This is a part of internal learning sessions we have at ACT360. In one of these sessions, I gave a brief overview of how to start investing in share markets to the colleagues.
Iam not a financial advisor and the contents of this blog should not be taken as advice.
The video is from the same session and covers the same topics as the blog apart from places where I have corrected few info that was incorrect in the video.
Why Invest?
Before we start diving into the topic though, let’s just touch base on why it is important to invest? The number one reason you should be investing is to make sure the money you have works as hard as you do. If you are just keeping the money in the bank, it is being lazy and definitely not working as you do every day.
If you or your family members suffer from a major ailment, it will definitely set you back by 10-20 lakhs rupees. You might want to buy a car which is 30 lakhs and above. You might want to buy a house which is going crazy. The kid’s education alone (for 16 years of education and if you are lucky and they don’t choose medical and engineering), you will probably need to have 50 lakhs with you right now. And also because of the social world (read Instagram), you would want to travel once every year which is a minimum of 1 lakh per person.
So, its a lot of money, if you don’t invest, you will probably be very very sad and depressed.
Where to invest?
Now, there are many places where you can invest. One avenue is Share markets. Why share market works for new investors is because you can make small investments. Unlike other investments like land (which btw is an amazing investment but a friend was telling me that the going price around Kathmandu is 70 Lakhs rupees per aana) where we will need a lot of money and we might not necessarily have that much with us, so if we want to start small, share market is probably the first place to explore.
In share market also there are several instruments. One option is IPO or FPO (Initial Public Offering or Further Public Offering). These are public offering by the companies who have already proved their business model. As per the rules we have in our country, to be listed you need to have profits for at least 5 years before you can offer a public offering. This is different than other developed countries where companies like uber although not making any profit can be listed in the share market and raise money.
Therefore, in Nepal, if a company is being listed, they do have a profitable business model and they will probably make money. One exception to this rule is the hydroelectricity companies where the IPO is raised before the operations begin.
How to start investing in IPO?
So if you want to invest in IPO / FPO. what do you do?
First thing you will need to do is go to a merchant banking company (list of merchant banking companies) and open a DEMAT account. A DEMAT (dematerialization) account is similar to your normal bank account which serves cash. With the DEMAT account, you would give a physical copy of the asset you have to the bank, and they give you a number saying you have this much balance in your account, similar to when you take your cash (physical asset) to your bank account and they give you a statement that your balance has increased.
Then another thing you need to do to apply for an IPO/FPO is to open a Mero Share account. Mero share account is a system run by CDSC (not NCHL, as mentioned in the talk). It makes easier for you to apply IPO. You no longer need to stand on these long long lines to apply for an IPO. All you need to do is connect your Meroshare account with your Demat account and your bank account. To link to the Meroshare account, you need to have the C-ASBA (C- Applications supported by Blocked Account) facility in your bank account. You should be able to apply and get this activated in your account in one visit to your bank. All you need to have then is money in your bank account and you are ready to roll to apply for IPO / FPO from your computer.
At the moment, you can only use Meroshare to apply for IPO. But, in a month’s time you can also buy shares through this portal from the secondary market. So, let’s talk about the secondary market now.
What about the secondary market?
With the secondary market, one thing you need to understand is business cycles. It has a yearly market. for eg. 2nd quarter – 3rd quarter the share prices start to drop. In the fourth quarter / first quarter (before the book closure), companies will start giving you projections on how much they will earn this year. That will give signals about how much dividend they would be able to pay and with the expectation of these dividends, the share market price tends to go up. This is the time when you probably would want to sell the shares.
However right now, with yearly cycle also, the price of the shares are low. Also on the cycle of 8 years – 10 years, our share prices are really low compared to what it was before. It will probably not go below this as we do have a stable government and the share price in the coming years should start to show some upward trends. So, it could probably be a good time to get into investing.
Portfolio Management Services
Another instrument you can use to get into share markets is through portfolio management services. Most of the merchant banking companies provide these services where you commit a certain amount (can be in terms of shares of cash). You can start as low as 3 lakh rupees and build on that portfolio. You may want to give them tota discretion to them with these plans.
You can also choose systematic investment plans (for eg. open mutual fund, fund managers). Few companies that run SIPs are KPIS and NIBL Ace capital through their open-end mutual fund.
There are other avenues to start investing as well including insurance which forces you to save but does not necessarily give you the returns that other instruments can. In the present situation, you can also put the money into fixed deposit whose returns in today’s’ market is hard to compete with.