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Breakout Trading: Definition, Pros, And Cons
Did you know there is a way for traders to make money when security breaks through support or resistance levels? In this blog, we will cover Breakout Trading in depth, including its method, pros, and cons.

What is Breakout Trading?

Traders who do breakout trading look for price levels that security has not been able to break through before and take advantage of the significant price changes that happen when the price does. In simple terms, Breakout trading is spotting the trend when a stock price breaks through the key level, like a resistance or support point. These levels are like roadblocks that the price struggles to pass, but when it finally passes through, it often triggers significant price movements, giving traders a chance to cash in. Price history, technical signs, and chart trends are often used to find such breakout points.

Strategy of Breakout Trading

Spotting Support and Resistance: On the chart, you need to find crucial support and resistance levels. The support level acts as the floor and the resistance acts as the ceiling. Look for the places where the price of the security has bounced back multiple times.

Keeping an eye out for breakouts: Always monitor the price of the securities for possible breakouts. Look for price changes that go beyond the established levels of support or resistance, along with a rise in trading volume and momentum.

Stop-Loss: Always place stop-loss orders to manage risks. This will help to limit potential big losses. Make a proper execution plan considering the risk-reward ratio and stick to it.

Profit Targets: The profit target needs to be set based on parameters such as distance between the support and resistance levels, volumes & momentum, market sentiments, etc.

Pros of Breakout Trading
1. Clear Exit & Entry Points: Breakout trading provides clear exit and entry points, which makes it easier for traders to execute trades.
2. Potential for significant gains: Traders can make substantial money when they correctly spot a breakout. The breakouts can lead to significant price movements, offering the potential for large profits.
3. Suitable for different time frames: The breakout strategy can be adapted to different time frames, whether you are an intraday or swing trader. The swing traders use daily or weekly charts, while intraday traders focus on minute or hourly charts.
4. Simple to understand & implement: The Breakout strategy can be used by traders of all experience levels as it relies on basic chart analysis and can be enhanced with other technical indicators, that are simple to understand and implement.
5. Universal Application: Traders can make use of the Breakout strategy across all asset classes, such as equities, currencies, commodities, etc., as it relies solely on price action.
Cons of Breakout Trading
1. False Breakout Signals: Dealing with false breakouts is one of the biggest challenges in breakout trading. A fake breakout happens when the price moves beyond a key level but quickly reverses, which results in a loss. If a false breakout is not managed properly, it can be frustrating and costly.
2. Large Losses: If there are chances of a huge profit, then there are also chances of large losses if the breakout fails. It is suggested that stop-loss orders be set to avoid significant drawdowns.
3. Constant Attention: Breakout trading often needs constant market tracking, due to the fast price changes, which can be cumbersome and time-consuming for many traders.
Tips for Breakout Trading
1. Using Multiple Indicators: By using multiple other technical indicators for confirmation, you can enhance your breakout strategy. Other indicators such as Bollinger bands, moving averages, MACD, relative strength index (RSI), etc. can help validate the strength of a breakout.
2. Risk Management: Develop a proper entry and exit plan before initiating a trade and rigidly follow the plan. Further, it is suggested to use stop-loss to protect your capital.
3. Keep yourself updated: Stay up to date with the market news and events that can impact the price movements of the overall market or securities you want to trade.
4. Trading Journal: Record your trades, including entry and exit points, stop-loss levels, profit targets, and the rationale behind each trade, and review your journal regularly. It will help you learn from your successes and mistakes.
Read Also: Descending Triangle Pattern in Stock Trading

Conclusion

In summation, the Breakout trading is a powerful strategy that, when used properly, may provide substantial profits. With its clear entry and exit points, it has the potential to generate significant gains. Traders may increase their chances of success by learning what breakout trading is, putting a well-defined strategy into practice, and being aware of its benefits and drawbacks.

Breakout trading takes patience, discipline, and ongoing learning, just like any other trading approach. As everything in this world has two sides, breakout trading also carries certain limitations. You must be careful about the risks that come with it.

Despite the risks, breakout trading can help you achieve your objectives and capitalize on market opportunities when combined with other technical analysis tools and risk management techniques. Whether you are new to trading or looking to diversify your strategies, breakout trading is worth considering to capture market moves.

Frequently Asked Questions (FAQs)
1. What is breakout trading?
  In breakout trading, traders wait for a security’s price to break through important support or resistance levels, indicating a potential move in one direction.
2. What do you mean by a breakout in simple terms?
  In a breakout, a stock’s price surpasses a support or resistance level, accompanied by increased trading volume, which signals a potentially significant move in that direction.
3. What are the benefits of breakout trading?
  There are many benefits of breakout trading, such as the chance to make substantial profits, clear entry and exit spots, and the ability to profit from strong market trends.
4. What risks are there in breakout trading?
  One of the risks in breakout trading is false signals, which happen when the price returns to the initial price after breaking a key level.
5. Is breakout trading good for beginners?
  Although newbies can use breakout trading, they must learn to find key levels, trading nuances, and proper risk management. Further, it is suggested that virtual trading be started first and gradually start with real money.

June 20, 2024

Top 10 Tax Saving Instruments in India

Even when you put much effort into earning your money, paying taxes might be uncomfortable. However, you can access various financial tools to invest, lower your tax liability, and retain a larger portion of your earnings.

This blog will explain the various tax-saving options and how they work.

Best Tax Saving Instruments in India

It is an investment product carefully chosen to lower the investor’s tax obligations. By investing in these tax-saving strategies, you can reduce the amount of tax you owe by reducing your taxable income.

There are numerous ways to save taxes, a few of which are included below:

1. Equity Linked Savings Scheme (ELSS)

You can deduct up to 1.5 lakhs from your taxes under Section 80C when investing in mutual funds under the ELSS category. Since the fund manager must allocate at least 80% of total assets to equity-related instruments, the returns offered by this type of mutual fund depend on the market. There is a three year lock-in period on this scheme. You can invest a minimum of INR 500 in this category.

2. Public Provident Fund (PPF)

One of the most popular tax-saving options for investors is PPF. It has a statutory lock-in duration of 15 years and is backed by the Indian government. The government announces the interest rate investors would earn on this product every quarter. This rate is fixed for the duration of the quarter. Investors have less liquidity because of the required lock-in time.

3. Senior Citizen Savings Scheme (SCSS)

The post office offers this product for elderly persons (those over 60) or retired. Under Section 80C, tax benefits are up to 1.5 lakh INR. An elderly person may invest a maximum of INR 30 lakh. The central government sets the interest rate that must be paid on it. Interest received under this plan is subject to taxation based on the taxpayer’s applicable slab.

4. Sukanya Samriddhi Account

This program aims to improve the welfare of Indian girls. It is especially popular with people who want to ensure their daughter’s financial future, as this scheme is backed by the government. Under this program, guardians may open accounts in the names of minor females under the age of ten. A family may open up to two accounts. The government modifies the interest rate under this program every quarter.

5. Tax Saver Fixed Deposit

Banks offer Tax-saving fixed deposits and provide benefits under Section 80C, and investors can claim tax deductions up to 1.5 Lakhs under this investment option. This product comes with a mandatory lock-in period of 5 years. The interest earned can be taxed per the investor’s tax slab.

6. National Pension Scheme (NPS)

NPS is a defined benefit plan supported by the Indian government and overseen by the Pension Fund Regulatory and Development Authority (PFRDA). Under this approach, a person can open Tier 1 and Tier 2 accounts. However, only contributions made through a Tier 1 account are eligible for the Section 80C tax deduction. In addition, there is a 50000 INR extra deduction available under Section 80CCD(1B).

7. Unit Link Insurance Plan (ULIP)

This investment product gives you the advantage of investment returns and life insurance coverage in a single product. Part of the premium will go towards providing life insurance coverage and the remainder will be invested in market-linked securities. Usually, this product has a five year lock-in period. The investor can select the fund that best suits their risk tolerance.

8. Life Insurance

A Section 80C tax deduction is available for paying insurance premiums to cover an individual’s life. In the sad event of the policyholder’s death, life insurance offers financial protection to the individual because the sum assured would be paid to the nominee. The death benefit earned under this insurance product is tax-exempt under Section 10(10D).

9. National Savings Certificates (NSC)

The Indian government is making this investment scheme available through post offices nationwide. The Indian government also sets the interest rate under this, compounded annually and due at maturity. Under this initiative, a minimum investment of INR 1000 can be made. It has a five year lock-in period. It is popular among investors who cannot afford to take financial risks because it is supported by the Indian government.

10. Capital Guaranteed Plan

It’s an investing plan that provides both money preservation and growth. Investors might benefit from this product by knowing their capital will be shielded from market fluctuations. This is a low-risk investing alternative. You may deduct the amount of your investment from taxes under Section 80C.

Differences Between Various Tax Saving Instruments

Product	Returns	Lock in (Period)
Equity Linked Saving Scheme (ELSS)	Market-oriented	3 Years
Unit Linked Insurance Plan (ULIP)	Market-oriented	5 Years
Public Provident Fund (PPF)	Fixed interest (Decided by the government)	15 Years
Senior Citizen Savings Scheme (SCSS)	Fixed interest (Decided by the government)	5 Years
Sukanya Samridhi Yojna	Fixed Interest (Decided by Government)	21 Years
National Pension Scheme (NPS)	Market Linked	Till 60 years of age.
Life Insurance	Fixed Sum Assured	Depends on Scheme
National Savings Certificate (NSC)	Fixed Interest Rate (Decided by Government)	5 Years
Fixed Deposit	Fixed Interest (Decided by financial institution)	5 Years
Capital Guaranteed Plan	Market Linked	5 Years

Which Product Should an Investor Choose?

The market offers a wide range of investment possibilities to save taxes under Section 80C; however, all investment products that provide a tax benefit have a mandatory lock-in term, which reduces the investor’s liquidity. Because every product has advantages and disadvantages, an investor’s risk tolerance and investing objectives are the primary determinants of choosing the best investment.

Conclusion

Finally, you are aware of the several types of tax-saving options. Since each instrument has unique characteristics, the optimal choice will rely on the investor’s investment goal and risk tolerance. However, you should speak with your tax counselor before choosing one.

Frequently Asked Questions (FAQs)

What is the maximum deduction I can get under Section 80C?
150000 is the maximum deduction one can claim under Section 80C.
Can I invest in multiple tax-saving instruments in a financial year?
Yes, you can invest in multiple tax savings instruments in a financial year, but you can claim a maximum deduction of INR 150000 in a financial year under Section 80C.
How does Section 80C help us in saving tax?
Various financial instruments are available under Section 80C for investing purposes, allowing you to claim annual deductions of up to 1.5 lakhs.
Which tax-saving instrument has a minimum lock-in period?
Equity-linked savings schemes have the lowest lock-in period of 3 years.
What is the mandatory lock-in period for public provident funds?
The mandatory lock-in period for public provident funds is 15 years.

June 20, 2024

What are Bond Yields?

People often ask how investing in bonds works and what the term “bond yield” means. If you are looking to invest into fixed-income securities such as bonds, understanding bond yields is fundamental. In essence, bond yield is the return that an investor would receive from a bond over a period of time.

In this blog, we are going to explain the meaning of bond yield in detail and its importance. Moreover, we will walk you through the different types of bond yield.

What are Bonds?

Bonds are fixed-income investment instruments that corporations or governments issue to collect money from investors. These institutions borrow the funds at a fixed interest rate for a defined period to finance their projects and activities.

What is Bond Yield?

A bond yield is the return an investor earns from a bond investment, typically expressed as a percentage. It includes income from coupon payments and any capital gain or loss due to changes in the bond’s market price. Bond yields help the investors to compare the returns or risk associated with different bonds.

Buying a bond means you are lending money to the issuer in exchange for coupon payments based on a set interest rate. The return from price increase or decrease depends whether the bond has been bought at a discount or a premium as the bond price moves towards face value as it matures. The yield is inversely proportional to the bond’s market price as when prices of bond rises the yield decreases and vice versa.

Types of Bond Yield

Various types of bond yields are:

Coupon Yield: It is the annual interest received by the bondholder from the issuer and is expressed as a percentage of the bond’s face value.
Current Yield: It is calculated as annual interest received divided by current market price of the bond.
Yield to Maturity (YTM): It is the total return expected if a bond is held to maturity.

Overview of Different Types of Bond Yield

Based on these explanations, let us see the fundamental types of bond yield which helps us in comparing different bonds. Every type reveals a different story regarding how much you may anticipate earning from a bond investment. Let’s look at them more closely.

1. Coupon Yield

Of all the yields, coupon yield is the simplest. It has a fixed rate that the bond issuer must pay during the lifespan of the bond.

Coupon Yield = (Annual coupon payment / Face Value) * 100

Suppose you purchase a bond with a face value of ₹1000 and it pays an annual interest of ₹100. The coupon yield becomes: 100/1000* 100 = 10%

The coupon yield remains static for the entire duration of the bond. Regardless of the price movement of the bonds, which could be upwards or downwards, coupon yield will always remain stagnant and is always positive.

2. Current Yield

Current Yield is the yearly interest (coupon) payments received from the bond divided by the bond’s current market price.

Current Yield = (Annual Coupon Payment / Current Market Price) X 100

Consider that a bond with a ₹1,000 face value and a ₹100 coupon that is currently selling for ₹900.

Current Yield = (₹100 / ₹900) x 100 = 11.1%

Current Yield tells us about the actual interest return the investors will get based on today’s market price. This metric can be either greater or lesser than the coupon yield and changes as bond market price changes.

3. Yield to Maturity (YTM)

Yield to Maturity or YTM calculates the total return that a bondholder can expect to earn if the bond is held till maturity, it is regarded as the best way to measure your returns as it is based on the following:

The market price of the bond at current price,

Coupon payments,
The remaining time until the bond matures,

YTM = [ Annual Coupon payment + (FV – PV) ÷ T ] ÷ [(FV + PV)÷ 2]

Where,

FV = Face value

PV = Present value

T = Years to Maturity

For instance: If you purchase a bond today for ₹950, it has a face value of ₹1,000 with a ₹100 annual coupon and it will mature in 5 years, then the YTM is 11.37%.

Why Does It Matter?

YTM allows a more accurate assessment of your returns as it takes into account future price changes, the time to maturity, and reinvestments as well.
It is considered best for long term investors that intend to hold onto the bonds until they mature.

Real-world Implications of Bond Yield

Increasing Interest Rates = Decreasing Bond Price = Increasing Yield

When the market’s interest rate goes up, the existing bonds are sold at lower prices hence their yield increases as they will be trading at a discount to face value and increase in value with time.

Decreasing Interest Rate = Increasing Bond Price = Decreasing Yield

Older bonds with higher coupons payment become more attractive and therefore their price increases.

Things To Consider Before Investing in Bonds in India

You should consider the following points before investing in Bonds in India:

1. Consider The Coupon Rate: Look for reputed companies offering bonds with higher coupon rates. Moreover, investors must purchase bonds with coupon payments that align with their passive income targets.

2. The Credit Rating of the Issuer: Bonds with a higher rating are less prone to default, although they typically have lower yields. Junk bonds or lower-rated bonds carry greater risk, but they also have higher yields.

3. Inflation: If inflation exceeds the bond yield, the real return is negative. Always measure the yields against expected inflation before investing.

4. Maturity Period: Bonds with longer durations typically offer higher yields but are more vulnerable to interest rate fluctuations.

5. Liquidity: Some bonds are more liquid than others, which makes them easier to sell and buy. Therefore, they are more desirable and less risky. Less liquidity may translate to higher yields due to liquidity premium.

6. Reinvestment Risk: It is relevant in situations where coupon payments received may have to be reinvested at a lower rate, thus reducing overall yield.

7. Taxation: Different bonds incur different tax obligations. Tax-free bonds, for example, may have lower yields, but provide better returns than taxable bonds after tax is applied.

8. Market Sentiment: Bond prices and consequently yields can be affected by economic news, geopolitical issues, and the activities of other investors.

9. Type of Bond: Government-issued bonds such as debentures, corporate bonds, and municipal bonds come with different levels of risk and return.

The Advantages and Disadvantages of Bond

Advantages

Predictable Income: Bonds provide coupon payments at regular intervals, which benefits the income-dependent investors.
Risk Diversification: When bonds are combined with equities in an investment portfolio, volatility is significantly reduced.
Variety: Investors have the freedom to select from a broad spectrum of bond issuers, based on their financial goals and risk tolerance.
Market Indicator: Yields indicate the average investor’s perception regarding interest rates and inflation.

Disadvantages:

Interest Rate Risk: When the interest rates increase, it directly affects the bond’s prices negatively.
Credit Risk: There is always a possibility that the bond issuer may default.
Inflation Risk: The nominal returns may be greatly reduced in the event of extremely high inflation.
Complexity: For novice investors, distinguishing different types of yields (YTM, YTC, etc.) can present a steep learning curve.

The Importance of Bond Yields for Indian Investors

There are people who seek low-risk investments in bonds and must carefully analyze bond yield metric as.

Government securities or G-Secs provide low returns but maximum security.

Corporate bonds provide high risk and better returns.

For instance, in early 2025, a 10 year Indian Government Bond had a yield of approximately 7.15% and AAA rated corporate bonds yield between 7.8%-8.5%.

Who Should Invest in Bonds Based on Yield?

Elderly people in retirement seeking constant cash flow.
Risk-averse investors
Investing in bonds can diversify the investment portfolios.

Bond Yield Trends in 2025

Due to a decrease in repo rate and stability in Indian equity markets, bond yields have decreased since the beginning of 2025. Other factors like the dollar index and economic indicators also play a huge role.

Investors are now looking closely at:

– Shorter-term G-Sec bonds (6.8-7.2% returns)

– Long-term corporate bonds (up to 8.5% returns)

Conclusion

So, what is bond yield really about? In simple words, bond yield is simply the annualized income you gain from a bond investment. Understanding the bond yield and rating helps you determine if investing in a particular bond is beneficial or not compared to other investment options available.

Some of the factors affecting bond yields include interest rates, credit rating of the issuer and inflation. Understanding and comparing yields will grant you the opportunity to make more strategic investment decisions. It is advised to consult a financial advisor before investing.

Frequently Asked Questions (FAQs)

What factors determine the yield on government bonds in India?
The yield on government bonds in India is determined by market demand and supply, interest rates set by the Reserve Bank of India (RBI), and the overall economic conditions.
What is the difference between bond yield and interest rate?
Bond yield is the expected return on investment considering both the coupon payments and any change in bond prices. On the other hand, interest rate refers to the cost of borrowing the money that the issuer pays to bondholders.
How does bond yield change over time?
Market demand, interest rates, and credit ratings heavily influence bond yield.
Is higher bond yield always better?
Not always as higher yields could mean higher risk. Always consider the issuer’s credit rating.
Can bond yields go negative?
Rarely, but in scenarios of deflation or extreme demand, it’s possible.
In what ways can I invest in bonds in India?
You can invest in bonds through online platforms, debt mutual funds, etc.
Why do government bond yields act as a benchmark for other interest rates in India?
Government bond yields are considered risk-free and reflect the government’s borrowing cost. They serve as a benchmark for setting interest rates on other loans and securities in the market.
How do I invest in Bonds?
Government bonds in India can be purchased directly from the RBI Retail Website. Corporate bond investments can be made through a financial institution or trusted broker. ETFs and other mutual funds are also a good option for investing in bonds in India.
What is the significance of the yield curve in the Indian financial market?
The yield curve represents the yields of bonds of different maturities. A normal upward-sloping yield curve indicates healthy economic growth, while an inverted curve may signal a potential recession.
What are the risks involved in investing in G-Sec bonds?
G-sec are generally referred to as risk-free instruments, as sovereigns rarely default on their payments. However, market, liquidity, and reinvestment risks exist even in G-sec bonds.

June 19, 2024

What is Pledging of Shares?

At one point or another, we may find ourselves in a situation where we require a certain amount of capital. A common solution to this is borrowing a loan by pledging an asset for the monetary requirement.

Property, home, car, deposits, etc., are the most popular collateral options for getting a loan. But have you heard about pledging shares? Yes, you heard it right; most investors and promoters use this practice to collect funds. Let us learn more about its regulatory implications, requirements, advantages, and disadvantages.

What is Pledging of Shares?

Share Pledging is an agreement in which one uses existing shareholdings as collateral to raise funds for one’s investing needs for a specified period. In this process, a shareholder (the pledgor) uses their shares as security credit, also called collateral margin, to borrow against them.

The pledged stocks don’t leave the borrower’s demat account during the tenure of the borrowing. Instead, a pledge is marked on behalf of the broker under a separate demat account labelled ‘TMCM – Client Securities Margin Pledge Account’ for this purpose (TMCM stands for Trading Member Clearing Member). The broker then re-pledges these securities in favour of the Clearing Corporation and obtains margins.

If the pledgor fails to meet the loan obligations, the pledgee has the right to sell the pledged shares to recover the outstanding amount.

How Much Amount Can One Borrow Against the Shares?

Knowing that the value of shares is volatile, it is obvious to get the question of the amount of funds one can raise by putting the shares as collateral. Fluctuations in the market value of pledged shares affect the collateral’s value. Investors must ensure the collateral value meets the minimum agreed upon in the contract. When the shares’ value drops below the minimum level, the borrower must provide more shares or pay cash to cover the shortfall.

According to RBI regulations, a loan-to-value (LTV) ratio of 50% must always be maintained when lending based on a stock pledge.

First, shareholders or promoters approach a financial institution to express their intent to pledge their shares to get a loan. To determine the loan amount, the lender assesses the shares’ quality, liquidity, and volatility.
Upon approval, both parties enter into a formal pledge agreement. This document has details of the terms and conditions, including the loan amount, interest rate, tenure, and conditions under which the lender can sell the shares.
Lenders typically do not provide loans equal to the full value of the pledged shares. They apply a margin, popularly known as a “haircut“, which is a percentage reduction from the market value of the shares. It serves as a buffer in case the stock price drops.
Once the loan is repaid, the investor can request the lender to release the pledge, regaining complete control over their shares.
If the borrower defaults or the share price falls below a certain threshold, the lender can sell the pledged shares in the open market to recover their dues.

Imagine a public company, XYZ Industries. You have 1,000 shares of this company worth ₹50,000. The share has been constantly performing well, and you don’t want to sell it. However, you need ₹40,000 for your new project.

You approach a financial institution and pledge 1,000 of your shares (worth ₹50,000) to get a loan of ₹40,000. The bank agrees to lend you ₹40,000, but they keep all 1,000 shares as security.

Who Can Pledge Shares?

Promoters are typically the founders or the company’s primary owners who have a significant stake in it. They often pledge shares to raise capital for business expansion and personal needs or to finance new projects without diluting their ownership in the company.
Institutional Investors include entities like mutual funds, insurance companies, and pension funds that hold large shares in various companies. They can pledge shares to raise short-term liquidity or to leverage their investment positions.
Individual Shareholders who own company shares, not necessarily in large quantities. Individual shareholders can pledge shares to meet financial needs.
Companies that hold shares of other companies as part of their investment portfolio. Companies might pledge these shares to raise funds for working capital, debt repayment, or strategic investments.

The following are some benefits of Share Pledging:

Share pledging allows shareholders to access funds without selling their shares, which is useful for personal or business financial needs.
Shareholders retain ownership and voting rights by pledging shares instead of selling them.
Shareholders can leverage their holdings to obtain loans for further investment or expansion, potentially enhancing returns.
Pledged shares can be released once the loan is repaid, offering a flexible financing option without permanent loss of ownership.

The following are some limitations of Share Pledging:

If the borrower fails to repay the loan, the lender can sell the pledged shares, resulting in a loss of control.
The value of pledged shares is subject to market fluctuations, which can lead to additional collateral demands or share sales by the lender if prices drop significantly.
Loans obtained through share pledging come with high interest and fees.

Conclusion

Following a structured approach, pledging shares is viable for stakeholders seeking liquidity without selling their holdings. While keeping shares as collateral, one has to pay an interest rate on the loan. Thus, getting good shareholding returns will be a good option to mitigate this interest expense. Understanding share market indicators and trends is essential to making an informed decision.

Frequently Asked Questions (FAQs)

How does share pledging impact the voting rights of shareholders?
While pledged shares usually retain voting rights, lenders may impose conditions restricting the pledger’s ability to vote on certain critical issues to protect their interests.
What is the limitation of pledging shares?
If the borrower fails to repay the loan, the lender can sell the pledged shares, resulting in a loss of control.
How does pledging shares affect the investor’s ability to raise future capital?
Pledging a substantial number of shares can signal financial instability, potentially making it more difficult for the investor to raise future capital.
Are there any tax implications for pledging shares?
The act of pledging shares does not have direct tax implications, but any income generated from the loan or interest payments may have tax consequences, depending on applicable tax laws.
Does share pledging influence the company’s corporate governance practices?
Extensive share pledging by promoters can raise concerns about corporate governance, especially regarding transparency, risk management practices, and aligning management’s interests with those of minority shareholders.

June 19, 2024

Marubozu Candlestick Pattern: Means, History & Benefits

Have you ever thought about how traders predict market movements using price action? It’s because of the patterns formed by the candlesticks. Understanding candlestick patterns is like having a secret tool for getting good at trading.

In this blog, we will learn about the Marubozu candlestick pattern. Market participants use many patterns, but the Marubozu candlestick is one of the best at showing strong upward or downward movements.

Overview

Before we begin, a thorough understanding of Candlesticks is important. We have written a blog on the same; you can read it here: What are Candlesticks Charts?

Have a look at the green and red candlestick below:

Coming to the Marubozu candlestick pattern, it is an important indicator in technical analysis. It offers valuable insights into market sentiment and price action. We will explore the significance of Marubozu candlestick pattern, its implication in both bullish and bearish scenarios, and how traders can analyze it to make informed choices.

What Is Marubozu Candlestick Pattern?

A Marubozu candlestick is a type of candlestick with no shadow or wicks. This pattern is named after the Japanese word “Marubozu,” which means “bald” or “shaven,” which indicates the absence of shadows on the candlestick. It consists of a single, long body and signifies a powerful and definitive price movement throughout a trading period. When there is no upper or lower shadow, it suggests that the opening and closing prices were high or low in the session, which signifies the amount of buying and selling pressure.

History of Marubozu

Munehisa Homma developed the Marubozu Candlestick pattern back in the 18th century. He was a successful rice trader who predicted market trends using historical price data. The word “Marubozu” means “shaven head” indicating a candlestick with no shadow and showing strong buying or selling power. A bullish Marubozu, which closes at the period’s high and has no shadow, indicates strong buying. A bearish Marubozu that closes at a period’s low with no shadow indicates strong selling pressure.

In 1991, the Marubozu patterns became popular in the world through Steve Nison’s book “Japanese Candlestick Charting Techniques,” and are now widely used to identify market trends and potential reversals.

Read Also: Closing Black Marubozu Candle

Characteristics of a Marubozu Candlestick

No shadow: In the Marubozu candlestick pattern, there is an absence of lower and upper shadows.
Long body: The body of a candle stick is long, reflecting significant price movement during the trading session.
Bullish and Bearish Marubozu: When the price opens at a low and closes at a high of the session, it is Bullish Marubozu. However, when the price opens at a high and closes at a low of the session, it is bearish Marubozu.

Bullish Marubozu

When the opening price is the same as the low and the closing price is the same as the high for a certain trading session, it signifies a bullish Marubozu pattern. Buyers were in charge of the whole session in this trend.

Implications of Bullish Marubozu

Strong buying pressure: When a shadow is absent, it means that the buyers have dominated the session, continuously driving the price higher.
Continuation of Uptrend: A bullish Marubozu, in an uptrend, shows that the trend is likely to continue as buyers maintain their momentum.
Potential Reversal: A bullish Marubozu, in a downtrend or a consolidation phase, can indicate that the market sentiment is shifting from bearish to bullish.

Bearish Marubozu

If the beginning and closing prices for a certain trade session match the high and the low, this signifies a bearish Marubozu pattern. The price closed to the day’s low with no lower wick, indicating significant selling pressure during the trading session.

Implications of Bearish Marubozu

Strong selling pressure: When a shadow is absent, it means that sellers have dominated the session, continuously driving the price lower.
Continuation of a downtrend: A bearish Marubozu, in a downtrend, shows that the trend is likely to continue as sellers maintain their momentum.
Potential Reversal: A bearish Marubozu, in an uptrend or a consolidation phase, can signal a potential reversal, indicating that the market sentiment is shifting from bullish to bearish.

Benefits of the Marubozu Pattern

Clear and decisive signals: The good thing about Marubozu patterns is that they are easily understandable. When there is no shadow, it means there is no room for confusion. This gives traders clear and decisive signals about the market direction.
Strong emotions of the market: Whether bullish or bearish, the sentiments of the market can be seen in Marubozu formations. This helps traders determine market sentiments and execute trades that fit the mood.
Flexibility in different periods: From minute charts to weekly charts or even monthly charts, the Marubozu patterns can be used at different time frames. As they can be used in multiple time frames, they are useful for all kinds of traders, from day traders to long-term investors.
Universal Application: Traders can make use of Marubozu patterns across all asset classes, such as equities, currencies, commodities, etc.

Risks and Limitations of Marubozu Candlestick Pattern

False signals: Marubozu patterns generally create strong signals, but don’t always work. When markets are sideways (not moving much), the possibility of false signs will increase. Further, the shorter the time frame, the higher the chances of getting false signals.
Dependence on other factors: Sometimes traders make bad trading decisions because they rely solely on the Marubozu patterns and do not consider other technical indicators and analysis. Therefore, other technical indicators and research tools such as RSI, moving averages, volume analysis, etc., should always be used as a backup.

Read Also: White Marubozu Pattern

Conclusion

In summation, if you’re a newcomer or an experienced trader, the Marubozu candlestick pattern is useful as it clearly indicates the sentiment of underlying. Traders can make use of Bullish and Bearish Marubozu patterns to improve their trading methods and make informed decisions.

However, for a strong confirmation and to avoid false signals, it is advisable to use Marubozu patterns along with other technical indicators and tools such as volume analysis, support and resistance levels, overall sentiments, macro indicators, etc.

Frequently Asked Questions (FAQs)

How can the Marubozu pattern be used?
Marubozu patterns are used to identify strong market trends and potential reversal points, and can often be combined with other technical indicators for confirmation.
Why are there no shadows on a Marubozu candlestick?
It is because in Marubozu, the price opens at one extreme (high or low) and closes at the other extreme, showing consistent movement in one direction.
Can a Marubozu pattern appear in any time frame?
Yes, it can appear at any time frame, from minutes to months, making it a convenient tool for different trading styles.
Should the Marubozu pattern be used alone for trading decisions?
Well, it is suggested to use the Marubozu pattern with other technical indicators to increase the reliability.
What is the difference between a Marubozu and other candlestick patterns?
Other candlestick patterns may have shadows, but Marubozu candlesticks have no shadows, indicating strong unidirectional market sentiments.

June 18, 2024

What is Price Action Trading & Price Action Strategy?

Did you know there is a simple yet powerful concept in trading that focuses solely on the movement of price over time to gauge market sentiments?

We are talking about Price Action Trading, which primarily focuses on trends, chart patterns, candlestick patterns, and major historical price movements to gauge market sentiments. Candlestick patterns help to identify the relationship between buyers and sellers over a period of time by analyzing the open, close, high, and low prices of the candlestick.

What is Price Action Trading?

Price action in trading analyses the price performance of a security, index, commodity, or currency to predict the future. If price action analysis tells us that the price is about to rise, one might want to take a long position, or if one believes that the price action is signaling a negative trend, one might choose to initiate a short trade.

Merits of Price Action Trading

Simple to understand: This is its biggest advantage; candlestick patterns can be observed on the charts without the need for any complicated technical indicators. Candlesticks itself give the signal of trend change; it’s confirmation or buying and selling signals. Along with that, a few other chart patterns can be observed with a wider time frame, that candlesticks make to give mid to long-term signals like Double bottom, Rounding bottom, Head & Shoulders, etc.
Easily accessible: Price Action uses only candlesticks which are easily accessible in charts as compared to complicated indicators.
Without any Lag: All the technical indicators have some lag before generating signals, but Candlesticks move in sync with the price movement.
Develop Independent thinking: As this method needs close observation and analysis, it engages traders’ analytical and critical thinking skills to make informed trading decisions.
Universal Application: Traders can make use of price action across all asset classes such as equities, currencies, commodities, etc.

Limitations of Price Action Trading

Not for all markets: Price action is not a perfect method in all market conditions.
Time Consuming: Interpretation of candlesticks can be more time consuming as compared to technical indicators because it relies on traders understanding and skills to interpret the patterns accurately. This can impact the decision-making.
No automation: In price action, most of the traders do manual execution as it is difficult to deploy fully automated price action strategies. This can lead to emotional bias, which eventually hampers the profitability.

Strategies Used in Price Action Trading

A pattern is formed by a group of candles over a certain period of time that creates a unique shape and carries a specific meaning. Such patterns help traders analyze the behavior of buyers and sellers during the formation of the pattern and predict the future direction of price movements.

There are various price patterns that traders should keep an eye on, including Double-bottom and Triple bottom patterns, head and shoulders patterns, cup and handle patterns, wedge patterns, pennants, triangle patterns, and more.

However, correctly identifying these patterns requires traders to have a good understanding of each pattern and observe price charts on different time frames.

Best Price Action Trading Strategies

There are numerous Price Action strategies, but learning each one can be challenging. To simplify things, we’ve explained a few key strategies below for your convenience.

1. Hammer

The hammer candlestick pattern, which consists of a short body and a long wick, is found at the bottom of a downward trend.

The colour of the body can vary, but green hammers indicate a stronger bull market than red hammers. If the pin bar/hammer pattern has a long lower tail, this tells the trader that there has been a trend of lower prices being rejected, which implies that the price could rise from here. Generally, the next day is the confirmation day, and if the next day’s price crosses the high of Hammer, then a strong buy signal is generated. Stop loss is the low of Hammer, the entry point is a bullish breakout above Hammer’s high and can continue with the trend till it gets any reversal signal.

2. Bullish Engulfing

The bullish engulfing pattern is formed by using the two candlesticks. The first candle is a short red body which is completely engulfed by a larger green candle. That’s called bullish engulfing. It signals a potential trend change from down to up, so the next day, even if the price opens a little bit lower, it will be a buying opportunity as bulls are in control and will push the price higher eventually.

The reversal of Bullish engulfing is Bearish engulfing, which occurs after an uptrend.

3. Three White Soldiers

It is a very strong bullish signal that occurs after a downtrend. It’s a three-candle pattern and consists of consecutive long green candles with small wicks and long bodies, which open and close progressively higher than the previous day. The potential direction is up.

In contrast, the reversal of Three White Soldiers is Three Black Crows, which signals a strong bearish trend after an uptrend.

4. Hanging man

The hanging man is a bearish pattern and it’s the opposite of a hammer. It has the same shape as of a hammer but forms at the end of an uptrend, so, it’s a bearish signal. It indicates that there was a significant sell-off during the day. The large sell-off is often seen as an indication that the bulls are losing control of the market. The next day, a lower close confirms the downtrend. One can continue with the short trade till get any reversal.

5. Head and Shoulders Pattern

As the name suggests, the head and shoulders pattern is a market movement that looks a bit like the head and shoulders. The head and shoulders trade is one of the most popular price action trading strategies as it’s relatively easy to choose an entry point (generally near the neckline after the breaking of the shoulder) and set a stop loss around or above the left shoulder and set the target at the downside till the length of the head.

A similar pattern can be reversed, called reverse head and shoulder. It works as a bullish signal and gives upside targets.

How to Trade Using Price Action

Traders can follow below mentioned steps to trade using price action:

Identify the asset class and market you want to trade.
Analyze the patterns and trends.
Decide whether to go long or short.
Build a trading plan, for e.g., entry price, exit price, risk reward ratio, stop loss levels, etc.
Execute the trade, monitor the position, and make a timely exit.

Conclusion

Price action trading is a powerful tool used by traders all around the world across different markets. It provides a systematic way to analyze the market and gives the direction to initiate a trade. Traders look out for price action signals for the emergence of a trend.

Unlike technical analysis, the Price Action focuses on the price itself and not on other indicators. The more expert a trader will be, the more likely repeated patterns of behavior from buyers and sellers can be found out and traded upon.

Following a set of price action trading rules is important to achieve consistent performance. Always be mindful of the risks involved in trading and make decisions accordingly. Further, for new traders, it is suggested to do paper trading at the initial stages; this will allow them to trade in a virtual environment until they get the confidence and clarity to go live.

Frequently Asked Questions

Is Price Action Trading Relevant?
Yes, it’s relevant as it is used to understand the price action and involves looking at the patterns and identifying the key indicators.
What do you mean by Price Action Analysis?
Price action is the process of analyzing historical price trends to forecast the direction of prices in the future. It is generally done by analysing the candlestick patterns, which show the relationship between buyers and sellers in a given time period.
Is Price Action Trading Good for Beginners?
Yes, price action is suggested to beginners as it is a good starting point for understanding the market through historical trends and predicting future market movements based on that.
Are there any strategies involved in Price Action Trading?
Yes, there are a number of different price action methods that traders use to predict market movements, like Head & Shoulder, Hanging Man, etc.
What are Candlesticks Patterns?
Candlestick patterns help traders to identify the relationship between buyers and sellers over a period of time by analyzing the candlestick’s open, closed, high, and low prices.

June 17, 2024

Momentum Investing: Meaning, History, Types & Advantages

Have you ever seen an unexpected spike in the price of a stock? After seeing it, everyone seems to rush in like it’s a bar fight over the final slice of pie. That is an oversimplified idea of momentum investing.

Momentum investing is the practice of purchasing stocks experiencing an upward price trend and selling those experiencing a downward price trend. Making money off of current market trends is the aim. Utilizing the current trends in the industry is a part of the procedure. This strategy is based on the idea that stocks that have performed well historically will continue to do so going forward.

What is Momentum Investing?

When you trade based on momentum, the idea is “buy high, sell higher”. It comes from the idea that assets that have done well in the past will continue to do well in the coming future. People often use this approach because they’ve seen that stocks that have done well in the last three to twelve months tend to keep doing well, and stocks that have been doing poorly tend to continue doing poorly.

History of Momentum Investing

The concept of momentum investing is not new. Its origins can be traced back to the 19th century. Richard Driehaus is known to have modernized the strategy, emphasizing the concept of “buy high, sell higher.” Momentum investing was empirically validated by academic studies, including those conducted by Jegadeesh and Titman in the 1990s, illustrating that stocks with robust recent performance are more likely to maintain their performance.

Momentum Investing Key Concepts

There are a few key concepts of momentum investing. They are explained in detail below:

A. Price Momentum

This investment strategy is founded on the principle of price momentum. It entails identifying assets with either upward or downward price trends over a specific period. Investors typically screen for securities with the most robust price performance in the past six to twelve months.

B. Strength in Relationship

Another fundamental principle of momentum investing is relative strength. It entails comparing a security’s performance to a pertinent benchmark, such as a sector or index. Under this strategy, stocks with greater relative strength than their counterparts are considered appealing investments.

C. Following Trends

Momentum investors frequently follow market trends to capitalize on existing price fluctuations. This involves identifying and investing in assets that are trending in a specific direction, such as an uptrend in an optimistic market.

Momentum Investing Strategies

There are many momentum strategies that are used by traders to generate above-average returns. Some of them are mentioned below.

1. Relative Strength Strategy

It involves ordering securities based on their past performance record, most often for a specific duration such as three, six, or twelve months. Investors subsequently select the best-performing securities and sell off the worst.

2. 52-Week High/Low Strategy

A stock is bought when it is close to its highest level over the past 52 weeks. Otherwise, it is sold or shorted when it is near its lowest over the same period. This strategy believes that securities approaching new peaks are more likely to continue rising due to upbeat investors’ attitudes and sustained buying pressure.

3. Momentum Oscillators

Technical indicators such as the Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), and Rate of Change (ROC) are used to identify momentum of stocks. These indicators can signal overbought or oversold conditions and potential trend reversals, guiding buy or sell decisions for traders.

4. Earnings Momentum

This strategy focuses on shares of companies that have consistently exceeded earnings expectations. Investors buy stocks of companies that have recently reported positive earnings surprises and strong earnings growth, anticipating that the momentum will continue.

5. Sector Rotation

This involves moving investments from one sector to another based on the relative momentum of different sectors. Investors shift their portfolios into sectors showing high performance and away from those showing low performance.

6. Price and Volume Trends

Investors analyze price trends and trading volumes to confirm momentum. A high volume of upward price movement indicates strong buying interest and can signal to buy, while a high volume of downward price movement can signal to sell.

Advantages of Momentum Investing

Opportunity to earn higher returns: Momentum buying can yield big gains, especially when the market is moving strongly. By riding the current wave of progress, buyers may be able to make money as prices continue to rise in certain assets.
Spreading out: Momentum investing can help more if you spread your investments across different assets that have strong momentum. This may lower risk and increase the overall return-to-risk ratio.
Rules and ease of use : Many buyers like momentum trading because it is easy to understand and is based on clear rules. It gives you a structured way to earn profit from current market trends.

Disadvantages of Momentum Investing

Risk and Volatility: Due to the stock market’s extreme volatility, momentum investing can result in substantial losses during market trend reversals. The strategy may put investors at greater risk since it depends heavily on short-term price fluctuations, particularly during volatile times.
High Charges for Transactions: Frequent trading may impact the total profits of momentum investing due to increased transaction expenses. For smaller investors, the strategy’s profitability may be weakened by the accumulation of trading costs.

Conclusion

By taking advantage of current market movements, momentum investing is a dynamic and fascinating technique that has attracted attention due to its potential to generate substantial profits. But it comes with its own set of difficulties. Success in investing based on momentum requires careful planning, risk management, and a long-term outlook, just like any other technique. Ultimately, an investor’s risk tolerance, financial objectives, and market forecast determine whether or not they choose to use momentum investing in their investing journey.

In summary, momentum investing is an effective strategy for navigating the financial markets. It allows investors to increase returns by giving them a framework for recognizing and taking advantage of current price trends. However, before incorporating momentum investing into your portfolio, you must thoroughly assess the risks involved and consider your unique investment goals.

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4	Option Chain Analysis: A Detail Guide for Beginners
5	What Is The Gap Up And Gap Down Strategy?

Frequently Asked Questions (FAQs)

What is investing with momentum?
Investing based on momentum involves performing transactions based on market trends; for example, one might buy equities that have shown an upward trend in price with the expectation that the price will climb further.
How can I tell which stocks are momentum-rich?
Use price charts, RSI, and averages to identify steady-rising patterns.
When should you purchase and sell based on momentum investing?
Based on momentum investing, you should invest in stocks while they are increasing in value but are yet to reach their peak and sell them when they start to fall in value or experience a trend reversal.
How should you diversify your portfolio?
It is advised to have a mix of bonds, index funds, and blue-chip stocks in your portfolio, so that during economic downturns, your investments remain safe.
What kind of risks are involved in momentum investing?
Momentum investing comes with its own set of risks, such as reduced returns due to high transaction costs, market reversals, and increased volatility.

June 15, 2024

What is Nifty BeES ETF? Features, Benefits & How to Invest?

Do you want to invest in stocks but need help choosing which ones to include? Selecting stocks can be a risky gamble. However, there’s an option that lets you invest in the top 50 companies simultaneously in India. This is possible through the Nifty BeES exchange-traded fund (ETF).

This blog will discuss the advantages of investing in the Nifty BeES fund and how it operates.

Understanding Nifty BeES ETF Meaning

Nippon India Nifty BeES ETF, more commonly known as just Nifty BeES ETF, was launched in 2001 with the objective of following the Nifty 50 Index. Its name was chosen so that Nifty stood for the index it monitors, and BeES stood for the abbreviation of the Benchmark Exchange-Traded Scheme.

Features of Nifty BeES

Like any other ETF, this is the most straightforward type of investment vehicle that allows for easy trading and investment.
Returns are aligned with the Nifty 50 index, thus allowing investors to earn a return similar to the top 50 stocks of the exchange.
Nifty BeES has a lower expense ratio than actively managed mutual funds.
The invested capital stays spread throughout 50 large-cap firms, reducing risk through diversification.

Advantages of Nifty BeES

The ETF has high liquidity, thus allowing you to quickly liquidate your money whenever you want.
Given the extremely low expense ratios, they are typically considered cost-effective investment options.
The fund allows the investors to gain exposure to India’s top 50 large-cap firms by investing in Nifty BeES.
Unlike other investment options, investing in Nifty BeES gives transparency because the investor already knows where their money will go.
During market hours, investors can buy and sell the units in real time.

How Does Nifty BeEs Work?

The Nifty BeES are funds that are managed passively. The money is invested in stocks that are part of the Nifty 50 index, and the fund aims to produce returns comparable to the index. However, it is important to know that though they invest in the Nifty 50 index, there is no assurance or guarantee that the fund will achieve its goal completely due to the presence of tracking errors.

How to Invest in Nifty BeES?

Investors can invest in Nifty BeES like other stocks through a trading and demat account. It has an ISIN (International Securities Identification Number) assigned to it. Unlike mutual funds, which can be traded only at the end of the day, the Nifty BeES ETF is listed on the National Stock Exchange. An investor can buy and sell the units of the Nifty BeES ETF at any time during market hours. The dynamics of supply and demand determine the price of Nifty BeES.

You can hold these securities in your demat account. Investors and authorized participants can participate through units. The minimum denomination of units that can be purchased or redeemed from the AMC is 50,000 units. Investors can buy as little as one unit at a time and at the prevailing market price.

Taxation of Nifty BeES

The tax treatment of the Nifty BeES is the same as that of any other stock index fund, as they are treated like equity mutual funds. The Nifty BeES units are subject to a 15% tax on profit (Short-Term Capital Gains) if sold within a year and a 10% tax on profit (Long-Term Capital Gains) if sold after a year and with more than one lakh in profit.

Who Should Invest in Nifty BeES?

If you are new to investing and lack sufficient understanding of the range of investment items on the market, you should consider investing in the Nifty BeES. The fund is known to provide the benefit of diversification as it spreads your capital among the top 50 companies listed on the exchange.

Additionally, an investor may want to think about this alternative if they want to invest in the equities market and are willing to pay a minor charge in expense ratios. Overall, it’s a good option for those investors who wish to gain exposure to the Nifty 50 index without going through the hassle of manually picking stocks.

Nifty BeES Performance

Scheme Name	1 Week	1 Month	3 Months	6 Months	1 Year	3 Years	5 Years
Nippon India Nifty 50 BeES ETF	1.89	1.63	2.14	14.26	24.89	15.95	15.79
Nifty 50 TRI	2.06	2.5	2.31	14.47	25.48	15.59	15.93

(As of 25th May 2024)

From the return table above, the fund has provided a slightly lower return than the Nifty 50 Index. This is probably due to the presence of tracking errors.

Read Also: What is Nifty BeES ETF?

Conclusion

Nifty BeES is an exchange-traded fund that invests in the top 50 Indian firms. It provides investors with the benefits of diversification while providing a hassle-free solution to the problem of manually picking stocks. The fund is also known to provide immense liquidity, thus making it more beneficial for investors to choose. Those looking to begin their investment path may find Nifty BeES to be a suitable solution.

However, equity markets have drawbacks, such as high volatility and no guaranteed return. Therefore, it’s important to analyze all the pros and cons before investing thoroughly.

Frequently Asked Questions (FAQs)

Is there any disadvantage to investing in Nifty BeES?
A drawback to investing in Nifty BeES is that it is a passively managed fund and, hence, cannot earn more than the benchmark.
Is there any lock-in period for Nifty BeES?
Nifty BeES has no maturity dates or lock-in periods since anyone can withdraw from this plan when markets are open.
Can I get a dividend while investing in Nifty BeES?
Indeed, the fund declares dividends. Upon the announcement of dividends by the holding companies, investors are given the choice to reinvest the income or receive it in their demat account.
Can I hold Nifty BeES for a longer period?
Yes, you can hold Nifty BeES in your demat account as long as you want.
What is the full form of Nifty BeES?
BeES stands for “benchmark exchange traded scheme,” whereas Nifty refers to the index it tracks, which is the Nifty 50.

June 15, 2024

What is the 151515 Rule of Mutual Fund Investing?

Investing is known around the world as a difficult venture, but if done correctly, it can lead to multifold capital growth. An example of a trick to achieve this is the “15*15*15 rule of mutual fund”. Today, we’ll explain this trick in detail.

What is the 151515 Rule in Mutual Funds?

This principle of mutual funds can help you achieve your dream if you save a particular amount over time. According to this rule, if you invest 15000 per month for a period of 15 years and your investment fetches a return of 15%, you will accumulate 1.01 crores, whereas your total investment will be only 27 lakhs.

Power of Compounding

Compounding is essentially the exponential growth of your investment over a long period. This occurs when the profits earned on investments are reinvested, producing further profits.

Let’s understand the magic of compounding through an example-

Assume that you have invested INR 1,00,000 in mutual fund schemes. You make 12,000 on it in the first year, assuming a return of 12%. Hence, the corpus at the end of the first year becomes INR 1,12,000 instead of INR 1,00,000. Furthermore, assuming a return of 12% in the 2nd year, the corpus would also become INR 1,25,440, earning a return of INR 13,440.

You can now understand that even earning a consistent return every year would lead to higher growth in investment due to the concept of compound interest.

Components of the 151515 Rule in Mutual Funds

There are 3 components of the 15*15*15 rules in mutual funds.

Period – This rule’s primary element is the investment horizon, often known as the time horizon. Since compounding has long-term benefits, it is appropriate for long-term investors.
Return—The 15% annualized return projected under this approach is typically offered in the equity asset class. Over an extended period, several mutual funds have reported similar results.
Investment – Since consistency in investment is a key component of this guideline, the investor must consistently invest 15,000 INR per month without being concerned about market volatility.

Benefits of the 151515 Rule in Mutual Funds

The major advantages of the 15*15*15 rule are as follows-

This investment principle encourages you to optimize the benefits of compounding by emphasizing long-term investing.
The systematic approach to investing aids in the formation of a consistent saving habit in the investor.
Mutual funds are an inexpensive and easily evaluable asset that is accessible to anyone. Thus, allowing high liquidity.

Limitation of the 151515 Rule in Mutual Funds

The limitations of the 15*15*15 rule are mentioned below-

Higher Returns – The 15% annualized return is regarded as extremely optimistic, and it is challenging for funds to regularly generate this return over an extended period of time.
Economic Downturn – The returns could decrease if the economy is expanding more slowly or if there are significant market crashes.
Investment – This investment principle assumes that the investor can make consistent investments throughout a 15-year period. However, there are a number of financial circumstances, such as unemployment or unexpected medical expenses, that may prevent an investor from making these kinds of investments.

Important Points to Remember for the 151515 Rule

An investor should take into account a number of factors before following the mutual fund 15:15:15 guideline.

To invest in mutual funds and build a corpus over an extended period of time, one must be aware of their level of risk tolerance.
It is necessary for an investor to confirm that they have the financial means to invest INR 15,000 each month for a duration of 15 years.
When you begin investing, select the best strategy allocation and periodically assess your portfolio to see how well it is going.

Conclusion

Compounding is beneficial if you keep your investment for a long time. Mutual funds have several advantages, including returns that beat inflation and tax advantages, but the compounding effect is much more valuable. The sooner you begin investing and the longer you stay involved, the better the return. The mutual fund industry’s 15*15*15 rule operates in this manner. However, you should assess your risk tolerance by speaking with an investment counselor prior to making any investments.

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Frequently Asked Questions (FAQs)

What is the 15*15*15 rule of mutual fund investing?
According to the 15*15*15 rule, if you invest in mutual funds using a monthly SIP of INR 15,000 for 15 years and your investment yields an annualized return of 15%, you will have accumulated INR 1.01 crore.
What is compounding in finance?
In the world of finance, compounding is the process by which returns on an asset are reinvested in the same asset class to produce further returns.
How can I earn 1 crore in 15 years by investing in mutual funds?
By investing just 15,000 INR every month, you can make 1 crore if you earn 15% p.a.
Which category of mutual fund can provide returns of up to 15%?
Investing in the equity category of mutual funds can yield profits of up to 15% annually.
Should I change the fund during the investment tenure of 15 years in the 15*15*15 rule?
A regular review of your portfolio is important to ensure a 15% annualized return such that the corpus of 1 crore can be achieved in 15 years time.

June 14, 2024

Margin Pledge: Meaning, Risks, And Benefits

Do you sometimes feel that your current capital is holding you back from the bigger moves in your F&O trades? If you are looking to seize new opportunities and are short on cash, then a margin pledge can be the ultimate solution.

In this blog, we will explore margin pledge and how it affect futures and options trading. Additionally, we will also discuss the advantages and risks involved in margin pledge.

What is Margin Pledge?

Margin Pledge is a facility offered by brokers that allows you to use your existing securities as collateral to borrow margin for trading. With the pledged margin, traders can utilize it for Intraday equity trading, futures trading, and selling options.

You deposit your financial assets like stocks, mutual funds, or government securities with your broker. These deposited securities act as collateral. The broker then lends you a margin amount which is less than the value of the pledged securities because of Haircut.

Here is a breakdown of the key points:

Haircut

It simply means the difference in asset price given for collateral and amount provided by the lender as collateral.

Suppose, you pledged small cap stocks worth INR 10,000 with a haircut of 30%, then the available collateral margin would be INR 7,000.

It is because the brokers do not lend you the total value of your pledged securities. Instead, they apply a deduction to account for market volatility and price fluctuations. This deduction reduces the amount you receive as a collateral. Haircuts are generally represented as a percentage of the asset price. The riskier the asset, the higher the haircut.

Read Also: What is Pledging of Shares?

Example of How a Margin Pledge Works

You have shares worth INR 1 lakh in HDFC, but you need funds to trade the F&O contracts of the Nifty 50 Index.

Here, you will pledge your shares of HDFC with your broker. The broker will deduct a haircut from the total value of the shares, let’s take 20% haircut for simplicity, which is INR 20,000.

The remaining INR 80,000 will be your margin limit, which you can use to trade the F&O contracts of Nifty 50 Index. Keep in mind that with a pledged margin, you cannot buy option contracts of Nifty 50; it can only be utilized to buy / sell future contracts and short option contracts.

Cash vs. Non-Cash Component

The Securities and Exchange Board of India (SEBI) regulates the margin requirements for F&O trading. It has mandated a minimum margin for each F&O position, and the required margin can be achieved through a combination of cash and non-cash components in case of pledged margin.

The cash component refers to your own cash deposited with the broker, the amount invested in liquid funds, bank guarantees, government securities, etc. and the non-cash component includes the collateral margin obtained by pledging your holdings, such as stocks, ETFs, mutual funds apart from liquid funds, etc.

Importantly, SEBI mandates that at least 50% of the total margin requirement for overnight F&O positions must be in cash and cash equivalents. The remaining 50% can be non-cash collateral. In case of non-fulfilment of the cash component, your broker will levy interest charges.

Other factors that can be taken into account:

Not all assets in your portfolio are eligible for pledging. Brokers accept stocks, ETFs, and government securities like SGBs.
This regulation aims to ensure that traders have sufficient liquidity to meet their margin obligations and mitigate the risk of excessive leverage.
Margin trading carries the risk of margin calls if the market moves against your position and the value of your collateral or F&O contract drops. Failing to fulfil a margin call may result in the broker’s forced selling of your pledged holdings.

*Margin Call is a notification from the broker demanding additional cash or securities to maintain the minimum margin requirement for your positions.

Advantages of Margin Pledge

Amplified buying power: The most important benefit is increased purchasing power. By using your current holdings as collateral, you have the opportunity to access additional capital to take larger positions in F&O contracts, magnifying the profits.
Strategic use of existing Assets: Margin pledge enables the efficient deployment of one’s idle holdings for productive purposes. You can use stocks or bonds to generate additional trading opportunities.
Convenience and Efficiency: The traders do not need to sell existing holdings to free up cash. They can use it while their assets keep on increasing.

Risks Involved

While margin pledge offers an attractive way to boost your trading margin, it is essential to understand the inherent risks involved.

The increased buying power that comes with the margin pledge can also increase your losses. It is a double-edged sword; market fluctuations can cause a sharp decline in your positions.
If the value of your pledged securities or F&O positions falls, you might face margin calls from your broker, which will require you to deposit additional cash or securities to maintain the minimum margin needs. Failure to meet a margin call could result in the broker being forced to sell your pledged securities.
F&O trading itself is inherently volatile. A margin pledge further increases this volatility, causing sharper swings in trading positions.
The ease of taking larger positions with pledged margins might tempt you to make impulsive or emotional trades.

Conclusion

To sum it up, margin pledge can substantially amplify your purchasing capacity for intraday, futures, and options trading. However, it is essential to use it strategically and have a clear understanding of the risks involved in it.

Additionally, it is important to understand mechanics of intraday, futures, and options trading and risk management prior to utilising the pledged margins.

Frequently Asked Questions (FAQs)

What is a margin pledge?
In margin pledge, you use your existing securities as collateral to borrow money for further trading.
Can I buy call and put options from the pledged margin?
No, you cannot utilize the pledged margin for buying option contracts. It can only be used for intraday equity, buying or selling futures, and selling option contracts.
Do liquid funds considered as a cash component?
Yes, liquid funds are considered as a cash component.
Do brokers have the right to sell my pledged holdings?
Yes, in case of a short fall, the broker has the right to liquidate your pledged holdings.
Is the margin pledge safe?
Yes, it is safe. However, you should use margin pledge only if you understand the F&O risks, and have a well-defined trading strategy.

June 14, 2024

Blog

What is Breakout Trading?

Strategy of Breakout Trading

Pros of Breakout Trading

Cons of Breakout Trading

Tips for Breakout Trading

Conclusion

Frequently Asked Questions (FAQs)

What is breakout trading?

What do you mean by a breakout in simple terms?

What are the benefits of breakout trading?

What risks are there in breakout trading?

Is breakout trading good for beginners?

Best Tax Saving Instruments in India

1. Equity Linked Savings Scheme (ELSS)

2. Public Provident Fund (PPF)

3. Senior Citizen Savings Scheme (SCSS)

4. Sukanya Samriddhi Account

5. Tax Saver Fixed Deposit

6. National Pension Scheme (NPS)

7. Unit Link Insurance Plan (ULIP)

8. Life Insurance

9. National Savings Certificates (NSC)

10. Capital Guaranteed Plan

Differences Between Various Tax Saving Instruments

Which Product Should an Investor Choose?

Conclusion

Frequently Asked Questions (FAQs)

What is the maximum deduction I can get under Section 80C?

Can I invest in multiple tax-saving instruments in a financial year?

How does Section 80C help us in saving tax?

Which tax-saving instrument has a minimum lock-in period?

What is the mandatory lock-in period for public provident funds?

What are Bonds?

What is Bond Yield?

Types of Bond Yield

Overview of Different Types of Bond Yield

1. Coupon Yield

2. Current Yield

3. Yield to Maturity (YTM)

Real-world Implications of Bond Yield

Things To Consider Before Investing in Bonds in India

The Advantages and Disadvantages of Bond

Advantages

Disadvantages:

The Importance of Bond Yields for Indian Investors

Bond Yield Trends in 2025

Conclusion

Frequently Asked Questions (FAQs)

What factors determine the yield on government bonds in India?

What is the difference between bond yield and interest rate?

How does bond yield change over time?

Is higher bond yield always better?

Can bond yields go negative?

In what ways can I invest in bonds in India?

Why do government bond yields act as a benchmark for other interest rates in India?

How do I invest in Bonds?

What is the significance of the yield curve in the Indian financial market?

What are the risks involved in investing in G-Sec bonds?

What is Pledging of Shares?

How Much Amount Can One Borrow Against the Shares?

How Share Pledging Works?

Example of Share Pledging

Who Can Pledge Shares?

Advantages of Share Pledging

Disadvantages of Share Pledging

Conclusion

Frequently Asked Questions (FAQs)

How does share pledging impact the voting rights of shareholders?

What is the limitation of pledging shares?

How does pledging shares affect the investor’s ability to raise future capital?

Are there any tax implications for pledging shares?

Does share pledging influence the company’s corporate governance practices?

Overview

What Is Marubozu Candlestick Pattern?

History of Marubozu

Characteristics of a Marubozu Candlestick

Bullish Marubozu

Implications of Bullish Marubozu

Bearish Marubozu