Category: Investing

What Is An IPO Mutual Fund? Should You Invest?
Recently, there have been a lot of new IPOs in Indian markets that have given stellar listing gains to investors. However, the better the potential IPO, the lesser the chances of getting an allotment for Retail Investors. Don’t worry; we will be discussing how you can invest in an Initial Public Offering (IPOs) via the mutual fund route.

Mutual funds are pooled investments that aim to provide capital growth to investors in the long term. They are classified according to asset class, financial goals, and structure. In this blog, we will discuss the thematic funds—IPO theme.

Thematic funds are similar to sectoral funds, which fall under equity mutual funds category and are professionally managed by a fund manager. Their strategy involves investing in a particular theme, e.g., IPO theme, Digital and tech theme, etc.

There is one such mutual fund in the industry that will enable you to invest in quality IPOs without worrying about allotment status. We are referring to “Edelweiss Recently Listed IPO Mutual Fund”. It is a thematic fund that will assist you in investing in quality IPOs that have either recently been listed or are going to be listed on the exchanges.

Edelweiss converted its “Maiden-Opportunities Fund”, a close-ended scheme launched in February 2018, to the “Recently listed IPO Fund, an open-ended scheme” open to new investments since June 2021.

As per Edelweiss, the following is the strategy of the fund:

1. The fund will invest in the recent 100 IPOs to capture listing and post-listing gains.

2. The fund will invest in new-age businesses that are getting listed in the Indian market.

3. The fund will invest in companies across sectors with a bias towards small and mid-caps that promise growth.

4. The fund will not invest in weak businesses that can be highly impacted by market shocks.

Read Also: Why Invest in an IPO and its Benefits?

Characteristics of the Fund:

As of December 2023:

1. More than 72,000 people have invested in this mutual fund.

2. Its expense ratio is 0.92% and has an exit load of 2% if redeemed within six months.

3. Since inception, the fund has given an app. annualized return of 15%.

4. Only such thematic mutual fund available in the industry.

5. The fund’s asset under management (AUM) is INR 943 crs.

Positives if you invest in such thematic mutual funds:
1. Get access to a large number of IPOs with minimal investment amounts without the headache of research and analysis.
2. You don’t have to worry about the non-allotment of IPOs, as such funds place bids via the QIB route (Qualified Institutional Buyers).
3. High growth potential as the fund will invest in new-age businesses with a bias towards small and mid-caps.
Negatives if you invest in such thematic mutual funds:
1. IPO-themed funds are relatively new in the industry, with a minimal track record. Further, there is only one IPO-themed fund in the industry as of December 2023, so comparing its characteristics and returns can be challenging.
2. Thematic funds have a narrowly defined investment focus, which provides less freedom to the fund manager to invest in profitable companies.
3. The fund’s AUM may get smaller if the quality of new IPOs declines.
4. Thematic funds are not suitable for short-term horizons. These funds may have negative or poor returns during the bear market or in the short term.
5. Thematic funds substantially carry more risks than other categories of mutual funds, as news and events related to a particular sector can impact the entire sector.
Conclusion

We have discussed one of the thematic funds, the IPO theme. Thematic funds are equity mutual funds that invest in a particular theme. As we discussed above, the IPO theme is relatively new, and the only fund available in the industry as of now is the “Edelweiss Recently Listed IPO Fund”. Assessing the long-term prospects of such funds can be challenging. Further, thematic funds generally carry a higher risk than other categories of mutual funds because of their concentrated approach and smaller investment universe.

The optimal asset allocation approach is to choose mutual funds after consulting with a financial advisor and assessing your investment horizon and risk appetite. Investments in thematic mutual funds shouldn’t constitute a significant portion of your portfolio.

Read Also: What is an IPO Subscription & How Does it Work?

Frequently Asked Questions (FAQs)
1. What are some examples of thematic funds?
  Digital and AI theme, IPO theme, Clean energy theme, etc.
2. What is the risk profile of thematic funds?
  Thematic funds carry a very high level of risk.
3. How many IPO-themed mutual funds are available in the industry?
  As of December 2023, only one fund invests in the IPO theme.
4. What are the Sectoral Funds?
  Both are almost similar; thematic funds focus on themes such as IPO, Digital India, etc., while sectoral funds focus on a particular sector such as Healthcare, FMCG, Financials, etc.
5. What is QIB?
  QIB stands for Qualified Institutional Buyers. These are institutional buyers with expertise in capital markets. Example: Mutual Funds, Alternative Investment Funds, Endowment Funds, etc.

December 11, 2023

What Is Nifty 50? How To Invest In It?

You must have heard these statements: “Nifty hits a new high, Nifty crashes 500 points”…

You must be wondering: What exactly is Nifty 50? What is it, what happens if it rises or falls, and how do I invest in it? We will unwind all these questions in this blog.

The Nifty 50 is an equity market index comprised of the 50 largest publicly traded companies in India. It was launched in 1996 and is currently managed by NSE Indices Ltd. (formerly NSE Strategic Investment Corporation Limited).

The 50 stocks included in the Nifty 50 are selected based on their free-float market capitalisation*. These 50 stocks can also be considered “blue-chip” stocks, as they are India’s largest and most liquid equity securities.

*Free float market cap: (outstanding shares – locked-in shares) X current market price

Nifty 50 is used to gauge the overall market sentiment, as 50 stocks in the Nifty 50 index are blue-chip companies from different sectors. There are numerous categories in the index universe, ranging from equity to debt, broader to concentrated. We will cover this in detail in a separate blog.

Apart from the Nifty 50, there is another broader market index in India, the Sensex. It is also a free-float market-weighted index but consists of 30 stocks compared to 50 in the Nifty 50 index.

Fact: All NSE indices are managed by a team of professionals. The governance structure of NSE Indices Limited consists of three tiers: the Board of Directors, the Index Advisory Committee (Equity), and the Index Maintenance Sub-Committee.

Index Variants:

There are multiple variants of the Nifty 50 Index:

Nifty 50 USD: A US dollar-denominated Nifty 50 index.
Nifty 50 Total Returns Index: In this, the dividends received from the constituent stocks are also factored into the index values, as a price index does not consider the returns arising from dividend receipts. Therefore, to get a true picture, the Nifty 50 Total Returns Index, which includes the dividends received, was established.
Nifty 50 Dividend Points Index: The Nifty 50 Dividend Points Index is designed to track the total dividend from the constituents of the Nifty 50 index.

Read Also : NIFTY Next 50

Criteria For Stocks To Be Included In Nifty 50

There are certain criteria that need to be fulfilled for a stock to be included in the Nifty 50 Index:

Constituents of the Nifty 100 index that are available for trading in the NSE’s Futures & Options segment are eligible for inclusion in the Nifty 50 index.
The company’s trading frequency should have been 100% in the last six months.
The security should have traded at an average impact cost* of 0.50% or less during the last six months for 90% of the observations for a portfolio of INR 10 crores.
The company should have a listing history of six months.
The company should have a minimum listing history of 1 month as of the cut-off date.

*Market impact cost (cost of executing a transaction) is the best measure of the liquidity of a stock. It accurately reflects the costs incurred when trading an index.

Re-balancing

The index undergoes testing every six months to see if rebalancing is necessary. The cut-off dates for the assessment of indices are January 31 and July 31 of each year. This means that the average data for the six months leading up to the cut-off date is taken into consideration. The market is notified four weeks in advance of the date of change.

Let’s understand this with an example: Assume Adani Enterprises Ltd. fell 50% and is no longer in the list of the 50 largest businesses by free float market cap; therefore, at the time of rebalancing Nifty 50, it will be replaced by the next stock in the Nifty Next 50 index list.

The inclusion and exclusion of any particular stock can create temporary volatility in that stock because of adjustments made by numerous index funds and ETFs.

Stocks In The Nifty 50:

As explained above and suggested by the name itself, it consists of 50 stocks. Some major names are Reliance, HDFC, SBI, Infosys, ITC, etc.

Top constituents by weightage as of October 2023:

Company’s Name	Weight (%)
HDFC Bank Ltd	13.24
Reliance Industries Ltd.	9.25
ICICI Bank Ltd	7.66
Infosys Ltd.	5.84
ITC Ltd.	4.53
Larsen and Toubro Ltd	4.23

Sectoral Distribution

Nifty 50 currently has exposure to 13 sectors, with the financial sector making up the majority. Have a look at the pie chart below (as of October 2023):

Purpose of Nifty 50

Now you must be wondering: What is the use of an index? The Nifty 50 plays an important role in shaping market sentiments and forms the basis for multiple investment strategies.

An index can be used for several purposes:

To gauge broader market sentiments.
Act as a benchmark for actively managed portfolios.
Acts as an economic indicator.
Forms the basis for various investment products, such as index funds, ETFs, index-based derivatives, etc.

How To Invest In Nifty 50:

There are multiple ways to do it:

Index Fund
ETF
Direct Investing: Individually own all 50 stocks as per the actual weightage (not recommended)

Pro tip: Always go with the index fund with the lowest expense ratio and tracking error. These factors differentiate an index fund, as all the Nifty 50 index funds invest only in those 50 stocks.

Check out our blog on Index Funds vs ETFs!

Benefits of Investing in Nifty 50:

Diversification: The major benefit of investing in broader market indices such as Nifty 50 is diversification, which means you are no longer exposed to any particular stocks or sector.
No Biasness: Stock selection is purely based on free-float market capitalization, eliminating human bias.
Less Expensive: Index funds and ETFs are less expensive than active mutual funds.

Demerits of Investing in Nifty 50:

Risk of return: Over a long time horizon, broad market indices generally correlate with a country’s economy. If a country is not doing well economically, it may give negative to nil returns on investment. Consider the example of Japan’s premier index, Nikkei 225. Between 1991 and 2023, it generated an approximate return of just 40%.
If any particular stock rises so much, it may cause significant movements in the index, and the index no longer represents the sentiments of the market; it is basically one stock moving the index.
While the Nifty 50 is a diverse index, it may not fully represent the entire Indian market, for example, small-cap and mid-cap stocks. As of March 2023, there are 2,137 listed companies on the National Stock Exchange.

Nifty 50 Returns

Over the last few decades, Nifty 50 has performed incredibly well. Have a look at the snippet below:

Source: Nseindia.com

The above chart is from 2000 to 2023 (November). It has given returns of app. 11 times during this period, which means 1000 rupees invested in 2000 have now become 11,000 in 2023.

From November 1995 (inception) to November 2023, Nifty 50 has generated an annual return of 11.28% (excluding dividends).

Conclusion:

The Nifty 50 index is a well-diversified index comprising 50 companies reflecting the overall market, with the finance sector being the majority. The free-float market capitalization method is used to calculate it. Its diverse composition, historical significance, and role as a benchmark make it a crucial element for investors. The Nifty 50 can be used to benchmark fund portfolios, launch index funds, and ETFs, among other things. There are several uses of an Index in the financial world. Buying a low-cost index fund is the ideal way to invest in the Nifty 50.

Frequently Asked Questions (FAQs)

How many stocks are there in the Sensex index?
30 stocks, while Nifty 50 consists of 50 stocks.
What is the ideal method to invest in Nifty 50?
Low-cost index fund.
Does buying Nifty 50 mean taking a small piece of the entire market?
Not really. Although the Nifty 50 is a diverse index, it may not fully represent the entire Indian market, for example, small-cap and mid-cap stocks.
Is the Nifty 50 a broad market or strategy index?
Broad market index
In how many months is the rebalancing of the Nifty 50 tested?
Nifty 50 is tested for rebalancing every six months. The cut-off dates are January 31 and July 31 of each year.

December 6, 2023

SIP in Stocks vs SIP in Mutual funds?

Which can be a better choice?

To choose between SIP in stocks and SIP in mutual funds, first we need to understand the fundamentals of mutual funds, stocks, and SIP. Check out this blog to get answers to all your questions.

What is a Mutual Fund?

It’s a pooled investment fund overseen by a professional fund manager. It gathers funds from investors who want to invest in the stock market. Depending on the type of mutual fund, these collected funds are then diversified into various asset classes. Mutual funds can differ from, open-ended to close-ended, and from actively managed funds to passively managed funds. Every mutual fund unit is allotted NAV, which is net asset value. It is the combined value of all the asset classes that you hold in your portfolio.

What are Stocks?

A stock, also known as equity or share, represents a part of ownership that an individual holds in a corporate or government company. Investing in stocks carries a level of higher risk because the value of a stock can be influenced by various factors, including the company’s financial performance, economic conditions, and market sentiment. However, stocks have historically offered higher returns compared to other investment options.

What is SIP?

SIP stands for Systematic Investment Plan. It is an investment method in mutual funds and stocks where you invest a fixed amount of money at regular intervals. SIP can be done for an amount as small as INR 500. SIPs are long-term investment strategies that help you compound your money over the years.

Having discussed the basics of mutual funds, stocks, and SIP, let us go through what SIP in mutual funds and SIP in stocks looks like.

SIP in Stocks

SIP in stocks involves regular investment in a specific stock at pre-determined intervals. Stock SIP can be used for averaging your shares, thereby reducing their purchase price. The concept of stock is more or less similar to SIP in mutual funds, which we shall discuss later in this blog.

Below are some key facts an investor should know before choosing stock SIPs.

SIP in stocks will give you direct exposure to individual stocks that can help you generate better returns, but as you know, reward and risk go hand in hand. This SIP method is susceptible to market fluctuations, which can significantly impact returns.
SIP in stocks will give you more freedom as you are solely responsible for selecting your allocation. However, selecting specific stocks involves in-depth research and analysis of companies as well as the overall trend of the market, which can be challenging and stressful at times.
Stock SIPs involve regular monitoring of the stocks and can be a tough task.
Diversification of the portfolio becomes difficult when using SIPs in stocks because it can be difficult to maintain multiple SIPs and stay current on research and new developments.

Stock SIPs can be a good option for investors who are well-versed in market fluctuations. However, for most of the investors, it is suggested to do SIP in mutual funds.

SIP in Mutual Funds

Mutual fund SIP involves regular investment of a fixed amount into a mutual fund. This method indirectly invests in multiple stocks and other instruments; therefore, it allows investors to allocate capital as per their risk profile. There are a plethora of mutual funds available in the industry, ranging from equity based to debt based. Check out our blog on mutual funds to learn more!

Below are some key points that an investor should remember before choosing SIPs in mutual funds:

Mutual funds offer diversification and carry less risk as compared to stock, as mentioned earlier, and reduce the impact of poor performance of a single security.
Investors can start their financial journey with mutual fund SIPs from as low as INR 100, which makes it accessible to people of all income groups in a country like India, but keep in mind that mutual fund investments are always subject to market risk.
Mutual fund SIPs allow disciplined and regular investing. You do not need to monitor and analyze your portfolio on a daily basis.
There are two ways to transact SIPs:
- You can manually pay the amount via UPI, Net banking, etc., at intervals.
- You can set-up an auto mandate authorizing your bank to automatically deduct a specified amount from your bank account at every interval.
Similar to stock SIP, investors can enjoy the benefits of rupee cost averaging in mutual funds SIP. With this, the NAV of the mutual fund unit will be allotted at lower prices.
Investors can choose SIPs based on their risk profile and financial goals, such as equity funds for capital appreciation, debt funds for stability, or hybrid funds for a balanced approach. However, before choosing any scheme, be aware of the expense ratio and other fees associated with mutual funds.

Read Also: SIP vs Lump Sum: Which is Better?

SIP in stocks vs. SIP in mutual Fund

Let’s explore the table of differences below for a better understanding:

Basis	SIP in Stocks	SIP in Mutual Fund
Risk	High – Market expertise is required	Risk is comparatively lower as it is managed by a fund manager.
Research Requirement	High	Low to none
Management	Self-directed	Professionally managed
Ownership	Direct ownership in your de-mat account	Indirect ownership as shares are purchased by mutual funds and its units are allocated to you
Charges	Only transaction related expenses are incurred. Click here to learn more.	It includes several charges: expense ratio (covers admin-related expenses and fund manager fees), exit load, redemption fees, etc.

Conclusion

SIP in mutual funds offers a disciplined way of investing, and people who wish to stay committed to the markets for the long term can choose this route. However, it is suggested to only those investors who are aware of the market technicalities and are willing to research companies. It requires active involvement as compared to mutual fund SIPs.

In summation, before starting your SIPs, carefully assess your financial goals and risk appetite. It is advised that you speak with a financial advisor to receive individualized portfolio support.

Further, click here to explore all the different investment options!

S.NO.	Check Out These Interesting Posts You Might Enjoy!
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3	PNB Vs Bank of Baroda: Which is Better?
4	MRF vs Apollo Tyres: Which is Better?
5	Bank of Baroda Vs Canara Bank: Which is Better?

Frequently Answered Questions (FAQs)

What is the full form of SIP?
SIP stands for Systematic Investment Plan.
Which is better? Stock SIP or Mutual fund SIP?
It depends on individual financial goals and preferences.
How many stocks can you choose when doing Stock SIP?
You can start SIP in as many stocks as you want. However, in a well diversified portfolio, atleast 30 stocks are suggested.
Does SIP in stocks has higher risk than SIP in Mutual Funds?
Yes. SIP in stocks is comparatively riskier.
What is the minimum amount of SIP required to invest in Mutual Funds?
SIP in a mutual fund starts from as low as INR 100.

December 4, 2023

Value Investing Vs Intraday Trading: Which Is More Profitable?

Value investing and Intraday trading are two different aspects of the stock market. Both of them carry their own set of characteristics and challenges. In today’s blog, we bring you an in-depth analysis of these concepts. If you are the one who is always confused about which is better for you, explore our blog to get answers to all your questions.

What is Value Investing?

Value investing is an investment strategy that involves buying securities at a price lower than their intrinsic value with the purpose of holding them for an extended period, often years or decades. The main objective of value investing is to create wealth over time. Value investors believe that the market does react to good and bad news that results in movements in stock price, but these movements are temporary and do not leave any impact in the long run. Value investors majorly focus on fundamental analysis of the company, such as earnings quality, dividends, and financial statements. They are of the view that the market will recognize the true worth of the stocks that are trading below their intrinsic value over time.

Rakesh Jhunjhunwala and Dolly Khanna are the biggest examples of value investors in India.

Key features of Value Investing

Margin of Safety

Long-term investors seek to purchase stocks at a discount to their intrinsic value, creating a margin of safety and avoiding potential losses.

Long-Term Perspective

Value investors typically purchase stocks with the intention of holding them for extended periods of time, which calls for patience and self-control.

Contrary Approach

Value investors often take a contrarian approach. This approach includes doing the reverse of what the majority is doing. Contrarian investors believe that the majority of the participants act in a herd because of fear, greed, etc., which results in securities being temporarily overvalued or undervalued. This approach can be highly rewarding, but keep in mind that it can be a risky one, which may result in hefty losses.

Interesting Fact: Warren Buffett is a famous Contrarian Investor

Advantages of Value Investing

Better Returns

Value investing has historically achieved superior and stable returns when compared to other investing strategies. By buying undervalued stocks and waiting for them to generate returns, long-term investors can benefit from the market’s eventual recognition of the company’s true value.

Lesser Risk

The margin of safety reduces the risk of the investors and protects them from losses if the valuation of the stock that they are holding is slightly off.

Disciplined Approach

Value investing focuses on a long-term perspective and encourages a disciplined and planned approach to investment, preventing investors from making impulsive decisions.

Challenges of Value Investing

Identifying undervalued stock is a challenging task, as analyzing the financials of the company and calculating its true value can be complex.
A contrarian approach to value investing can sometimes lead to holding stocks that are unpopular with the market and will not be able to generate potential gains over time. Not all the stocks trading at a seemingly low valuation are good investment opportunities.
Timing the market, i.e., identifying the right time to enter the market or buy a stock, can be challenging.
Psychological biases, such as overconfidence or anchoring, can influence investors and lead to poor decision-making.
Value investors may face challenges when industries evolve and companies fail to adapt to new trends or technologies, leading to value destruction.

What is Intraday Trading?

Intra-day trading is a financial approach where stocks, currencies, and commodities are bought and sold within the same trading day. Intra-day traders aim to earn profits from very short-term price fluctuations in the market, and they do not carry their positions overnight.

Key facts about Intra-day trading

Intraday trading is carried out on short-time frames on technical charts like 1 minute, 5 minutes, 15 minutes, 1 hour, and 4 hours.
Intraday traders design their strategies based on technical analysis. (Read our blog, Best Options Trading Chart Patterns, to know more about technical analysis)
Intraday traders get an option to leverage their trading positions. This allows them to buy more stocks with a lesser amount of capital. However, do remember that leverage is a double-edged sword.
Intra-day traders are generally quick decision-makers because market timing and executions are crucial factors for them.
Intra-day trading can be speculative since traders try to catch short-term market movements.

Benefits of Intra-day Trading

Quick profits

Intraday traders can earn quick profits within a single trading day because they aim for short-term price movements, which involve multiple trades in a day. At the end of the day, these multiple small trades can significantly influence the overall P&L.

Lesser risks.

Intraday traders do not carry positions overnight and square off their positions within the same trading day. This eliminates the risk of gap-up and gap-down openings, as well as random market news.

Leverage

Intraday traders can significantly benefit from taking high leverage in intra-day trades, which can significantly influence their P&L. However, keep in mind that leverage is a double-edged sword, and it is advisable to trade with less leverage while carrying out intra-day trades.

Challenges of Intraday Trading

Excessive market volatility can lead to unpredictable swings, thereby causing losses and increasing market risks.
Day traders can face constant fear of loss of capital, and the mental pressure to make instant decisions can be stressful. Fear and greed can lead to impulsive decisions.
Intraday traders can end up paying higher transaction costs (brokerage, STT, stamp duty, etc.) because they might execute multiple trades on the same day.
Day traders get a limited time window to execute trades, and they may face technological issues since they rely heavily on real-time data provided by the broker.
Sticking to your strategy in real-time markets can be a tough task since it requires a lot of patience and discipline.

Value Investing vs Intra-day Trading

Since both come with their own merits and demerits, choose what aligns best with your financial goals and investment horizon. We have created a table of differences for you. Let’s have a look:

Basis	Value Investing	Intra-day Trading
Time Horizon	Long-term (generally >5 years)	Within a day
Investment Philosophy	Major focus on fundamental analysis	Intra-day traders focus on technical analysis
Stock Selection	Undervalued stocks	Highly liquid and volatile stocks are preferred
Risk	Value investing generally carries lower risk.	Carries higher risk than Value investing

Conclusion

To wrap it up, it completely depends on the individual preferences, risk tolerance, and time that he or she is willing to give. Value investing is considered suitable for long-term investors, while intraday trading is for short-term traders who are looking to make quick bucks. Keep in mind that intraday trading is a zero-sum game, while value investing is a positive-sum game. Both strategies carry inherent risks, and careful evaluation is required.

Frequently Answered Questions (FAQs)

Which is riskier? Value investing or intra-day trading
Intraday trading is considered riskier.
Is it suggested for beginners to be involved in intraday trading?
No, intra-day is speculative in nature and is generally not suggested to beginners.
Which investment approach uses fundamental analysis?
Value investing uses fundamental analysis and reading financial statements.
Mention two value investors in India.
Rakesh Jhunjhunwala and Dolly Khanna.
What is the intrinsic value of a stock?
The inherent value or true worth of the stock is known as intrinsic value.

December 4, 2023

Mutual Fund vs ETF. Are They Same Or Different?

Mutual Funds and Exchange Trade Funds (ETFs) are both pooled investments that take money from multiple investors and then invest in several instruments: Equity, Bonds, Commodities, etc. However, there are a few differences between them. Let’s find out those differences!

What are Mutual Funds?

Mutual funds collect money from numerous investors to invest in a diversified portfolio of stocks, bonds, or other assets. These funds are managed and curated by professional fund managers and hence become suitable for investors who have less time and expertise to manage their portfolios. When you invest in mutual funds, NAV (Net asset value) is allotted to you which reflects the net value of the assets that the fund manager chooses to invest your money.

Mutual funds in India are established in the form of a trust under the Indian Trust Act of 1882, in accordance with SEBI (Mutual Funds) Regulations, 1996.

Mutual funds are considered ideal for investors who do not have sufficient knowledge of investing in stock markets and wish to start their financial journey with a small amount since these funds offer investors a wide variety of investment options like shares, bonds, debentures, real estate, and money market instruments.

Check out our blog on Mutual Funds!

Types of Mutual Funds

1. On the basis of organizational structure

Open-ended funds

These funds issue shares and redeem existing shares on a daily basis. The NAV of the underlying assets determines the price of this fund.

Closed-ended Funds

These funds have a fixed number of shares that are issued only once and then are traded on the exchange until maturity. Close-ended funds have a fixed maturity date.

Interval Funds

These funds are a mixture of open-ended and closed-ended funds that allow investors to purchase & redeem their shares at certain intervals. The transaction period in interval funds has to be a minimum of 2 days, and there should be at least a 15-day gap between the two transaction periods.

2. On the basis of portfolio management

Active Funds

An active fund is a fund where the fund manager manages the portfolio, i.e., he decides what needs to be sold, bought, and held in the portfolio.

Passive Funds

Passive funds, also known as index funds, are investment funds that are designed to replicate the performance of a specific index. They keep track of the benchmark returns.

3. On the basis of asset class

Equity funds

These funds invest primarily in stocks or equities and come with higher volatility. For example, large-cap funds, mid-cap funds, and small-cap funds.

Debt Funds

These funds invest in fixed-income securities such as government bonds and carry lower risk when compared to regular equity funds.

Check out our blog on Debt Mutual Funds

Hybrid funds

In these funds, the capital of the investor is allocated both in equity and debt funds and the fund manager tries to create a balance between risk and return.

Advantages of investing in Mutual fund

Investing in mutual funds comes with certain risks and advantages. Below are some key advantages that mutual funds offer:

Mutual funds offer investors a diversified portfolio of different asset classes – Large cap, Small Cap, Flexi Cap, etc.
Active Mutual funds are professionally managed funds with skills and expertise.
Mutual funds are an affordable way to start an investment journey because the initial investment amount is relatively low.
Liquidity – The lock-in period is generally low to none in Mutual funds.
Tax benefits are also available to the investors investing in ELSS funds.

Risk of Investing in Mutual Funds

Mutual funds are subject to market risks, and returns are not guaranteed.
The value of your investments may fluctuate depending upon the market movements.
Market-related risk: The inability of a mutual fund to sell securities held in the portfolio could result in potential losses to the scheme.
Changes in interest rates and economic conditions can significantly affect the prices of securities held by Mutual Funds.

What is ETF?

ETF stands for Exchange-traded funds. It is a type of investment option similar to Mutual Funds. ETFs invest in a basket of securities such as stocks, bonds, and other assets. Unlike mutual funds, ETFs are traded on stock exchanges just like any individual stock, and an investor can buy or sell them during market hours at certain prices. These funds track indices such as CNX NIFTY. ETFs generally carry a low expense ratio because of lower administrative costs. (Read more about expense ratios in our blog Asset Under Management).

To trade in ETFs, a de-mat account is required, and usual brokerage charges and STT would apply. When investing in ETFs, dividends from a stock that is in the ETF basket are also reinvested.

ETF shares are created or redeemed through a unique in-kind process. Authorized participants or Market Makers (typically large institutional investors) can exchange a basket of securities for ETF shares or vice versa, helping to keep the ETF’s market price close to its Net Asset Value (NAV).

Merits of investing in ETFs

ETFs offer diversification because they invest in a basket of securities. Investors can customize their portfolios as per their choice.
ETFs usually carry a lower expense ratio than mutual funds.
ETFs are tax-efficient. They are designed and structured to minimize capital gains distributions so that your tax liability is reduced to an extent.
ETFs can be easily bought and sold.

Demerits of investing in ETFs

ETFs may have tracking error which is the difference between the ETFs performance and the performance of the underlying asset. Various factors such as expense ratio, brokerage, and liquidity of the underlying securities can cause this.
ETFs offer less diversification as compared to Mutual Funds.
ETFs with low trading volume can be more volatile because of high bid-ask spreads, which is the difference between the price at which you can buy an ETF and the price at which you can sell it.

Pro Tip: Always check the NAV of the ETFs before investing because ETFs generally trade at a premium.

Read Also: Types of Mutual Funds in India

Mutual fund vs. ETF: Which one is right for you?

Confused! Explore this table to have a better understanding.

Basis	Mutual Funds	ETFs
Structure	Managed by investment firms and are priced once per day at the NAV	ETFs are tracked by index sector or asset class.
Trading	Bought and sold through the fund company	Traded on stock exchanges just like any other individual stock.
Management	Mutual Funds can either be actively managed or passively managed.	Most of the ETFs are passively managed, but there are actively managed ETFs as well.
Fees	Mutual funds carry management fees, sales loads, and expense ratios	ETFs do not carry any sales load, but you need to pay STT, brokerage, and expense ratios while trading in ETFs.

Conclusion

To wrap it up, ETFs and Mutual Funds are both pooled investments. Eventually, the choice between a mutual fund and an ETF depends on the preferences of the investor, his investment strategy, and risk tolerance. Some investors may prefer the ease of trading and lower costs associated with ETFs, while others may value the professional management and simplicity of mutual funds.

Frequently Answered Questions (FAQs)

Which mutual fund offers investors with tax benefits?
ELSS (Equity Linked Savings Scheme) funds provide investors with tax benefits under Section 80 (C) of the Income Tax Act.
What does ETF stand for?
ETF stands for Exchange Traded Funds.
Are ETF and mutual Funds the same?
ETFs are traded like individual stocks, and mutual funds can be bought and sold through fund houses.
ETFs are actively managed or passively managed?
Most of the ETFs are passively managed, but there are actively managed ETFs as well.
Where do money-market funds invest?
Money market funds invest in highly liquid instruments like T-bills and commercial papers.

November 30, 2023

What should you do if your stock portfolio is stuck in losses?

You must be tired of seeing those red figures whenever you open your portfolio. We understand that if your portfolio is stuck in losses, it can be a challenging situation. You need to go through the stocks and re-evaluate the strategies. It is necessary to analyse your portfolio with a level-headed mindset and consider different factors before reaching any decision. You need not worry because we got you covered and in today’s blog, we will be exploring key steps to help you navigate the losses and work towards a more strategic approach.

Possible causes of losses in your portfolio

Below listed are some of the causes that can land you in losses.

Volatile Markets
Focusing on a specific sector
Wrong Entry and Exit
Leveraged Positions
Psychological Reasons
Poor Selection of Stocks

Let’s understand above mentioned reasons in depth:

Volatile Markets

Stock market fluctuations are normal and any sort of volatility in the short-term can lead to unrealised losses. Economic uncertainties like global economic conditions and geo-political events can contribute to volatility in the market. Therefore, if you are a short-term investor you need to be careful about the economic activities and global events.

Focus on a specific sector

Warren Buffet once said, “Do not keep all your eggs in one basket”. Hence, concentrating on one sector can expose your portfolio to sector-specific risks. Any kind of challenge in that particular sector can impact the performance of the stocks of that particular sector.

Wrong Entry and Exit

A lack of technical analysis and bad trading decisions can lead to poor timing of entry in the market. Buying stocks when they are at their highs can affect the overall performance of your portfolio.

Leveraged positions

If you do margin trading chances are likely that you will end up amplifying your losses because any kind of trend reversal in the market can worsen your situation and you will be forced to liquidate your portfolio at unfavourable prices.

Psychological Reasons

Herd mentalities won’t work when trading in the stock market. If you are someone who frequently invests or trades on tips and bets on random stocks you will lose all your capital because people can have different financial goals and risk appetite.

Poor selection of stocks

It is important to analyse any stock technically and fundamentally before investing. Without proper study, stock selection can be tough and can impact your portfolio.

How to deal with red portfolio

Let’s discuss the ways through which you can manage the losses and turn your portfolio into green.

Revaluation

Analyse the reason you initially invested in the losing stock. Are there any kind of fundamental changes since then? We say that candlestick charts are astrological graphs of any stock. Go through these charts and try to know the current trend of that stock. The initial reason for investment should still align with your long-term investment goals. If you find anything fishy then consider exiting the stock.

Long-term perspective

If you are a long-run investor and revisit your portfolio every now and then, it may lead to disappointments because those red figures might bother you. As company goes through several phases, it might be the case that your stock is in red now because of temporary reasons. If company’s philosophy is aligned and management is good then stocks often generate good returns to Investors but yes that takes patience. Since patience is the key to successful investing in the stock market you need to wait for the stock to recover from the losses.

Some wise person once said “Checking your portfolio daily is like putting up a web-cam in the forest to see if the trees are growing.”

Portfolio-review

Review your portfolio periodically say once every quarter and keep a check on your investment strategies. Consider rebalancing your portfolio quarterly, half-yearly or annually according to your current financial situation and market conditions.

Follow Stop-loss

Strict stop-loss is a prudent decision. Learn to respect the stop loss. If there is a sudden fall in the margin or ratios of the stock, consider selling and reallocating the funds. Stop loss is designed to limit an investor’s loss in a position. There is no point of staying investing in a stock that has underperformed over the years and is no longer giving you returns.

Invest practically and not emotionally.

Risk-Appetite

Reassess your risk tolerance. If the losses are causing significant stress or anxiety, it may be an indication that your risk tolerance needs adjustment. Your portfolio should match your comfort level and your goal of investments.

Diversification

Do not concentrate your investment amount on an individual stock or in stocks of the same sector. Diversify your portfolio in order to reduce stock specific and sector specific risks. This can help you in mitigating the losses because not all the stocks in your portfolio will give you losses.

Exit your mistakes in Bull Market

Go through the overall market trends including the global economy. Sometimes market gives golden opportunities to investors to exit their mistakes, as in Bull run, most of the stocks do well irrespective of their fundamentals.

“No stock in an uptrend has ever gone bankrupt.” – Walter Deemer

Advice from professionals and experience.

If you are a newbie, you must understand the fact that a journey in the stock market is a roller coaster ride. If you are not able to navigate your losses and diversify your portfolio, go for professional advice. An experienced person can give market insights and help you make investment decisions as per your risk and financial goals

Invest at regular intervals

One of the best ways to avoid losses and reduce the risk is regular investment. We have already discussed about selling the investments if they are not generating returns, but we also want to make you aware of the art of averaging the stocks. Falling markets give us losses and we all know this. But instead of panic selling, you can choose take benefit of downtrend and average the stock if it’s fundamentally strong.

Also, check out the blog on ATR.

Note: Averaging of stocks is defined as buying more shares of that stock over time to lower the average buy price of the stock provided the price of the share is trading below your initial buy price.

Conclusion

It is important to be mindful of your investments because there is no guaranteed technique to escape losses in the stock market. All an investor can do to protect his/her portfolio and minimise losses is diversification of investments in different asset classes including equities and debt. You should know that only an optimistic approach will work well with your developed strategies throughout your investment journey. The stock market inherently carries risk and it’s unavoidable. Any investor should make decisions based on his/her own rationale. You just need to be consistent and patient and the market will surely reward you with profits.

The decision is tough but will be worth it!

Frequently Asked Questions (FAQs)

If your portfolio is stuck in losses what should be the first step?
The first step should be analysing the reasons for the losses – It can be either stock specific (e.g. Yes Bank) or market specific (e.g. Covid-19). Force selling in a market specific scenario is not ideal.
Should an investor consider selling stock immediately once the portfolio turns red?
No, by doing so s/he will be selling the stocks in a panic state. Sit back and analyze the technical and fundamentals of the stock. Always take the decision with a clear mind.
How can diversification help you minimise your risk?
Diversifying your portfolio can help you in eliminating the stock specific or sector specific risks.
Can professional advice help you reduce losses?
Yes, professionals can help you making an informed decision.
How to control emotions when trading in the stock market?
When trading in the stock market you should be disciplined. Further, educate yourself so that you can make better investment decisions and formulate profitable strategies. Always remember that Emotional biases are easier to understand but difficult to overcome.

November 29, 2023

FD (Fixed Deposit) vs Stocks: Which is the better investment option?

Where to invest? How much to invest? Should I go with investing in stocks, or should I go with bank fixed deposits?

These questions commonly arise whenever you have an ample amount of money and you are economical. In this blog, we will explore the difference between investing in stocks and fixed deposits. Before we learn about the key differences between stocks and fixed deposits, let’s have some basic ideas about financial planning. What is financial planning, and why do we need financial planning?

Financial Planning means channelling one’s income into consumption and savings, where consumption is defined as the unavoidable expenditure incurred by an individual on his basic needs, and the residual amount after spending is known as savings. The savings can be used to meet the financial goals.

Types of Saving Instruments

In a country like India, saving instruments can be divided into two parts

Traditional Savings instrument
Investments

Most people in India generally opt for traditional savings instruments because there is a lack of financial literacy. Some of the most common traditional methods to save are listed below.

Fixed deposits
Recurring Deposits
Post Office

Some of the most widely used new-age investment options apart from traditional saving instruments are

Stocks
Mutual Funds
Commodities

Now, let us dig deep into the concept of the most used methods of traditional and modern investing i.e., Fixed Deposits and Stocks.

What are fixed deposits?

Let’s make it easy, simplified and crisp with a short example.

Suppose, you received a Diwali Bonus of Rs.50000, and instead of buying something expensive, you decided to go for a Fixed Deposit. Now you will visit your nearest bank branch and will deposit your money to earn some amount of interest and will just sit back for some years. You will reach out to the bank once again when your Fixed Deposit matures to get your principal amount as well as the interest that you have earned over the years.

Therefore we can say that fixed deposit (FD) is a tenured deposit account provided by banks or NBFCs (Non-banking financial companies ) which provides investors with a higher interest rate than a regular savings account until the given maturity date. Investment in fixed deposits is considered a risk-free investment.

Merits & Demerits of Investing into FDs

There are certain merits and demerits of saving your money in FDs

Merits of Investing in Fixed Deposit

1. Guaranteed Rate of Interest

2. Easy to Monitor

3. Tax Benefits

4. Loan Against FD

5. Flexible Period

6. Better option for senior citizens

Demerits of Fixed Deposits.

1. May not beat inflation

2. Lower rate of return

3. Penalty on pre-mature withdrawal.

4. Lack of re-investment opportunity.

Taxation of Fixed Deposits in India (Example):

In India, the interest income earned from fixed deposits is subject to taxation under the Income Tax Act. Here’s a simplified example to explain how FD interest is taxed. Suppose Mr. Y has a bank FD of Rs.1 lakh and as per the current rate he is earning an interest 6.5% per annum on his FD, which amounts to 6500 (6.5% of 1 lakh). Now he is liable to pay tax on 6500 as per his income slab. By now, you must have understood the basics of Fixed Deposits. Now let’s throw some light on the most discussed yet so undervalued concept of investing i.e., stocks

What do you mean by investing in stocks?

A stock, also known as equity, represents a part of an individual’s ownership in a corporate or government company. Investing in stocks carries a level of higher risk because the value of a stock can be influenced by various factors, including the company’s financial performance, economic conditions, and market sentiment. However, stocks have historically offered higher returns compared to other investment options. Many investors choose to build a diversified portfolio of stocks to spread their risk. Diversification involves owning a basket of stocks from different sectors to reduce the impact of poor performance in any one stock. Stocks can be diversified into large-cap, mid-cap and small-cap companies

Large-cap

Companies are generally growth-oriented companies that are considered safer while investing. They are less risky and give lower returns than other companies since risk and reward in the stock market go hand in hand.

Mid Cap

Companies possess higher risk when compared with large-cap companies and they are suggested for investors who are well-versed with the concept and idea of investing in stocks.

Small cap

Companies carry higher risk since they are start-ups, having good potential to perform in longer investment horizon.

From where can we buy or sell stocks?

Stocks are bought and sold on stock exchanges, organized marketplaces where buyers and sellers join together to trade. Stock exchanges in India are NSE and BSE. If we talk about the returns of the stock market, they are highly volatile and are dependent on the performance of the market. If you are planning to invest in stocks from the point of view of the short term, then be ready for the volatility you might face. Still, if you stay invested for a longer horizon, the market will surely reward you for your patience with outstanding higher returns, which can fight inflation.

Taxation of Equity in India

Just like taxation on FDs, stocks are also subject to tax deductions. The taxation on equity is divided into two parts, the first being the short-term capital gain and the second being the long-term capital gain.

Short-Term Capital Gain

The realized gain within 365 days of investing is considered short-term and taxable at 15%.

Long-Term Capital Gain

The realized gain after 365 days of investing is considered long-term and is taxable at 10% over and above 1 Lakh.

Merits & Demerits of Stocks

Now, let’s discuss the merits and demerits of investing in stocks.

Merits of investing in stocks

1. Inflation rate adjusted Returns

2. Dividend income

3. Liquidity

4. Tax benefits

5. Wealth creation

Demerits of investing in stocks

1. Volatility of markets

2. Higher Risk of Loss

3. Brokerage

In India, 3% of the current population is investing in stock markets and we hope that with our blogs we will be able to make our upcoming population financially more aware.

After having an overview of the basics of Fixed Deposits and stocks.

We can now easily create a table of differences between stocks and FDs.

Basis of Difference	Fixed Deposit	Stocks
Liquidity	It has very little liquidity as compared to stocks.	Stocks have high liquidity.
Risk	Investment in Fixed Deposit is considered risk-free.	Investment in stocks possesses higher risk.
Investment Horizon	Pre-decided investment horizon.	Suggested for individuals having high-risk appetites.
Rate of Interest (Return)	Guaranteed	Market Linked
Taxation	Interest is fully taxable.	Long
Expenses	No expenses	Transaction Cost
Inflation Rate	Returns of FD may or may not beat inflation.	It offers inflation-adjusted returns.
Duration of investment	Generally suggested for the shorter horizon.	It is suggested for individuals having long-term investment horizons.

Conclusion

Therefore, it is always suggested to select between the two as per your investment objective, financial goal and risk appetite. Eventually, there is no one-size-fits-all answer, and the optimal choice depends on your preferences. Do not forget to consult a financial planner to tailor your investment strategy if you are confused.

Frequently Answered Questions (FAQs)

Which is considered safer, Fixed deposits or stocks?
Fixed deposits are generally considered safer as they provide a fixed return.
Which investment option offers higher returns between stocks and FDs?
Stocks offer higher returns than FDs.
Who provides FDs?
Banks and Non-Banking Financial Institutions provide FDs.
What is STCG in stocks?
STCG in stocks stands for short-term capital gains, which are 15% of your realized gains.
Who decides the interest rate on FDs?
Banks and NBFCs decide interest rates on FDs, which vary from bank to bank.

November 27, 2023

What is Asset Under Management (AUM) in Mutual Funds

Before learning about AUM, let us know a little about AMCs.

AMC stands for Asset Management Company and manages and operates the mutual funds. It pools money from retail and institutional investors and invests that fund in a diversified portfolio of stocks, bonds, and other financial instruments. AMCs have dedicated research teams and fund managers who make decisions on the allocation of assets and portfolio management. AMCs earn fees for managing mutual funds, a percentage of the fund’s AUM.

What is AUM?

AUM stands for asset under management. AUM in mutual funds refers to the total market value of all the assets a mutual fund manages on behalf of its customers. It is an essential metric in the financial markets. A larger AUM generally implies a larger fund with more investors. The respective mutual fund scheme AUMs can be found in the monthly fact sheet of the AMCs on their website or online mutual fund research platforms.

Indian Mutual Funds Industry

Before getting into the Indian mutual funds industry, let us know about the history of mutual funds. To make India financially stable, strong, and independent and encourage saving and investment, the first mutual fund was established in 1963, Unit Trust of India, by a combined initiative of the Government and the Reserve Bank of India by an act of Parliament. The mutual funds industry has grown significantly over the years. Unit Scheme 1964 was the first scheme that UTI launched.

In 1993, the first set of SEBI Mutual Fund Regulations existed for all mutual funds except UTI. The former Kothari Pioneer (now merged with Franklin Templeton Mutual Fund) was the first private-sector mutual fund registered in July 1993.

With the entry of private sector funds in 1993, a new age began in the Indian MF industry, giving Indian investors a wider and better choice of Mutual fund products.

The MF Industry’s AUM has grown from ₹ 22.24 trillion as of October 31, 2018, to ₹46.72 trillion as of October 31, 2023, more than a 2-fold increase in 5 years (source- AMFI website). The Indian Mutual Funds industry has witnessed robust growth over the years. The sector provides investors with different mutual fund categories like equity, debt, and hybrid funds catering to their risk profiles and preferences. Not only this, the mutual fund industry in India has also undergone a digital transformation.

Calculation of AUM

AUM in mutual funds is calculated by adding up the market value of all the securities, cash, and other assets mutual funds hold.

The formula for the same is listed below

AUM= Market Value of Securities + Cash & Cash equivalents + Other Assets

For example, a mutual fund holds the following

The market value of securities = Rs. 50 Crore

Cash & Cash equivalents = Rs. 7 Crore

Other Assets = Rs. 3 Crore

Therefore, AUM = Rs. 50 Cr. + Rs. 7 Cr. + Rs. 3 Cr. amounts to Rs. 60 Crore.

It’s important to note that the actual calculation may involve more detailed considerations, especially in a real-world scenario where the portfolio may consist of various types of securities, derivatives, and other financial instruments. Moreover, the market values of securities can fluctuate, affecting the AUM over time.

Remember that the total value of AUM keeps changing depending on the performance of the assets.

Significance of AUM in different Mutual Funds Categories

Larger AUM in equity funds, whether large or mid-cap, reflects a broader investor base and better scale of operations. However, a larger AUM while investing in small-cap companies can pose challenges. Therefore, small caps do not concentrate much on AUM.
Smaller AUM in sectoral and thematic funds may indicate a more focused approach to investment since these funds often focus on specific sectors and themes.
In the case of hybrid funds, a mixture of equity and debt, a larger AUM can provide better diversification benefits.
Fixed-income funds like bonds also need a larger AUM for better diversification.

Factors affecting AUM

Performance of the Market

When markets are performing and in a rising phase, investors are more likely to invest, resulting in increased inflows and higher AUM for investment companies. In falling markets, investors redeem the funds, resulting in a decline in AUM.

Fees & Expenses

The expenses charged by asset management companies can influence AUM. Lower fees can make the funds more eye-catching to investors.

Advertisement & Distribution of Funds

Effective marketing and distribution policies are vital in attracting new investors and growing a firm’s investor base. Successful marketing campaigns and a strong distribution network can help the MF house generate inflows and increase AUM.

Economic Conditions

The global economic environment can also affect AUM. When a country is economically stable and in its growth phase, more investments will occur, leading to higher inflows.

Past performance

The historical show of a company plays a vital role in determining AUM. Funds generating consistent positive returns will eventually attract new investors.

For this, first, we need to understand what is the expense ratio. The expense ratio is defined as the annual cost of managing and operating mutual funds. AMCs charge these expenses and are a percentage of AUM., for example, management fees, administrative expenses, and Distribution expenses. Formula for calculating Expense Ratio = (Total Fund Expenses / AUM) *100. Therefore, there is an inverse relationship between AUM and the expense ratio.

As AUM increases, the overall percentage of expenses relative to assets decreases. Keep in mind that AUM influences the calculation of the expense ratio and plays a vital role in structuring the overall cost of the fund and

Conclusion

To wrap it up, AUM is an important metric for investors when it comes to selecting mutual funds. It can only provide insight about the AMC but cannot be the sole factor when making investment decisions also, a higher AUM does not signify better returns and performance by the mutual funds. The significance of AUM can fluctuate across different fund categories.

Read Also: History of Mutual Funds in India

Frequently Answered Questions (FAQs)

What is AUM?
AUM stands for asset under management and is the total market value of all the assets that a mutual fund manages on behalf of its customers
What is the formula for calculating AUM?
The formula for calculating AUM isAUM= Market Value of Securities + Cash & Cash equivalents + Other Assets
How is the expense ratio and AUM related?
Expense ratio and AUM share an inverse relationship, i.e., an increase in AUM decreases the expense ratio.
Who manages the mutual fund?
Asset Management companies manage mutual funds.
When was the first mutual fund in India established?
1^st mutual fund in India was established in the year 1963.

November 25, 2023

What is Debt Mutual Funds: Invest in the Best Debt Funds in India

What are Debt Mutual Funds?

Debt mutual fund is a category of mutual fund that invests in fixed-income instruments such as Corporate and Government bonds, commercial papers, treasury bills, state development bonds, etc. (T-bills are short-term debt instruments or money market instruments that the government of India issues. These are generally given for 91 days, 182 days, or 364 days. They are provided to fulfill the short-term financial needs of the government).

The primary objective of debt mutual funds is to generate income for investors through interest payments while preserving the capital invested. Debt mutual funds allocate their holdings across various debt instruments to diversify the risk. This helps the fund manager reduce the impact of poor performance by any single security.

Debt funds invest in listed or unlisted securities, including corporate and government bonds. The NAV of the fund is calculated as the difference between the buy price and the sell price. Debt funds also receive regular interest from the underlying debt, which is added daily.

A debt fund’s NAV also depends on the interest rate. Debt mutual funds are open-ended funds, which means investors can buy or sell fund units on any business day at the fund’s net asset value (NAV). When considering debt mutual funds, it’s essential to assess your investment goals, risk tolerance, and time horizon and select funds that align with your financial objectives.

Who should invest in Debt Funds?

Debt Funds are suggested for individuals who prefer capital preservation to higher returns because debt funds provide investors with consistent returns and are less volatile. Investors who want a regular income but are risk-averse i.e., refrain from taking risks with their investments.

How to invest in Debt funds

You can invest in direct debt funds through Asset Management Companies (AMCs), and in the case of regular debt funds, you need to contact mutual funds distributors (MFDs).

Types of Debt Mutual Funds

These categories of debt funds cater to different investor preferences and financial goals.

1. Liquid Funds

Liquid funds invest in very short-term debt instruments like T-bills, Certificates of deposits, and commercial paper and have a maturity of 91 days to generate optimum returns. Liquid fund invests in highly liquid money market instruments and debt securities. The best liquid funds to invest in India are ABSL Liquid Fund, Mahindra Manulife Liquid, PGIM India Liquid, SBI Liquid Fund, and Nippon Liquid Fund.

2. Short-term Funds

These funds invest in money and debt market instruments and government securities. The investment duration of these funds is longer than that of Liquid Funds. The best Short-term funds to invest in India are ICICI Prudential ST, UTI SD, HDFC ST Debt, Sundaram SD, and ABSL SD.

3. Credit Risk Funds

These funds invest in lower-rated corporate bonds and debt instruments to earn higher returns. The best Credit Rating Funds in India to invest in are DSP Credit Risk, Baroda BNP Paribas Credit Risk, Nippon India Credit Risk, and ABSL Credit Risk.

4. Fixed Maturity Plans (FMPs)

FMPs are close-ended mutual fund schemes, and the maturity dates in FMPs are decided beforehand. They invest in debt instruments with a specific date of maturity. FMPs are issued for a period ranging from 30 days to 60 months, and units of FMPs are listed on the stock exchange.

5. Floating Rate Funds (FRFs)

FRFs invest in instruments that offer a floating interest rate on your investments in bonds, government securities, and debentures. The best-floating Rate Funds to invest In India are ABSL Floating Rate, Franklin Ind Floating Rate, and HDFC Floating Rate.

6. Gilt Funds

Gilt in Gilt funds stands for government securities. This fund invests your capital in government securities issued by central and state governments. This fund offers you low credit risk and moderate returns. The best Gilt Funds to invest in India are ICICI Pru Gilt Fund, SBI Magnum Gilt Fund, DSP Govt. Securities Gilt Fund, and Kotak Gilt Investment.

7. Dynamic Bond Funds

These funds invest in debt securities with different maturity periods and actively manage the fund’s interest rate risk. Returns vary based on market conditions. Above mentioned are some of the types of debt mutual funds. There are various other types, which we shall discuss later. The best Dynamic Bond funds to invest in India are ABSL Dynamic Bond Fund, ICICI All Seasons Bond Dir, HDFC Dynamic Debt, and 360 ONE Dynamic Bond.

8. Monthly Income Plans (MIPs)

MIPs are hybrid schemes that invest in a mixture of debt and equity. However, the allocation in equity is about 15-20% only. These funds offer regular income in the form of dividend payouts. However, you don’t need to receive dividend payments because it is at the discretion of the AMCs and depends on the surplus left from realized gains.

Taxation of Debt in India

Tax in debt is divided into two parts.

Short-term gain and long-term gain where the short-term duration is less than three years as per your income tax slab, and for long-term, it is more than three years at the rate of 20% with indexation benefit. (Indexation- means adjusting your purchase cost based on inflation). Now let us go through the advantages and disadvantages of investing in debt funds before jumping to any conclusion as to why to choose debt funds.

Advantages of Investing in Debt Funds

1. Stability & Safety

Debt Funds invest in fixed-income securities, which are stable and safe compared to other investment options like stocks.

2. Regular Income

Debt securities like MIPs and FMPs help the investor receive regular income through interest payments.

3. Diversification

With the help of debt funds, investors’ exposure to risk is reduced because debt funds generally have less exposure to equities, reducing the portfolio’s overall risk.

4. Tax Efficiency

If you want an escape from taxes, debt funds can be a solution because these funds carry more tax efficiency than any other traditional investment option like FDs and post office schemes. FMPs can offer investors tax advantages because of indexation benefits.

5. Liquidity

Debt funds are generally more liquid than FDs. Investors can buy or sell these funds on any business day, providing liquidity when needed, and these funds do not have any lock-in period. However, they do carry minimal exit load in some funds.

Conclusion

Debt mutual funds play a vital role in an investor’s portfolio by providing a range of fixed-income investment options. These funds offer stability, regular income, and diversification by investing in various debt instruments. The choice of debt funds depends upon factors like risk appetite, investment horizon, and financial goals. But it would help if you remember that debt funds are not entirely risk-free. Investors should consider consulting a financial advisor for personalized advice.

Frequently Answered Questions (FAQs)

What are debt mutual Funds?
Debt mutual fund is a category of mutual fund that invests in fixed-income instruments such as Corporate and Government bonds.
What are the different types of debt funds?
Different types of debt mutual funds include short-term funds, Fixed maturity period funds, gilt funds, credit risk funds, etc.
What is the taxation rate on long-term capital gains in debt mutual funds?
The tax rate on debt mutual funds for the long-term is more than 3 years at 20% with an indexation benefit.
What are T-bills?
T-bills are treasury bills that the Government of India issues to meet short-term financial needs.
What is the complete form of MIPs?
MIP stands for monthly income plan.

November 24, 2023

How does the Price of Oil affect the Stock Market?

Oil prices can significantly impact the stock market and are closely inter-related. Oil is an important commodity that contributes to the growth or downfall of an economy and is extensively applied in various industries. Oil prices are defined by a complex interplay of supply and demand dynamics, geopolitical events, production decisions by major oil-producing countries, and changes in the global economy. When the price of oil rises or falls, it can cause various effects that leave footprints throughout the financial markets.

In today’s blog, we will be discovering the ways in which changes in the price of oil can affect the stock market. Whether you’re an investor, or simply interested in knowing about the theories of the financial world, understanding the relationship between oil prices and the stock market is crucial for making sound trading decisions and analyzing the current economic trends that are prevailing in the market. The relationship between oil prices and the stock market is complex and intricate.

Below listed are some of the key points which depict the relationship between the stock market and oil prices

The direct impact of the change in oil prices is on the energy sector stocks which include oil producers and exploration companies. Increased oil prices will have a positive impact on the profitability of these companies. As a result, the stock prices of all the oil companies will soar high.
Oil prices can have a noteworthy impact on inflation. An increase in the price of oil can lead to high production and transportation costs which will increase the general price level of the economy.
Any kind of change in oil prices can also affect other sectors. For example, companies like manufacturing and chemicals that use oil as the key input can have negative effects on their production capacity and their profit margins will be reduced significantly.
Changes in oil prices can also affect the spending capacity of consumers because they will have to pay more money for oil-related products and will be forced to think before buying.
Geopolitical events in major oil-producing regions can disrupt oil supplies and lead to price spikes. These events can increase market uncertainty.
Oil prices are generally denominated in foreign currency i.e., the U.S. dollar. Any kind of increase in the oil price will strengthen the dollar and weaken the Indian currency.

Companies that are majorly affected by the change in oil prices

1. Airlines & Transportation

Fuel cost comprises one of the most important parts of the operating expenses of the aviation sector. If oil prices are low then the profit margin of these companies will automatically increase. Consumers, in such a case, may get a chance to enjoy lower airfares.

2. Paint companies

A fall in the price of oil can reduce the production costs of paint companies. Derivatives of crude oil are important in the production of paints.

3. Automobile companies

If there is a sustained increase in prices customers’ choice of fuel-efficient vehicles may change which in turn may affect the demand of some vehicles.

4. Oil refineries & Marketing Companies

Oil refineries are meant to convert crude oil into useful products like gasoline and diesel. A spike in oil prices can affect the input costs of these companies.

5. Agriculture

Geopolitical events in major oil-producing regions can disturb oil supplies and lead to an increase in prices of oil. These events can increase market uncertainty.

Oil Crisis

One of the most famous examples of oil crisis in history is the 1973 oil crisis. This had a deep impact on the global economy and energy policies. Here’s a brief overview of the 1973 oil crisis:

The oil crisis of 1973 was the end result of some geo-political events. In the year 1973, Egypt and Syria attacked Israel. The U.S. provided military aid to Israel which Arab countries did not like. In reaction, the OPEC countries applied an Oil Embargo on the United States. An Oil Embargo is defined as an economic situation where the transportation of petroleum is limited by some entities to or from an area). This led to a reduction in the global supply of oil. Oil prices at that time were at sky-highs and this caused inflation and higher energy costs. The crisis resulted in increased investment in the development of alternative energy sources, such as nuclear, solar, and wind energy. The purpose of giving the reference to the oil crisis in today’s blog was to give a historical example of how geopolitical conflicts can impact the energy sector. For our readers’ knowledge let us have some basic ideas about OPEC countries.

OPEC stands for the Organisation of the Petroleum Exporting Countries. This organization was formed in the year 1960
OPEC countries are a group of countries that collaborate to coordinate and control the pricing policies of petroleum products.
Currently, there are 13 OPEC countries.
India imports 84% crude oil to fulfill its requirements from countries like Saudi Arabia, Iraq, Iran, and UAE.

Conclusion

The relationship between oil prices and the stock market is not always the same and aligned. To conclude, some companies may take advantage of lower oil prices while others may suffer if their core business is dependent on the energy sector. The investor should take note of ongoing oil prices and news updates if any before investing in oil-related companies because chances are likely that oil prices may change and these fluctuations are unavoidable. By now you must have understood that oil prices do have a major impact on the stock market.

FAQs (Frequently Answered Questions)

How does the price of oil affect the stock market?
Oil prices affect sectors across the stock market in different ways energy company benefits if the stock prices increase and other companies might suffer losses.
What is the full form of OPEC?
OPEC stands for the Organisation of the Petroleum Exporting Countries.
From which country India imports maximum oil?
India imports 84% oil from U.A.E.
What affects the oil prices?
Any kind of change in supply-demand dynamics and geopolitical events can lead to a change in the price of oil.
How can investors navigate the impact of oil price changes?
Investors can lower their risk of loss by diversifying their portfolios and concentrating their investments in oil-related stocks.

November 22, 2023

Category: Investing

Characteristics of the Fund:

Positives if you invest in such thematic mutual funds:

Negatives if you invest in such thematic mutual funds:

Conclusion

Frequently Asked Questions (FAQs)

What are some examples of thematic funds?

What is the risk profile of thematic funds?

How many IPO-themed mutual funds are available in the industry?

What are the Sectoral Funds?

What is QIB?

Index Variants:

Criteria For Stocks To Be Included In Nifty 50

Re-balancing

Stocks In The Nifty 50:

Sectoral Distribution

Purpose of Nifty 50

How To Invest In Nifty 50:

Benefits of Investing in Nifty 50:

Demerits of Investing in Nifty 50:

Nifty 50 Returns

Conclusion:

Frequently Asked Questions (FAQs)

How many stocks are there in the Sensex index?

What is the ideal method to invest in Nifty 50?

Does buying Nifty 50 mean taking a small piece of the entire market?

Is the Nifty 50 a broad market or strategy index?

In how many months is the rebalancing of the Nifty 50 tested?

Which can be a better choice?

What is a Mutual Fund?

What are Stocks?

What is SIP?

SIP in Stocks

SIP in Mutual Funds

SIP in stocks vs. SIP in mutual Fund

Conclusion

Frequently Answered Questions (FAQs)

What is the full form of SIP?

Which is better? Stock SIP or Mutual fund SIP?

How many stocks can you choose when doing Stock SIP?

Does SIP in stocks has higher risk than SIP in Mutual Funds?

What is the minimum amount of SIP required to invest in Mutual Funds?

What is Value Investing?

Key features of Value Investing

Margin of Safety

Long-Term Perspective

Contrary Approach

Advantages of Value Investing

Better Returns

Lesser Risk

Disciplined Approach

Challenges of Value Investing

What is Intraday Trading?

Key facts about Intra-day trading

Benefits of Intra-day Trading

Quick profits

Lesser risks.

Leverage

Challenges of Intraday Trading

Value Investing vs Intra-day Trading

Conclusion

Frequently Answered Questions (FAQs)

Which is riskier? Value investing or intra-day trading

Is it suggested for beginners to be involved in intraday trading?

Which investment approach uses fundamental analysis?

Mention two value investors in India.

What is the intrinsic value of a stock?

What are Mutual Funds?

Types of Mutual Funds

1. On the basis of organizational structure

2. On the basis of portfolio management

3. On the basis of asset class

Advantages of investing in Mutual fund

Risk of Investing in Mutual Funds

What is ETF?

Merits of investing in ETFs

Demerits of investing in ETFs

Mutual fund vs. ETF: Which one is right for you?

Conclusion

Frequently Answered Questions (FAQs)