Investment School: 2008-08-24

What is Earnings per share?

We often come across the term EPS(Earnings per share) in the television channels when the companies report their quarterly/annual reports. Lets see whats exactly is EPS

Earnings per share = (Net Income - Dividend paid) / Outstanding shares

Where Outstanding shares = Total number of shares held by the investors. This is referred to as Capital stock in the company balance sheet.

EPS can be used as a comparison tool for evaluating companies. However we should compare EPS of companies in the same domain and not across various sectors.The decision to buy a company's share should not be totally dependent on one technical parameter. It should be based on collection of all technical parameters.

Instead of comparison of two companies by comparing their net income , comparing their EPS would give a more better comparison in terms of efficiency of the company to generate profit for each share that the investor holds.Two companies may have same net income,but one might have a higher EPS, because it has used less number of shares to generate that income.Given that net profit of two companies are same, the one with a higher EPS is better for investment.

There are three types of EPS reported.

Trailing EPS = Net profit for the last financial year/outstanding shares.

Current EPS = Estimated profit for the current financial year/outstanding shares.

Future EPS = Estimated profit for the upcoming financial year/outstanding shares.

When the company splits the stock bases, say from a face value of Rs 10 to face value to Rs 1,the EPS of the company would also get adjusted.

EPS is used in measuring PE ratio,which is again much discussed technical parameter.We shall see this in detail in the next blog entry.

Learn More....

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What is Liquid fund?

Liquid funds belong to the category of ultra short term debt funds. These can be used as alternative for short term bank deposits (deposits for less than a year).

1. They invest in debt instruments which have maturity of 1-2 months.

2. They have a lock in period of only few days unlike banks wherein you have to pay penalty if you preclose your FD.

3. They have a lower tax rate than a bank FD for a person in 30% tax bracket.The tax on dividend paid out is less than the income tax slab rate of a person in 30% tax bracket.

4.The interest rate varies with the market and it is a good option in a increasing interest rate scenario unlike bank FDs where interest rate is fixed.

5. They accept a minimum investment of 10,000.

6. These are suitable for investors who don want to lock in their money at banks for a shorter while but at the same time want to get interest on their amount.

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What is index fund?

There are two kinds of investing.

Active Investing

This involves active analysis of the company while investing. It involves answering the following questions

1. How is the company performing?
2. At what price should i buy?
3. What %age of my portfolio, should the stock occupy
and more questions.

Passive Investing

This involves creating a portfolio by simply replicating an already existing system witout any change at all.

Index Fund

Index funds are an example of Passive Investing where in the fund's portfolio is created completely by replicating an index.For eg, nifty index fund will constitute stocks present in nifty in the same ratio as it is in nifty


1. The index fund has a lower cost attached to it. Since it has minimal transactions in terms of selling and buying stocks, it has a lower expense ratio. Lower expense ratio reflects in the NAV of the fund.

2. The investment objective is simple to understand and easy to track since its a mirror image of an index.

3. There will not be any change in fund's objective since it is based on index.Today lot of funds are churning their portfolio often.


1. In the downward market, there will not be any cushion against the fall, since it does not have cash in its portfolio and is always fully invested.

2. When the tracking error(diff between fund's return n index return) is more than 2-3%

3. It can not outperform the benchmark index since it exactly replicates the index portfolio.

Target Investors

It is suitable for investors who are contempt with the broader market returns given by various indices.

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How to calculate your insurance cover?

There are well known methods to arrive at a ideal insurance cover for an indiviual.These further explains the significance of term insurance

Income Replacement Value

1. Age = 40

Annual Income = 5,00,000

Retirement Age = 60

Insurance Cover needed = (60-40) * 5,00,000 = 1 crore

Another variation, is to mutiply the income with a mutiplier to calculate your life cover.The multiplier differs across various age groups

20-30 years = 5-10 times annual income
30-40 years = 15-20 times annual income
40-50 years = 10-15 times annual income
50-60 years = 5-10 times annual income

So when you fit into any of this category and calculate your insurance cover it would be amounting to a significant sum.

When going for a typical endowment policy for such a insurance sum(eg 1 crore for 40 years old earning 5 lacs annually) , the premium would shoot to very high levels.

Term insurance 's cost benefit will be best exploited in these scenarios.

Always keep Insurance and Investment seperate.

Related Topics

What is term insurance?

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What is a floating rate mutual fund?

In th debt category of mutual funds, one important variety is Floating Rate Mutual Funds.


To provide stable rate of return without much volatility arising out of interest changes.

How it works?

Unlike a typical debt fund which buys a govt security or a corporate bond at a fixed rate of return, floating rate funds invests in debt instrument which offers a variable rate of return depending on the interest rate in the market.

Eg. A debt fund would invest in a govt sec giving a return of 6%. When the interest changes to 8%, the govt sec would still give you only 6%. However a floating rate debt instrument will adjust its return to 8% as per the inflation rate in the market.

When it works well?

It works well in an increasing rate scenario as what had happened in last 2-3 years. When you invest in a floating rate fund when interest rate is at 6% and when it increases to 8% in a year, you stand to get benefited.

However in a falling rate scenario, you would lose your return on your investment.

Who should buy?

People who want to leverage the interest rate changes in a increasing interest rate scenario.

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How to select a mutual fund?

There are more than 500 schemes in mutual fund to choose from. An investor is fed with too many choice to choose from,but, a wise investor should consider certain criteria before investing in a fund.Lets go through the criteria.

1. Performance

The performance of the fund should be checked against its own benchmark which is mentioned in the fund document. The fund's performance should also be compared against its peers in the same category. A tech fund should not be compared with a pharma fund or a diversified fund.

2.Risk-Return Ratio

The ability of the fund to generate optimal returns for the risk level that fund is taking up. A balanced fund should deliver a moderate return since its risk level is not that high as a equity fund. The equity fund should be able to deliver a higher return owing to its risk taken in investing in equities. There are good indicators for risk-return ratio of a fund.We can see that in the coming posts.


To analyse the porfolio of a fund, the should be in existence for a significant period of time.So go for a good track record fund.Check if the fund is a large cap or midcap or smallcap fund and choose a fund which aligns with your requirement of investment.

4.Fund Management

A fund's track record is nothing but the track record of the fund manager. So track his presence in the mutual fund.However fund houses don make a fund reliable totally on a single fund manager, it still makes an impact when a top fund manager leaves a fund.No need for panic redemption when a fund manager leaves,stay put and analyse the fund before and after fund manager's exit and take a decision.


Two funds A and B with a similar returns in the past but with varying costs makes a difference.A fund with a lower costs stands better than a higer cost fund.The cost of a fund is expressed in terms of expense ratio.Go for a fund with lower expense ratio.

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What is Monthly Income Fund?

MIPs or Monthly Income Plan would be suiting for retired people who would need a monthly income plan but they have not opted for assured pension during their working life period for various reasons.

Let us go through more in detail about the Monthly Income Plan


To generate regular monthly income to investors in the dividend plan.

Asset Allocation

Fixed Income Instruments = 80-85%
Equity = 15-20%

Assured Return?

As with mutual funds , the monthly dividend payout is not assured but there are certain good funds which has a good track record of giving monthly dividens without fail.


For a person in the 30% income tax slab, MIP scores over other debt products by having a Dividend Distribution tax of 19% instead of 30% in bank FDs.

Suitable Investors

Those who are nearing retirement or attained retirement

To find the list of funds in this category, check out @

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