When to sell your stock

Consider a situation where you have to buy a stock at, say, Rs 100. See it climb to Rs 200 and then plunge back to may be Rs 80 in no time.

Then it takes months or may be years for that stock to reach Rs 200. You rue your decision not to sell when the stock had touched Rs 200.

Investor behaviour is motivated by greed. That makes us think that a rising stock will climb further. But until you sell, the capital appreciation is only on paper and, therefore, likely to vanish if prices start tumbling.

Yet, the right time to unload shares is one of the toughest calls an investor has to make. Even investment analysts and fund managers admit it can be difficult. Here are a few guidelines you can follow while making the decision:

Targeted return: Whenever you buy a stock maintain a target price at which you will sell the stock partially or fully. When the target price of your stocks has been reached, taking a selling decision is easy.

The targeted return could be 25 per cent or 40 per cent, based on your risk appetite or it could be based on what you think is the fair value for the stock. This discipline of booking profits will stand you in good stead as you will accrue profits, without giving in to greed during a rising trend.

Stop-loss trigger: By having a stop loss trigger you sell a stock, not to book profits, but to minimise your losses. A stop-loss sell order is a contingent order that will get triggered only if the stock does fall to a particular price.

For instance, the stock you have decided to sell is quoting at Rs 100. You have reason to believe that the stock will go up but you need to protect your profits.

So you may place a stop-loss order for the stock at Rs 80 as trigger i.e. in case it goes below Rs 80 you will compulsorily sell it.

Stipulated time or event: It may happen that you are targeting a specific sum for a particular event like a child’s education, marriage or vacation. In case you have an opportunity to realise this sum before the time period is over, you can do so and park it in a safer avenue such as fixed deposits, bonds.

By doing this, you may avoid exposing your investments to the volatility in the stock market closer to your goal.

Asset allocation: Sometimes, because of a relentless rise in a particular stock or stocks, the weight of that stock or stocks in your portfolio could rise substantially, making your portfolio lopsided.

Prudence demands that you reduce exposure to the stock to rebalance your portfolio. The change in asset allocation could also be due to change in preference with growing age.

As you grow older, try to increase the percentage of fixed income instruments in your investment portfolio.

Changes in fundamentals of the stock: There could be fundamental reasons why you should think of selling the stock that you have long owned. It could be a sudden about turn in the company’s financials or prospects — the loss of market share, declining margins, or liquidity problems that peg up the risk of holding the stock. By selling out now, you may get a chance to buy later at a lower price.

Mismanagement: In case you come across any mismanagement in the company or issues of corporate misgovernance then it is better to get rid of the stock at the earliest opportunity.

The Satyam Computer stock has been the sole stock not to participate in the recent market rally. A lesson that companies which lack in corporate governance may not benefit you in the long run.

New investment avenue: Another reason to sell your stock could be the opening up of a new investment avenue that can deliver better returns than your existing investment. While evaluating returns it is also necessary to evaluate risk, an investment that delivers a 12 per cent return with no risk may be superior to one which delivers 15 per cent with risk to your capital.

The above are some of the triggers for selling. There can be a few more which may be relevant to individual investors.

Whether it is a bull phase or a bear market rally, there will always be stocks in your portfolio that merit selling or replacing with other options.

Long term wealth creation requires you to be, not a passive investor, but an investment strategist who aims to maximise gains.

Booking of profits is not a bad idea at all; after all, it leaves you with liquidity, which can be handy when there is an opportunity to buy.

via Businessline

FAQs of NPS

* Who shall be responsible for protecting my interests as a NPS subscriber?

A) The Pension Fund Regulatory and Development Authority, the regulator, will protect your interest.

* What is the process for enrolling in NPS?

A) Eligibility: 18-55 years of age. Upon registration, you will receive a permanent retirement account number. Minimum annual contribution is Rs.6,000. The minimum number of instalments per year is four. There is no upper limit on the contribution per instalment or on the number of instalments.

*Would my personal information be confidential?

A) Yes.

*Under what circumstances can my account be closed before attaining retirement age?

A) The account would be closed under following circumstances: death, account value reduces to zero and change in citizenship status.

*Can I exit before attaining the age of 60 years?

A) Yes, provided you annuitise at least 80 percent of your pension corpus.

*What if I do not exit the system at or before 70 years?

A) In that case, on attaining 70 years, your account would be closed with the benefits transferred to you.

*Can someone else make contributions on my behalf?

A) Yes.

*What would be the penalty in case I am unable to contribute the minimum annual contribution?

A) You would have to bear a default penalty of Rs.100 per year of default and the account would become dormant. In order to re-activate the account, pay the minimum contributions, along with penalty due. A dormant account will be closed when the account value falls to zero.


*Are there any investment returns guarantees?

A) No. NPS is a defined contribution scheme and the benefits would depend upon the amounts contributed and the investment growth up to the point of exit from NPS.

* Will I be permitted to select more than one pension fund to manage my savings?

A) You have to select only one fund. However, the regulator may allow the subscribers to choose more than one fund in future.

* What if I do not select any investment option?

A) All your contributions would be channeled into a life-cycle fund.

* What are the risks of investing in NPS?

A) As with every investment, there is a degree of risk under NPS also. The value of your investment in NPS may rise or fall.

* I am 30 years old and would like to retire at 60. I want a pension of Rs.2,000 per month at today's prices when I retire. How much do I need to contribute?

A) You would need a pension wealth of Rs.319,000 (at today's prices) at the age of 60 to get a pension of Rs.2,000 per month. To realise this, you would need to contribute approximately Rs.16,600 every year.

* What will happen to my savings after I retire at 60?

A) You will have to compulsorily invest a minimum of 40 percent of your pension wealth to purchase a life annuity from an IRDA-regulated life insurer. The remaining pension can be withdrawn in lump sum or in a phased manner.

* What will happen to my savings if I decide to exit NPS before the age of 60?

A) You would be required to invest at least 80 percent of your pension wealth to purchase a life annuity from any IRDA-regulated life insurer. The remaining 20 percent may be withdrawn as a lump sum.

* Will the annuity also provide for a family (survivor) pension?

A) Yes, you will have an option of selecting an annuity which will pay a survivor pension to your spouse.

* On my death, can my nominee continue to operate the account in my name?

A) No, the balance standing to the subscriber's account may be transferred to the nominee's account after following regulator KYC procedure.

* Can I opt not to exit in case of disability?

A) Yes.

All about NPS - New Pension System

What is the New Pension System (NPS)?
It is a system where individuals fund, during their work life, their financial security for old age when they no longer work. All those who join up would get a Permanent Retirement Account (PRA), which can be accessed online and through so-called points of presence (PoPs).

A central record keeping agency will maintain all the accounts, just like a depository maintains demat accounts for shares. Six different pension fund managers (PFMs) would share this common CRA infrastructure. The PFMs would invest the savings people put into their PRAs, investing them in three asset classes, equity (E), government securities (G)and debt instruments that entail credit risk (C), including corporate bonds and fixed deposits.

These contributions would grow and accumulate over the years, depending on the efficiency of the fund manager. The NPS in this form has been availed of by civil servants for the past one year. Subscribers can retain their PRAs when they change jobs or residence, and even change their fund managers and the allocation of investments among the different asset classes, although exposure to equity has been capped at 50%.

Where can people sign up for the NPS?

People can subscribe to the scheme from any of 285 PoPs across the country. These are run by 17 banks — SBI and its associates, ICICI, Axis, Kotak Mahindra, Allahabad Bank, Citibank, IDBI, Oriental Bank of Commerce, South Indian Bank, Union Bank of India — and four other financial entities, LIC, IL&FS, UTI Asset Management and Reliance Capital. A subscriber can shift his pension account from one PoP to another. Subscribers can choose from six fund managers — ICICI Prudential, IDFC, Kotak Mahindra, Reliance Capital, SBI and UTI.

Is the scheme open to all?

NPS is available for people aged between 18 years and 55 years.

How often should a subscriber contribute to NPS?

The minimum amount per contribution is Rs 500, to be paid at least four times in a year. The minimum amount to be contributed in a year is Rs 6,000.

How will the subscribers get the money back?

If the subscriber exits the scheme before the age of 60, s/he may keep one fifth of the accumulated saving and invest the rest in annuities offered by insurance companies. An annuity transforms a lump sum spent on buying the annuity into a steady stream of payments for the rest of the annuity holder’s life. Now, how long an annuity buyer would live is something that takes a life insurance company’s expertise to compute and that is how they come into the picture. Insurance companies offer flexible investment and payment options on annuities. A person who exits NPS when his age is between 60 and 70 has to use 40% of the corpus to buy an annuity and can take the rest of the money out in one go or in instalments. If a subscriber dies, the nominee has the option to receive the entire pension wealth as a lump sum.

Is the scheme tax free?

Long term savings have three stages: contribution, accumulation and withdrawal. The NPS was devised when the government was planning to move all long term savings to a tax regime called exempt-exempt-taxed (EET), standing for exempt at the time of contribution, exempt during the period when the investment accumulates and taxed at the time of withdrawal. So, NPS comes under the tax regime EET. However, the government could not muster the political courage to change the taxation regime of EET on several saving schemes. So, the pension fund regulator has taken up with the finance ministry the need to remove the asymmetry in tax treatment between the NPS and other schemes such as the PPF. In any case, the amount spent on buying an annuity would be exempt from tax.

What is the default allocation of savings towards different asset classes for those who do not make an active choice?

For a saver not yet 35 years of age, half the investments will go into asset class E, one-fifth into asset class G, and the rest into asset class C. Above the age of 35, the default proportion going to equities would come down and the proportion going to government securities, go up. By the age of 60, these investments will gradually be adjusted so that only one-tenth remains in equities, another one-tenth in corporate bonds and 80% in central and state government bonds.

How does the NPS compare with mutual funds?

Since the NPS is meant for post-retirement financial security, it does not permit flexible withdrawals as are possible in the case of mutual funds. Fund management charges are ridiculously low (0.0009% a year), as compared with mutual funds. The cost of opening and maintaining a permanent retirement account, and the transaction charge on changing address, pension fund manager, etc are around Rs 400 now.

What kind of returns would the NPS generate?

The NPS generated an average return in excess of 14% in the last financial year, the first one in which it operated, handling the corpus of civil service pensions.

via ET

Take it easy policy

The crisis worldwide is surely impacting you as well. Here's how

Yes, all of us would like to believe that we are insulated from the spiralling subprime crisis. And why not, the economy is likely to grow by a good 8.5 per cent, corporate earnings have been reasonably good and credit growth is at a good 20 per cent.

The latter being a clear indication that consumption has not been drastically impacted. And there will be further credit off take during the buying season comes in October.

But here’s the bad news. The stock markets have been very turbulent and asset prices have been under pressure. Then of course, there has been inflationary pressures forcing the Reserve Bank of India (RBI) to hike indicative rates like cash reserve ratio (CRR) and repo rate to reign in liquidity.

As a result, Equated Monthly Instalments (EMIs) of homes have shot up by over 40 per cent leading to a rise in defaults. In the recent months, there has been slight softening of rates but there are expectations that it will harden again, if the inflation rears its ugly head again.

So what should you be doing now? For the stock market investor, most experts have a clear view. If you have stayed invested for some time, this is the time to raise some cash. That is, you could unwind some of the position that you have built up.

Arun Kejriwal, investment advisor is very clear about it, “If you have not raised cash till now, do it immediately, next week could be too late.” He advises raising almost 25 to 30 per cent and putting it aside now.

And if want to invest afresh, then do not put the entire money right now. Says Hemant Rustagi, Managing Director, Wiseinvest Advisors, “I am advising my client to invest about 30 per cent now and the rest over a time period of six months.”

His reasoning is that though there has been a sharp recovery, the market still looks too stressed. Kejriwal goes a step further with, “If you have been patient till now, continue to be so for some more time.”

As far as making big expenditures go, the plasma television or car you have been planning to buy on a personal or car loan may suddenly seems out of reach. And it is simply because of the fact that the interest cost has got higher. Says Harsh Roongta, CEO, Apnaloan.com, “Though it is completely dependent on your needs, buying through loans should be completely considered from the end result point of view.”

In other words, you need to ask yourself whether you would purchase that good, if there was cash on hand. “As far as purchasing of white goods on loans go, I am advising my clients against it,” adds Govind Pathak, director, Acorn Wealth. He feels that in high interest market, it is better to liquidate equity holdings for making such purchases.

Also, if you are looking at buying property, a first home, where you are going to stay can never be timed. However, if investing in a second property, you could wait for the asset prices as well as interest rates to cool off. In other words, this is a period when no decision is the best decision for you.