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Currently, Inflation is the buzz word and let us take a look how inflation affects stocks markets and stock prices. To put it in simple words, Inflation is - your money loses purchasing power and as a result you buy less with the money you have than before. When the inflation rates start to rise, investors get very nervous anticipating the potentially negative consequences.

Many industries wait for the response of the Central Bankers or the Reserve Bank of India (RBI)  for their measures combating inflation. One of the measures is to increase interest rates, which the RBI is currently doing in its monetary policy.

However, the rising prices and the higher interest rates don't lead to positive effects on the investment portfolios of investors. When the interest rates are increased it becomes more expensive for the companies to borrow money and their borrowing costs is increased, and expansion plans are slowed down.

Since the revenues and earnings of companies tend to rise at the same pace as inflation, stocks can provide protection to inflation to a significant extent, but only when rising prices can be transferred to consumers. However, if the rising prices are transferred to the consumers this may lead to loss of market share due to competitiveness of companies.

Inflation has another negative impact, namely the prices rise but no additional value is added.  Since revenues and earnings of companies rise at the same pace as inflation, their financials are overstated, since no additional value is created. However, when the inflation starts to fall to its normal levels, the overstated earnings and revenues will decline as well. These ups and downs lead to blurring the actual state of value. Hence, we can say that lesser the firm is able to pass the inflation to its consumers lesser is its value and the more it can pass inflation higher is its value.

To conclude, the companies cannot pass whole inflation to consumers due to increase in competition and With the increase in inflation, cost of borrowing is generally increased due to increase in interest rates. As a result companies have to slowdown their expansion plans and their growth is reduced which reduces their valuation. Hence stocks provide a hedge against inflation, only when the company can pass that inflation to the consumers, which inturn would reflect in their earnings.

An exchange-traded fund (ETF) is an investment fund traded on stock exchanges, much like stocks. An ETF holds assets such as stocks,commodities and bonds. Most ETFs track an index, such as the S&P 500 or NIFTY. They first came into existence in the USA in 1993. It took several years for them to attract public interest. Over the last few years more than $120 billion is invested in about 230 ETFs. About 60% of trading volumes on the American Stock Exchange are from ETFs.

The most popular ETFs are QQQs (Cubes) based on the Nasdaq-100 Index, SPDRs (Spiders) based on the S&P 500 Index, iSHARES based on MSCI Indices and TRAHK (Tracks) based on the Hang Seng Index. In India , Nifty Bees is the first index fund which tracks the S&P CNX Nifty.

Let us take a look at  different types of ETFs.

Index ETFs : Most ETFs are index funds that hold securities and attempt to replicate the performance of a stock market index. An index fund seeks to track the performance of an index by holding in its portfolio either the contents of the index or a representative sample of the securities in the index.

Commodity ETFs : Commodity ETFs invest in commodities, such as precious metals and futures. Among the first commodity ETFs were gold exchange-traded funds, which have been offered in a number of countries.

Bond ETFs : Exchange-traded funds that invest in bonds are known as bond ETFs.

Currency ETFs : These funds are total return products where the investor gets access to the FX spot change, local institutional interest rates and a collateral yield.

While similar to an index mutual fund, ETFs differ from mutual funds in significant ways, because of their low costs, tax efficiency, and stock-like features. To know more about ETFs,  watch out for the Part 2, in which we discuss about advantages and disadvantages of investing in ETFs and details about various ETFs available in India...stay tuned !

When it comes to investing in stock markets, an investor is exposed to two kinds of risks - systematic risk and unsystematic risk. Systematic risk is due to macroeconomic movements and it affects the whole market, while unsystematic risks are company specific risks.

When we buy a stock of a single company we are exposed to both systematic risks (market risk) and unsystematic risks( company risk. But when we buy a diversified mutual fund or a portfolio we are exposed only to systematic risks and there is no unsystematic risks due to proper diversification by the mutual funds.

Let us take a look at some of the major advantages of mutual fund over stocks :

A mutual fund gives diversification :

If you have only 1,000 to 5,000 to invest, the money will not buy many shares of a single stock, and it will certainly not buy many different stocks. By putting your money in only two or three stocks, you are exposed to the possibility that one of them will plummet in price, wiping out much of your invested capital.

Instead, when you put your 1,000 or 5,000 in a mutual fund, your money buys into a portfolio that may comprise of 50 or 100 different stocks. If one or two stocks in the portfolio get hit hard, your losses will be much more limited because many of the other stocks will probably be going up at the same time.

A professional skilled manager chooses stocks for you :

Managers of stock mutual funds have instant access to information about every stock around the world at the push of a few computer keys. They work in companies where teams of research analysts who study corporate annual reports and these analysts visit company executives and factories to evaluate the firms’ prospects first hand. But individual investors have limited access to such information, like these fund managers.

The only disadvantage in investing in a mutual funds is that you depend on the fund's manager to make the right decisions regarding the fund's portfolio. If the manager does not perform as well as you had hoped, you might not make as much money on your investment as you expected.

Anyway. buying a mutual fund can substantially reduce our long-term market risk and result in a higher net return if they are used for longer term horizons and they take all the worries which are associated with managing stocks and provide proper diversification. In general that mutual funds are always better than individual stocks, since they involve lower risks, less money and but safe returns, as we have seen in HDFC Top 200 .

Jubilant Foodworks is flying all around the place and hit an all-time-high of Rs.807, recently. The company came out with an IPO at Rs.145 in 2010, later listed around Rs.200 and it is currently trading at Rs.800. What's buzzing around ? Is it just the momentum or is there any extra flavor to this stock?

The company, known for its popular brand Dominos Pizza, has more than 50% single store cities. In 4QFY11 it entered new cities such as Patna, Bhubaneswar etc. These regions present huge opportunity for penetration-led growth, success of the product in these cities would be a key factor to watch out for in FY2012E. Currently 65% of sales are contributed by top seven cities and 50% of stores are located in Maharashtra, New Delhi and Karnataka.

The company currently trades at more than 50 x 2012E Eps of Rs.15 , which is on the higher side.The company's business model is good and there is huge growth opportunities for the company driven by changing demographic and socio-economic factors. Despite the strong near-term earnings forecast and favorable view, the current valuation of the company (PE of 50X FY2012E), the stock is expensive and one could book profits at current levels. Though, the momentum could take it higher, it would not be in the taste of retail investors to buy at these prices.

The country's premier commodity exchange Multi Commodity Exchange of India Ltd (MCX) has launched 1 gram gold contract namely Gold Petal futures contract, which is primarily launched targeting small traders. Already there are many such contracts developed by MCX like Gold (1 Kg), Gold Mini (100 grams) and Gold Guinea (8 grams).

The trading unit of the gold contract is 1 gram and the initial margin required to trade will be 4%, which would be around Rs.100, based on current market price of Rs.2100. The delivery of contract is possible in dematerialised or physical form, but the minimum quantity has to 8 gm.The physical delivery is available in multiples of eight gram coins with London Bullion Manufacturers Association (LBMA) certified 999 purity. The delivery centers are G4 Securitas at Mumbai, and other major cities.

There are many Gold ETFs like Gold Bees by Benchmark funds and many other ETFs by various fund houses like Reliance, HDFC available. Small investors can take the route of ETFs rather than the current product by MCX, since this would lead them to margin trading. This is because many are unaware of the risks involved in margin trading and their consequences of it.

Hence it is better to buy gold only through ETFs. Be a wise investor !

The country's premier stock exchange NSE (National Stock Exchange), has launched a new website in the interest of small investors to spread awareness and benefits of buying gold exchange traded funds (ETFs).In 2007, there was only one Asset Management Company (AMC), Benchmark Fund offering Gold ETF,(Gold Bees) in the market. As on date, there are more than 10 AMCs offering Gold ETFs and investing in them is getting more and more popular and easier.

Gold ETF is gold in an electronic form and it is just like buying shares of any company through a broker. Through Gold ETFs, one can even buy just one gram or half a gram of gold at a time. Gold prices had risen more than 20 per cent compounded annual growth rate (CAGR) since April 2007. While 10 gm of gold cost Rs. 9,357 in April 2007, it is now priced at over Rs 20,000.

To know more about Gold ETFs, you can read it here at Gold ETFs and Nse's website NseGold.