future. Hence if a constant review is done, you have an exact idea as to where you are and what kind of adjustments or changes are required post marriage.
Kids: Children bring about a joyful change in life. Additional day-to-day expenses, their educational expenses, medical expenses, getting them married, leaving behind inheritance becomes an integral part of your financial plan. Hence, the change has to be accounted for.
Death: Death of any member of the family can be life changing. In case of death, there can be added responsibilities or deletion in responsibilities. Both ways, there is bound to be a major turmoil in your finances.
Hence, constant monitoring by both the husband and wife helps in keeping abreast with your finances and you are prepared for all eventualities.
Change of employment or business or place: Can have a negative or positive impact on your finances — whichever way adjustments are required.
Inflation: Again a big factor. I am sure everyone will agree with me especially after what they must have seen in last few year. The adjustment in finances based on inflation is a must.
There can be many other factors like say illness, windfall gains or something else that affect your finances. A constant monitoring of your finance helps you to adjust all of these in best possible manner and also help you in planning your finances in the most optimum manner.

The benefits of reviewing your financial plan

Let us have a look at the benefits of constant reviewing of your financial situation.
Budget is the first step towards organising finances. A lot has been written about budgeting. But how many of you actually sit down to review your budget every month, that is, compare the projected expenses with the actual expenses? Or one month’s budget with another or one year’s budget with the previous year?
Not only is it important to maintain a budget on a regular basis but also to sit and analyse it. This will help you know whether you are going overboard and if so, where.  Although you might be saving money at the end of the month, with just keeping a regular review you will be amazed as to how efficiently you can cut your expenses and end up increasing your present savings.
Also a regular review of your finances will help you know how much contingent fund or emergency fund is required. Ideally an amount equivalent to three-month of your mandatory monthly expenses can be set aside as emergency fund.
It is also important to prepare a statement of net worth wherein all your assets and liabilities are listed. A constant reviewing is required so as to know whether you are going overboard in borrowing or what is the exact status of all your assets. Opening this sheet gives you an overall view of your financial situation and hence a constant updating is a must.
Insurance is a very important aspect of financial planning. Why a constant review or monitoring?
As explained earlier life keeps on changing and with additions like marriage or children the insurance requirement increases. Again individuals with ULIPs have to monitor their account statements to know how it is performing.
One more important fact: monitoring also helps you to remember to renew your mediclaim insurances and term plans and reminds you to p ay your premium on time. For individuals above 45 it becomes difficult to get a new mediclaim policy.
Investments are done to aide you in achieving your goals and have a financially secured future. It is very important to monitor these. You should know whether your hard-earned money is earning for you or not.
Many a times there are changes happening with regards to an investment, say for example, a fund manager of a mutual fund has changed or change in some rules which might lead the fund to not perform or in stocks like a particular sector is not performing or there is bonus, or problems in company, or rights have been issued.
Monitoring will keep you abreast with all these changes and you know your status and if need be change them at an appropriate time and not after incurring losses.

Frequency of review

Depending on your financial plan (your asset allocation, size of assets, nature of assets) the frequency of review differs for everything.
Budget: Every month.
Investments: At least every quarter. Do note that although you are reviewing the status of your investments every quarter it does not imply that you need to shuffle your portfolio every quarter. If your portfolio is planned as per your goals and time frame in which you need to achieve them then all you need is a review. Shuffling is a big no-no unless, a big change has happened in your life or you are actively following the stock markets and you trade 20 percent of the portfolio or some new guidelines in investment avenues have been announced which might lead you to redeem your investments.
Complete financial plan (which includes review of goals, statement of net worth, insurances and again cash flow and investments): Once every year unless a big change has happened.
Life is uncertain and much more uncertain is the events that happen during a lifetime. While you cannot change the course of events, being prepared at least financially and knowing what your options are at each and every stage of life can give you a sense of reassurance, stability, and the much-needed peace of mind.

A Step by step guide to choose a right mutual fund scheme

November 1, 2011 Leave a comment
Models work when they are appropriate for the particular circumstance, but some of the best investment judgments over time have come when people recognized that models derived in other periods were broken or not directly relevant.”   Abby Joseph Cohen
Investing in mutual funds seems interesting, with number of websites, TV and other finance and wealth magazines publishing various information. However it is a challenging task and involves    knowledge regarding the shares and securities market and various laws that govern mutual funds is necessary before investing in them.Understanding the principle of mutual funds; the investment of the money of a large number of investors in stocks, bonds and money market instruments that are managed by managers makes one feel relieved.  However it is best for you as an investor to make a right choice of the mutual fund that suits your need.
 
Choosing right MF:
Investment Objective & Time Horizon
 
The objective of the fund or the use to which the funds would be put to would be a vital deciding factor. Mutual funds investing in stocks would suit those that are ready to take more risks; stocks means more exposure to the volatile market though higher returns. The length of time that one has to wait to get reasonable returns also plays a vital role. So it is best to read the offer document or fund brochure carefully before making the decision.
Liquidity:
In addition whether a fund is an open-ended or close ended one points out to how liquid your investment is. Open-ended funds are preferable to close ended ones as they can be converted to cash more easily than close ended ones that involve waiting for a period of time. Historically open ended funds have performed better than closed ended funds.
Diversification:
It pays to check for diversification in mutual funds, for an optimum diversification makes for a good choice. Opting for a diversification over 8 to 10 securities would be more risky than going in for diversification of 20 to 30 stocks. The diversification of stocks over 80 to 100 securities may mean difficulty of management to the fund manager. In addition making sure to ensure that there is a balanced diversification helps. 
 
 
 
Fund Performance:
After getting comfortable with the fund’s objective, it becomes equally important to know and analyze the fund’s performance. This involves looking at the fund’s short term and long term performance and comparing it with larger market indices or benchmarks like BSE Sensex and NSE Nifty. A higher market index over a longer period indicates better funds, however past performances in case of mutual funds can never be a guarantee of future returns and can serve only as an indicator.
Level of Risk:
The level of risk involved would be another important indicator, with higher returns available only at higher risk levels.Would you like to go for a low risk debt fund or to go for a moderate risk balanced fund or a high risk equity fund? Look before you leap.
Volatility & Consistency:
Next it is to be understood that any 2 funds giving the same return are not necessarily the same, as one fund could be more subject to market ups and downs than the other.  Volatile nature of funds is more a standard deviation meaning more risk involved. In the same category of funds, an investor needs to choose funds performing consistently.
 
Fund management:
The management of the fund plays an important role in deciding the best mutual fund for you, with professionalism being very important. The experience of the fund manager and the number of years he/she has been associated with the fund matters. With a new manager and frequent turnover are not good for investors.
 
Charges:
Things seem pleasant in mutual funds; however the charges like entry load, exit load, administrative charges and fund management charges on an annual basis are to be carefully looked into. It is significant to note that these charges cannot exceed 2.5% of the fund’s assets. Most funds have uniform charges, however hidden charges need to be looked into and carefully analyzed
To conclude mutual funds may be the best investments as they can be done in small amounts as compared to other types of investment and carry a comparatively lower risk. But your ultimate success in the form of good returns can only be assured with following these steps of smart mutual investment planning.
The author is Ramalingam K,an MBA (Finance) and Certified Financial Planner. He is the Director and Chief Financial Planner ofHolistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached atramalingam@holisticinvestment.in  

Powerful Financial Lessons from the Festival of Lights Diwali

October 29, 2011 Leave a comment
 
 

Happy Diwali; let us discuss fireworks, Diwali and great financial planning.
As we start our festivities of Diwali 2011, my mind went to the powerful lessons that Diwali taught us all. These thoughts gathered momentum when I started thinking about the similarities of Diwali and financial planning. It made me realize that financial planning lessons were so simple, yet enlightening that even a 12 year old could master its principles and start financial planning for a lifetime.


Fireworks and Diwali 

I have always enjoyed fireworks, both as a child as well as a parent and found that mine as well as my children’s safety and comfort lay in obeyed certain rules while handling fireworks. This included avoiding loose and flowing clothes and wearing appropriate footwear, goggles and protection for the ears. Next noisy crackers caused hearing, ENT and nervous problems, with smoke causing ENT and allergic problems. This made me come to the conclusion that we need to enjoy crackers and fireworks, but were excesses were to be avoided.
Safety applies to all Diwali, as it does to other aspects of life with our requiring reading and following instructions on the boxes. Next keeping of a bucket of water handy to put off fires and keeping numbers of fire stations proves handy. In addition vigilance and safety of children while using fireworks is to be adhered to, with keeping fireworks out of reach from children when not in use.   My dear friends now is the right time to view the great co-relation between crackers/fireworks and financial planning.

Grasp the financial planning lessons Diwali teaches us:
Ø Modern science with its developments have been able to render us some very useful lessons like noise pollution that could affect not only infants, the old, and those with nervous, heart and psychiatric problems, but also cause slow declining abilities in many others.  
      

This applies to noisy stocks also; this noise pollution in the form of everyone talking about hot stocks and best next issue. This information could also affect us with its full impact. This inside information may at times prove very dangerous if acted upon. We have observed many investors not only being be charged with fines and/jail, but it has been harmful to financial professionals as well.  Next if they are rumors the financial harm could be too large to recoup and rejuvenate easily and quickly. It is worth understanding also that some information could be stale and if acted upon cause indigestions of the worst order.

Ø The next most close and interesting co-relation of fireworks and the colorful nature of the festival Diwali are being prepared for emergencies, with this meaning keeping water and the numbers of the nearby fire stations handy. This applies to also using long sparklers and incense sticks, avoiding the use of metal and glass containers and using fireworks in open grounds.
It is true that emergencies and contingencies are a part of everyone’s life and being a wise and smart financial planner requires not only planning for emergencies, but also for contingencies in the form of death. Finances in the form of term insurance could provide for the stable lifestyle of your loving family on death. Health insurance and critical health insurance plans would provide for health and critical illness coverage and stable lifestyle in such contingencies. The youth could benefit also with investing surplus funds on land in remote places and allow it to appreciate. Creating contingency funds could act as emergency fire extinguishers.  

Ø  I appreciate those who have listened to the experienced regarding wearing appropriate clothing, footwear and other safety accessories while enjoying fireworks. Financial planning for a lifetime also requires certain measures.

Understand that investing is different from financial planning for a lifetime.Financial planning requires clear understanding of the risks and returns available on the different investments like shares, mutual funds and fixed deposits in companies and banks So you need to draft a clear risk management strategies in while constructing your portfolio.

Ø Storing of fireworks out of reach of children properly requires as much innovation as children are very smart to fool parents now-a-days and get into accidents and dangers. Parents need to be smart and creative to find out what works and what doesn’t. The same thing dear chums apply to safety and security of our investments.

Safety and appropriate storage of our precious investments in the form of shares, mutual funds, land and flat documents, gold and gold ETF, insurance and other investments lies in storing them in separate places in lockers at home/banks and other places. In addition to storage, the information regarding where we have stored these documents should be a family information and secret for safety.
Finally, we were taught by wise parents to not make our own fireworks, as it is not our expertise. Similarly a financial expert is the best person to advice us on financial planning for a lifetime. Finding and engaging a financial planner would be best to create and make changes in your financial planning according to your life’s changing circumstances.

The author isRamalingam K, an MBA (Finance) and Certified Financial Planner. He isthe Director and Chief Financial Planner ofHolistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached atramalingam@holisticinvestment.in 

6 Financial Planning Misconceptions Demistified

October 25, 2011 2 comments
This is a guest posting article by Mr. K. Ramalingam  He is the Director and Chief Financial Planner of Holistic Investment Planners 
Let’s start the useful exercise:
Finance may mean different things for different people. Some assume that they need no financial planning as they have very little finances. Still others believe thatonce they have invested their savings for future their task is over. In addition some pre-conceived notions that company we work for, pays our medical and hospitalization expenses so we need no reserve, combined with the notion that a life insurance policy takes care of death, disability and accidents.
The need for no financial planning is complemented with the myth especially among the young that their retirement is far away and they could easily plan for it just a few years in advance. To further complement this myth that our ancestors would leave behind estate and property for us to enjoy with a will.
Well dear friends financial planning can never be overlooked as finances invested well today could provide for good financial resources in future. It is true that a person who helps himself succeeds best in having financial stability in life.
Have a look at the myths of financial planning:
  1. “I have life insurance to protect them in case of my death.”
My hearty congratulations for taking up insurance policies to protect your family needs in case of your death. But the question is do you have adequate insurance to look after your family needs for a lifetime. In addition it is worth considering if you have enough to look after your children’s education and marriage needs considering the rate of inflation. Also it is worth considering if your family would be financially secure if they have to repay loans taken by you after your death.
  1. “I just make both ends meet, where is the need to go in for financial planning?”
You may be right, but if I were to tell you that we all need to provide for financial contingencies would you say financial planning is unnecessary? So all of us have to plan to make their hard-earned money to work for them, and this applies more so single income families. Financial planning makes sense not only to repay loans taken but also to get continuous supply of money for our needs.  So we need to have a strict look at our expenses and find ways to minimize them. A small example could be to forego a pack of cigarette a day to save and invest in viable investment scheme.
  1. “My financial planning is done as I have invested in different schemes.” 
I appreciate you for taking the first step towards financial sufficiency, however believe me this is just the first step to the 1000 miles towards lifelong financial stability.
All you are investments are really supporting your financial goals or not? Is the schemes in which you have invested is really performing or not? Is the maturity value from the schemes is sufficient to meet the goals or not?
A financial need analysis to cover various short term and long term needs could be best accomplished with a financial expert’s advice.
  1. “Youth is to enjoy, retirement is far away. It will look after itself.”
Let us face this myth headlong with analyzing that retirement is not a contingency, but a necessity that is to be provided for right from the time one starts earning. It is advisable and much easier to start saving when young, as savings become difficult with additional expenses.  
Saving for retirement starting from youth through retirement plans seems much easier when the amount to be put aside for the corpus is much less every year and it is also possible to save through various investment avenues. Starting to invest for retirement when young gives one the advantages of compounding of savings. This would also help take care of inflationary tendencies.
  1. “I have enough health insurance, and my company gives me coverage too.” 
Being covered with health insurance and medical expenses at work is great, but this would not cover all your health expenses. It is always good to take additional coverage and provide for unforeseen contingencies like critical illness that would not only involve expenses on treatment, but also on maintaining the lifestyle of the family till one is ready to go to work.
Being young does not prevent you or any of your family members from getting a critical illness with the present lifestyle. With fresh insurance coverage over the age of 45 being tough it is best to save for this period.
  1. “I do not have to worry as I will inherit from my parents as my children will inherit from me.”
Inheritance has neither been a cake-walk, and a will is very important for inheritance. Financial planning involves the making of a will to avoid disputes between the heirs. Making a will is not about how big your property or estate is, it is more about necessarily making a will about the inheritance.
Financial planning is not just the forte of finance professionals alone, but is judicious and smart planning of finances for a lifetime. Lastly financial planning is not an end but a means to an end of financial stability and security.
(The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Director and Chief Financial Planner ofHolistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached atramalingam@holisticinvestment.in.)

A Complete and Comprehensive Checklist  for Buying  Term Life Insurance.

October 21, 2011 2 comments
   Buying insurance for protection and wealth creation has always been a very complicated task involving careful analyzes. The analysis involves the amount of coverage, reason for coverage and the term/time that the cover is required. Term policies taken for a specified period of time like 5, 10, 15, 20, or even 30 years helps to look after family’s financial commitments like education and marriage of our children and the day to day expenses for a reasonable standard of living.
Term insurance policies that resemble motor/house insurance are not subject to the law of indemnity as damage due to human life cannot be measured. Taken for a specified period when financial obligations have to be met, no money is generally paid back if death does not occur in the period.
A bird’s eye view of term insurance policies would tell you:
·        Term policies are cheaper as they cover only the risk of death happening within a specified period. In addition the premium charged depending on the age of the person insured and time of coverage required with medical examination being compulsory in most of the cases.
·        With very competitive premium rates being the present scenario of the insurance sector, it is found that most companies encourage insurers to take a much higher coverage for extended period of time even up to 35 years or 65 years of age. This accounts for popularity of these policies for people with long term financial commitments. 
·        Term life policies can be bought very easily either online or through life advisors that market and service these policies. You would benefit buying term insurance policies online as this does away with the expenses of agents/life advisors commission. This accounts for discount in premium. 
·        In addition a check of the insurer’s ‘claim settlement’ ratio or the percentage of claims settled by the insurer of the total received would help, with this available on the IRDA website.  
·        Once death occurs and claim is to be settled this is done in a lump-sum to the nominees or beneficiaries. This depends on the terms of the policy that the insured has taken, with the settlement free of tax payments.
·        Term plans suit young earning members with dependents, with the low premium allowing them with additional funds to invest in lucrative    equity-linked savings schemes that provide tax breaks
Deciding different factors about term life insurance:
  • Term insurance serves as the best life cover for large amounts and extended terms to meet your family’s financial commitments if you are not there. Insurance experts suggest about 12 times your annual income added to your total liability less investment in various assets.

  • It is important to note that liabilities include loans taken for house/ personal/ vehicles/and other obligations.
  • You should also consider amounts required for the education and marriage of your children, healthcare needs for your spouse and dependents and other amounts that would be required to maintain a reasonable lifestyle.
  • Term life insurance policies are mainly meant for earning members of the family, whose financial commitments have to be meant on his/her death. It is however not meant for the young, unmarried working people that have no dependents or financial commitments. 
  • Term plans are best taken for amounts that consider not only the present financial needs, but also inflation, increase in salaries and lifestyle needs. The premium could rise with age and with increase in the amount of insurance taken and with riders/ additional benefits like personal accident insurance and critical illness coverage.
  • Insurance contracts being contracts of utmost good faith require revealing of material facts that would influence its acceptance. This could include your existing health conditions, family history and details of other insurance contracts that have been rejected in past.  Undergoing a medical examination if necessary may help reduce chances of claims being rejected in future.
  • Term policies are best taken in blocks and increased or decreased according to need. Reviewing insurance needs every 3 to 5 years is ideal to adjust insurance needs.  Taking insurance in blocks provides for flexibility to discontinue some in case of decreased financial obligations with time.

  Finally take care to ensure that you have read and understood all the information to the best of your knowledge and disclosed the correct material facts like age, income and present health status. In addition carefully go through the signed proposal form and policy document and inform the insurance company in case of discrepancies within 15 days of issue of policy.
 
The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He isthe Director and Chief Financial Planner ofHolistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached atramalingam@holisticinvestment.in
 

Investing behavior and returns

October 20, 2011 2 comments
Why investors are not making returns in the stock market?
   In the last 10 years, sensex gas grown at 17.79% CAGR. That means, if someone could have invested Rs. 1 lac 10 years back, it could have grown to 5.14 lacs. In the last 10 years one third of diversified equity mutual funds have delivered a CAGR of more than 25%. That means if someone could have invested 10 years back in these mutual funds Rs.1lac, it could have grown to Rs.9.31 Lacs.
But how many investors have REALLY got these kinds of returns…?

   In this context knowing about the study conducted by Dalbar to determine how the investment behavior and decisions impacted the overall investment performance would be advisable. Dalbar, Inc. is a US based leading financial services market research firm. They have done comparative study on the returns of S&P 500 Index and the returns of the investors for a 20 year period ending 31-12-10.
The study revealed the following two important facts.

·       The average return of the S&P 500 during this 20 year period is 9.14%.
·       The average return of the equity investor during the same period is only 3.27%

When the market is delivering so much, why is that the investor is making out less? What are all the factors contributing for this gap in the market returns and the investor returns?
Though the market is delivering returns, investors were not able to benefit. Why is it so? What went wrong?  It is because of the nature or character of the investor.
Agriculture is getting affected by nature, either because of excess rain or no rain.  But we found out a system to fight against this nature. We built dams. So whenever there is excess rain, dams retain water to save agriculture and whenever there is no rain, it releases water to help agriculture.
Similarly investors are supposed to find and build a dam against their nature and behaviour towards stock market investing in order to get better returns.
What are the natures or behaviours of an investor that blocks him from getting the market return?
Fear:
When stocks suffer large losses for a sustained period, the overall market can become more fearful of sustaining further losses. At that point in time everyone will come with their own logic, reasoning, and statistical evidence on the chances of further losses. Fear stands for “False Evidence Appearing Real”.

Greed:

Most of us have a desire to acquire as much wealth as possible in the shortest amount of time.  This get-rich-quick mentality makes it hard to maintain gains and keep to a strict investment plan over the long term.
An investment portfolio based on ones personality
Basing investment portfolios on one’s personal likes and dislikes are the first of the powerful influences. It is like investing in cars and fancy gadgets just because you love them. Investing on shares just because you think they are smart or flashy is ambiguous, for they could sink in the long run. It is better instead to invest in profitable ventures that pay in the long run. It is true; our investment fancies make us pay a heavy price.
Follow the flock policy
The follow the flock for fear of being the black sheep policy makes you as an investor to believe in following others in the share markets. The pitfalls of group behavior lead us to buying high and selling less.
 
It also leads to unbalanced investment emotions of black or white (wrong or right) with no shades of objectivity and rationality. Buying high and selling low has made many investors suffer heavy losses in the long run.

 

A look at positive investment behavior:
 
It is good to be investment smart with humility and reasonable aspirations that makes achievement of financial goals a reality. I have never known of any high return investments that did not have high risks.
 
Patience over a lifetime and being able to assume stress helps in aiming for long term positive returns and contributes to assuming less financial stress after retirement.
 
Positive investment behavior requires balanced moods, one of neither elation nor panic. Neither selling in a panic due to share market positions or adverse world or country conditions is advisable, nor is a reaction of extreme financial prosperity, both can destroy a lifetime of healthy investment. A long-term investor needs to realize that neither despairing nor elation of situations in civilization proves worthy for long term financial portfolios.
(The author isRamalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director ofHolistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached atramalingam@holisticinvestment.in.)
  

Factors To Consider Before Investing In IPO’s

October 18, 2011 Leave a comment

   IPO’s or initial public offering is best understood as the first public offering of shares by a private limited company before listing in a stock market. Looking down IPO’s history of success and failure stories, you would be smart to first fully understand the various aspects behind such offerings and makes the right choice to invest or not in IPO’s. It is advisable to understand that  
investing in IPO’s could prove risky with unfavorable market situations and sentiments and when the fundamentals of the company and industry are weak. It is best to go by facts, avoid being influenced by rumors and have a closer look at the past performances also.
Understanding the concept of investing in IPO does require a clear look into these factors:   
v It is not wise to believe rumors and success stories of IPO’s at face value, for investing in IPO’s is not easily learnt and there could be some misconceptions. So it is best to venture into IPO’s only after you have learnt the art of investing your hard earned money in them. 
v It is wrong to be overwhelmed with hearing general statements that some IPO’s are attractively priced. You would be smarter comparing the price earnings ratio that helps get the relationship between the stock price and the company’s earnings and comparing it with those of competitive companies.
 
v Beware of being under the misconception that investing in IPO’s could give you great gains on listing. It has been noticed by both amateur as well as experienced investors that sometimes high losses are also made. It would be safer and secure not gambling in the shares of new issues. 
 
v It is good to experiment with new products in the market. But I would say that it is not smart to have this attitude with shares and invest in IPO’s. Investing is about getting effective and safe returns on the hard earned money that you put into shares, so it would be smarter putting your money to work in index stocks that have been in the market for a long time and have survived the volatile economic market for long.
 
v Beware of being influenced by the favorable feeling and trend in the investment market to borrow money from financial institutions of brokerage companies for getting higher allotment of shares. It is sometimes very difficult to judge the trend of the market especially as an amateur and this could make you end up in huge losses coupled with the repayment of the loan with interest.
 
v Some assume that investing in IPO’s would surely bring about gains in the long run. However I would suggest that you would definitely be much better off investing in good listed shares that have a proven record, though they sell at a higher price. However you may invest with sufficient information of the IPO’s, but could not always be sure that the listing will not bring down the issue price.
 
So it is best to be prudent and informative before investing in IPO’s.  
 
Factors that have a bearing on analyzing investments in IPO’s:
 
v It is first important to know that companies are required to file their draft red herring prospectus (DRHP) with SEBI while floating an IPO. Analyzing this document would give you financial and other information about the company. The highest percentage of shares held by institutional investors, banks and financial institutions could be a positive indicator to invest in IPO’s. 
 
v The draft red herring prospectus (DRHP) would also provide other important information and indicators like the quality of management. The quality of management like their work experience, their past history or work experience, qualifications and projects handled would help in the decision to analyze IPO’s.   
 
v Another factor having a bearing is strong promoter backing. Big companies like Tata and Birla bring about credibility and also add a premium to the price of IPO’s. The ownership by the government and public sector undertakings are also an indicator of high level of safety of returns.   
 
v The other major, though not the only indicator though is grading, with a higher grading being good. However also could be false as seen with the IPO of Vasvani Industries that had a 2/5 grading.  Similarly high graded companies like Galaxy Surfactants with a CRISIL rating of 4/5 withdrew its IPO. So it is best to understand that even some good companies withdraw their IPO’s due to poor public sentiments and difficulty experienced in raising funds in the market.   
 
v The objective for raising funds would prove to be an important indicator to its profitability and time for return. Finding out this objective looking at various factors like the businesses past performance, future growth prospects, potential rate of return and profitability. In addition it is best to avoid investing in businesses that you cannot understand.
 
v Last, but most important a periodic review would help you understand how your investment in IPO’s are fairing and help effect follow-up. However it is advisable to avoid taking hasty decisions to sell, as some IPO’s have underperformed initially but has given consistent returns in the long run. But prompt follow-up action would be required in case of IPO’s that lose very badly or are fundamentally wrongly invested.  
 
To conclude investing in IPO’s is best kept to the minimum as they involve a high level of research and uncertainty. However if they are selectively chosen they would help avoid investments with bad performance.
   The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director ofHolistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached atramalingam@holisticinvestment.in.