Free Cash Flow and Asset Allocation Strategies

Learn about Free Cash Flow (FCF) and how it is calculated, as well as its importance in company valuation. Explore asset allocation strategies that help investors make decisions on where and how to invest based on factors like projected returns and risk tolerance.

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@WellBredJuxtaposition

Questions and Answers

What is the main benefit of reinvesting dividends for investors over the long term?

Compound growth through reinvestment

Contrarian investing strategy involves buying stocks when?

In times of economic downturn or market decline

What is a key consideration for contrarian investors when buying stocks during market downturns?

Company's capacity to build value

How does investment strategies help in risk reduction in a portfolio?

<p>By investing strategically across asset classes and industries</p> Signup and view all the answers

What is one advantage of investing strategically according to the text?

<p>Reduced transaction costs and lower tax payments</p> Signup and view all the answers

Study Notes

Invests in companies with positive social or environmental impact, such as sustainability and clean energy
Generated favorable returns in the past

Infrastructure Funds

Invests in infrastructure projects, such as railways, bridges, and airports

Alternative Investment Funds (AIF)

Category II AIF

Does not use leverage or debts, except for day-to-day operational expenses
Includes Private Equity Funds, Debt Funds, and Fund of Funds

Private Equity Funds

Makes equity investments in unlisted companies to help raise capital

Debt Funds

Invests in debt securities of unlisted companies via bonds, debentures, and other fixed-income instruments

Fund of Funds

Invests in multiple AIFs, rather than directly in stocks or bonds

Category III AIF

Uses complex trading strategies, may use leverage or debt for investment in listed or unlisted derivatives
Typically has a ratio less than 1, except for capital-intensive businesses

Criteria for Selection of Companies for Long-term Investment

Revenue Growth

Should be greater than 15% YoY to ensure business growth, profitability, and survival

Gross Block

Should be greater than ₹2000 crores to generate adequate revenue growth, except for asset-light models or quick commerce

Free Cash Flow (FCF)

Represents cash generated by a business, considered a better metric than EBITDA
Used for valuation and determining debt obligations
Calculated as: Revenue – (operating expenses + taxes) – capital expenditure

Asset Allocation Strategies

Involves deciding where and how to invest based on factors like projected return, risk tolerance, corpus size, etc.

Passive Strategy

Involves buying and holding stocks to reduce transaction costs, considered less risky

Active Strategy

Involves frequent buying and selling, aiming to outperform the market

Value Investing Strategy

Involves investing in undervalued companies based on their intrinsic value
Aims to benefit from market corrections and increase in stock price

Income Investing Strategy

Focuses on generating cash income from stocks, rather than increasing portfolio value
Includes dividend and fixed interest income from bonds

Dividend Growth Investing Strategy

Focuses on companies that consistently pay dividends and aim to increase dividend payout every year
Allows investors to benefit from compounding over the long term

Contrarian Investing Strategy

Involves buying stocks of companies during downtime, focusing on companies with value and branding
Aims to buy low and sell high, but requires careful selection of companies