Stocks and Mutual Funds

Top 10 Stock Picks + Market Strategy For 2016 By IndiaNivesh

2016-01-10T08:19:00.004-08:00

In our note dated Dec 30, 2014 we had recommended 10 stocks
to play in CY15. It gives me great pleasure that those stocks have delivered -33 to 113% returns (equal weighted average of 10.9% v/s Nifty avg of -6.6% & BSE500 avg of -2.2%) taking into consideration our recommendation day price & price on Dec 22, 2015 However returns are much higher (avg 33.7%) if we consider the highest price these stocks have reached after our recommendation. I hope our esteemed investors would have benefitted from those recommendations.

Click here to download IndiaNivesh’s Top 10 Stock Picks + Market Strategy For 2016

Nine Top-Quality Stock Picks + Market Strategy For 2016 By Motilal Oswal

2016-01-10T08:19:00.001-08:00

Nifty’s Outlook – Nifty remains consolidating within the Falling Wedge pattern with support at 7200 and breakout point being 8200. The range is expected to contract with time before a directional move. 7200 remains a make or break point and positions can be created once Index is around the same with a stop marginally below it. Upside remains open and can be traded with trailing stops later

Click here to download the research report issued by Motilal Oswal

Motilal Oswal Finally Reveals Names Of Stocks Destined To Go From “Mid-Cap” To “Mega-Cap”

2016-01-10T08:18:00.001-08:00

We know by now that Motilal Oswal’s Wealth Creation Studies are not meant to be taken lightly. Each of the stocks referred to therein are chosen after careful application of mind to the fundamentals and valuations and have the potential to give mega gains.

The 18th Wealth Creation Study of 2014 recommended five stocks. Four of these stocks, namely, Symphony, Bajaj Finserv, Bajaj Corp and Zydus Wellness, have given blockbuster returns to shareholders since then.
The 19th Wealth Creation Study of 2015 recommended seven stocks. Five of these stocks, namely, Tata Elxsi, Granules India, Shilpa Medicare, Aarti Drugs and Atul Auto have given handsome returns since then.
The 20th Wealth Creation Study of 2016 is conspicuously silent with regard to the names of the recommended stocks. This appears to be a deliberate strategy by the think tank at MOFSL for reasons that are best known to them.
However, Mr. Motilal Oswal, the boss man of MOFSL, has let the cat out of the bag by naming these stocks.
In his latest interview, when he was asked to recommend a few multibagger stock ideas, Motilal Oswal blurted out:
“What are your top five multibagger ideas for 2016 with a minimum investment horizon of three years?
Motilal Oswal: Bajaj Finance, Sun Pharma, SBI, ONGC, and InterGlobe Aviation are the five largecap stocks to watch out. Among the smallcaps, I would bet on Alkem Labs, DFM Foods, Astra Micro, Eveready and Lincoln Pharma.”

Motilal Oswal’s “Mid to Mega” Stocks
Stock	CMP (Rs)	MCap (Rs Cr)
DFM Foods	970	971
Eveready	302	2,197
Astra Micro	137	1,191
Alkem Labs	1533	1,544
Lincoln Pharma	251	409

The first thing worth noting is that of the five small cap stocks referred to, two are Pharma stocks. This is not a coincidence. Even in the 19th Wealth Creation Study, four of the seven stocks were Pharma stocks.
Of the five stocks, DFM Foods is somewhat familiar. This stock was first recommended by Ekansh Mittal’s Katalyst Wealth on 19th April 2015 when it was at Rs. 322. Today, the stock stands tall at Rs. 970, resulting in eye-popping gains of 200% in just nine months.
DFM Foods’ credentials as a quality stock are established by the fact that Westbridge/ Jwalamukhi holds a massive chunk of 25% of the equity.
It is worth noting that 82.18% of DFM Foods’ equity capital is collectively held by the promoters, Westbridge/ Jwalamukhi and two other HNI shareholders.
This means that there is really no floating stock available for sundry shareholders.
It may be recalled that Sumir Chadha, the whiz-kid behind Westbridge/ Jwalamukhi, had revealed that it is his strategy to corner large stakes in top-quality small cap stocks because this results in “mis-pricing” of the stock.
Eveready is also mildly familiar because Ashish Kacholia holds a major chunk in it. Akash Prakash’s Amansa Capital also bought a chunk of 5,48,000 shares of Eveready on 06.11.2015.
Astra Micro is of the same top-quality caliber. It happens to be one of Sanjoy Bhattacharrya’s favourite stocks and had pride of place in his famous Model Portfolio.
There is a detailed research report on Astra Microwave by Oscar Capital. The report explains how Astra’s expertise in the Defense sector coupled with the Government’s ‘Make in India’ will bring great prosperity to the Company.
Amongst the Pharma stocks, Alkem Labs made its IPO debut a few days ago. The IPO was highly recommended by most brokerages on the basis of the Company’s powerhouse track record and reasonable valuations.
Lincoln Pharma is a mystery stock that has never been heard of before. Preliminary inquiry reveals that the stock is a micro-cap with a market capitalisation of Rs. 409 crore. It has been a powerhouse so far with a mind-boggling return of 213% YoY and 625% in two years.
The interesting aspect is that none of the super-savvy investors appear to have discovered Lincoln Pharma so far. There are also no research reports on the stock so far.
So, of the five stocks referred to by Motilal Oswal, Lincoln Pharma appears to be the perfect “hidden gem” to take us to the road of riches if we are able to muster the courage to buy a truckload of the stock!

Dolly Khanna’s Fav Micro-Cap Stock Has Potential For More Gains: Religare

2016-01-10T08:17:00.001-08:00

With my usual diligence, I first reported about Dolly having bought a truck load of Nandan Denim in May 2015. The stock was then at about Rs. 73.
Not surprisingly, Dolly’s entry into Nandan Denim attracted analysts the way bees are attracted to honey. Sunidhi Securities, IndiaNivesh, Nirmal Bang and Karvy vied with each other to project lofty targets for Nandan Denim.
Nandan Denim has lived upto everyone’s expectations by effortlessly touching an all-time high of Rs. 174 on 04.08.2015. The CMP is Rs. 155.
Such is the confidence of analysts in Nandan Denim that Polus Global Fund, a renowned FII, has bet a large sum of money in the wager that the stock will touch Rs. 200 in the next 18 months.
Religare is the latest analyst to be charmed by Nandan Denim. In their latest report, Religare has waxed eloquent about Nandan’s prospects. It says:
“After huge capex investment plan, NDL will create itself as the biggest denim player in India with exports to many countries. We believe demand for Denim will surge going forward mainly due to improving standard of living, rising population and income levels, online sales, penetration in smaller cities, more women workforce and brand awareness.
India’s share in global textile industry will advance because of problems faced by China and other exporting countries. Also favorable government policies like capital subsidy, interest rate subsidy, lower power tariffs and VAT reimbursement have benefitted our textile industry and we foresee the same to continue in the future.
With strong distribution network, proactive management and growing presence, NDL will be able to escalate its market share in denim segment from existing share of 10%. Out of the total capex investment of Rs. 620 crores, 70% is financed with debt and 30% with fresh equity. We expect debt to peak out in FY16. NDL’s operational margins will improve on addition of spinning capacity and value added products in its portfolio.
Net sales and Net Profit surged at CAGR of 23.9% and 34.7% respectively in last 5 years. We expect NDL to grow around 10-15% in following 2-3 years. At CMP of Rs. 150 the company is trading at FY16E PE of 11 and FY17E PE of 9.1 times. We recommend to buy NDL for long term horizon with price target of Rs. 183.”
When I last checked, Dolly Khanna had a big smile on her face owing to the massive gains (~100% in 9 months) that have effortlessly flowed into her kitty. Whether Dolly will have more reason to smile thanks to the recommendations by Religare and the wager by Polus Global Fund requires to be seen!

Click here to download Religare’s research report on Nandan Denim

Seven Top-Quality High-Conviction Mid-Cap Marvels Stocks By Edelweiss (Jan 16)

2016-01-10T08:16:00.003-08:00

Edelweiss has issued a research report in which seven high-quality high-conviction mid-cap marvels stocks have been recommended for investment.

Our Midcap Marvels are high conviction stock ideas from the Mid-Cap and Small-Cap space to power your portfolio with the investment horizon of 1-2 years. The stocks featured in this product are relatively strong on the fundamental side, with potential for exponential revenue growth, high ROCE, strong margins and credible corporate governance.
We had introduced Midcap Marvels last month (on 4th June 2014) which has outperformed benchmark CNX Midcap Index by 62%.
Salient Features of the stocks:
These stocks are selected based on thorough bottom-up research
We believe that these stocks could be multi-baggers in the long run and should be recommended to the investors with the investment horizon of 1-2 years.

Click here to download Edelweiss’ research report on Mid-cap Marvels (Jan 16)

Top Large-Cap & Mid-Cap Stocks Picks By Angel Broking

2016-01-10T08:15:00.001-08:00

A lot of macro factors are falling in place to create the right conditions for the markets to rally in the coming year. Brent crude oil prices have declined ~66% over the last two years to $33 as against ~$99 at the end of CY2013, resulting in significant savings for the government. Led by lower crude prices, the net import bill has reduced at a CAGR of 16% to $115bn in CY2015 as against $192 bn in CY2012, resulting in a steep decline in the current account deficit.
With these savings, the government has also been able to maintain fiscal discipline, despite an increase in infrastructure spending. We are already seeing a strong bid pipeline of `120,000cr from the NHAI and of over Rs. 244,000cr from the defense sector, expected to get tendered over the next 12 months. Accordingly, we expect uptick in government spending to result in private sector capex cycle revival. We believe the revival in the investment cycle will be the key to push the earnings trajectory upwards over the next few years led by the multiplier effect of infrastructure spending.

Click here to download Angel Top Picks – January 2016

Top 10 Large-Cap & Mid-Cap Stocks For 2016 By Karvy

2016-01-10T08:13:00.001-08:00

Karvy has issued its much-awaited Wealth Maximizer Report for 2016 in which ten top-quality large-cap and ten top-quality mid-cap stocks have been recommended for investmen.

We believe that equities will continue to outperform other asset classes like fixed income and commodities (Gold) in the long term. Hence, we advise to remain invested in equities with a long term perspective in good quality companies in a systematic manner. We expect Nifty to trade in the band of 7560-9720 in the coming 12-15 months implying a P/E band of 14-18x CY16E consensus EPS. Considering the brighter prospects in the long term, we remain overweight on Consumers, Financials, Infrastructure, Automobile, Cement, Energy and Power.

Click here to download Karvy’s Wealth Maximizer Report For 2016

Rakesh Jhunjhunwala” Takes Punters For A Ride In Surana Solar Scam

2015-06-11T05:36:00.002-07:00

On Monday, 8th June 2015, the radar flashed the red alert that “Rakesh Jhunjhunwala” had bought and sold 2,50,000 shares of a little known company called Surana Solar Ltd.

However, as the trade was squared off on the same day, nobody paid much attention thinking that it was a quirky time-pass transaction of the type that the Badshah is known to occasionally indulge in.

On Tuesday, 9th June 2015, the radar again flashed the red alert that “Rakesh Jhunjhunwala” had bought another lot of 2,56,500 shares of Surana Solar at Rs. 53.74 each. However, this time he was reported to have taken delivery of the shares.

Nobody bothered to check whether the “Rakesh Jhunjhunwala” who bought the Surana Solar stock is the same Rakesh Jhunjhunwala who is revered as the Badshah of Dalal Street or he is just a namesake. All the major journals, including the ET, Business Standard, Mint, NDTV etc, reported the purchase as being that of the Badshah’s.

Today morning, the punters were understandably excited and eager to have a go at the Surana Solar stock. They lined up in large numbers at the counter and each was desperate to grab as much of the stock as he could.

The total volumes traded today in this little-known counter was 5,824,896 shares on the NSE and 1,756,375 shares on the BSE. You can judge the magnitude of the volume when you compare it with the 30-day average volume of the stock, which is a mere 75,000 shares.

Not surprisingly, the hectic buying action sent the stock surging to an all-time high of Rs. 63, up nearly 19% from the opening price.

By afternoon, CNBC’s Varinder Bansal broke the news that the “Rakesh Jhunjhunwala” who bought the stock is not the Badshah of Dalal Street but a namesake based in Kolkata.

Within seconds, the stock price slumped like a ton of bricks, leaving the punters dazed and confused in its wake.

At the end of the day, the stock closed at Rs. 44.75, down a whopping 40% from the peak of Rs. 63 and down 15.65% from yesterday’s closing.

Varinder Bansal speculated in his report that the entire episode appears to be a carefully orchestrated ‘pump-n-dump’ operation. Apparently, somebody had planned the entire episode and was lying in wait for the stock price to surge so that he could dump a large quantity on the hapless punters.

When I last checked, the punters were licking their wounds and looking very downcast. Hopefully they would have learnt a lesson from today’s episode that you must always look before you leap!

Seven Top-Quality ‘Mid-Cap Marvels’ Stocks For June 2015

2015-06-10T23:47:00.000-07:00

Edelweiss’ Midcap Marvels are high convection stock ideas from the Mid-Cap and Small-Cap space to power the portfolio with the investment horizon of 1-2 years. The stocks featured in this product are relatively strong on the fundamental side, with potential for exponential revenue growth, high ROCE, strong margins and credible corporate governance.

Edelweiss introduced Midcap Marvels on 4th June 2014. It has outperformed the benchmark CNX Midcap Index by 50%.

The seven stocks have been picked on the basis of the following factors:

Opportunity size
– How big the sector can grow (3x, 4x, 5x)

Moat around the business

– Differentiated business Model
– Sustainable competitive advantage
– High barriers to entry

Corporate Governance

– Management back ground
– Accounting policies
– Corporate policies
– Business with Related Parties

Strong Management Credentials

– Professional management
– 2nd level of management
– One person dependency
– Track record of past decisions
– Comments v/s deliverable

Click here to download Edelweiss’ Midcap Marvels for June 2015

Porinju Veliyath Foresees More Multibagger Gains From Latest Micro-cap Stock Pick

2015-06-09T22:54:00.002-07:00

Porinju Veliyath never tires of talking about Samtex Fashions, a micro-cap with a market capitalisation of about Rs. 100 crore. In an interview to ET, Porinju oozed confidence about the prospects of companies like Samtex. “I am seeing many potential multibaggers and when I look for values, I am still more convinced that the value is lying in the midcap and the small cap segment” he said.

Porinju later tweeted about the stock:

(Samtex Fashions, I suggested on @ETNowTv last Friday is on 5th day circuit. Look cons. nos. There are 100s of such potential multi-baggers!)

Porinju was in fact a major shareholder in Samtex Fashions earlier. As of 30th June 2011, he held 117,000 shares. His name, however, does not appear in the present list of major shareholders.

Samtex has been on fire in the recent past. On a YOY basis, it has given a stupendous return of 225%. The two year return is an incredible 607%.

The million dollar question is whether after such a scorching performance, Samtex has the potential to offer more gains?

Porinju obviously believes that it has that potential. Today, he scooped up a chunk of 77,473 at Rs. 70 each, making an investment of Rs. 54 lakhs.

Porinju’s logic appears to be that Samtex Fashions is walking on the same path as its illustrious peers, Arvind, Page Industries, Kitex Garments, Indian Terrain, Ashapura Intimates etc and that there are mega gains to be made from such stocks.

Only time will tell whether Porinju is right in his theory or not.

Daljeet Kohli Reveals His Model Portfolio Of Top 10 Stocks

2015-06-09T22:52:00.003-07:00

Daljeet, as is his custom, has made a careful selection of stocks while preparing the Model Portfolio. First he has taken care to ensure that all the top sectors such as Pharma, Financials, FMCG, Power etc find place in the portfolio. Then, he has ensured that there is an equitable distribution amongst the large-caps and mid-caps. This strategy ensures that the portfolio remains stable even in the midst of heavy turbulence.

A detailed rationale in support of each stock is also given in the note.

Click here to download IndiaNivesh’s Model Portfolio of top 10 stocks

Parag Parikh’s PPFAS Mutual Fund’s AUM Zooms, New Stock Added

2015-06-09T22:51:00.002-07:00

The first good news is that there is a steady increase in the AUM of the PPFAS Mutual Fund. As of 30th May 2015, the AUM stood at Rs. 602.71 crore. That is an increase of about 41% over the AUM of Rs. 426.03 crore as of 30th May 2014.

The other good news is that the PPFAS Mutual Fund has added Balkrishna Industries to the portfolio. The Fund bought 140,259 shares in May 2015 worth about Rs. 10 crore.

We have earlier seen that Balkrishna Industries is a value investors’ favourite owing to its niche area of manufacturing “off road” highway tyres. Its valuations are also reasonable.

Sanjoy Bhattacharyya, the doyen amongst value investors, recommended the stock in March 2013. At that time, he called it a “compelling investment opportunity” and a “solitary exception”. He explained that Balkrishna Industries is “well positioned in a highly profitable niche”.

Sanjoy Bhattacharyya was perfectly correct in his analysis because the stock price has jumped from Rs. 250 to Rs. 696, a handsome return of 175%.

Even in his latest interview, Sanjoy Bhattacharyya heaped lavish praise on Balkrishna Industries by emphasizing that it enjoys the “moat” of operating in a niche area.

Akash Prakash is another ace investor who has put his faith in Balkrishna Industries. His Amansa Capital invested Rs. 108 crore in buying 17,50,000 shares of Balkrishna Industries on 20th March 2015.

If you want to read a research report on Balkrishna Industries, there is one available from IndiaNivesh.

Basant Maheshwari’s Fans Launch Spirited Counter-Attack To Battle His Detractors Over Failure Of Hawkins Cookers’ Stock Pick

2015-06-09T22:50:00.005-07:00

Being a stock picker and making public stock recommendations is a hazardous activity. If the stock pick fails, disgruntled investors are quick to draw the gun and shoot to kill. You need a thick skin to handle the criticism and carry on with your job.

Daljeet Kohli is one of the victims of this short-tempered attitude of investors. Though he has several multibagger stock picks like Ajanta Pharma, Alembic Pharma, JB Chemicals, CARE, Gujarat Pipavav etc to his credit, Daljeet was attacked mercilessly over the failure of his stock pick, Sharon Bio-Medicine.

Porinju Veliyath, who is well known for his forever bullish stance and preference for so-called ‘low quality’ stocks, is also frequently lampooned as an ‘operator’, ‘fixer’, ‘manipulator’ and whatnot whenever his stock picks are discussed. Though there is no evidence to show any wrong-doing on Porinju’s part, people nevertheless attack him and his stock picks.

Basant Maheshwari is the latest to join the club. The alleged failure of his stock pick, Hawkins Cooker, has not gone down well with a section of investors and several of them have taken to MMB to vent their ire on him.

Basant has been subjected to the choicest of abuses. Someone called him a “bluff master” and said that he has “lost credibility”. Another asked him to “apologize”. Yet another threatened to file a “complaint with SEBI”. Another ridiculed Basant’s followers as suffering from “BM Mania” and claimed that they are “blinded” by his charm. Yet another claimed to have “busted BM’s gang who mislead the small retail investors for their own vested interest”. Some crossed the line by alleging that “Basant is a crook making tall claims of CAGR using leverage” and that “BM’s free advice just to manipulate the stock price so that he and his paid members get the benefit”. Some other allegations are that Basant had already sold off the stock when he made the public recommendation, etc, etc.

Basant has so far maintained a dignified silence and kept a stiff upper lip, refusing to be drawn into the debate.

However, Basant’s fans have rallied in his support. They have descended in large numbers and are keeping a 24×7 vigil at MMB. Every criticism of Basant meets with a swift and brutal rebuttal. The strategy that Basant’s fans are following is to highlight his long track record of picking winning stock picks and to emphasize that he is a man of “integrity”. They have also adopted the strategy of lampooning the detractors. “The critics of BM don’t know the story – they truly are the frogs in the well and who remain content being in the well. Live with your ignorance you ignoramus” one fan said. Another added that the criticism of Basant is “unprofessional and unacceptable statement. We know BM very well. Don’t act like smart here”. Yet another claimed to be happy to be living in “BM Mania”. Another was more direct: “You are only here to discredit and denounce and raise allegations without putting yourself in any line.. If you are such great man, pls give 2-3 reco like BM and lets see what happens in 6 months..”

Interestingly, Basant Maheshwari is not a stranger to criticism. On an earlier occasion, Basant was attacked on twitter for allegedly making a claim that his PMS/ portfolio had earned “65% CAGR” and for allegedly not having any evidence to back it up. His detractors also took umbrage at the fact that Basant is not “registered as a RIA” and is not “subjected to audit” from SEBI. On that occasion also, Basant’s followers turned up in large numbers to combat the detractors. There was a free-for-all slug fest of allegations and counter-allegations which lasted many days.

However, Basant is probably unaffected by all the criticism. He is a seasoned player and knows that if one wants to be in public life, one has to accept the bouquets with the brickbats.

Arbitrage Fund

2015-06-05T22:08:00.000-07:00

Debt mutual funds were a perfect substitute to the conventional fixed deposits (FDs) because they offered much better post-tax returns. But the Budget 2014-15 took away the tax advantage of debt funds. Now, for debt funds to enjoy the benefit of indexation (gains after calculating inflation), they have to be invested in for three years or more. Having said that, liquid funds haven't been badly impacted because even though the tax advantage may have lessened, the convenience and better absolute returns they offer for very short-term, even overnight investing, is significant.

The change in taxation affects investors who have money for one to three years of investment or goals arising within that timeframe the most. If investors invest in FDs, Fixed Maturity Plans (FMPs), or income finds for less than three years, the returns get taxed at their respective marginal tax rate of 10 per cent, 20 per cent or 30 per cent. Most likely, the post-tax return from these FDs, FMPs or income funds will fail to beat current inflation levels.

There are three questions that will arise in the minds of investors:

* Do we have a substitute that could offer improved post-tax returns? How does it work?

* How safe is the substitute from protecting capital perspective?

* How will it better the income funds' returns?

Fortunately, the arbitrage fund could work as a substitute to the debt funds (that is, FMPs/income funds) for a period of more than one year and less than three years.

How does it work?

As you know, there are two markets - the spot market and the futures market. There is a price difference between the two. The fund manager buys a stock in the spot market. At the same time, he sells an equal quantity in the futures market. By doing this he doesn't take any market risk.

A fund manager buys, say, 100 shares of Infosys at Rs 3,560 in the spot market. At the same time, he sells an equal quantity in the futures market, at say, Rs 3,585. So the fund manager has booked a Rs 25 gain - on the expiry date of the future, the price converge providing the fund manager the gain of Rs 25.

The difference typically reflects the interest rate in the economy, mainly the overnight liquid fund rate. Please note the similarity in liquid and arbitrage fund returns (see table).

When do arbitrage funds work?

We need to ask if arbitrage funds are good at capital protection. Most of the time arbitrage funds mimic the liquid fund returns that prevail in the economy, but it may not work as a perfect substitute to liquid funds for three reasons:

* It is volatile over a short-term period

* One month in the last five years has seen a very marginal negative return as well

* On a one-month rolling return basis it has underperformed 19 out of 40 quarter periods over the last 10 years

However, arbitrage funds work as a good substitute for income funds over a one- to three-year time horizon.

Rolling return analysis

The three months and above rolling returns of arbitrage funds over a period of five years show that they have never been negative. However, the returns fluctuate quite a bit, with the worst three months rolling return being 0.55 per cent absolute. The rolling returns over one, two and three years gain steadiness with the maximum returns being in the 9 per cent region, whereas the worst return is four to six per cent.

The volatility in returns is a function of the arbitrage spread. It widens during uncertain and volatile times. Hence, it delivers a slightly better return during such times. However, the same typically narrows when the stock market is unidirectional.

Better returns than income funds

The worst return of arbitrage funds over two and three-year period equals post-tax FD returns. The upside of this strategy is that it can generate a post-tax return in the range of 9-9.5 per cent per annum. Arbitrage funds qualify as equity investment, resulting in tax-free returns for investments of over one-year periods. So, on the downside, long-term investors have very little to lose, but the upside offers good 9 per cent tax-free returns.

What to watch out for:

One has to be careful in selecting arbitrage funds because some of them have higher exposure to the debt category. The equity and equity-related instruments must cross the minimum average of 65 per cent to qualify as equity funds and to get the tax advantage associated with it. The whole purpose of using arbitrage in this situation is tactical. If this point is overlooked, the purpose itself will get defeated.

The author is the founder & CEO of Fincart

Why reverse mortgage has failed to take off in India

2015-06-05T22:05:00.001-07:00

Reverse mortgage has proven to be a very effective tool to supplement one's income in old age, particularly in Western countries like the United States. However, despite being introduced 7-8 years back in India, it has failed to take off the way industry experts had hoped.
But before finding out the reasons, we need to take a look at what reverse mortgage is all about.

Reverse mortgage, in fact, is a special type of loan against a home that allows the borrower to convert a portion of the equity in the property into cash. In simple words, reverse mortgage is a scheme where any individual (senior citizen) who has a self-occupied house and is looking for regular income can mortgage it to a financial institution. In return, the institution pays the person a fixed periodic (monthly, quarterly, annual) installment or a lump-sum amount at a defined rate of interest.
"The payout is generally for a fixed term of 15-20 years, after which the borrower or legal heirs (on death) can release the house by either repaying the loan or the company settles the amount by selling the house. Any excess in the process is paid to borrower or legal heirs as the case may be," says Jitendra P.S. Solanki, a SEBI-registered investment adviser and founder of JS Financial Advisors.
With a traditional second mortgage, or a home equity line of credit, one must show sufficient income versus debt ratio to qualify for such a loan, and needs to make monthly payments towards the mortgage. However, reverse mortgage pays the borrower, and is available regardless of current income or assets.
"The amount that can be borrowed depends on the borrower's age, the current interest rate, other loan fees, and the appraised value of the property. One does not have to make payments, because the loan is not due for paying off as long as the house is one's principal residence. However, like all homeowners, the borrower is still required to pay applicable real estate taxes and other conventional payments like utilities," says a Jones Lang LaSalle (JLL) India report.
Thus, as it is clear, unlike the other lines of credit, reverse mortgage doesn't require income or credit history of the borrower as repayment is based on the value of the house owned by the borrower. Also, "in reverse mortgage, the borrower doesn't have to pay principal or interest payments during the loan tenure (15-20 years). More importantly, the amount received from the lender with property as collateral is not taxable, as the same is considered as loan and not income with ownership fixed with the owner," informs Chintan Patel, director-real estate practice, Ernst & Young.
However, despite having so many advantages and global acceptability, reverse mortgage has not managed to captivate the Indian market because of multiple reasons.
Anuj Puri, chairman & country head, JLL India, says, "In the first place, it is a predominant tendency for Indians to treat owned property as an important family asset. This asset is usually intended to be inherited by the next generation, and would be liquidated only as a last resource. Also, the elderly tend to hold a place of importance in Indian culture. Property-owning senior citizens are generally assured of care and support in their golden years."

Echoing similar views, Patel says that property ownership in India is considered as an inheritable subset, which is ideally handed over to the legal heirs. Also, the owned property is considered for trade unless there is a substantial benefit or imperative financial crisis of owner.
Another point to note is that in reverse mortgage, the loan amount is capped at Rs 50 lakh - Rs 1 crore by the lender. Therefore, availing the same in key metro cities, where property prices usually range from Rs 1.5 to Rs 3 crore, is less lucrative for the borrower.
The structure of the product is also cited as the main reason for its unacceptability in India. In fact, when launched, it was a loan from a bank for a fixed term up to 5-20 years. There were also a few disadvantages in this product. Firstly, there was no lifetime income which most retirees search for in any fixed income avenue. Secondly, the liability of repaying the loan was set to arise as the term gets over. So, if someone lives the term, one runs a risk of loosing the house if one is not able to repay the loan.
"This can be a dangerous situation for any retire who have only a house to live. Also, the income offered in this product was quite low as it was a loan product from a bank which is more dependent on interest rate environment. Since there are lots of emotions attached to a house ownership, not many came forward to mortgage their house for such a low income and take the life risk of loosing the asset if they live thereafter," says Jitendra Solanki

Source: Economictimes

CAPM: theory, advantages, and disadvantages

2015-06-05T21:58:00.002-07:00

THE CAPITAL ASSET PRICING MODEL

Section E of the Study Guide for Paper F9 contains several references to the capital asset pricing model (CAPM). This article is the last in a series of three, and looks at the theory, advantages, and disadvantages of the CAPM. The first article introduced the CAPM and its components, showed how the model can be used to estimate the cost of equity, and introduced the asset beta formula. The second article looked at applying the CAPM to calculate a project-specific discount rate to use in investment appraisal.

CAPM FORMULA
The linear relationship between the return required on an investment (whether in stock market securities or in business operations) and its systematic risk is represented by the CAPM formula, which is given in the Paper F9 Formulae Sheet:

The CAPM is an important area of financial management. In fact, it has even been suggested that finance only became ‘a fully-fledged, scientific discipline’ when William Sharpe published his derivation of the CAPM in 1986 (Megginson WL, Corporate Finance Theory, Addison-Wesley, p10, 1996).

CAPM ASSUMPTIONS
The CAPM is often criticised as being unrealistic because of the assumptions on which it is based, so it is important to be aware of these assumptions and the reasons why they are criticised. The assumptions are as follows (Watson D and Head A, 2007, Corporate Finance: Principles and Practice, 4th edition, FT Prentice Hall, pp222–3):

Investors hold diversified portfolios
This assumption means that investors will only require a return for the systematic risk of their portfolios, since unsystematic risk has been removed and can be ignored.

Single-period transaction horizon
A standardised holding period is assumed by the CAPM in order to make comparable the returns on different securities. A return over six months, for example, cannot be compared to a return over 12 months. A holding period of one year is usually used.

Investors can borrow and lend at the risk-free rate of return
This is an assumption made by portfolio theory, from which the CAPM was developed, and provides a minimum level of return required by investors. The risk-free rate of return corresponds to the intersection of the security market line (SML) and the y-axis (see Figure 1). The SML is a graphical representation of the CAPM formula.

Perfect capital market
This assumption means that all securities are valued correctly and that their returns will plot on to the SML. A perfect capital market requires the following: that there are no taxes or transaction costs; that perfect information is freely available to all investors who, as a result, have the same expectations; that all investors are risk averse, rational and desire to maximise their own utility; and that there are a large number of buyers and sellers in the market.

While the assumptions made by the CAPM allow it to focus on the relationship between return and systematic risk, the idealised world created by the assumptions is not the same as the real world in which investment decisions are made by companies and individuals.

For example, real-world capital markets are clearly not perfect. Even though it can be argued that well-developed stock markets do, in practice, exhibit a high degree of efficiency, there is scope for stock market securities to be priced incorrectly and, as a result, for their returns not to plot on to the SML.

The assumption of a single-period transaction horizon appears reasonable from a real-world perspective, because even though many investors hold securities for much longer than one year, returns on securities are usually quoted on an annual basis.

The assumption that investors hold diversified portfolios means that all investors want to hold a portfolio that reflects the stock market as a whole. Although it is not possible to own the market portfolio itself, it is quite easy and inexpensive for investors to diversify away specific or unsystematic risk and to construct portfolios that ‘track’ the stock market. Assuming that investors are concerned only with receiving financial compensation for systematic risk seems therefore to be quite reasonable.

A more serious problem is that, in reality, it is not possible for investors to borrow at the risk-free rate (for which the yield on short-dated Government debt is taken as a proxy). The reason for this is that the risk associated with individual investors is much higher than that associated with the Government. This inability to borrow at the risk-free rate means that the slope of the SML is shallower in practice than in theory.

Overall, it seems reasonable to conclude that while the assumptions of the CAPM represent an idealised rather than real-world view, there is a strong possibility, in reality, of a linear relationship existing between required return and systematic risk.

WACC AND CAPM
The weighted average cost of capital (WACC) can be used as the discount rate in investment appraisal provided that a number of restrictive assumptions are met. These assumptions are that:

the investment project is small compared to the investing organisation
the business activities of the investment project are similar to the business activities currently undertaken by the investing organisation
the financing mix used to undertake the investment project is similar to the current financing mix (or capital structure) of the investing company
existing finance providers of the investing company do not change their required rates of return as a result of the investment project being undertaken.

These assumptions essentially state that WACC can be used as the discount rate provided that the investment project does not change either the business risk or the financial risk of the investing organisation.

If the business risk of the investment project is different to that of the investing organisation, the CAPM can be used to calculate a project-specific discount rate. The procedure for this calculation was covered in the second article in this series (Project-specific discount rates, Student Accountant, April 2008).

The benefit of using a CAPM-derived project - specific discount rate is illustrated in Figure 2. Using the CAPM will lead to better investment decisions than using the WACC in the two shaded areas, which can be represented by projects A and B.

Project A would be rejected if WACC was used as the discount rate, because the internal rate of return (IRR) of the project is less than that of the WACC. This investment decision is incorrect, however, since project A would be accepted if a CAPM - derived project-specific discount rate were used because the project IRR lies above the SML. The project offers a return greater than that needed to compensate for its level of systematic risk, and accepting it will increase the wealth of shareholders.

Project B would be accepted if WACC was used as the discount rate because its IRR is greater than the WACC.

This investment decision is also incorrect, however, since project B would be rejected if using a CAPM-derived project-specific discount rate, because the project IRR offers insufficient compensation for its level of systematic risk (Watson and Head, pp252–3).

ADVANTAGES OF THE CAPM
The CAPM has several advantages over other methods of calculating required return, explaining why it has remained popular for more than 40 years:

It considers only systematic risk, reflecting a reality in which most investors have diversified portfolios from which unsystematic risk has been essentially eliminated.
It generates a theoretically-derived relationship between required return and systematic risk which has been subject to frequent empirical research and testing.
It is generally seen as a much better method of calculating the cost of equity than the dividend growth model (DGM) in that it explicitly takes into account a company’s level of systematic risk relative to the stock market as a whole.
It is clearly superior to the WACC in providing discount rates for use in investment appraisal.

DISADVANTAGES OF THE CAPM
The CAPM suffers from a number of disadvantages and limitations that should be noted in a balanced discussion of this important theoretical model.

Assigning values to CAPM variables
In order to use the CAPM, values need to be assigned to the risk-free rate of return, the return on the market, or the equity risk premium (ERP), and the equity beta.

The yield on short-term Government debt, which is used as a substitute for the risk-free rate of return, is not fixed but changes on a daily basis according to economic circumstances. A short-term average value can be used in order to smooth out this volatility.

Finding a value for the ERP is more difficult. The return on a stock market is the sum of the average capital gain and the average dividend yield. In the short term, a stock market can provide a negative rather than a positive return if the effect of falling share prices outweighs the dividend yield. It is therefore usual to use a long-term average value for the ERP, taken from empirical research, but it has been found that the ERP is not stable over time. In the UK, an ERP value of between 2% and 5% is currently seen as reasonable. However, uncertainty about the exact ERP value introduces uncertainty into the calculated value for the required return.

Beta values are now calculated and published regularly for all stock exchange-listed companies. The problem here is that uncertainty arises in the value of the expected return because the value of beta is not constant, but changes over time.

Using the CAPM in investment appraisal
Problems can arise when using the CAPM to calculate a project-specific discount rate. For example, one common difficulty is finding suitable proxy betas, since proxy companies very rarely undertake only one business activity. The proxy beta for a proposed investment project must be disentangled from the company’s equity beta. One way to do this is to treat the equity beta as an average of the betas of several different areas of proxy company activity, weighted by the relative share of the proxy company market value arising from each activity. However, information about relative shares of proxy company market value may be quite difficult to obtain.

A similar difficulty is that the ungearing of proxy company betas uses capital structure information that may not be readily available. Some companies have complex capital structures with many different sources of finance. Other companies may have debt that is not traded, or use complex sources of finance such as convertible bonds. The simplifying assumption that the beta of debt is zero will also lead to inaccuracy in the calculated value of the project-specific discount rate.

One disadvantage in using the CAPM in investment appraisal is that the assumption of a single-period time horizon is at odds with the multi-period nature of investment appraisal. While CAPM variables can be assumed constant in successive future periods, experience indicates that this is not true in reality.

CONCLUSION
Research has shown the CAPM to stand up well to criticism, although attacks against it have been increasing in recent years. Until something better presents itself, however, the CAPM remains a very useful item in the financial management toolkit.

Reliance Retirement Fund

2015-06-05T21:32:00.002-07:00

Reliance Retirement Fund

An open ended notified tax savings cum pension scheme with no assured returns

Why Retirement Planning?

A 30-30 rule of thumb says an individual earns for 30 years, to provide for 30 years of post-retirement life where the individual’s income would have stopped, yet the need to maintain similar life style exists.

You build in the first 30 working years		We all need retirement planning since we…
You enjoy the benefits in the next 30 years…Are you WELL prepared or ILL prepared?		We all need retirement planning since we…

How Retirement Planning?

Two Phases of Retirement Planning
Accumulation Phase	Distribution Phase
Accumulation Challenges · You can only save a part of your income…You have expenses to take care of, don’t you? · You need that saving to become big enough…To replace your regular income when you retire · Your accumulated assets should cover your expenses…Which will grow each year due to inflation	Key Concerns · Income should be adequate to maintain lifestyle · Inflation should not erode the income or corpus · Corpus should not be subjected to high investment risks

Role of Investment

Accumulation Phase	Distribution Phase
You do one part of the job by setting aside as much as you can. Your investments do the other part of the job by appreciating in value over time.
Growth of asset for fighting inflation. Inflation is a silent Killer…Inflation not only reduces the current purchasing power but also increases the savings requirement for future. The current expense will go up by approximately 7 times over next 30 yrs assuming inflation rate of 7% p.a.	Primary focus on income generation Enable drawdown without depleting corpus
Mathematics of Accumulation and Distribution
Monthly Investment…You invested Rs. 5000 every month for 30 years	Your Monthly Retirement Annuity

At 7% your retirement assets will grow into Rs.61 lakh. At 15% your assets would have grown to Rs.3.46 crore	If over a 30 year period, the accumulated retirement corpus was Rs. 3.46 cr from a monthly SIP of Rs. 5000 at an assumed rate of 15%, then one can withdraw an annuity of Rs. 3 Lakh per month over next 30 yrs assuming that the corpus would grow at 10% post retirement

Reliance Retirement Fund…A one stop Equity & Debt Oriented Retirement Solution

Two Schemes with distinct portfolios
Wealth Creation Scheme…for Accumulation Phase	Income Generation Scheme…for Distribution Phase
Equity-oriented for accumulation · 65 - 100% in Equity & equity related instruments · 0 - 35% in debt and money market securities	Debt-oriented for distribution · 70 - 95% in debt and money market securities · 5 - 30% in Equity & equity related instruments
Key Features
· Accumulate using both SIP and lump sum over the earning years o Step up Facility- Step UP Facility is available only during ongoing basis and not during NFO. A facility wherein an investor who has enrolled for SIP, has an option to increase the amount of the SIP Installment by a fixed amount at pre-defined intervals. · Flexibility To Manage Investments o Unlimited switch between schemes o Exit load of 1% on redemption before age 60, subject to lock in period of 5 Yrs · Auto transfer to move from accumulation to distribution · Auto Transfer is an optional facility wherein investors' entire investment (Lump sum/SIP) shall be switched automatically from Wealth Creation Plan to Income Generation Plan (with nil exit load) at any date as specified by the investor (which is within or after the lock-in period) or upon completion of 50 years of age.	Use systematic withdrawal plan (SWP) to use only what is needed after retirement o Auto SWP - This optional facility aims to provide a regular inflow of money to investors (monthly/quarterly/annual) by automatic redemption of units on or after 60 years of age. o Manual SWP
· Tax Benefit: As per the clause (xiv) of sub-section (2) of Section 80C of the Income Tax Act, 1961, individual investor will get tax deductions for investments up to Rs.1.5 lakh in a Financial Year

Stocks Are Not Expensive. Time Is Right To Buy Stocks: Prashant Jain & S. Naren

2015-06-05T21:24:00.000-07:00

Most amateur investors are feeling wary of investing in stocks at present in the belief that stock prices have run up and are expensive on the basis of the expected earnings. However, this is not correct say Prashant Jain of HDFC MF, S. Naren of ICICI MF, Mahesh Patil of Birla Sunlife MF and Harsha Upadhyaya of Kotak Mahindra MF in their latest interaction with CNBC TV18.

Their advice can be summed up in clear-cut actionable points:

The market is up only 30% in 7 years. The present rally is a mere catch-up of previous years’ under-performance:

The Sensex is presently at 28,000. From January 2008 (over the last seven years, pre-Lehman crises), the market is up only 30 percent. However, the nominal gross domestic product (GDP) in rupee terms is up more than 100 percent. This means that the market has played a catch-up in the last one-one-and-a-half years.

Stocks are reasonable valued:

The price to earnings (PE) multiples are a fairly reliable indicator of how market tends to behave in the future over one to three year periods. If you look at the current PE multiples despite markets trading at 28,000, PEs are not expensive. They are quite reasonably valued. Interest rates are sitting at near peak and should move lower, economic growth should improve.

Strong earnings growth is expected. There will be an expansion in the EPS of companies:

The earnings growth momentum will probably pick up towards the end of this financial year. The commodity prices which actually took away some of the profits of Indian corporate will start acting as a positive trigger; they will start aiding margins going forward. We have also started seeing some amount of pickup in terms of government spend and there is some amount of volume growth. The operating leverage will kick-in and we will start seeing better numbers.

The market is in transition, the economy is improving. We will see economic improvement in the current year. Few lead indicators are already telling us that. Yesterday I met a company and they said that now trucks are not available, there is a waiting period of two to three months. I think we are seeing very good traction in roads, railways, in power transmission and distribution (T&D).

In the next few years the earnings growth should be very strong.

Invest in stocks with the long-term in mind:

Equities are a volatile asset class in the short run. It does not make sense to focus too much on the short run. The short-term focus takes people away from long-term substantial profits. Equities are a good promising asset class with a one-three year view.

Click here to read the entire article in moneycontrol.com

Is Nestle India A Good Buy After The Steep Crash In Stock Price? Basant Maheshwari & Prof. Sanjay Bakshi Explain

2015-06-05T21:20:00.002-07:00

Nestle India is one of those venerable blue chip powerhouse stocks that is used by stock market veterans as an example to illustrate the benefits of long-term investing. In just the past ten years (5th June 2005), the stock has given a return of 755%, which works out to an impressive CAGR of about 25%. If you go back further in time, the results are simply astounding.

Nestle India is also a rock steady stock. It is seemingly immune to all the ills that plague the other stocks. It is the ideal stock to have in the portfolio if you are allergic to erratic and volatile stock price movements.

The present crises over the presence of alleged lead content in Maggie Noodles have led the stock to plunge nearly 18%.

A lot of long-term investors who couldn’t muster the courage to buy the stock earlier owing to its exalted valuations are now feeling tempted to tuck into the stock.

However, stock veterans Basant Maheshwari and Prof. Sanjay Bakshi are opposed to the idea.

Basant Maheshwari opined in his latest interview in NDTV that the controversy is still fresh and could take an ugly turn before it fizzles out. He also pointed out that the valuations are still high (P/E of 47x) and that there could be more downside in store for the stock.

Basant also revealed that by temperament, he is not inclined to buy or hold stocks that are in troubled waters irrespective of their pedigree. He cited the example of Titan Industries which ran into turbulent weather some months ago due to the RBI norms on gold lending. Though Titan was Basant’s favourite stock, he wasted no time in dumping the stock.

Prof. Sanjay Bakshi echoed the same viewpoint in a note. The Prof acknowledged that Nestle is a “great business” and that the problem that it is presently facing is “one-time” and “solvable”. However, he opined that “one needs to wait to find the truth” and that it is “too early to jump and buy”.

Both stalwarts agreed that the “wait and watch” approach could lead to a missed opportunity. However, they were not perturbed by it. They said they would pay more for the certainty that everything is okay rather than to take the risk of more downside.

Two Top-Quality Stock Ideas Of Vikas Sethi Of Sethi Finmart

2015-06-05T21:14:00.001-07:00

In an interview with ET Now, Vikas Sethi has identified the following two stocks:

HSIL – dominant market share, attractive valuations and tremendous growth expected:

Today, I would like to recommend a stock which has seen a sharp cut in the recent days or fortnight. It has corrected close to 27% from its recent highs, despite having to do with anything negative as far as the fundamentals of the company are concerned. The name of the stock is HSIL, the Hindustan Sanitaryware India. This is a leading sanitaryware company in the country with a dominant 40% market share. The company has a very strong brand, variety of product portfolio, and a very strong distribution network across the country.

The kind of results which the company came out with for the March quarter was pretty good. After the recent correction, the stock has also started trading pretty attractive at around say 23-24 times its FY15 reported EPS, which is quite attractive for a company which is expected to grow tremendously in the coming years. So, I am bullish on the stock, and I feel one could buy into the stock at the current levels of 335 rupees and my target in a year’s time would be 550 rupees on the stock.

Dish TV – clear turnaround story set to go places:

My second bet is clearly a turnaround story. It is Dish TV, which is the leading DTH player in the country. The company came out with its March quarter numbers and they were simply fabulous. The company reported profit of around 35 crores versus around 150 odd crore losses, and if you look at the full financial year, the company has reported profits for the first time since inception. So, it is a clear turnaround story.

This company should go places in the coming quarters and years. I think it is just the beginning of their growth story. The stock presents a pretty good opportunity for long-term investors and I feel in a year’s time, we could see levels of 150 rupees on the stock.

Click here to read the entire article in ET

Punters Cry Foul At Mega Loss In Adani Ent Demerger Fiasco & Petition SEBI For Rescue

2015-06-05T21:12:00.002-07:00

Adani Enterprises has always been the punters’ favourite. Given the alleged closeness between its promoter, Billionaire Gautam Adani, and NAMO, any news relating to NAMO sends the stock either plunging or soaring. So, the stock is a favourite hunting ground for punters looking to make a quick buck.

Yesterday, Adani Enterprises was a bit sluggish. It opened at Rs 574 and began to drift. Given that NAMO has been receiving a bit of good press lately, Adani looked good for a couple of bucks. A few sharp punters loaded up on the stock and lay waiting in anticipation.

To the utter shock and disbelief of the punters, the stock price plunged all of a sudden to touch a low of Rs. 116, a whopping loss of 80%.

When the punters came to their senses, they realized that the reason for the plunge in the stock price was because the stock price adjusted for the demerger of the port to Adani Ports & SEZ and the demerger of the power and transmission businesses to Adani Power.

In the normal course of events, this would make no difference because investors in Adnai Enterprises as on the record date would be compensated by shares in Adani Ports & SEZ and Adani Power. The fall in the value of shares of one would be compensated by the rise in the stock price of the other.

Also, in the normal course of events, such a fiasco does not happen. The normal practice amongst stock exchanges in cases of demerger etc is to allow trading only at the price adjusted for the demerger or to have a special session for discovery of the price. There are a number of precedents for this including in the case of the demerger of Reliance Industries into the other Reliance companies.

Now, fortunately for the punters who are caught on the wrong foot, the Investors Grievances Forum (IGF) has come to their rescue. In a strongly worded letter addressed to SEBI, the IGF has alleged that the stock exchanges allowed trading in Adani Enterprises “by brushing aside and throwing all the norms” and in a “most shocking manner”. It is also alleged that the irregularity appears to be “deliberate and mala fide”.

The IGF has claimed that a “large number of gullible innocent investors” … having no knowledge of the “cunning way” in which Exchanges allowed trading of share of Adani Enterprises … have been trapped resulting into losses to them.

It is also stated that “vested interests in Exchanges with connivance of manipulators allowed trading” …. with “mala fide intentions to cause loss to large number of investors”. It is also alleged that there could be “instutionalised scams orchestrated and executed by the unethical highly qualified professionals”.

The IGF has pleaded for a time bound investigation so as to ensure that “the sanctity of the trading platform is always maintained and investors are not put to any loss by discriminatory treatments”.

Surprisingly, the IGF has not claimed that the transactions should be nullified and treated as null and void. It is a principle of contract law that anything done under a mistake is voidable.

Now, we have to see how SEBI and the stock exchanges react to this fiasco and whether the punters are able to get all or any of their losses back.

Click here to read the entire report in moneycontrol.com

Key Performance Indicators (KPI)

2015-06-03T03:53:00.003-07:00

What it is:

Key performance indicators (KPIs) are written goals for companies, departments within companies and often individual employees.

How it works/Example:

Let's say John Doe is the CEO of Company XYZ, and he wants the company to "produce higher-quality products" next year. How can John tell whether that has occurred? How will he measure it?
One way is through KPIs. He might, for example, tell his vice president of customer service that her bonus next year will depend on the following things:

Number of customer refunds for defective products decreases by 20% over last year.
Number of complaint-letter responses decreases by 10% over last year.
Number of repeat customers increases 5% over last year.

He might tell his vice president of production that her bonus next year will depend on the following things:

Number of defective products decreases by 30% over last year.
Production line stops no more than five times per year for retooling due to line problems.

And he might tell his vice president of procurement that his bonus next year will depend on the following things:

Less than 10% of supplies are returned to vendors due to defects

Every business's KPIs are different, but the idea is to give people measurable, indisputable expectations so that they know when they are succeeding and when they are failing.

Why it Matters:

The idea behind KPIs is that you can't manage what you don't measure. By breaking down goals into measurable pieces of work, KPIs help organizations reach their goals. They also improve morale by showing employees, in writing, exactly what they have to do to receive good reviews, raises or other incentives.
KPIs cannot solve every problem, however. Often, matters of culture, morale and ethics require a softer, intangible form of management.

Best execution refers to the imperative that a broker, market maker, or other agent acting on behalf of an investor is obligated to execute the investor's order in a way that is most advantageous to the investor rather than the agent.

Municipal Securities Rulemaking Board (MSRB)

2015-06-03T03:51:00.005-07:00

What it is:

The Municipal Securities Rulemaking Board (MSRB) regulates municipal bond underwriters and dealers in an attempt to prevent fraud and manipulation in the issuance and trading of municipal bonds.
Congress created the MSRB when it passed the Securities Acts Amendments of 1975. Before its creation, financial institutions that engaged in municipal securities transactions did not have to register with any regulator or with the Securities and Exchange Commission (SEC).

How it works/Example:

Despite its Congressional charter, the MSRB is a private entity funded and staffed by municipal bond underwriters, issuers and dealers. As a private entity, it regulates only its own members, although it delegates examination and enforcement of its rules to the National Association of Securities Dealers (NASD), the Federal Depository Insurance Corporation (FDIC), the Federal Reserve and the Comptroller of the Currency. The SEC also oversees the MSRB. All municipal bond dealers must register with the MSRB before he or she can engage in any municipal bond transactions. The MSRB does regulate issuers of or investors in municipal securities.
The MSRB has 15 directors on its board. Five of them represent bank dealers, five represent securities firms and five are members of the public who are not associated with any bank dealer or securities firm. One of these public members must represent a municipal bond issuer, and another must represent municipal bond investors. Directors serve staggered three-year terms.
When the MSRB wants to create a new rule, it publishes a proposed rule in its MSRB Reports newsletter. There is usually a 60-day comment period. The MSRB directors then adopt or drop the proposed rule, taking into account the feedback. If the MSRB adopts the rule, it passes it on to the SEC for review. If the SEC approves the rule, the MSRB publishes the rule in the Federal Register. Another comment period follows before the SEC can formally approve the rule.

Why it Matters:

The MSRB is the primary regulatory authority in the municipal bond industry. Its job is to create rules and regulations that prevent fraud or manipulative practices and promote fair trade, efficient trading operations and an open market. The MSRB also dictates professional qualification standards, recordkeeping standards, transaction standards and quotation standards. Although it is a private entity that is funded and run by the industry, the layers of federal oversight provide some backstop to any self-serving industry regulatory actions.

Mortgage Cash Flow Obligation (MCFO)

2015-06-03T03:51:00.001-07:00

What it is:

A mortgage cash flow obligation (MCFO) is a debt security that uses payments on a series of mortgages to fund principal and interest payments to MCFO holders.

How it works/Example:

An MCFO pays interest and principal payments at a specified rate similar to a bond. Monthly payments from a pool of underlying mortgages are bundled together and then used to make principal and interest payments on the MCFO. The MCFOs are unsecured and are issued in a range of classes, or tranches, that vary in risk.

Why it Matters:

It is important not to confuse MCFOs with collateralized mortgage obligations (CMOs). The two securities function in a similar manner, but CMOs have direct liens on the underlying mortgages (meaning the underlying mortgages are collateral for the CMOs). MCFOs are simply a contract -- MCFO owners have no legal rights to the actual underlying mortgages, meaning that all else being equal, MCFOs are riskier than CMOs.

Market Cannibalization

2015-06-03T03:50:00.001-07:00

What it is:

Market cannibalization refers to a reduction in sales volume or market share of a product as a result of the introduction of a new product made by the same company.

How it works/Example:

Market Cannibalization is also referred to as corporate cannibalism.
Market cannibalization occurs when a company's new product line crowds out the existing market for its current products, rather than expanding the company's market base as originally intended. In other words, rather than appealing to an additional segment of the market, a new product line appeals to the company's current market, reducing the demand for its established products. In this respect, market cannibalization is an instance in which a company's own two product lines compete against one another.
To illustrate, suppose a company, XYZ, reputed for its quality wristwatches, decides to introduce a line of belt-fob pocket watches in an attempt to capture a larger market segment. XYZ soon discovers that despite the successful rollout and high sales volume of its new pocket watches, its volume of wristwatch sales has taken a concurrent nosedive. The crowding-out of XYZ's wristwatch sales by its sales in pocket watches constitutes market cannibalization.

Why it Matters:

Market cannibalization can cost a corporation significant sums of money if it does not perform proper market research before a product is released. If a new version of a product is released too soon (to replace the company's existing product), or if a product is too similar to another product the corporation has released, it may end an existing product's life prematurely, hurting overall sales.