With a whole host of financial updates being thrown at you, learn to separate the wheat from the chaff
Nowadays, listed companies are tracked by almost everyone. There are whole lot of sources eager to share any and every piece of ‘information’ about themselves and their product(s). It is fashionable to issue daily, weekly, monthly, quarterly and annual updates about products, dividends paid and benefits being given. At times, even before one is able to go through the annual report, investors know about a company's next-quarter result.
Just like too much of food makes an individual obese and unhealthy, excessive information can make an investor indecisive. This can give rise to a situation where an individual invests in an investment avenue he/she may not be willing to or hasn't invested before. Let us look at some examples.
Stocks: The kind of pomp and show seen in financial and performance evaluation reports of companies is unparalleled. These days, a company’s annual report is supposed to run into 100-150 pages. Apart from financial data, it is beautified by way of charts, tables, photos and quotes. Concepts like earnings before interest, tax, depreciation and amortisation or EBITDA, consolidated accounts showing financial statement of holding company with subsidiaries, deferred tax, measurement of volatility or beta, quarter-on-quarter analysis of the results, so on and so forth may make investors jittery.
Also, topics like corporate governance, corporate social responsibility, micro finance and small and medium enterprises (SMEs), financial inclusion, and so on, form an important part of financial reports of all companies.
There will be another page dedicated to all the awards received by the company. Some sectors like banking see a variety of award categories. In a year, a minimum of 10-12 banks receive awards. Going ahead, the biggest worry will be to understand and interpret the new International Financial Reporting Standard (IFRS) norms.
Mutual funds: Most fund houses present a scheme like a stock or fixed income instrument. If you happen to fall into the trap, more problems await you.
Firstly, you will see at least 20-30 mutual fund schemes on a fund house’s web page or its fund factsheet. Then, you will have to decide whether you want a growth, dividend or dividend reinvestment option.
While making a performance evaluation, you will have to understand what is meant by benchmark, beta and Sharpe Ratio. Further, most fund houses give a table which shows a fund’s returns over a month, three months, six months, a year, three years, five years, may be even 10 years. For some even from inception.
Many may get confused as to which number to trust and invest in the scheme or the fund house.
Unit-linked insurance plans (Ulips): This product is the most difficult to understand. Mostly, these share less information about the product but provide complex mathematical models which calculate the projected return on investment. They also have a highly complex expense structure. Even after the deduction in the front loaded structure of Ulips, these continue to have high initial charges when compared to other financial instruments. And these charges put a lot of stress on returns. The initial cost on Ulips are such that in the first year itself, 10-15 per cent of your investment may get wiped out.
Investment Advice: One and all want to give advice to investors on what is good and what isn’t. The media - television, newspapers and web portals dish out analytical and research information. Some even put out a list of best 100 or 500 companies, as per their survey. And some companies in these lists turn into worst ones over years on account of loan defaults, incorrect accounting (Satyam) or poor corporate governance.
Investor should understand the information, analyse and take a well-informed decision. One should not be influenced by the hype or the overflow of information. Information should be such that can it be utilised fruitfully. The art of identifying right information comes from being analytical about investment decisions and not emotional.
Sources of information: Some good sources of information are the websites of the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). These give detailed information about all listed companies. Even Securities and Exchange Board of India (Sebi) can be checked for more information. For mutual funds, you may refer to the websites of Association of Mutual Fund in India (Amfi) and Sebi. Even few publications provide a lot of analytical updates.
The writer is a freelancer