6 Tips in Choosing Your Best Stock Charting Package

 

When you are a new trader and starting out trading, you need to learn, understand and experiment with different charting techniques, chart patterns, and trading strategies. This will involve reading up on, and researching different stocks, trading approaches, strategies and systems. As you review training material, or take a trading course or research stocks on the web, you will come across stock charts that are marked up with different lines, text and other shapes in different colours and styles. You can identify some chart patterns only by drawing lines or shapes and marking up the charts. These annotations and notes on the charts make the patterns really stand out and provide valuable insight that can help you make buy and sell decisions. This may seem to be a lengthy or daunting task and you may wonder how you can also create such beautiful and insightful charts.

Good chart software should also allow you to draw and annotate the charts to validate and verify your trading strategy. It is very useful to draw lines, channels, fans, arcs, and time zones and to make notes on the chart. Most patterns can be identified visually and these annotations and notes ensure they are being identified correctly. These annotations also act as a record of your analysis and hypotheses for future reference. Good charting software actually makes annotating and drawing on charts very easy. Therefore, one of the important factors to consider when shopping for a charting tool for a trader is the support for the common drawing and annotation tools. Charts are the primary tool of market analysis. When you are selecting a charting package, you need to ensure that it provides the right set of tools to help you analyse effectively.

So what are some of the drawing tools you need in great stock charting tool that will help you get better insight? Some of the important drawing and annotation tools that a charting package should offer are:

1. Lines

The charting software you select should support horizontal, vertical and trend lines. Lines are essential for almost all types of studies and analyses including basic analysis such as identifying support and resistance levels and recognizing trends. Now you could be using lines multiple times on a chart while annotating. Therefore, good support for different styles, weights, and colours is very helpful to mark up the charts effectively.

2. Shapes

Good charting software should support other basic shapes such as ellipses and rectangles. Ellipses and rectangles are useful to highlight specific price action or any interesting development on a specific chart. Using these shapes, you can make a particular price action pattern stand out on the chart.

3. Symbols

You may also want to mark various signals using specific symbols for Buy, Sell, Exit long, Exit short. A good symbol library along with the ability to load your own images as symbols is very helpful.

4. Text annotation

The chart software should also allow you to type any text on the chart. Text annotation combined with symbols is very useful for recording notes, signals, and ideas on the chart. This capability is invaluable when you want to share your ideas with your mates or colleagues or the trading community.

5. Line studies

In addition to basic tools, good charting software should provide the pre-built support for the common types of line studies. These studies include Standard Error channels, Gann Fans, Speed lines, quadrant lines, Raff Regression, and Tirone levels. These studies will help you to analyse potential movement and price action. Rather than draw lines manually for these studies, the software should allow you to select the level and automatically calculate and draw the appropriate lines for the studies. This helps you save time drawing and focus on analysis.

6. Fibonacci studies

Many analysts and traders use Fibonacci studies as part of their tool set for technical analysis. Followers of Elliot Wave Theory (IGNORE: link to EWT article) use Fibonacci arcs, fans, retracements, and time zones for ascertaining trends, support and resistance levels, and potential direction of price movement.

I recommend that you look for a stock charting tool designed for smart investors who are not full time traders. This should also be a charting tool that won't cost you a fortune, is easy to use and navigate. It should help you analyse stocks and effectively find the right stocks for trading and support all the tools outlined above. It must also provide annotation capability and all the drawing tools discussed above to help the new user get started. Moreover, these tools can be customised to your liking using templates and presets. You must be able to select the colour, weight, style that you are familiar with and use them consistently in all your charts. This capability is very useful to make the chart look like one that you may have seen in a training course or read about from your favourite expert.

What I particularly look for in a good charting software is a fantastic ability to mark up charts to do different analyses and studies quickly. That way, I am able to focus on the analysis of the stock instead of wasting time on manually drawing lines and arcs and shapes.

The automatic calculation and drawing combined with the consistency of templates and presets ensures that I am doing the analysis correctly. I can quickly examine the charts using different studies according to my trading strategies. This improves my decision-making and builds confidence, helping me become more certain about my trade.

A stock charting tool must also offer excellent training videos to help you learn it thoroughly. You can view these videos to quickly and easily learn the software and implement your strategies. The presence of a user community where you can learn a lot from the beautiful stock charts shared by the different users is also desirable. Finally, you must be able to download a free trial version to give it a good test drive. That way, you can go ahead and take it out for a spin to begin your journey for trading success.

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http://www.traderslaboratory.com/forums/trading/12414-6-tips-choosing-your-best-stock.html

Introduction To Options

Options are a high-risk investment, but they are also highly profitable. Traders enter the option market for many reasons. One reason is because the amount of capital required to enter the market is lower than regular stock. The fact that most options move faster (volume) and produce higher returns is another reason traders dabble in the option market.

Many brokerage houses limit the amount of cash (margin) new traders can use to invest because of the market's high potential for loss. As option traders become experts, these limitations go away, and the trader is free to invest as much as their account allows. Once a new trader gets familiar with how the option market works, they can become an expert in no time at all.

Stock vs. Option

Regular or preferred stock is an asset. In other words, stock is equity, and it gives the holder ownership in the company where it's drawn from. It trades easy in the exchange because, like money, investors consider it a liquid asset.

An option is a derivative of stock. This means that its value completely depends on the value of the equity associated with it.

Option Buyers: Option buyers own a contract that says they have the right to buy or sell an asset by a certain date (expiration date). Option buyers are not obligated to buy or sell the asset, and if they choose not to, they let their option expire as it becomes worthless.

Option Sellers: Option sellers own a contract that obligates them to buy or sell an asset by a certain date (expiration date), if the buyer exercises the option. Most option sellers hope the buyer's contract expires, so they can collect premiums.

Online Brokers

Most investors trade options using an online broker system that connects directly to the brokerage house holding trader's investment account. Traders send orders through their broker, which go directly to an exchange. Their brokerage house, which has a seat on the exchange floor, receives the investor's order and sends the trader's request to auction after deducting or adding funds to their investment account. All this takes place in real-time, which occurs in a matter of seconds.

Expiration

Every option expires. Traders call an option's expiration date, the strike date, because it stands as a marker where all options must be either be bought or sold. On or before the strike date, the trader can either choose to exercise the option and buy the underlying asset, or they can let the option expire, where its value then becomes worthless.

Strike Price, Exercise & Assignment

An option's strike price is the value an investor will pay to exercise their right to buy or sell the option. If a buyer chooses to exercise the option, the brokerage house assigns the seller's assets to the buyer's account.

Margin Requirements

Margin is the total amount in which an investor can use to make a trade. Most traders make a deposit at a brokerage house, which serves as collateral for buying and selling options. Normally, the trader can only buy or sell options up to the balance available in their account (margin). Sometimes, brokerage firms extend credit to the trader, which adds on to their margin's limit. However, if at any time a trader buys an option on credit (borrowed margin), makes a bad choice, and their option starts to lose value, the brokerage house has the right to immediately sell the option to cover the margin (margin call).

Order Entry

Home broker systems basically have two types of transactions, buy and sell. Investors can fine-tune their orders by adding details to the order, including limit, stop or market, which directs their broker on how to specifically auction it.

Types of orders

In each of the two types of order entries, there are two types of orders that a trader can place.

Call Orders

Buying a call option - Trader buys a call option thinking its price will go up (long-buying). Buying the underlying asset is not an obligation.

Selling a call option - Trader sells (writes) a call option thinking its price will go down (short-selling). Trader must sell the underlying asset, if a buyer exercises the option.

Put Orders

Buying a put option - Trader buys a call option thinking its price will go down. Selling the underlying asset is not an obligation.

Selling a put option - Trader buys a call option thinking its price will go up. Trader must buy the underlying asset, if a buyer exercises the option.

Moneyness

Moneyness is the real value of an option. An option starts to lose value the minute it enters the market. The closer it gets to its expiration date, the less it's worth. Investors call this occurrence time decay. Intrinsic value is simply the difference between an option's strike price and the underlying asset's market price. Option traders calculate moneyness by adding an option's intrinsic value to its time decay value.

Courtesy: 

http://www.traderslaboratory.com/forums/options-basics/11547-introduction-options.html

Ethical Investing Tutorial

 

By Amy Fontinelle

Introduction

What is ethical investing? The definition depends on your personal beliefs. Ethical investing is highly subjective because each individual investor has different ideas about what constitutes ethical behavior by a company, and different priorities that they want to support with their investment dollars.

Broadly speaking, however, ethical investing is a way of earning returns in the financial markets by supporting companies that are creating positive change in the world, or, in some cases, that aren't creating positive change; but aren't making the world worse, either. Ethical investors want to reach their financial goals in ways that coincide with their values. Their investing decisions are usually part of an overall strategy for ethical living that includes making values-based decisions about work, housing, transportation and shopping, among other concerns.

A Niche Style Gains Popularity

Ethical investing is still a niche investment style, but it has gained popularity.

According to the Forum for Sustainable and Responsible Investment (US SIF), "From 2007 to 2010, social investing enjoyed a growth rate of more than 13%, increasing from $2.71 trillion in 2007. Nearly one out of every eight dollars under professional management in the United States today, 12.2% of the $25.2 trillion in total assets under management tracked by Thomson Reuters Nelson, is involved in socially responsible investing." Furthermore, socially responsible investing "encompasses an estimated $3.07 trillion out of $25.2 trillion in the U.S. investment marketplace today." These figures were as of 2011.

Ethical investing isn't just for individual investors. Institutional investors also practice ethical investing. After all, many institutions, such as universities, are largely supported by individual donors, and the donors want their funds used in ways they approve of. Institutional investors are actually "the largest and fastest growing segment of the socially responsible investment (SRI) world," states US SIF. (To learn more, see our Introduction to Institutional Investing.)

Active Investing

Ethical investors are heavily involved in their investment decisions. They take their roles as part-owners of the companies they hold shares in seriously. They read annual reports and prospectuses, vote proxies and submit shareholder resolutions. They care who manages a company and who sits on its board. They are concerned about corporate transparency and accountability. They also want to know how companies are behaving with respect to the environment, social issues, human rights and workers' rights. Some ethical investors care about all of these issues; others choose to focus on just one or two. It's often difficult to find investments that meet 100% of an ethical investor's values and financial goals.

From a financial perspective, ethical investing has historically been considered a subpar investment style. However, it isn't true that socially responsible funds consistently underperform. Social investors don't have to sacrifice investment gains in the name of doing good. But, just like any type of investment, there are winners and losers in the ethical investing universe. It takes thorough research to find the investments that meet both ethics criteria and have the potential to meet desired performance goals.

Unethical Investors?

Of course, the idea that some investors are "ethical" doesn't mean that individuals and institutions that don't pursue ethical investing are unethical. Many people don't have the time, or the confidence, to make the active investment decisions required of ethical investors. Others simply don't like investing and want to put minimal effort into it. Chances are that these people are putting at least some of their money toward ethical causes whether they intend to or not. Investing for your family's future? That's ethical. And if you simply put your money in a Standard & Poor's 500 Index (S&P 500) fund, you can't help but have funds invested in a number of good companies.

What's more, people who consider themselves ethical investors often have to make compromises. A company that produces an ethical product might have some questionable business practices. A company that performs well on environmental issues might not perform well on social issues. A company that donates a percentage of its profits to the community might use sweatshop labor. Ethical investors are faced with the challenge of not only uncovering these complex issues, but deciding where to draw the line with their investments. Sometimes they will even invest in companies they are unhappy with and use shareholder activism to force the companies to change.

Even people who aren't particularly interested in the social, environmental, humanitarian or governance issues, that ethical investors support, can benefit from incorporating ethical investing principles into their investment strategies. Companies that treat people and the environment with respect are less likely to find themselves distracted by or burdened with lawsuits. Companies that have a positive image in the public eye are more likely to generate high sales levels. Ethical business practices can generate better profits and better returns for investors, especially in the long run. As Amy Domini, founder and CEO of ethical investment firm Domini Funds, puts it, "To pollute, to discriminate, to violate basic human rights, is just not good for business."

Ethical investing goes by a number of names, which will be used interchangeably throughout this tutorial. The most common is socially responsible investing; others include morally responsible investing, impact investing, mission investing, sustainable investing and triple bottom line investing (the triple bottom line being people, the planet and profits). (Learn more in Socially Responsible Stocks: Do Good Deeds Punish Profits?)

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Basics Of Trading Systems

 

It seems that everywhere you look, you see advertisements for software promising accurate buy and sell signals and profits with every trade - all with minimal time and effort. Ads like these can make trading systems look like scams aimed at your pocketbook. Is this stereotype justified? Or can trading systems offer viable methods of trading?

This tutorial addresses these questions and defines what a trading system is, and what it takes to design and implement one. If you are thinking of adopting a trading system, this is the place to learn about the skills and resources you'll need to do it.

The next section starts our study off by defining what trading systems are, outlining their components and discussing their advantages and disadvantages.

So What Is A Trading System?
A trading system is simply a group of specific rules, or parameters, that determine entry and exit points for a given equity. These points, known as signals, are often marked on a chart in real time and prompt the immediate execution of a trade.

Here are some of the most common technical analysis tools used to construct the parameters of trading systems:

• Moving averages (MA)
• Stochastic
• Oscillators
• Relative strength
• Bollinger bands

Often, two or more of these forms of indicators will be combined in the creation of a rule. For example, the MA crossover system uses two moving average parameters, the long-term and the short-term, to create a rule: "buy when the short-term crosses above the long term, and sell when the opposite is true." In other cases, a rule uses only one indicator. For example, a system might have a rule that forbids any buying unless the relative strength is above a certain level. But it is a combination of all these kinds of rules that makes a trading system.

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Elliott Wave In The 21st Century

 

By Matt Blackman with Mike Green

There is a standard joke shared by technical analysts that if you were to put twelve Elliott Wave practitioners in a room, they would fail to reach an agreement on wave count and the direction in which a stock is headed. There is no doubt that the Elliott Wave theory has posed some interpretive challenges, but is such skepticism fair?

Robert Prechter, the undisputed leading expert of Elliott Wave, has made some excellent forecasts using the theory, particularly in the '70s and '80s - he forecasted the horrific crash of 1987. But Prechter's record at the end of the twentieth century has not been stellar. In fact, his book "At The Crest Of The Tidal Wave" (1995), which publicly called for the end of the great bull market in 1995, was nearly five years and many Dow points premature; he was advising clients to exit the market even though the ascent was nowhere near its end.

If even the leading Elliott Wave expert finds Elliott Wave theory and its application so challenging, what hope is there for the rest of us? The high degree of subjectivity involved in using the theory is one reason why it can be so problematic and why it is rare to find agreement among practitioners. This leads to uncertainty, which in trading or investing leads to inaction. This may explain why so many traders opt to trade without Elliott Wave or give up in frustration after using it for a while. But is such an attitude akin to throwing the baby out with the bath water?

In this feature, we hunt down and use Elliott Wave-based programs and products that greatly streamline the process of taking the theory and applying it to trade. Think of these as applications that help bring Elliott Wave into the twenty-first century.

Our goal is to familiarize readers with the new millennium version of Elliott Wave theory. For those who may have rejected the theory out of frustration, this tutorial will demonstrate how new developments in technology have transformed this application, which was developed more than sixty years ago.

First, let's take a look at the history of Prechter's application of Elliott Wave and how it demonstrates both the successes and challenges of the theory.

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10 Golden Rules for Successful Trading!

 

The following are 10 most successful rules which are important to turn you a consistent Winner if applied properly with discipline

1. Divide your Risk Capital in 10 Equal Parts.

As part of the Successful money management, it is always advised to divide your Risk Capital (which you can afford to lose) into 10 equal Parts and at any given time none of your Single Trade should have more than 3 parts of your capital in it even if you are in a winning position. At the same time always keep some spare money for any Buying Opportunity, which may come any time.

2. Trade ONLY in active & high Volume Stocks/ Futures.

Many Traders get stuck with stocks for want of liquidity. Always rely upon Stocks which have reasonably high volume over a period of time. High Volume are always advised for easy Entry, Exit and Stop Loss. In low volume stocks the spread is too high and chance of Stop Loss limit getting failed is too high as there would be no Buyer or seller at your Stop Loss Level.

3. Come Prepared with a Trading Plan

Successful traders always keep their Trading Plans ready before entering into any transactions. One must prepare a Watch List or Probable candidates for Day's trading and remain focused on the movement of those stocks only. For example a Stock 'X' is on verge of a Bullish Breakout from any pattern or stock 'Y' has declined substantially after an initial sharp upmove or stock 'Z' is close to an important support level. Successful trader would concentrate on the movement of those stocks only and enter the trade as soon as stock 'X' gives the anticipated breakout or stock 'Y' starts an upmove or stock 'Z' breaks the support level to initiate a trade for quick gains.

4. Never Over Trade

This is the most common mistake committed by Traders, particularly after a Streak of winning Trades. This mistake generally not only wipes off all the profits, but puts traders in heavy losses. In order to remain in market while making consistent Profits, under no circumstances, traders should go beyond their Risk Capital.

5. Trade in 2 to 4 Stocks at a time with strict Stop Loss.

In a Bull move, most of the stocks move up and similarly in any Bear Move, most of the stock moves southwards. As a Trader you know this fact but can you Buy 20 Stocks and try to make profit in all the 20 stocks just because all are moving up or vice versa in a Down trend? What will happen if market reverses without any indication on any bad news? Would you be able to monitor all your trades in such situation? Smart and Successful trader would trade in 2 to 4 stocks with strict Stop Loss and keep a strict vigil to avoid any misfortune in case of any eventuality.

6. Sell Short as often as you go Long.

More than 90% of common investors/ Traders are 'Bulls' by nature. Because they love to see prices going up only. Stocks are bought by anybody/ corporate/ financial institutions/ Mutual Funds to make profit on rise. They have large holdings and mentally they wish and pray for the market to rise only. But facts are different. History shows that Bull Phases have shorter duration that Bear phases. So every stock that moves up will retrace back to 38%-50%-66%. Since 90% investors are Bulls by heart they normally do not book profit at higher levels to re-enter later at lower levels instead they prefer to increase their portfolio at lower levels. Successful Traders know how to capitalize such correction. They are always prepared to go 'Short' as often as they trade

7. Don't Trade if you are not Clear.

Many Traders, because of their daily habits trade even when there are no signals to buy or short. Normally such situation arrives after a sharp rise or decline when stocks are adjusting their values. While some stocks attempt to move up, few may be taking breather before next move. Such situation are often confusing. There is no harm in taking rest for a day or two or short period if the trend is choppy, unclear or doubtful, instead of putting your money at higher risk.on 'Long' side.

8. Don't expect Profit on Every Trade.

If you consider you are a smart trader who can make profit on every trade, you are 100% wrong. Always be flexible and accept the fact as soon as you realize that you are on wrong side of the trade. Simply get out of the trade without changing your strategy during the market; it may cause you double losses.

9. Withdraw portion of your profits.

The business of Trading is excellent as long as you are making profits. Unlike other business your losses can be unlimited and rapid if market does not move as per your expectations. While in other businesses you may have other remedial measures available but in trading it is you only who has to control it. Traders have large egos particularly after series of successful trades and their tendency to enlarge commitments in overconfidence may cause major financial set back. There fore it is must that trader must take a portion of the profit and put it in separate account. This is absolutely must for long term stability in the market.

10. 'Tips'/'Rumors' can ruin you sooner or later- Don't follow them. 

Tips and Rumors are part of the game in Stock market. In most cases these are spread by vested interests through brokers, media, analysts, or other rumor mongers in the interest of any particular company well before their IPO's, or to reduce/enlarge holdings or whatever reason. But instead of relying on Charts which are the translated copy of Price Action of any scrip based on demand supply. While you may be lucky if you have had made profits on such 'Tips' but there are 100% chances that you are likely to be trapped in sooner or later if trading on 'Tips' or 'Rumors' is part of your strategy. Believe in Charts, act on Charts. There is no second best option.

Source : http://www.trade4profit.org

How to READ a MUTUAL FUND FACTSHEET

Most asset management companies usually publish monthly reports (also called fact sheets) that contain critical information related to the portfolios, at times a roundup on debt and equity markets from the fund manager and performance details of the schemes managed by the AMC.


The idea is to help investors (both existing and potential) to track the performance of the mutual fund schemes so as to take an informed decision. To that end, factsheets serve as an investor's guide.


To be sure, factsheets were always meant to be the investor's guide. However, in many cases, they are not upto the mark leaving much scope for improvement and even standardization. We highlight the most critical reference points for the uninformed investor based on data that is more or less standardized across AMCs.


For ease of reference, we have divided the article in two parts, the first part discusses how to assess the equity fund factsheet and the second part discusses the debt fund factsheet.


A) Equity fund factsheets


Stock allocation


Thankfully, factsheets of most AMCs highlight the portfolio composition well enough, although there is scope for standardization. For an investor who wants to invest in equity funds, the factsheet can offer some critical insight into the fund management style/approach.


To begin with, consider the top 10 stocks in the portfolio to determine the level of diversification. In our view, a diversified equity fund should have no more than 40 per cent of net assets in the top 10 stocks. This should help the fund negotiate volatility more effectively than its concentrated peers. For instance, Sundaram BNP Paribas Growth Fund is a fund we like for its disciplined investment approach (no more than 5 per cent of assets in a single stock) that ensures that its top 10 stocks are well-diversified.


Sometimes, a fund could be well-diversified across the top 10 stocks, but investments in a single stock could be so high so as to offset an otherwise diversified portfolio. A case in point is HDFC Capital Builder (a well-managed value fund), which was done in during the market crash in May last year due to unduly high investments in a single stock (Hindustan Zinc).


Also look at the fund's portfolio over several months to get a sense of the consistency in the fund manager's stock picks. Too much churn in the stock picks (new names every other month) indicates that the fund manager could be punting rather than investing, thereby adding to the trading cost, which ultimately eats into the returns.


Sectoral allocation


Just as you evaluate the stock allocation, it is important to consider the sectoral allocation of the equity fund. Diversified equity funds should be well-diversified across stocks and sectors. A fund could be well-diversified across stocks, but may pay the price for not diversifying well enough across sectors.


For instance, Sundaram Growth Fund, a fund we admire for superior diversification across stocks, learn the hard way during the last market slide that diversification across stocks is as important as diversification across sectors. The fund had unduly high investments in infrastructure-related sectors.


The crash proved particularly harsh for the fund, as it had failed to diversify across other sectors. So like stocks, being diversified across sectors is just as important; unfortunately, it often takes a sharp dip in the stock markets to highlight the importance.


However, funds like HSBC Equity Fund, which pursue the top down investment approach, have concentrated sectoral allocations, which suit their investment style. These funds need to be evaluated differently from funds that pursue the bottom up investment style.


While calculating the sectoral allocation, the investor must combine like-natured sectors to understand the level of sectoral diversification. For instance, most equity funds list Auto and Ancillaries sectors distinctly; given the similar nature of these sectors, their allocation must be combined.


Another problem relates to the categorization of companies across sectors. Different equity funds categories the same company across different sectors. There is no standardization. While AMFI (Association of Mutual Funds of India) has introduced certain standardization processes in this regard, the same is not adhered to across the industry.


Asset allocation


Stocks and sectors apart, there is another detail that must catch your attention and that is the asset allocation. The asset allocation table tells you how the fund's net assets are diversified across stocks, current assets/cash. An equity fund's allocation to cash should be noted.


Among other reasons, this could be because the fund manager is not comfortable with market levels at that point in time. This fact can be established easily by browsing through the previous month's factsheets. If the fund manager has been in cash for some time, it means he does not find enough stock-picking opportunities at existing levels.


Being in cash could work in the fund manager's favor if the market crashes, like it did for Sundaram BNP Paribas Select Midcap May 2006. But a higher cash allocation works against the fund during a rising market, when being fully invested is what counts. Sundaram BNP Paribas Select Midcap has also witnessed this scenario, which explains its relative underperformance over the last few months.


Other data points


In addition to the points listed above, there are some data points that must be marked by the investor.


Portfolio Turnover Ratio


Put simply, this ratio tells the investor how much churn the portfolio has witnessed. This ratio is calculated based on the number of shares bought and sold by the equity fund over the review period. A high Turnover Ratio (vis-a-vis peers or other equity funds from the same fund house) indicates that the portfolio has seen above-average churn.


A high churn by itself does not necessarily imply that the fund is good or bad, however, it must be in line with the fund's investment philosophy. A growth fund can have a high turnover ratio (although that's not necessarily a good thing as it adds to the trading costs and therefore eats into your returns).


However, a value fund should typically have a lower churn as the fund manager would usually be investing in the stocks over the long term.


Important as it is, the Portfolio Turnover Ratio is yet to be given due importance by the fund houses (maybe they are afraid of 'exposing' their fund managers). How else, do you explain the fact that fund houses either don't reveal the Portfolio Turnover Ratios or when they do reveal them, it is not standardized thereby robbing investors of the opportunity to compare them across fund houses.


Expense Ratio


This ratio underscores how expensive your equity fund really is. A high Expense Ratio (regulations cap this at 2.50% for equity and debt funds) indicates that your mutual fund investment is expensive. As per regulations, fund management expenses, which form the largest chunk of the expense ratio, must decline with a rise in Net Assets. So larger equity have more scope to reduce their Expense Ratios.


Again, fund houses are not very enthusiastic about sharing this important detail with investors. However, they do declare this ratio every 6 months, which is only because regulations demand that they do so.


Fund manager information


It always helps to know who is managing your fund. Not that we have any particular fund manager in mind, rather we recommend that investors do not get infatuated by any fund manager in particular and look for investment teams instead. Over the long-term, it pays to have your money managed by a group of fund managers, rather than one star fund manager, who could quit the fund house any time and take the performance with him.


So keep an eye on the fund manager details, typically, there should not be many external changes in the fund management team. When the same names manage your money, over a period of time there is stability in the fund management process. Thankfully for investors, majority of the fund houses do provide the fund manager details.


B) Debt Fund Factsheets


Like their equity fund counterparts, debt fund factsheets offer enough insight to the debt fund investor. For this, investors have to keep an eye on at least three aspects:


Average Maturity


For debt fund investors, this is perhaps the most significant detail to look out for in a debt fund factsheet. Since the Average Maturity of a portfolio for a particular month in isolation does not tell the investor much, he must go back several months to see how the Average Maturity of the portfolio has moved in order to understand the fund manager's view on debt markets.


To give investors an idea - if the fund manager has been maintaining a higher Average Maturity for some time, it means that he expects interest rates to fall over time. On the other hand, if the Average Maturity of the portfolio is lower, it means that the fund manager is cautious about interest rates. Ideally, investors must read up on peer factsheets to understand the consensus on interest rates and if your fund manager has a differing view, you must try to understand why.


Credit Rating Profile


Debt funds invest in securities with varying credit ratings. In the Indian context, most debt funds do not take on undue credit risk - i.e. they invest primarily in securities that are highly rated. Investors should mark the credit rating profile of the debt fund. A large chunk in AAA/Sovereign paper (which is the highest rating) implies that the fund is taking lower credit risk. On the other hand, a higher allocation to AA+/AA paper underlines the fact that the fund manager is taking credit risk.


Asset Allocation
Like with equity funds, debt fund investors must consider the asset allocation of the fund under review. This should help him understand the investment approach of the fund manager and the risk he is taking. Debt funds invest mainly in corporate bonds and government securities, both of which carry varying risk. Investors must make a note of the assets invested across both these segments.


Then there are floating rate funds that invest predominantly in floating rate paper; in practice however, many are predominantly invested in cash/current assets for lack of adequate floating rate instruments.


Likewise, monthly income plans invest a portion of assets in equities (the maximum limit on which is predetermined), investors must check the equity allocation over the last several months to understand the kind of risk the fund manager is taking (on the equity side) and whether he is adhering to the ceiling on equity investments.


Source - Rediff