Basics of Equity Research Career

If you have a knack of financial modeling and really passionate about analyzing companies and have a right attitude of putting time and efforts, equity research career is for you.

If you get a real high when you think of having your name on an equity research report, then start working towards it. Get the right skill set, start reading annual reports, and interpreting financial statements and valuing businesses.

What Do Equity Research Analysts Do?

Equity research analysts work on both—the buy side and the sell side.

What’s buy side? Buy side is typically indicates hedge funds, mutual funds or investment management companies.

What’s sell side? Sell side typically indicates investment banks and independent research companies.

On the sell side, researchers develop earnings models and carry out detailed company analysis and valuation.

So, for example, equity research analysts working on sell side typically would like to know whether TCS is better than Infosys for investment. They are assigned a particular industry/sector and know more about that sector and the players in that sector.

On the contrary, buy side analysts do not publish reports as sell side analysts do. They focus on 20-40 companies for investments.

As an equity research analyst, you need to study economy, industry and company to see macro and micro trends. There are two main frameworks in equity analysis—one is E-I-C and the other is C-I-E, based on the methodology.

Pay Package

Pay package of equity research analysts include salary plus bonus. Bonus depends on the performance of the analyst.

Work Culture

Work hours one needs to put are less in equity research, but 10 hours is the average in equity research.

Eligibility Criteria

Graduates/Postgraduates in Finance, Economics, Mathematics, MBAs, CFAs, and CAs are preferred for equity research role. You need to be proficient in MS-Office Suite, mathematics, analyzing companies, financial analysis, web searching, and writing reports are some of the skills required for this job.

Liquid Fund an alternative to Bank FD

Liquid Funds and Ultra Short Term Funds are debt mutual fund schemes investing in safe money market instruments and are better than Bank Fixed Deposits(FDs). They provide tax-free returns!! Liquid Funds are very safe debt instruments sold by mutual fund companies.

Liquid Funds are for the rich people while Bank Fixed Deposits are for the general public.

Liquid Funds à  No entry load, no exit load, no brokerage charge, no tax, you can sell even next day, invests in instruments having maturity of less than 90 days.

Mutual fund company pays 25% dividend distribution tax then the remaining comes into your pocket. The returns shown are post tax returns. You don’t pay any tax at your end (like you pay on Fixed Deposits). You can buy and hold the fund for many years without any problem. You can call your stock broker and buy these mutual funds.

Ultra Short Term Funds (also called Liquid Plus Funds) -à No entry load, may have 0.25% exit load if sold before 2 months(few schemes don’t have it), no brokerage charge, no tax, you can sell even next day, invests in instruments having maturity of more than 90 days.

Mutual fund company pays 12.5% dividend distribution tax then the remaining comes into your pocket. The returns shown are post tax returns. You don’t pay any tax at your end (like you pay on Fixed Deposits). You can buy and hold the fund for many years without any problem. You can call your stock broker and buy these mutual funds.

Liquid Funds/Ultra Short Term Funds invest in Govt Bonds, CD(Certificate of Deposits), CP(Commercial Papers), Reverse REPO, NCDs(non convertible debentures). They are extremely safe!  But the Mutual Fund company doesn’t guarantee any interest payment(though it pays interest every day since 2003). CDs have high liquidity while CPs have low liquidity, hence CDs are preferred.

Liquid Funds pay interest even on Saturdays and Sundays. You receive interest till the Liquid Fund is in your demat account.

For equities, more the investment holding period, more the safety. In debt markets, more the investment holding period, higher is the risk. So Liquid Funds have very low risk while Ultra Short Term Funds have low risk. Till now no Liquid Fund has ever defaulted.

To avoid risk, invest in 5 Liquid Fund schemes instead of a single Liquid Fund. If the corpus is more, invest in 15 Liquid Funds(diversification). Divide your investment into different Mutual Fund Companies to reduce risk.

Ultra Short Term fund is better than Liquid Fund if it does not have an exit load.

Factors to consider before choosing a Liquid Fund:

1)      Size of fund should be greater than Rs.1000 crores ideally. Minimum Rs.500 crores +

2)      There should not be any entry load, exit load, brokerage charges.

3)      Opt for daily dividend. There is no tax on dividends(at your end) but there is tax on growth option(tax  is paid at your end). Mutual Funds pay dividend distribution tax(internally) and the returns you receive are tax free returns.

4)      Payout (while exiting) should be on same day and not after 3 days(ideally).

5)      Fund scheme should be atleast 3 years old.

6)      No single investment done by the fund should be greater than 10% of its size. i.e. if the fund holds CDs of banks then ensure that it doesn’t hold any SINGLE CD investment(of any SINGLE bank) which is greater than 10% of the fund’s total size.

7)      Check the minimum investment required. For daily dividend, the minimum investment in most funds is HIGHER i.e. Rs.1 lakh. In such a case (for lower minimum initial investment) opt for weekly dividend or monthly dividend and growth option as the last resort (as you will have to pay tax on growth option).

8)      Check whether the payout (after exit) is via cheque or directly into bank account.

9)      Regular Option is for small retail investors. Institutional and Super Institutional option is for Big investors (minimum Rs.1 crore + investment).

10)   Check expense ratio of the fund (charged by AMC).

Pros & cons of investing in mutual funds

For investments in mutual fund, one must keep in mind about the Pros and cons of investments in mutual fund.

Advantages of Investing Mutual Funds:

1. Professional Management - The basic advantage of funds is that, they are professional managed, by well qualified professional. Investors purchase funds because they do not have the time or the expertise to manage their own portfolio. A mutual fund is considered to be relatively less expensive way to make and monitor their investments.

2. Diversification - Purchasing units in a mutual fund instead of buying individual stocks or bonds, the investors risk is spread out and minimized up to certain extent. The idea behind diversification is to invest in a large number of assets so that a loss in any particular investment is minimized by gains in others.

3. Economies of Scale - Mutual fund buy and sell large amounts of securities at a time, thus help to reducing transaction costs, and help to bring down the average cost of the unit for their investors.

4. Liquidity - Just like an individual stock, mutual fund also allows investors to liquidate their holdings as and when they want.

5. Simplicity - Investments in mutual fund is considered to be easy, compare to other available instruments in the market, and the minimum investment is small. Most AMC also have automatic purchase plans whereby as little as Rs. 2000, where SIP start with just Rs.50 per month basis.

Disadvantages of Investing Mutual Funds:

1. Professional Management- Some funds doesn’t perform in neither the market, as their management is not dynamic enough to explore the available opportunity in the market, thus many investors debate over whether or not the so-called professionals are any better than mutual fund or investor him self, for picking up stocks.

2. Costs – The biggest source of AMC income, is generally from the entry & exit load which they charge from an investors, at the time of purchase. The mutual fund industries are thus charging extra cost under layers of jargon.

3. Dilution - Because funds have small holdings across different companies, high returns from a few investments often don't make much difference on the overall return. Dilution is also the result of a successful fund getting too big. When money pours into funds that have had strong success, the manager often has trouble finding a good investment for all the new money.

4. Taxes - when making decisions about your money, fund managers don't consider your personal tax situation. For example, when a fund manager sells a security, a capital-gain tax is triggered, which affects how profitable the individual is from the sale. It might have been more advantageous for the individual to defer the capital gains liability.

Choosing the Right Bank for A Loan

Whether purchasing a vehicle, investing in a house or stuck in a financial crunch, borrowing money from a financial institution is the best means of getting the required funds. As easy it may sound, borrowing funds calls for plenty of efforts. A person has to chart out a plan for his borrowing needs and implement it wisely so as to escape any trouble later on.

Of all the stress one has to go through for getting a loan, finding a competent lender tops the list. Therefore, one should be very careful as choosing the right lender will not only eliminate the chances of any probable glitches, but will also help reduce the expenses of his undertaking.

First and foremost, the borrower should look around which means consulting everyone who has an experience of getting loans. This may include family members, friends, colleagues, kins and even neighbors. One can ask them about their lenders and how their experiences were working with those lenders. One can make a list of all the lenders suggested by people and note down their pros and cons as well.

Prodigious information about loans and lenders can be conveniently found over the Internet. So,one can spend a few good hours online searching for competent lenders. One can also search as per the list made after consulting people he knows. This will help him zero down his search and save plenty of time which can further be used to compare different lenders. While one is at it, he can search for competitive offers available online in order to nail a lot better deal.

Once he has narrowed the list down to minimum five lenders, he can call up the customer service of each one and inquire about interest rates, loan tenure, application fee and other costs. He must ensure that he is asking the same questions to each lender. It's important because he will have the same information to make comparison easier. In case he asks different questions to each lender, he will be, let's say, comparing the guavas, apples, grapes, pomegranates and pears. While with the exact details at hand, he will be comparing guavas to guavas.

One more thing to consider here is that the information gathering part should not take more than two to three days because if one takes longer, the market will probably fluctuate, resulting in different answers from each lender. During this digging into various lending institutions phase, one should also ask the institutions' representatives to explain the different types of loans. One should express his financial requirements and ask the representative to spell out the kind of loan that would best suit his situation.  

What is Equity Linked Savings Scheme ?

Majority of us rush up to our auditors/financial planners during the month of March for tax planning in order to invest upto Rs. 1 lakh that qualifies for tax exemption under section 80C of the Income Tax Act. We end up in paying LIC premium, PPF, NSC, 5 year bank FDs and other traditional tax savings instrument. Let me throw light on another option available to us – ELSS.

An ELSS – Equity Linked Savings Scheme is akin to a Diversified Equity Fund. It is a type of mutual fund that qualifies for tax exemption under section 80 c.  Also unlike those equity funds which require minimum investments of Rs. 5000, one can invest in ELSS with as low as Rs. 500 by means of SIP (Systematic Investment Plan). The returns from ELSS depend on the stock market and hence tend to be volatile, but then they are generally higher than the returns generated from traditional tax saver instruments.

Let’s find some more information on this scheme.

An ELSS is an equity oriented mutual fund scheme in which the majority corpus (about 80-100%) is invested in equities. As the allocation is done in equity which are considered as high return assets, the primary aim of such funds is capital appreciation. As it is linked to equity, it carries higher risk and is not as safe as NSC, PPF etc. It has a 3 year lock in period (which is very less compared to NSC, PPF etc.) post which it is like an open ended mutual fund. Investor needs to pay tax on premature withdrawal.

ELSS has 2 options: Growth Option and Dividend Option.

It is a classic investment option as it offers two benefits at once:

1. Capital Appreciation

2. Tax benefits

Tax Benefits in ELSS: Investment in ELSS is deductable from taxable income, hence reducing the taxable amount for the investor. Basically, the investor shall save tax at a rate depending on his income slab.

Tax free returns: Income/Returns on ELSS schemes (dividend and on redemption) is tax free under EEE (Exempt – Exempt – Exempt) regime of the Income Tax Act.

Hence, if you wish to save tax while offering your portfolio an extra edge on investing long term, ELSS schemes are designed for you!

Insight on Asset Allocation

Most important investment activity you can possibly do!!

While investing in different asset avenues, people generally listen to advice of relatives and friends, read newspaper articles, financial blogs & so on. This is because every investor normally comes across two questions:

1. What are the investment avenues available?

2. How much should I invest in each avenue?

An advice or suggestion which acts good for one investor may not be good for another. This is because every investors faces different factors such as risk tolerance (i.e. how much volatility I can handle?), time horizon (how long my asset should last?) and financial situation (i.e. lifestyle and current assets).

The answer to above situation is “asset allocation” constructed and executed in a right manner. Asset allocation is distribution of money across different investment avenues considering your risk tolerance, time horizon and financial situations.

Today, there are various investment options available such as equity, debt, real estate, precious metals, bond, cash etc.  But, how much an individual should invest in each of these assets differs from investor to investor. Every asset plays an important role in your portfolio. Hence, it is equally important to allocate or distribute your money across various assets in a right manner.  For instance, every time any investment asset moves higher, investors tend to invest a large portion in such asset, ignoring the other assets. Imagine if this asset decline to a great level in near future, the investor would lose a big amount of money. Hence to avoid such situations, no single asset should occupy a larger than necessary share of any investment plan. Having different assets in a portfolio is beneficial because different assets react differently to same factors. A decline in one asset can be partially offset with the presence of other assets, which are not witnessing the same decline. Hence, correct asset allocation protects the downside of an investor.

Assets are also diversified as per the risk tolerance level of an individual. For instance, an individual, age 27yrs, unmarried and has no dependents must form equity as a part of his portfolio, as he is young with more appetite for risk. In the long run equity can add a considerable value to his portfolio.  Similarly, a person with advanced age and having dependents has lower risk appetite and time horizon. Hence, he should include a lot of fixed income assets to his portfolio.

Asset allocation is not only to diversify across different assets, but one can also diversify within each asset class. For e.g. while investing in equity, one can further divide the funds in large-cap stocks which are less risky than small-cap stocks. One can have such endless combinations, but the main idea remains the same i.e. diversification by balancing the risk and return within the portfolio.

Asset allocation also helps in minimizing the tax to be paid, as different types of investments have different tax treatments. Assets can be allocated in such a manner that the after tax returns are maximized.

Now, that you have understood the importance of asset allocation, start categorizing your assets and liabilities. Create a table to assess where most of your assets are held. This will help you to understand whether your money is invested in a single asset class or evenly distributed. Once you understand your asset allocation you can now decide how to maximize returns and minimize risks by changing percentage of investment in each asset. You can make a financial plan too & get advice on your asset allocation.

Once you have formed your initial asset allocation strategy make sure to rebalance it from time to time to maintain the original asset allocation and to balance it as per market conditions.

Overall, a well constructed and executed asset allocation strategy provides consistent returns, reduces the volatility of the portfolio and pays off better returns over a long period of time, which naturally every investor desires.

Hence, follow the asset allocation strategy that is right for your investment objectives, your risk tolerance level and your investment time horizon. Happy Investing!