Prakash Lohana – Ascent Financial Solutions

What is the Total Expense Ratio?

Prakash Lohana — Mon, 19 Aug 2024 13:32:26 +0000

The Total Expense Ratio (TER) is a fundamental metric in mutual funds, indicating a percentage of a fund’s assets that investors pay to cover various operational costs. Here’s a breakdown to clarify:

Total Expense Ratio (TER):

Expense ratio is the fee or amount you pay to the mutual fund to manage your money. All the money given by investors to the fund is pooled together and invested in various assets, which earn returns for you.

However, there are various costs incurred by the fund in managing this large pool of money, and all these expenses are recovered from investors in the form of ‘Expense Ratio’. It’s expressed as a percentage of assets under management (AUM). The expenses typically comprise the fund managers’ fees, marketing and distribution costs, administration charges, audit fees, brokerage, etc.

You don’t pay this fee to the mutual fund separately. Expense ratio is deducted daily from the net asset value (NAV) of the fund before it is published on the AMC website.

Is there a cap on the expense ratio?

Sebi has prescribed limits for TER depending on the fund’s AUM and category. So, for the first Rs. 500 crore AUM, the maximum expense ratio is 2.25% for equity funds and 2% for debt funds; on the next Rs. 250 crore, it is 2% for equity funds and 1.75% for debt funds, and so on.

How does it impact returns?

The higher the expense ratio, the lower your returns. If you invest Rs. 1 lakh a year in a fund with a TER of 1.5%, you will pay Rs. 1,500 a year, which will be reduced from the returns earned by you.

However, expense ratio is not the only criterion you should consider while selecting a fund. It does not reflect a fund’s performance or indicate whether it is better or worse than others. So only if there are two comparable funds should you consider the expense ratio as a deciding factor.

Direct plans have a lower TER than regular plans and, hence, are cheaper. This is because you invest directly with the AMC without any intermediaries, and this cost is reduced by the fund.

How is it calculated?

It is calculated by dividing the fund’s total expenses by the average value of its total AUM over a year. Total expense ratio = total annual expenses / average of total assets * 100

So, if the average value of total assets in a year is Rs. 1,000 crore and the total expenses are Rs. 10 crore, the expense ratio will be

TER = 10 crore / 1000 crore * 100 = 1%.

This means that every investor will pay 1% of his total investment to the mutual fund each year. However, understanding TER is crucial for investors to evaluate the cost-effectiveness of mutual fund investments. By comprehending how TER impacts return and considering it alongside other factors, investors can make informed decisions that align with their financial goals and risk tolerance.

Source: The Economic Times

Mutual Fund Taxation: Post Union Budget July 2024

Prakash Lohana — Mon, 19 Aug 2024 13:17:54 +0000

*Note: Tax rate and holding period mentioned (for column “Now”) in this table are illustrative and not final. Depending on the acquisition and redemption date the tax rate and period of holding may differ, as elaborated in below table.

Source: Whiteoak Capital Mutual Fund

Also note: LTCG exemption of Rs. 100,000 (annually) on transfer of listed equity shares, equity oriented MFs u/s 112A is proposed to be increased to Rs. 125,000 (annually).

^ In additional to the rates mentioned above, additional Surcharge and Cess will be levied as applicable. ^^ In a case where the fund invests in the units of another fund which is traded on a recognised stock exchange,: (A) a minimum of ninety per cent of the total proceeds of such fund is invested in the units of such other fund; and (B) such other fund also invests a minimum of ninety per cent of its total proceeds in the equity shares of domestic companies listed on a recognised stock exchange. **Applicable to the extent classified as “Specified Mutual Fund” as per earlier definition.

***Applicable to the extent not classified as “Specified Mutual Fund” as per new definition. Source: Union Budget 2024 (23rd July 2024). The tax rates are provided based on the proposals in the Finance (No. 2) Bill, 2024 and are subject to change. The said proposals have not yet been enacted and are subject to passage of the bill by the Parliament and Presidential Assent thereafter. The information provided above has been prepared on the basis of internal understanding on the subject. Investors are requested to consult their tax consultant to understand individual nature of tax implications. Investment in Mutual Funds is subject to market and various other risks and there are various factors that can impact the performance of the scheme. It is advisable to consult with your financial advisor to understand these factors before investing. #The definition of specified mutual fund is proposed to be amended with effect from 1st April 2026 (therefore shall apply from AY 2026-27 i.e. financial year 2025-26) and above tables have considered the amendment for ease of understanding. STCG/LTCG = Short/Long Term Capital Gain.

Source: Whiteoak Capital Mutual Fund

Achieving Financial Freedom: Lessons from Independence Day

Prakash Lohana — Wed, 14 Aug 2024 12:41:51 +0000

Independence Day stirs a deep well of emotions in every Indian, evoking reflections on the nation’s journey to freedom. The Indian freedom struggle, marked by patriotism, resilience, and sacrifice, offers more than just historical lessons; it also provides valuable insights into personal finance.

“Just as our forefathers envisioned a free nation, envision a future where your financial freedom is your greatest asset.”

As we celebrate Independence Day on August 15th, it’s an opportune moment to focus on our individual pursuit of “financial independence.” Much like our country’s quest for freedom and self-reliance, achieving personal financial independence requires careful planning and disciplined strategies. This Independence Day, let’s draw inspiration from our nation’s path to sovereignty and explore seven practical steps to secure a robust financial future.

1. Set Clear Life Goals: Setting clear and measurable financial goals is crucial to achieving financial

independence. Just as the nation had a vision for its future, you should outline your personal financial objectives. These might include long-term goals such as buying a house, funding children’s education, or planning a special vacation. Short-term goals might involve saving for an emergency fund or paying off high-interest debt. Clearly defined goals act as a roadmap, helping you stay focused and motivated.

2. Analyze Your Cash Flows:

Understanding where your money is going is essential for effective financial management. Create a detailed budget to track your income and expenses. By analyzing your cash flows, you can identify areas where you might be overspending and find opportunities to save or invest more effectively. This discipline will help you avoid debt and ensure that you’re living within your means, enabling you to allocate resources toward your financial goals.

3. Invest Wisely:

Investing is a key component of achieving financial independence. Just as strategic planning was essential for India’s independence, a well-thought-out investment strategy is crucial for building wealth. The “ARC formula—Asset Allocation, Regular Investing, and Compounding” – can guide you towards your financial goals. Ensure a balanced mix of assets based on your risk tolerance and investment horizon. Delaying investments can result in lost compounding opportunities, so start early to maximize your returns.

4. Manage Risks and Build an Emergency Fund:

Financial independence also involves managing risks effectively. Adequate insurance coverage, including health and term life insurance, is essential to protect against unexpected financial setbacks. Additionally, build an emergency fund with enough savings to cover six months’ worth of living expenses. This fund acts as a safety net during times of income disruption, such as job loss or medical emergencies, allowing you to maintain financial stability without derailing your long-term plans.

5. Periodically Track and Restructure:

Regularly monitoring and adjusting your financial plan is crucial for staying on track. Just as India periodically reassesses its policies and strategies, you should review your financial progress and make necessary adjustments. Track your investments, reassess your asset allocation, and rebalance your portfolio as needed. This will help you adapt to changing market conditions and ensure that you remain aligned with your financial goals.

6. Focus on Estate Planning:

Estate planning is an important but often overlooked aspect of financial freedom. Proper estate planning ensures that your assets are distributed according to your wishes and helps prevent legal complications for your family. Prepare a will, list beneficiaries, and organize information about your assets and liabilities. This proactive approach will provide peace of mind and protect your family’s financial future in case of an unforeseen event.

7. Seek Professional Advice:

Consulting with a SEBI Registered Investment Advisor can provide valuable insights and help you develop a comprehensive plan to achieve financial independence. Advisors can support you in crafting a customized strategy, maximizing investments, and managing complex financial choices.

Conclusion:

Independence Day is a celebration of freedom and self-determination, values that resonate deeply with the pursuit of financial independence. By setting clear goals, analyzing cash flows, investing wisely, managing risks, tracking progress, planning your estate, and seeking professional advice, you can work towards achieving your own financial freedom. This Independence Day, take the opportunity to commit to a structured and disciplined approach to your finances, setting yourself on the path to a secure and independent future.

Achieving Your Dreams: The Power of Goal-Based Investing

Prakash Lohana — Tue, 23 Jul 2024 05:51:15 +0000

Introduction:

Imagine boarding a train without knowing the destination. You’d feel uncertain about where to get off, right? Similarly, investing in the world of investments without clear financial goals can lead to confusion and missed opportunities. That’s where goal-based investing comes in – it provides a structured approach to achieving your dreams and aspirations. Let’s delve into the essence of goal-based investing and how you can use it to pave your path to financial success.

Understanding Goal-Based Investing:

Goal-based investing is like setting GPS coordinates for your financial journey. By identifying specific goals, setting timelines, and allocating resources accordingly, you create a roadmap to guide your investment decisions. This ensures clarity, focus, and confidence in your financial strategy.

Steps to Goal-Based Investing:

Define Your Goals: Start by writing down your financial aspirations – whether it’s buying a home, funding your child’s education, or retiring comfortably. Consider the importance, priority, cost, and timeline of each goal to determine its significance in your overall financial plan.

Categorize Your Goals: Organize your objectives into three categories: Immediate, Intermediate, and Long-term goals. Immediate goals are those you aim to achieve within the next 3 years, while Intermediate goals have a timeframe of 3-7 years, and Long-term goals extend beyond 7 years

Establish a Timeline: Assign a realistic timeline to each goal based on its priority and urgency. This will help you prioritize and focus on the most critical objectives while ensuring steady progress towards long-term financial success.

Develop a Personalized Investment Strategy: Once your goals and timelines are established, it’s time to create a tailored investment strategy. Consider your risk tolerance, time horizon, and investment preferences to design a portfolio that aligns with each goal’s unique requirements.

Monitor and Adjust: Regularly review your investment portfolio and track progress towards your goals. Make adjustments as needed to stay on course, taking into account changes in market conditions, life events, and personal circumstances.

Benefits of Goal-Based Investing:

– Cultivates disciplined savings habits
– Leverages the power of compounding over time
– Provides clarity and focus in financial decision-making
– Offers a structured approach to achieving financial goals

Conclusion

Goal-based investing empowers you to take control of your financial future and turn your dreams into reality. By setting clear objectives, establishing timelines, and implementing a personalized investment strategy, you can manage the complexities of the financial landscape with confidence and clarity. Start your journey towards financial success today with goal-based investing as your guiding compass.

Key Takeaways

1. Goal-based investing offers a structured approach to financial planning, allowing individuals to establish precise goals, distribute resources, and progress towards long-term financial success with clarity and confidence.

2. Through disciplined savings habits and leveraging the power of compounding, goal-based investing fosters wealth accumulation, helping individuals achieve their aspirations efficiently and effectively.

3. By offering clarity and focus in decision-making, goal-based investing empowers individuals to monitor progress towards their goals, make informed adjustments, and stay on course towards realizing their financial dreams.

Buying A New Immovable Property In 2024?

Prakash Lohana — Tue, 23 Jul 2024 05:34:47 +0000

If you are planning to buy any Immovable property in India other than agricultural land, we have compiled some key points to be kept in mind for all resident as well as non-resident buyers.

As per section 194IA of the Income Tax Act 1961, Buyers of above category are required to deduct 1% of Total consideration as TDS on date of payment or credit to seller whichever is earlier.

This is applicable irrespective of property type ie. Residential or Commercial or Industrial.
Above provision is applicable only if sale consideration is Rs. 50 Lakhs or more.
Rate of 1% is increased to 20% if PAN of seller is not available.
Amount so deducted has to be deposited with Government through challan-cum-statement in Form No. 26QB which is to be filed electronically within 30 days from the end of the month in which the deduction is made.

Total consideration should be taken as higher of actual consideration and Stamp duty value of the property. For example, Mr. A purchase a flat in Mumbai for 55 Lakhs which has Stamp Duty Value of 50 Lakhs. If the Seller provides valid PAN to Mr. A, TDS of Rs. 55,000 (1% of 55 Lakhs) shall be deducted.

What can be the consequences if TDS is not deducted???

Income Tax Department can demand the amount of TDS as well as late fees from the buyer. For example, if a buyer buying a house of 1 Crore and is found guilty for contravention of this section, A demand of up to 20 Lakhs can be raised by the IT Department under worst case.

Mind map while transacting:

If TDS deduction required for property under consideration.
How to calculate total value of consideration.
If TDS is required to be deducted, at what rate and at which point in time.
When is the deadline to Pay TDS so deducted.
What if PAN of seller is invalid.

Bonus Question.

Suppose a couple Mr. A and Mrs. B (wife of Mr. A) buys a flat worth 80 Lakhs having stamp duty value of 82 Lakhs in combined name and makes payment of 40 Lakhs each on 15^th May 2024. Is TDS applicable? If yes, what should be the value of TDS? Till when should TDS be deposited?

Please comment your answers in the comment box and feel free to ask related questions or doubts.

3 Steps to get out of debt

Prakash Lohana — Fri, 19 Jul 2024 13:35:11 +0000

Make this a priority.
Debt is expensive – financially, emotionally, and mentally.
It increases stress levels and anxiety.
It keeps you emotionally obligated to individuals to whom you are financially indebted.

It has a huge financial cost. When you service your credit card debt of around 24% annualized, be extremely mindful of the fact that this debt costs you a lot more than you can ever earn elsewhere. Even if you are servicing a much cheaper loan – say 12% per annum, once you clear it, there is an immediate return there.

Remember, you are already dealing with inflation and taxes. Both affect current consumption. Both eat into investment returns. Both erode your personal wealth. Now, if you are also in debt and your income is also being diverted to service loans, your savings will take a massive hit. This triple whammy (inflation, taxation, and debt servicing) cripples your ability to save.

Control the narrative that plays in your mind.

Don’t live in denial. Come clean about it to your immediate family, spouse, or close friend. Talk to at least one person whom you trust. Not only does it help when you share the emotional load, but a discussion can also put things into perspective.

Own your mess. Did you take a loan to finance your spending? You may feel guilty. Did you do so because you squandered your money on gambling or trading? You may be ashamed. Did you take a loan because you desperately needed it for an emergency? You may feel cheated out of life or overburdened. Face the pain. Once you identify the emotion and name it, it becomes easier to deal with. Now you are ready to take the bull by its horns.

Look for solutions.

Take inventory. Make a list of everything you owe. Credit card debt, personal loans, education loans, vehicle loans, home loans, home improvement loans, and loans from family or friends. In an Excel sheet, list them in order of interest rate, and size (amount of outstanding). Once you stack your debt on both parameters, you are in a position to decide which route to take.

Identify loopholes. You need to up your savings game. So identify certain habits that will help you deal with this, at least until you clear a significant portion of your debt. Are you an emotional spender? Do you order in all the time? Are you hooked on online shopping sites? Narrow down on certain behavior patterns that you need to control.

Identify cheaper debt. If the interest rate of your credit card is destroying you with rates between 36% and 42% per year, look for cheaper avenues. You could get a personal loan at a cheaper rate. With that money, clear your credit card debt and service the less expensive loan. If you have a home loan, approach your bank for a top-up loan, which should be cheaper than the credit card debt. This way, you lower the pressure on interest payments.

Identify assets you can sell. If you have a fixed deposit, you could break it to clear your debt. However, this must only be done taking into account your overall financial situation, whether or not you have many dependents, and an Emergency Fund in place. Alternatively, in a raging bull market, you could sell some investments to get debt out of the way.

Devise a repayment strategy.

Debt Avalanche Strategy: The Focal point is the interest rate.

This is when you pay off your debts in order from the highest interest rate to the lowest, regardless of balance.

Say you have a credit card outstanding bill of Rs 40,000 at a 24% per annum interest rate. But your personal loan is 18% per annum. This strategy would require you to pay off your credit card bill with priority, as it has a higher cost.

But it does not imply paying off one loan to the exclusion of another. Make the minimum payment on each loan, while the extra money you have managed to save should be channeled into the one with the highest interest rate. Once you clear that, you move on to the next most expensive item outstanding.

Debt Snowball Strategy: Focal point being the size of the debt.

This time, the size of the debt is the issue, not the cost of it. Make the minimum payment on each loan, while the extra money you have managed to save should be channelized towards clearing the smallest debt. Once that is paid off, you move on to the next one, and the next, until you are debt-free.

If you have many loans, this is a good way to clear the clutter.

(In both strategies, an exception to the list could be the home loan, as it runs into decades and has a significant tax break associated with it.)

Both strategies will help you get on track and build momentum. The one you choose is completely dependent on your mental makeup.

Financially and theoretically, it is always better to pay off the highest-interest-rate debt first (Debt Avalanche). Get rid of the costliest debt because reducing the total amount of interest-paying liability would benefit the investor from a mathematical perspective when considering the total payment to clear the debt.

While the Debt Avalanche strategy makes sense financially and theoretically, what about psychologically? This factor can make or break the plan.

You may be desperate to get some sense of control. In that case, paying off the smallest debt first will help you get that sense of achievement. As Christine Benz says, anyone who has ever tried to tackle a daunting task–whether cleaning up a house after a dinner party or tackling a large project at work–knows that there’s great power in just taking those first small steps. The Snowball Strategy is kind of a behavioural trick, the idea being that taking small steps can lead to a sense of motivation and empowerment.

Nothing is written in stone. You can try a combination. If you are really saddled with debt, you can work on eliminating the smallest loan first to keep you motivated. After getting one or two out of the way, you can switch to tackling the most expensive debt. A word of caution here: Have a written plan that you adhere to. Or else you will be switching between the two constantly and not making much progress. Figuring out the right strategy is completely dependent on you and your mindset. You need to narrow down what drives you. If you are really overwhelmed and this advice does not help, then seek the services of a professional financial planner.

Source: MorningStar

Crafting Superior Portfolio Performance through Strategic Stock Selection

Prakash Lohana — Fri, 19 Jul 2024 13:31:52 +0000

At Franklin Templeton, our equity investment philosophy is anchored in a long-term perspective and a commitment to quality. Our rigorous, bottom-up research approach, coupled with a disciplined Growth at a Reasonable Price (GARP) strategy, ensures that we consistently identify and invest in companies with strong growth potential and sustainable competitive advantages. This article outlines our stock identification process, the benefits of thorough bottom-up research, and how our research team supports portfolio managers in delivering superior portfolio performance.

Our Equity Philosophy: The Foundation of Our Strategy

Our investment philosophy revolves around five core principles:

Long-term Approach: We focus on the enduring growth potential of companies, rather than short-term market fluctuations.

Institutionalized Process: Our research methodology is systematic and disciplined, ensuring consistency and rigor in our stock selection.

Bottom-up Approach: We prioritize the fundamentals of individual companies over macroeconomic trends.

Quality Orientation: We seek out companies with robust business models and strong management teams.

Growth at a Reasonable Price (GARP): We invest in companies with solid growth prospects that are trading at attractive valuations.

Stock Identification Process: The Q-G-S-V Model

Our stock selection framework is encapsulated in the Q-G-S-V model, which stands for Quality, Growth, Sustainability, and Valuation. This model ensures a comprehensive evaluation of each potential investment.

Quality: We assess the management’s track record, the business model, management guidance, and leverage. Quality companies have strong leadership, sound business strategies, and prudent financial management.

Growth: We analyze key financial metrics such as Return on Equity (ROE), Return on Capital Employed (ROCE), Return on Invested Capital (ROIC), and EBITDA. Scalability is crucial, as it indicates a company’s potential for sustained growth.

Sustainability: We evaluate the management’s vision, the variability, visibility, and predictability of earnings, and initiatives aimed at building a sustainable and profitable business.

Valuation: We employ various valuation methods, including Price-to-Earnings (PE), Price-to-Book Value (PBV), implied growth rates, and discounted cash flow analysis, to ensure we invest at reasonable prices.

The Benefits of Thorough Bottom-Up Research

A disciplined bottom-up research approach offers several significant benefits to our investors:

In-depth Understanding: It allows us to gain a deep understanding of each company’s intrinsic value and growth potential, ensuring we invest in high-quality stocks.

Risk Mitigation: By focusing on fundamental analysis, we identify potential risks early and take measures to mitigate them, thereby protecting investor capital.

Superior Returns: Our research-driven strategy helps identify companies with strong fundamentals, likely to deliver superior returns over the long term.

Supporting Portfolio Managers: The Role of Our Research Team

Our research team is integral to helping portfolio managers create and maintain high-performing portfolios. Here’s how our strategic focus areas contribute to superior portfolio performance:

Compounding Growth Ideas: We seek companies that are integral to India’s robust economic growth, can sustain high returns on equity, and demonstrate strong management capability. These companies exhibit recurring revenues and profitable reinvestment opportunities, supported by a track record of strong execution.

Cyclical Growth Orientation: We identify companies capable of generating positive cash flows and earnings growth at a rate faster than the industry or economy. These companies have sustainable competitive advantages and are valued reasonably compared to their peers.

Disruptive and Innovative Businesses: Our team identifies companies poised to benefit from disruptive changes within their sectors. We invest in those with the vision to capitalize on technological advancements, robust processes, and strong brand positioning to achieve long-term growth.

Contrarian Approach: We look for businesses with above-average ROE available at below-average prices. These companies have strong long-term fundamentals, good execution, and cash flow track records. Often, they possess hidden value underestimated by the market.

Conclusion

Our equity research framework is designed to identify and invest in high-quality companies with sustainable growth prospects. Through rigorous analysis and a disciplined approach, we aim to create long-term value for our investors. At Franklin Templeton, we remain committed to leveraging our research strengths to deliver superior portfolio performance and sustainable shareholder value.

By adhering to our principles and utilizing our comprehensive stock selection process, we continue to build portfolios that not only perform well but also withstand market volatility, ensuring steady growth for our investors.

Don’t Let Your Emotions Spoil Your Financial Planning

Prakash Lohana — Fri, 19 Jul 2024 13:28:39 +0000

Some of us may be astute financial planners under ‘normal’ circumstances. However, that seemingly surefootedness tends to lose its grip – when we come across either a great buying tip or a panic sale.

Suddenly, that financial plan is but a distant memory, and we’re posed to make a thoughtless decision that could cost us money. What happened? Why has our thought process changed?

Some call it the lizard brain, it’s a part of our brain that oversees the choices that were necessary to keep ancient humans (and ancient lizards) alike. The fight or flight response – or quick and impulsive behaviour without conscious thinking – may have been absolutely perfect for ancient lizards to survive but that’s not the way financial planning should be approached. So let’s talk about a few ways to regain control of your decisions.

We Can’t Let Our Lizard Brain Invest for Us

Investing requires you to work in a different state of mind than the lizard brain specializes in.

To invest well, you have to make a plan, pay attention to the long haul, and stay the course even when things get rocky. Your lizard brain, though, wants you to react quickly to whatever immediate threat you are facing.

In the abstract, you might not think about financial issues like losses to your portfolio as a threat; after all, it isn’t the kind of life-or-death threat the lizard brain was developed to handle. However, losses are often experienced in a physiological way, as if they actually are a physical threat.

Because our body gets hyped up, we might find it difficult to stick with conscious thought and not let our emotions make decisions for us, which can lead to investing errors when left unchecked.

How to Regain Control of Your Decisions

Fortunately, we’re not helpless against the tyranny of the lizard brain. Research suggests we can effectively regulate our emotions through cognitive change. Cognitive change is when we adjust how we think about the situation (or ourselves) to help alter our emotional response to it.

The next time you receive an investment tip that sets your pulse racing, pause for a moment and try one or all of the following approaches to properly analyse the situation first and ensure that your on-the-spot emotions aren’t clouding your long-term investment decisions.

Reset the emotion: Suppose you’re experiencing a negative emotion, don’t just give in. Instead, chin up and try and see the same emotion from a different angle. If it’s regarding missing out on a bull run, remind yourself that feeling a bit frustrated is normal. But instead of brooding, you can begin searching for individual stocks with strong fundamentals, where the ‘correct’ price discovery is yet to happen.

Relook at the problem: If a particular problem has been weighing you down, you ought to have a relook at the same issue. What if the problem, similar to the proverbial dark cloud, has a silver lining? For example, bearish markets can be an excellent time to adopt a contrarian attitude and buy fundamentally-strong stocks for the long-term.

Change your point of view: Sometimes, negative emotions can make it really hard for us to see the BIG picture. Some of us may have had the experience of helping friends/ family through moments of desolation and even panic by pointing at solutions that were already present but something they couldn’t see. Thus, try to take a step back and view your situation from the perspective of an objective observer. For example, if you’re feeling miserable that your bet on a certain stock has gone wrong, take a moment and ask yourself if your research on the company’s fundamentals is justified. If you are convinced that your research is rock-solid, buy some more of the same stock because the market will surely turn around sometime soon.

When our emotions get going, we tend to want to respond. By taking the time to reframe the situation, you can give your conscious brain a chance to catch up to your emotions before you act. Happy investing!

Source: MorningStar

Money lessons one can learn from Warren Buffett

Prakash Lohana — Wed, 19 Jun 2024 13:25:03 +0000

1. Do your own research: He believes in doing your own research. He likes to do analysis on his own by reading all financial statements. He said that you should buy companies which even a fool can run because someday a fool will.

2. Power of an economic moat: He is also fond of investing in the stocks of companies which have an economic moat around them. This means the companies with strong competitive advantage over competitors are likely to grow in the long run. “Great businesses are not all that common, and finding them is hard. Unusual factors combine to create the moats…” wrote Bill Gates in a 1996 article published in Harvard Business Review (HBR).

3. Investing is simple: He is one of the few investors who often asserts that investing is simple and it is unnecessarily complicated by some. He says that there are some fundamental rules and investors should stick to them and ignore the noise that comes.

4. Question your decision of investing: Warren Buffett is known for asking the right questions before choosing to invest in a stock. It’s vital to ask the right questions. By questioning every investment and stock, you will make better investing choices.

5. Overlook the noise: He believes that investing should be an objective decision and instead of following the market, it is advisable to ignore the noise.

There could be a euphoria or scepticism about a stock or sector, but it is advisable to ignore both the extremes and invest rationally.

Source: Mint

Return on Equity (ROE) Ratio:

Prakash Lohana — Mon, 17 Jun 2024 11:28:50 +0000

Return on Equity (ROE) Ratio serves as a vital metric in assessing a company’s financial health and its ability to utilize shareholders’ equity effectively for-profit generation.

The formula,

ROE = (Net Income / Shareholders’ Equity) * 100, unveils the percentage of net income derived from each rupee of shareholder equity.

For Example,

Suppose a company in India has a Net Income of ₹2,50,000 and Shareholders’ Equity of ₹8,50,000.

Return on Equity (ROE) Ratio = (₹2,50,000/₹8,50,000) * 100%

Return on Equity (ROE) Ratio = 29.4%

This signifies that, the Return on Equity (ROE) ratio for the company is 29.41%. This means that for every rupee of shareholders’ equity invested in the company, it generates approximately 29.41 paisa in net income.

Hence, ROE Ratio helps us figure out how well a company is using its investor’s money to make a profit. A higher ROE is usually good because it means the company is making more money with each rupee invested. But, it’s important to look at other numbers too, not just ROE, to get a complete picture. Investors use ROE to understand how likely a company is to grow and take risks. So, it’s like a helpful tool that gives us a peek into how smart a company is with its money, helping investors decide where to put their money.