Pocketful

Category: Investing

  • The Art of Value Investing: Meaning and Strategies

    The Art of Value Investing: Meaning and Strategies

    In the hustling world of finance, where trends shift and fortunes change quicker than ever, one strategy stands the test of time and is known as value investing.

    This approach has guided investors to discover gems in the rough for decades. But is value investing still relevant in an age of instant satisfaction and flashy IPOs?

    In today’s blog, we will be analysing the concept of value investing and how to assess a company’s true worth.

    Concept 

    Value investing is an investment philosophy based on buying stocks that are trading below their intrinsic value. Intrinsic value represents the true worth of the company estimated by analysing its fundamentals, such as financial statements, business models, and industry trends.

    The concept of value investing functions on the following principles,

    Undervaluation: 

    Value investors generally look for stocks that are trading less than their intrinsic value and offering a discount.

    Margin of Safety: 

    MoS is when an investor buys below intrinsic value, providing a buffer against unforeseen events and protecting against overpaying.

    Contrarian Approach:

    Value Investors are predisposed to buy stocks out of favour with the market, betting the market will eventually recognise the true value.

    Long-term Investing:

    Focusing on holding stocks for an extended period and waiting for the market to catch up with their intrinsic value.

    Read Also: Intrinsic Value vs Book Value

    Benefits

    1. The core advantage of value investing lies in its ability to control market inefficiencies. Recognising and buying undervalued stocks with a margin of safety can help investors achieve returns that exceed the market average over the long term.
    2. Value investing inherently emphasizes on buying stocks trading below their intrinsic value. This helps create a buffer against downturns, which means that even if the market price falls, it is less likely to fall below the intrinsic value.
    3. Value investors generally prefer companies with strong financial health, stable business models and consistent cash flows. This focus on fundamental strength helps preserve capital by investing in companies with a higher chance of fighting market storms and keeping themselves financially sound.
    4. Value investing encourages a disciplined and research-driven approach to investment in the market. The focus is on fundamental analysis, and emotional decisions based on market sentiments are avoided, eventually preventing investors from getting into impulsive trades.
    5. Additionally, value investors often adopt a contrarian approach, which can lead to significant gains if markets correct their mispricing.
    6. Value investing also offers emotional benefits. Investors can avoid the anxiety and stress linked with reactive trading decisions and short-term market noise by focusing on research and analysis.

    Risks 

    1. The success of value investing hinges on finding market inefficiencies. If the market is truly efficient, recognising undervalued stocks might be difficult.
    2. Value investing demands patience and discipline from the investors. It might take a long time for the market to identify a company’s true value.
    3. Going against the market sentiment and buying unpopular stocks can be emotionally challenging, and investors need to stick to their convictions.
    4. Not every cheap stock is a good investment. Some companies appear undervalued but may have legitimate reasons for low prices, such as poor management, structural decline or hidden liabilities. These value traps can lead to losses and destroy the investor’s confidence if not identified correctly.
    5. Broader economic trends such as regulatory shifts, recession or any industry-specific changes can also impact even the fundamentally strong companies.

    Key Metrics

    Some of the key metrics that an investor needs to look for are as follows.

    Price-to-Earnings Ratio (P/E Ratio)

    This ratio tells us how much an investor would have to pay to own a piece of a company based on how much profit the company makes. A lower P/E ratio indicates that a stock is undervalued as we would have to pay less to gain the profit. However, it is essential to analyse and compare the P/E to the company’s industry average and historical P/E ratios.

    For example, Consider two companies

    Company A

    Stock price – INR 50

    EPS – 5

    PE Ratio – INR 50/5 = 10

    Company B

    Stock Price – INR 100

    EPS – 20

    PE Ratio – INR 100/20 = 5

    Company A is trading at a higher multiple of their earnings. Thus, Company B is undervalued when compared to A. 

    Debt-to-Equity Ratio

    This ratio compares the company’s total debt to its equity. A lower debt-to-equity ratio shows that a company is less risky in financial terms as they don’t have to worry much during reduced margins. 

    For example, consider two companies

    Company A

    Debt – INR 1 lakhs

    Equity – INR 2 lakhs

    Debt-to-Equity Ratio – INR 1 lakhs/ INR 2 lakhs = 0.5

    Company B

    Debt – INR 3 lakhs

    Equity – INR 1 lakhs

    Debt-to-Equity Ratio – INR 3 lakh/INR 1 lakh = 3

    With a Debt-to-Equity ratio of 0.5, Company A has less debt relative to its equity, indicating a more conservative financial structure and low financial risk.

    On the other hand, Company B has a debt-to-equity ratio of 3, reflecting more debt than its equity, indicating a higher financial risk.

    Price-to-Book Ratio (P/B Ratio)

    This ratio compares a company’s stock price to its book value per share. A low P/B ratio indicates that the stock is undervalued.

    For example, consider two companies

    Company A

    Stock Price – INR 20

    Book Value per share – INR 10

    P/B ratio – 20/10 = 2

    Company B

    Stock price – INR 40

    Book value per share – INR 20

    P/B Ratio – 40/20 = 2

    While Company A trades at INR 20, Company B trades at INR 40. B is expensive and overvalued at a superficial level, but after calculating the P/B ratios, they both seem equally valued in the market. 

    Return on Equity (ROE)

    This metric measures a company’s ability to generate profit from the equity of shareholders. Higher ROE indicates a well-organized use of capital.

    Consider a company named ABC Technologies with an income of INR 10 Lakhs and shareholder equity of INR 50 Lakhs.

    ROE – Income/shareholder’s Equity = INR 10 lakhs/INR 50 lakhs = 0.2

    This shows that for every rupee provided by the shareholders, ABC Technologies generates 20% of profit.

    Discounted Cash Flow (DCF)

    This model helps estimate the present value of the company’s future cash flow, allowing investors to analyse the stock’s intrinsic value.

    For example, to estimate a company’s intrinsic value using a DCF model, an investor needs to forecast the future cash flows, which is the core part of the model, and to forecast the future cash flow, an investor first needs to.

    • Project financial statements by analysing historical track records.
    • Use applicable assumptions to predict Cash Flows for coming years and estimate the terminal value of the company using different methods.
    • Then, determine the appropriate discount rate to reflect the risk linked with the company and the projected cash flows.
    • Now, the investor can use the chosen discount rate to bring each year’s forecasted Cash Flows back to its present value (PV) and then add the PV of all the future cash flows to arrive at the present value of all future cash flows.
    • Add the present value of the terminal value to the present value of free cash flows to get the estimated intrinsic value.

    *(Remember that real-world DCF models involve complex adjustments and calculations).

    PEG Ratio

    This ratio compares the company’s P/E ratio to its expected earnings growth rate. A lower PEG ratio indicates that a stock is undervalued relative to its growth potential.

    For example, Consider 2 companies

    Company A

    P/E Ratio – 20

    Expected EPS growth rate – 10 %

    PEG Ratio – 20/10 = 2

    Company B

    P/E Ratio – 15

    Expected EPS growth rate – 5%

    PEG Ratio – 15/5 = 3

    A PEG ratio closer to 1 indicates undervaluation relative to the company’s growth potential (like company A).

    Additional Tips for Value Investing

    1. Do not choose cheap stocks, look for quality companies with strong financials that are trading at a discount.
    2. Understand and analyse the company’s business model and competitive landscape before investing.
    3. It may take time for the market to identify the worth of an undervalued company. So, patience and confidence in our choices are extremely important.

    Value Investing v.s. Growth Investing

    1. Value investing seeks stocks currently trading below their intrinsic value, whereas growth investing seeks stocks with high growth potential, irrespective of the current valuation.
    2. Value investing uses fundamental analysis, including metrics like P/E ratio, P/B ratio, etc., while growth investing uses growth metrics like revenue and sales growth, market share, etc.
    3. The former is used for longer time-frames and needs patience, while the latter can be used in medium timeframes.
    4. Features of value investing include reduced downside risk and capital preservation, whereas features of growth investing include the potential for significant returns with comparatively higher risk.

    Value Investing for Beginners

    1. Grasp the core principles and understand the philosophy of value investing along with the metrics used to identify them.
    2. Make financial statements a friend and analyse the industry trends carefully.
    3. Beginners should avoid making impulsive decisions and should stick to their investment goals.

    Read Also: Explainer on Cigar Butt Investing: Features, Advantages, Limitations, and Suitability Explained

    Conclusion

    To wrap it up, only invest money you can afford to lose because past returns do not guarantee future success, and not every cheap stock is a good investment. Value investing isn’t a get-rich-quick scheme fuelled by speculation. Instead, it is a research-driven approach built on patience and deep fundamental analysis.

    Frequently Asked Questions (FAQs)

    1. Why should I consider value investing?

      Value investing focuses on strong fundamentals and protects from market downtrends.

    2. Isn’t the concept of value investing outdated in the fast-paced market?

      No, because value investing helps you discover undervalued gems.

    3. Is value investing risky?

      Remember that every investment comes with a risk. Every investor needs to focus on thorough research and diversification of their portfolio.

    4. How do I get started with value investing?

      Practice fundamental analysis and gradually add individual stocks to your portfolio while analysing their trends.

    5. Is value investing right for me?

      It depends on your specific risk tolerance and investment goals.

  • IPO Alert: Entero Healthcare Solutions Limited (EHSL)

    IPO Alert: Entero Healthcare Solutions Limited (EHSL)

    The Indian healthcare industry is booming, and in this dynamic landscape, EHSL has emerged as a major player in healthcare product distribution. The ongoing IPO subscription has drawn significant attention from investors and has sparked questions about their growth potential in the highly competitive market.

    In today’s blog, we will explore the company and dive deep into the business model and the key IPO details. 

    Company Overview

    The company was incorporated on January 10, 2018, as Entero Healthcare Solutions Private Limited by Prabhat Agarwal and Prem Sethi to create an organised, technology-driven, pan-India distribution platform for integrated healthcare products.

    Entero is one of India’s largest and fastest-growing healthcare distribution platforms, with an operational presence across 495 districts through physical warehouses in 37 cities in 19 states and union territories.

    Over the Financial Years 2021 to 2023, the company saw consistent growth, initially serving 39,500 retail and 1,600 hospital customers. By 2022, these numbers rose to 64,200 and 2,500, respectively. Furthermore, in 2023, they expanded their reach to 81,400 retail and 3,400 hospital customers, illustrating a steady increase in customer engagement.

    Currently, the company operates in cities like Amritsar, Dehradun, Lucknow, Gurgaon, Jaipur, Guwahati, Hyderabad, Bombay etc. 

    IPO Details

    1. Entero Healthcare Solutions is a book-built issue of INR 1600 crore. 
    2. The issue is a combination of a fresh issue of 1000 crore shares and an Offer For Sale (OFS) of 600 crore.
    3. The bidding for the IPO opened for subscription on February 9, 2024, and will close on February 13, 2024.
    4. The allotment is expected to be finalised on Wednesday, February 14, 2024.
    5. The temporary listed date is fixed as Friday, February 16, 2024, with a price band of INR 1195 to INR 1258 per share.
    6. The minimum lot size for an application is 11 shares with a minimum investment amount for retail investors standing at INR 13,838.
    7. The issue includes a reservation of up to 70,625 shares for employees offered at a discount of Rs 119 to the issue price.
    8. The company will utilise the IPO proceeds from the fresh issue.
    • To partially or fully repay or prepay the borrowed amount.
    • Fulfill the working capital requirements.
    • General corporate purposes.
    1. ICICI Securities, JM Financial, and Jefferies India Private Limited are the book-running lead managers.
    IPO DateFebruary 9, 2024 to February 13, 2024
    Expected Listing Date16th February, 2024
    Price BandINR 1195 to INR 1258
    Total Issue Size1,27,18,600 shares
    Employee DiscountINR 119 per share
    Listing atBSE and NSE
    IPO TypeMainboard IPO
    Issue TypeBook-Built Issue
    Initiation of refundsThursday, February 15, 2024

    Business Model

    The company operates under the two lines of business. 

    1. Primary Business

    It involves distribution of healthcare products to retail pharmacies, hospitals, and healthcare clinics in India.

    The company periodically buys the products in bulk from product manufacturers and then curates and offers a diverse product portfolio to retail pharmacies, hospitals, and healthcare clinics based on their requirements through its distribution network.

    Healthcare Product Distribution – provide distribution and logistics services for healthcare products to retail pharmacies, hospitals and healthcare clinics in India. Such products are sourced from healthcare product manufacturers and sold to pharmacies, hospitals and clinics at margins over the cost of the products. The product range offered includes pharmaceutical products, medical devices, surgical consumables, OTC, nutraceuticals and vaccines.

    Furthermore, the healthcare products distribution channel consists of retail distribution and hospital distribution. 

    Retail Distribution – the company’s retail distribution channel involves distributing healthcare products to pharmacies, who then sell these products to end customers. Supply a wide range of healthcare products, including pharmaceutical, nutraceutical OTC products, and medical devices, to pharmacies through a distribution network. 

    Hospital Distribution – EHSL distributes healthcare products to hospitals and healthcare clinics across India through the hospital distribution channel . The prices of the products are pre-determined in the contract between the hospitals and the suppliers.

    Entero also supplies healthcare products to customers based on their orders, which are placed through the Entero Direct application or other order-taking applications or which have been communicated through salespeople or call centre representatives.

    2. Ancillary Business

    The segment can be broadly categorised into 2 further classifications.

    1. The provision of complete and integrated commercial solutions, including sales, marketing and supply chain solutions to pharmaceutical companies and healthcare product manufacturers.
    2. The sale of private label products and medical devices under their private label, Entero Surgicals.

    Private Label Products 

    Entero Surgical comprises brands such as Carent, Entros, Entair, Safent and Glovent. The product categories under the private label products business entail homecare medical devices, surgical consumables, and rehabilitation products and devices. Furthermore, key private-label products include nebulizers, hygiene and surgical consumable products, homecare medical devices, gloves and mobility equipment.

    Future Outlook

    The Indian healthcare market is expected to grow significantly in the coming years, driven by several factors like rising disposable income, increasing awareness about healthcare and an ageing population. Entero is well-positioned to capitalise on this growth with its strong business model, vast network and technology focus. 

    As of FY23, Entero Healthcare had a market share of 1.24% while making a revenue of 3,300.2 Crores. This indicates that the potential for growth is huge, and the company is poised for success if it continues to provide value to the end consumer.

    Financial Highlights

    ParticularsAs of March 31, 2023 (FY23)As of March 31, 2022 (FY22)As of March 31, 2021 (FY21)
    Total Assets1,308.731,125.98833.79 
    Total Liabilities711.07562.77346.73 
    Total Borrowings342.45247.90141.70 
    Revenue3,305.722,526.551,783.67
    Net Profit/(Loss)-11.10-29.44-15.35 
    Revenue from Operations3,300.212,522.071,779.74 
    Expenses3,309.412,546.361,794.51 
    EBITDA21.5524.4464.01 
    EBITDA Margin1.21%0.97%    1.94%
    ROCE1.88%1.49%6.05%
    Note – In Crores, unless stated otherwise

    EHSL has shown impressive revenue growth, which indicates a healthy financial track record, and its turnaround from losses, which have narrowed over the past three years, highlights improvement. The debt level might be a concern, but the company seems to be managing it effectively.

    Strengths

    1. Benefit of consolidation – The company operates in a large and highly fragmented Indian healthcare products distribution market. This could prove beneficial for EHSL if they can consolidate such a fragmented industry.
    2. Growth – Entero is one of India’s largest and fastest-growing healthcare product distribution platforms with a major focus on network expansion and cost efficiency, catering to the needs of a wide range of customers.
    3. Large reach – In a matter of just 4 years, EHSL has reached 37 cities and employs 3040+ people. This indicates that it is no longer a small player. 
    4. Industry growth – The healthcare market in India is expected to grow at 11% p.a. in the next 5 years. This opens up a long list of opportunities for EHSL to grow. 

    Risks

    1. High short-term borrowing – The majority of EHSL’s borrowing exists for the short term. This may not be a good sign, as failure to meet these payments could be catastrophic for the company. 
    2. Competition –  There are many players in the industry, and any of the behemoths can enter the industry and cause substantial damage to the bottom line figures. 
    3. Negative Cash Flows – Historically, the company has had negative cash flows, and this trend could continue for some more years. 

    Awards & Recognitions

    • ‘Best Healthcare Brand of 2021’ – Economic Times
    • ‘Outstanding Performance’ Award for FY 2022-23 – Mankind Ltd.
    • ‘Outstanding Performance’ – JB Chemicals Ltd.
    • Recognised as ‘Maximiser 2022’ by Pfizer for improving access to quality medicine.
    • Received ‘Outstanding Contribution’ Award – Alkem Laboratories Ltd.

    Read Also: Rashi Peripherals Limited: IPO Analysis

    Conclusion

    Entero Healthcare Solutions boasts rapid growth, a sizable customer base and a well-established distribution network. The company’s turnaround from losses to profitability (11.6 Crores in 2Q24) highlights financial improvement over the years. 

    It is important to consider the risks and uncertainties before drawing any definite conclusions. The performance of the stock after listing will depend on various factors, including the overall market conditions and Entero’s competitive landscape. It is important to conduct your research and analysis before investing in any IPO.

    S.NO.Check Out These Interesting Posts You Might Enjoy!
    1What are the Different Types of IPO in India?
    2What is the Book-Building Process in an IPO?
    3Why Does a Company Go Public & Launch IPO?
    4Performance Of IPOs Launched
    5OFS vs IPO: Key Differences and Benefits
    6Apply in IPO Through ASBA- IPO Application Method
    7What Is An IPO Mutual Fund? Should You Invest?
    8What is IPO Listing Time?
    9Strategies To Boost Your IPO Allotment Chances
    10From Private to Public: Decoding the IPO Journey
    11Why Invest in an IPO and its Benefits?
    12Top 10 Largest IPOs in India
    13Anchor Investors in IPOs – Meaning, Role & Benefits
    14What is Grey Market, and How Are IPO Shares Traded?

    Frequently Answered Questions (FAQs)

    1. What is the expected use of proceeds from the IPO?

      The proceeds from the IPO will be used to repay the borrowings and fulfill the working capital requirements.

    2. Who are the major competitors of the EHSL?

      The company faces tough competition from Mankind Pharma, Max Healthcare, and Apollo Pharmacy.

    3. What is the minimum investment amount for the IPO?

      The minimum lot size is 11 shares, with an investment amount of INR 13,838.

    4. What are the risks of investing in EHSL?

      Some analysts consider the pricing aggressive, and the company has a relatively short track record compared to other established players.

    5. Should I invest in EHSL?

      This depends on your individual risk tolerance and investment goals, and do your research before investing.

  • IPO Alert – Capital Small Finance Bank

    IPO Alert – Capital Small Finance Bank

    India’s investor community has come a long way from investing in bank fixed deposits to participating in initial public offerings (IPOs), a relatively riskier alternative. Initially, people hesitated to invest even in a renowned company, but nowadays, they are actively interested in initial public offerings (IPOs).

    You would be surprised to hear that in 2022, the Indian stock market reported the third-highest number of initial public offerings (IPOs) globally. Additionally, India saw several fantastic initial public offerings (IPOs) in 2023, some of which allowed investors to earn over 90% in listing gains!

    In today’s blog, we will explore another IPO, Capital Small Finance Bank.

    If you haven’t read our blog on Jana Small Finance IPO, click here to check it out. 

    Overview of the company

    Initially founded as Capital Local Area Bank(CLAB), Capital Small Finance Bank mostly operated in Punjab. With RBI’s approval on April 24, 2016, it became India’s first small finance.

    In February 2017, it received the designation of a ‘scheduled bank’ (these banks get access to low-interest loans from RBI), which allowed it to increase its lending and borrowing capabilities.

    Capital Small Finance Bank started its business operations with 39 branches but currently operate around 1000 branches in the country. 

    Promoters

    The Samara Family is in charge of the Capital Small Finance Bank, and Mr Sarvjit Singh Samra serves as both the institution’s managing director and CEO. In the year 2000, he was instrumental in the founding of Capital Local Area Bank.

    Dinesh Gupta, Amarjit Singh Samara, Navneet Kaur Samara, and Surinder Singh Samara are other family members who are regarded as promoters.

    The promoters group holds approximately 24% of Capital Small Finance Bank Shares.

    Details of the issue

    Capital Small Finance Bank is proposing an IPO of Rs. 523.07 crore. The IPO consists of an offer for sale of 73.07 crore and a fresh issue of Rs. 450 crore.

    The Capital Small Finance Bank IPO is open to the public from February 7 to February 9, 2024. The shares will be allotted in full on February 12th, 2024, with a listing date of February 14th on the NSE and BSE.

    Timeline of the IPO

    IPO Open Date7th Feb 2024
    IPO Close Date9th Feb 2024
    Finalization of Allotment12th Feb 2024
    Initiation of Refund13th Feb 2024
    Credit of Shares into a Demat Account13th Feb 2024
    Listing Date on NSE & BSE14th Feb 2024

    Details of the IPO

    Face Value of ShareRs. 10
    Price BandRs. 445 – 468 per share
    Market Lot32 Shares
    Total Issue SizeRs. 523.07 Crores
    Total Number of Shares1,11,76,713 shares
    Fresh Issue SizeRs. 450 Crore
    Offer for SaleRs. 73.07 Crore
    Listing ExchangeNSE & BSE

    Objective of the Issue

    The main objective of Capital Small Finance Bank is to use the funds from the offering to meet the bank’s projected future capital needs, and the issue costs may also be covered using the money that was raised.

    IPO Allotment Size

    The table below displays the minimum and maximum number of shares that an investor is eligible to apply for.

    ApplicantMarket LotShareAmount
    Retailer (Min)13214,976
    Retailer (Max)134161,94,668
    Small High Net Worth Individual (Min)14448209,664
    Small High Net Worth Individual (Max)662,1129,88,416
    Ultra High Net Worth Individual (Min)672,14410,03,392

    The aforementioned figures showcase that a retail investor can invest a minimum of INR 14,976 rupees and a maximum of INR 1,94,668. 

    Lead Managers

    Equirus Capital Private Limited, DAM Capital Advisors Limited, and Navuma Wealth Management Limited are the firms in charge of managing the Capital Small Finance Bank IPO procedure.

    Read Also: IPO Alert: Jana Small Finance Bank

    Financial Highlights of Capital Small Finance Bank (In crores, unless stated otherwise)

    Particulars31 Mar 202331 Mar 202231 Mar 2021
    Assets7,990.777,153.926,371.24
    Revenue725.48632.40557.27
    Profit After Tax93.6062.5740.78
    Reserve & Surplus576.36481.74416.88
    Total Borrowings721.38498.43616.72
    Capital Adequacy Ratio – Total Capital (CRAR) (%)18.87%18.63%19.8%
    Net NPA (NNPA) (%)1.36%1.36&1.13%
    Net Interest Margin (NIM) (%)4.19%3.74%3.36%
    CASA Ratio (%)41.88%42.16%40.08%

    Both the revenue and the assets have significantly improved which suggests that the bank is operating profitably. Additionally, not only did the bank’s clients increase, but the profit after tax also rose by almost 50% y-o-y in FY23.

    The CASA ratio indicates that the bank has access to a stable and consistent source of cheap money as interest rates on Savings and Current account holdings are much lower than traditional borrowings. 

    The Net NPA ratio showcases the bank’s efficiency in providing loans only to credit-worthy individuals and institutions. A consistent rate of 1.3% is much lower than the industry average of 3-4%.

    A healthy NIM of around 4% indicates stability even in an environment where all major banks saw a decrease in NIM.

    Additional Key Performance Indicators (KPIs) 

    ROE – Capital Small Finance Bank’s return on equity ratio rose to 16.62% in FY23 from 12.95% in FY22.

    RoE is the ratio of profit after tax to average net worth.

    EPS – Capital Small Finance Bank’s earnings per share rose to 27.35 in FY23 and 18.41 in FY22. 

    This crucial financial ratio establishes the company’s profitability. It is computed by dividing net income by the total number of outstanding shares of the corporation.

    P/E Ratio – Currently, the price-to-earnings ratio stands in the range of 16.27 to 17.11, based on the lower and upper end of the price band. 

    The amount an investor is willing to pay for a single share of a company for one rupee of its earnings is referred to as the PE ratio.

    Risks

    1. Competition – The small finance banking industry is extremely competitive, with many players entering the market and even getting into the public domain via launching IPOs. This may cause some serious issues as fierce competition leads to decreased margins and market share.
    2. Negative Cash Flow – The bank has a history of having negative cash flow from operating activities. In FY23, CFO stood at -107.44 Crores, and in FY22, CFO was -210.74 Crores. The bank’s inability to generate positive cash flow from a money-making business like banking could be indicative of deeper inefficiencies that are more qualitative than quantitative. 
    3. High attrition rate – In FY23, the bank faced an attrition rate of 19.82%. This is extremely high and showcases the dissatisfaction among the workforce. This could translate into decreased margins in the coming years. 
    4. RBI Crackdown impending – As of now, the small finance banking industry has been allowed many relaxed requirements that other banks have to face. If RBI decides to take some of those relaxations away, then it could dramatically affect the margins of these banks. 
    5. Geographical concentration – As of FY23, 87% of the branches were in Punjab and 96.44% of deposits came from the region. This could be indicative of the bank’s unwillingness to expand beyond Punjab, to other regions of the country. 

    Read Also: Small Finance Bank Share List in India 2025

    Conclusion

    Investors have a fantastic opportunity to access a bank with a strong and profitable track record in the market through the initial public offering (IPO). Currently, the bank offers a varied loan portfolio with robust growth in both revenue and margin over the years.

    Investing in initial public offerings (IPOs) involves conducting extensive research on the regularities that the companies must meet. 

    The suitability of investment in an IPO depends on an individual’s risk horizon and financial objective. So, you must do your research before investing! 

    Frequently Asked Questions (FAQs)

    1. How can I participate in the Capital Small Finance Bank IPO?

      You can participate in Capital Small Finance Bank IPO through your demat account via ASBA (Application Supported by Blocked Amount) or UPI (through the broker).

    2. What will happen after I subscribe for the IPO?

      Shares are listed on the exchange after you subscribe for the initial public offering (IPO), at which point you can purchase and/or sell shares.

    3. Does the bank have enough capital to support its deposits/liabilities in case of emergency?

      The Capital Adequacy ratio, as prescribed by RBI, has to be above 15% for Small finance banks, and the Capital Small finance bank has consistently beaten this requirement by at least 3%. 

    4. What is the issue price of the Capital Small Finance Bank IPO?

      The price band of Capital Small Finance Bank IPO is 445 to 468 INR.

    5. Why is Capital Small Finance Bank going public?

      Capital Small Finance is going public to meet capital requirements.

  • Apeejay Surendra Park Hotels Limited: IPO Analysis

    Apeejay Surendra Park Hotels Limited: IPO Analysis

    Imagine a hotel experience that perfectly blends modern luxury with timeless heritage! Apeejay Surrendra Park Hotels (ASPHL), an Indian hospitality player, is ready to debut on the Indian Stock Exchanges with its upcoming IPO. But is it an investment opportunity worth exploring?

    Buckle up! In today’s blog, we will examine the company’s financials, business model, and key IPO details along with the risks and opportunities that await investors.

    Key Details

    1. Apeejay Surrendra Park Hotels IPO is a main-board IPO, which means that the post-issue paid-up capital will be a minimum of 10 crores.
    2. The IPO is a book-built issue of INR 920 crore. It is a combination of a fresh issue of INR 600 crore and an Offer For Sale (OFS) of INR 320 crore.
    3. The IPO will open for subscription on February 5, 2024, and close on February 7, 2024.
    4. The company has set the price band for shares at INR 147 to INR 155, and the minimum lot size is 96 shares.
    5. JM Financial, ICICI Securities and Axis Capital Limited are the book-running lead managers of the IPO and Link Intime India Private Limited is the registrar for the issue.
    6. The minimum amount of investment required by retail investors is INR 14,880.
    7. The initiation process for the IPO is scheduled for February 9, 2024.
    8. The IPO will be listed on Stock Exchanges, NSE and BSE on February 12, 2024.
    9. The promoters of the company are Karan Paul, Priya Paul, Apeejay Surrendra Trust, and Great Eastern Stores Private Limited.
    10. The company has allocated the IPO proceeds to repay the loan amount and address general corporate purposes.

    Opportunities linked with the IPO

    1. Apeejay Surrendra boasts a strong record of consistently growing brand portfolios that fulfil the needs of various segments.
    2. The company enjoys healthy financials with an almost 96% growth in Total income and also turned profitable in FY23 with a strong net profit of 48 Crores while exceeding 90% occupancy rates in owned hotels.
    3. Established brands of the hotel, which include ‘The Park’ and the ‘Zone by The Park’, have gained recognition and loyalty and significant competitive advantage over the years.
    4. An uptrend in Debt Service Coverage Ratio (DSCR) and Interest Service Coverage Ratio (ISCR) is visible with the DSCR reaching 1.63 in FY23 from 0.4 in FY22 and ISCR reaching 2.05 in FY23 from 0.3 in FY22.     

    Risks Linked with the IPO

    Risk in IPO
    1. The Indian hospitality sector is fiercely competitive, with strong and established players like ITC Hotels and Marriott Hotels competing for the market share. This could lead to big changes in topline figures if Apeejay Surrendra Park loses its market share.
    2. Economic uncertainties and fluctuations in tourism can expose the hotel industry to seasonality, impacting both occupancy rates and profitability.
    3. Almost 75% of the total income is realised from top 5 owned hotels, with the PARK Kolkata contributing a staggering 21.75% to the total income alone. This exposes Apeejay Surrendra Park hotels to the risk of Revenue concentration.
    4. Almost 49% of total bookings come from Online Travel Agents. While this is a growing industry, in an effort to increase their profits, these online travel agents could increase their convenience fees and other charges. This could substantially affect Park Hotels’ topline figures.
    5. A significant portion of the IPO involves selling existing shares (OFS), which means the company is not raising fresh capital. This might not directly fuel growth.

    Read Also: Rashi Peripherals Limited: IPO Analysis

    Apeejay Surendra Company Overview

    Apeejay Surrendra Park Hotels Limited is an India-based hospitality company. It holds the position of the eighth-largest hotel chain in India in terms of chain-affiliated hotel rooms with asset ownership. It is also renowned for its distinctive and personalized approach to hospitality, providing modern and stylish hotels tailored to both business and leisure travellers. ASPHL operates under 5 brands, namely:

    1. The Park is positioned as an upscale brand with luxury offerings with a philosophy that focuses on design, style and service.
    2. The Park Collection encompasses small luxury properties located at the selected travel destinations.
    3. Zone by the Park brand is positioned at the upper midscale level and is designed for price-conscious and design-conscious customers.
    4. Zone Connect by the Park is an upper midscale brand that networks its essence and design philosophy from Zone by The Park.
    5. Stop by the Zone is an economy motel brand that aims to provide convenient accommodation with easy access to parking, free Wi-Fi, and food services.

    All the brands are located in the prime locations of Bangalore, Chennai, Goa, Hyderabad, Indore, Kolkata, Mumbai, Navi Mumbai, New Delhi, and Vizag. The group will soon open hotels in other areas such as Chettinad, Patiala, Pune, and Kolkata.

    The hotels built by the group carry contemporary designs with luxurious interiors, furniture, paintings and accessories. Apart from this, the company focuses on relevant social issues and promotes art and culture in each region.

    Apeejay operates 27 hotels across luxury boutiques, upscale, and upper-midscale categories, with a pan-India presence in metro cities and aims to build upon existing brands, create an expanded group of upscale and upper-mid-scale hotels in strategic locations in India and abroad, leverage the cooperation between hospitality, food and beverage business while achieving strong profitability.

    Did you Know?

    The Park opened its first hotel in Kolkata in 1967, featuring 149 rooms on Park Street, which led to the company’s name.

    Apeejay Surendra Business Model

    Business Model of Apeejay

    Apeejay operates hotels by directly owning hotel properties, securing long-term leases for land and buildings, and entering into operation and management agreements on a contractual basis. The brand names are used on hotels constructed by third parties.

    Hotels operated under the ownership model are located on freehold and leasehold land that belongs to the company.

    Government authorities or private institutions lease some of the hotels, with lease terms ranging from five to fifty years, and renewals are possible upon expiration.

    Apeejay brand operates some hotels through operating and management contracts. Typically, the term of such contracts ranges from 8 to 25 years, with termination options available to either party.

    The fundamental hotel operations departments are front office, housekeeping, food and beverage service, food production and spa services while focusing on customer experience and comfort through quality service offerings.

    The Apeejay Park Hotel’s business model includes three different store formats:

    • A kiosk format comprising a store size of about 80 to 100 square feet.
    • A cafe format comprising a store size of about 350 to 400 square feet.
    • A restaurant format comprising a store size of about 800 to 1000 square feet.

    Awards & Recognitions

    Below mentioned are some of the accolades for ASPHL:

    • TripAdvisor Travelers Choice Awards in the year 2022-23
    • World Luxury Hotel Awards in the year 2023.
    • EEF Excellence Awards in the year 2022 for excellence in sustainable tourism.
    • CNBC TV18 Hotelier Awards in the year 2021

    Financial Statements – A Snapshot

    ParticularsFY 2021 (in millions)FY 2022 (in millions)FY 2023 (in millions)
    Revenue/Total Income1,902.902,678.305,244.30
    EBITDA228.46582.931,770.95
    Profit(758.84)*(282.02) *480.62
    Profit Margin(39.88%)*(10.53%)*9.16%
    Debt5,834.005,500.106,137.59
    Total assets12,803.3913,617.9012,751.76
    Debt-to-Equity Ratio1.091.210.99
    *(The figures in bracket shows the company incurred net loss for the particular FY)

    Read Also: Strategies To Boost Your IPO Allotment Chances

    Conclusion

    ASPHL’s IPO and planned expansion projects show its ambitious growth plans. Apeejay’s diverse brand portfolio and emphasis on innovation have helped them well to capture the opportunities in the Indian hospitality market.

    However, navigating industry competition and economic uncertainties will be important for Apeejay’s success. Do not forget to conduct proper research and analyse your risk tolerance before investing in IPO.

    Frequently Asked Questions (FAQs)

    1. What is the price band for the ASPHL IPO?

      The IPO price band for ASPHL is set at INR 147 to INR 155 per share.

    2. What will the IPO proceeds be used for?

      The IPO proceeds will be used for debt repayment and general corporate purposes.

    3. What makes ASPHL unique?

      ASPHL offers a set of diverse services that cater to different segments, from budget-friendly options to luxury stays.

    4. Who are the major competitors of ASPHL?

      ASPHL competes with major hotel chains like ITC Hotels and Marriott etc.

    5. Is investment in ASPHL IPO a good option for investment?

      Investing in ASPHL IPO should only be done after careful consideration of your financial objectives and risk tolerance. However, you should perform your own analysis before investing.

    Disclaimer: The securities, funds, and strategies mentioned in this blog are purely for informational purposes and are not recommendations.

  • CAT Bonds: An Easy Explainer

    CAT Bonds: An Easy Explainer

    CAT is an animal right or Common Admission Test; this is what you have heard till now. Now, there is some twist in the plot. We also have bonds that are known as CAT Bond, financial instrument offering investors high returns and helping society prepare for the worst.

    Don’t be shocked, in our today’s blog, we will explain what CAT bonds are. 

    History of CAT Bonds

    History of CAT Bonds

    Have you ever wondered how do insurers manage their risks? Suppose, a natural disaster came which caused massive destruction. To compensate the claimants for the damage, insurance companies have to shell out a lot of funds; by this, insurance companies can even go bankrupt. So, to manage this risk they have their risk management in place, right?

    Before the invention of CAT Bonds, the insurers used the traditional method of re-insurance to manage such catastrophic risks. Re-insurance involves transferring a part of the risk to another insurance company. This process is also known as “Risk Transfer”. However, as the frequency of natural disasters increased, reinsurance became insufficient.

    In the year 1992, Hurricane Andrew, a category 5 hurricane, struck Florida and caused widespread destruction. The insurance industry faced severe and staggering losses, which eventually highlighted the need to re-evaluate risk management practices.

    In the aftermath of Hurricane Andrew, the first catastrophe bond was issued in the year 1997 named “Tempest Re”.

    The year 2005 Hurricane Katrina marked a turning point and was one of the costliest disasters in the history of the United States and the CAT Bonds came to the rescue since these bonds performed the way they were meant to. The event spurred the growth and significance of CAT Bonds in the market and insurers started seeking CAT Bonds as alternative risk-transfer solutions.

    The CAT Bonds market has consistently evolved since Hurricane Katrina, and today these bonds cover diverse risks.

    CAT Bonds – An Overview

    The word ‘CAT’ is derived from the word Catastrophe, which refers to an event that causes great suffering or damage.

    CAT Bonds or Catastrophe bonds are a type of insurance-linked security (ILS) that transfers specific risks from an insurance company to investors. They are a debt financial instrument that allows the insurers to manage their exposure to natural disasters such as earthquakes, floods, wildfires, etc. These bonds provide a way for these companies to obtain additional financial protection against large-scale and unexpected losses.

    Read Also: Electoral Bonds Explained: What Are They and Why Did Supreme Court Ban It?

    How do CAT Bonds work?

    When an insurance company issues CAT Bonds, they promise to pay interest to investors. If, in any case, a predefined disaster occurs and meets certain criteria, the insurance company does not have to pay back the principal to the investors. Instead, the money is used to cover the losses caused by catastrophes. It is a way for insurance companies to manage their risk and for investors to earn a higher return. Pretty cool! Isn’t it?

    The proceeds from issuing CAT Bonds are placed in a collateral account and sometimes may be invested in low-risk instruments such as T-Bills.

    The criteria for a catastrophe bond are generally defined in the bond’s terms and conditions (known as ‘Indenture’ in the bonds’ world). These criteria can differ depending on the specific conditions. In the case of a hurricane catastrophe bond, the criteria might include factors like the intensity of the hurricane, the damage caused, etc.

    Investors can benefit from the bonds through the interest payments they receive. When investors buy CAT Bonds, they lend money to the issuing insurance company. In return, they receive regular interest payments over the bond’s term, and if no qualifying catastrophe occurs during that period, the investors get back the principal amount at the end of the term. So, investors can generate a return through the interest payments while supporting disaster relief efforts. CAT bonds are a unique way to combine financial investment and social impact.

    Did you know?

    The World Bank has a cat bond market access facility for member countries.

    Risks Involved in CAT Bonds

    Investors in CAT bonds face certain risks. One of the major risks is that if a qualifying catastrophe occurs, the investors may not get back their principal amount and the funds would be used to cover the losses caused by the catastrophe. Additionally, the interest payment received may be lower than expected if there are no qualifying catastrophes during the bond’s term. It is always a good idea for investors to carefully evaluate the risks before making any investment.

    How are the returns on CAT Bonds calculated?

    The returns on CAT Bonds are calculated depending on the interest mentioned in the terms and conditions. Suppose, you invest INR 10,000 in a CAT Bond with a coupon of 5% (read it as interest rate). If no qualifying catastrophe occurs during the bond’s term, you will receive an annual interest of INR 500. (5% of INR 10,000). At the end of the tenure, you would get back your initial investment of INR 10,000.

    Benefits of CAT Bonds

    1. For Insurers, CAT Bonds offer a way for insurers to transfer risk to the capital markets, freeing up their capital to write more insurance. This can help them to improve their risk management and financial stability.
    2. For Investors, CAT Bonds carry the potential for high returns because they are not so liquid and have a higher risk of default than traditional bonds.
    3. Further, they also help you to diversify your portfolio because they are not in any way linked with other asset classes.

    CAT Bonds in India

    While catastrophe bonds are more commonly seen in international markets, including the United States and Europe, they have not gained much traction in India just yet and are still in their nascent stage.

    However, there is growing interest in exploring CAT Bonds as a risk-minimising source for the insurance sector in India. It can be an interesting development to keep an eye on in the coming future!

    Read Also: Detailed Guide on Bond Investing: Characteristics, Types, and Factors Explained

    Conclusion

    To wrap it up, CAT Bonds is a complex financial instrument that can be a valuable tool for both investors and insurers since it bridges the gap between risk management in the insurance industry and capital market opportunities.

    Challenges like climate change and other  natural uncertainties exist, but consistent innovation, interest of the investor and supportive frameworks hold promise for future growth.

    Considering the high-risk profile of CAT Bonds, it is suggested that you do thorough research and seek professional advice before investing in it.

    Frequently Asked Questions (FAQs)

    1. Why do CAT Bonds exist?

      CAT Bonds exist because they help insurers manage risk and avoid financial instability caused by natural disasters. And for investors, they get higher returns.

    2. Are CAT Bonds risky?

      Yes! Cat bonds are riskier than traditional bonds, and investors can lose their capital if a trigger event happens.

    3. Are there any ‘exotic’ CAT Bonds covering unusual risks?

      CAT Bonds generally focus on natural disasters; some bonds have covered volcanic eruptions and political instability.

    4. Do CAT Bonds always offer high returns?

      Not necessarily! Returns of CAT Bonds depend on specific risk profiles and market conditions. Although CAT Bonds returns are fascinating, they can also carry higher risk as compared to traditional bonds.

    5. How liquid are CAT Bonds?

      CAT Bonds are comparatively less liquid than Corporate or Government bonds. However, their unique risk profile can attract long-term investors.

  • BSE Sensex vs BSE All Cap? A Comparative Study

    BSE Sensex vs BSE All Cap? A Comparative Study

    The ‘BSE Sensex’ and BSE ‘All Cap’ are indices launched by BSE. Before we delve into their analysis, let’s understand what BSE is first.

    BSE, also known as the Bombay Stock Exchange, has been an efficient capital-raising platform for the past 143 years. It was established in the year 1875 as ‘The Native Share & Stock Brokers Association’.

    In 2017, BSE became the first listed stock exchange in India. BSE aims at providing a transparent market for trading in equity, currencies, debt instruments, derivatives, and mutual funds.

    • BSE STAR MF is India’s largest online mutual fund platform, which processes over 27 lakh transactions per month.
    • BSE Bond, the transparent and efficient electronic book mechanism process for private placement of debt securities, is the market leader.

    BSE’s well-known equity index, ‘The S&P BSE SENSEX’, is India’s most widely used and tracked benchmark index.

    Did you know?

    BSE is Asia’s first and the fastest Stock Exchange in the world with a speed of 6 microseconds.

    BSE Sensex vs BSE All Cap A Comparative Study

    BSE SENSEX

    The ‘S&P BSE SENSEX’ also known as the “SENSEX” is a benchmark index of the Bombay Stock Exchange. It tracks the performance of the 30 largest and most liquid companies listed on the stock exchange.

    You must be wondering what a benchmark is. Well, a benchmark is a widely used standard to compare the returns generated by securities. Index as a benchmark depicts the overall health of the stock market, representing a substantial portion of the Indian market capitalisation.

    Consider ‘SENSEX’ as a basket containing the top 30 stocks in terms of size and trading activity. The price fluctuations showcase the combined performance of these companies and give you a general sense of how the Indian stock market is performing.

    Its value is calculated based on the free float-adjusted market capitalisation, i.e., the weightage of each company depends on its market cap but is adjusted for the portion of shares available for trading.

    BSE All Cap

    The ‘BSE All Cap’ is a broader Index launched in 2015 that comprises the S&P BSE Large Cap, the S&P BSE Mid Cap, and the S&P BSE Small Cap. It measures the performance of 1,170 companies that are listed on the stock exchange of different market capitalisation.

    Did You Know?

    Market Capitalisation = Current Market Price of Shares * Total Number of Outstanding Shares

    For example, a company with 1 lakh outstanding shares, each valued at INR 100, would have a market cap of (1 lakh * INR 100) INR 1 crore.

    Read Also: How Many Companies Are Listed on NSE & BSE?

    Sensex vs All Cap

    The “Sensex” tracks the performance of the 30 largest companies and is a basket of India’s blue-chip stocks, whereas “All Cap” tracks the performance of 1,170 companies across all market capitalisation and includes large-cap, mid-cap, and small-cap.

    “Sensex” is considered less volatile since its major focus is on large and established companies whose performance tends to be more stable, while “All Cap” can be more volatile because of its broader market exposure and inclusion of small and growth-oriented companies with fluctuations in their performance.

    Let’s have a look at the historical returns given by them:

    Historical Returns

     Time Frame Sensex (%)All Cap  (%)
     1 Year 17.43 28.96
     3 Year 13.51 18.99
    5 Year14.4417.05
    10 Year12.8415.04*
    *Index launched on 15 April 2015

    Read Also: BSE Sensex vs BSE All Cap? A Comparative Study

    Investment Strategies

    Investment Strategies

    Choosing between Sensex and All Cap depends completely on your investment goals and risk tolerance. However, below mentioned points will give you a brief overview of strategies:

    BSE SENSEX

    1. Index Investing

    Invest in Sensex-based Exchange Traded Funds (ETFs) or Index funds to passively track the performance and growth of the top 30 companies. This investment strategy is low-cost and can be beneficial for investors who wish to start their financial journey.

    1. Value Investing

    Choose undervalued Sensex stocks with strong fundamentals when compared to industry benchmarks and decent prospects. This will help you find some hidden gems.

    1. Dividend stocks Investing

    Go for stocks with a history of consistent dividend pay-outs so that you can generate not only good returns but also regular income.

    BSE All Cap

    1. Growth investing

    Target those stocks of ‘All Cap’ that hold high growth potential. You will often find these stocks in mid-cap and small-cap segments. Do proper research to analyse their prospects and financial health.

    1. Thematic Investing

    Invest in stocks based on specific themes such as technology, healthcare, energy or infrastructure, which can give you returns in the long term.

    Sectoral Analysis

    Understanding the sectoral composition of ‘BSE Sensex’ and ‘All Cap’ can help you measure their exposure to different industries.

    • BSE Sensex is dominated by financials with a weightage of around 26% due to the presence of major banks and financial institutions such as HDFC Bank, ICICI Bank, etc. IT and consumer goods such as TCS, HUL, and ITC also hold significant weightage of around 13% to 15%. However, energy, healthcare, etc. represents the smaller portions of the index.
    • BSE All cap is more diversified, but financials still hold the top spot with weightage around 18%. However, the weightage is lower than that of Sensex. There is also a stronger presence of mid-cap and small-cap companies. Also, emerging sectors like healthcare, materials, and utilities have greater exposure and high weightage than BSE Sensex.

    Refer to the links below for a complete list of the Constituents of both indices:

    For BSE SENSEX

    https://m.bseindia.com/Sensex.aspx?Scripflag=16

    For BSE All Cap

    https://m.bseindia.com/Sensex.aspx?Scripflag=87

    Risk & Return

    Risk and Return

    ‘BSE Sensex’ is generally considered less risky due to its focus on large companies with relatively stable performance and has historically offered lower average returns compared to All Cap due to its focus on mature companies with slower growth.

    ‘All Cap’ is more volatile because of its broader exposure and also carries a higher risk. Historically, ‘All Cap’ has offered higher returns because mid and small-cap companies carry growth potential. However, remember that historical returns provide no guarantee for future returns.

    Combining stocks from various indices or sectors can help you curate a balanced portfolio with stability and returns.

    Read Also: A Comparative Study on NSE v/s BSE: Differences, Similarities, and Popularity

    Conclusion

    In summation, ‘Sensex’ and ‘All Cap’ offer valuable insights and exposure to the Indian stock market. The former represents the top 30 companies in India and, the latter represents the 1,170 companies. Keep in mind that past performance is not indicative of future results. Focus on research and carefully assess your risk appetite before making any investment decisions.

    Frequently Answered Questions (FAQs)

    1. What is the difference between BSE Sensex and All Cap?

      ‘Sensex’ tracks the 30 largest blue-chip companies, and ‘All Cap’ tracks 1,170 companies across all market sizes.

    2. Which index is right for me?

      Choosing between the two completely depends on your investment objectives and risk appetite.

    3. Which index is more impacted by economic events?

      ‘All Cap’ because of its broader exposure, it can be more volatile during short-term economic fluctuations and specific sector-related events.

    4. What are some emerging sectors within the ‘All Cap’ Index?

      A few  emerging sectors that are currently drawing investors’ attention are renewable energy, electric vehicles, healthcare, artificial intelligence, etc.

    5. Can I invest directly in Sensex or All Cap?

      No! Sensex and All Cap are not actual investment vehicles. You can invest in them through Index Funds, ETFs, etc.

  • A Guide To Investing In Gold In India

    A Guide To Investing In Gold In India

    You must have seen ladies in your house wearing gold. Well, have you ever thought that gold can be a great source of diversification in your portfolio?

    Investing in gold is not just about chasing returns; it is about understanding its exceptional role in a diversified portfolio. In our today’s blog, we will help you understand the gold as an investment option in India.

    Gold in India holds a long-standing culture and financial significance, which makes it a popular investment choice for people.

    investing-in-gold

    Why Gold Matters?

    • Gold acts as a hedge against inflation and acts as a store of value since gold prices tend to rise when inflation increases, protecting your wealth.
    • Gold is often considered a haven asset for investment during economic or political uncertainties.
    • Gold can help you diversify your portfolio and reduce the overall risk because the price of gold is not positively correlated with the stock market, which means, it does not always move in the same direction as the price of securities in the stock market.
    • Gold is a liquid asset and can be bought and sold as and when required. You can convert your gold easily into cash if you need to.

    Did you know?

    Gold received from a relative as a gift during marriage is tax-free. However, gold received as a gift or inheritance from any other person over INR 50,000 is taxable.

    Factors Affecting Gold Prices

    Factors affecting gold prices

    There are certain factors globally and locally that affect the gold prices:

    Mine production

    The amount of gold mined each year has a significant impact on its price. If there is a decline in mine production, gold will become scarce, and its price will rise and vice versa.

    Gold Reserves

    Central Banks around the world hold large reserves of gold. When they buy or sell gold, it can affect gold prices. Say, if a central bank sells some of its gold reserves, it could flood the market and push the gold prices down.

    Investment Demand

    When there is a lot of uncertainty in the market, such as during a recession, the demand for gold can increase and hence the prices.

    Exchange Rates

    Gold is priced in US dollars. When the dollar is strong, it makes gold more expensive for investors who hold other currencies, which leads to a decrease in demand for Gold and a fall in its price. Conversely, when the US dollar is weak, it makes gold cheaper for investors.

    Read Also: Types of Investment in the Stock Market

    How to Invest in Gold in India

    There are multiple ways to invest in the gold. Some of the widely used options are mentioned below:

    Physical Gold

    • Gold Bullion – Investors can buy physical gold in the form of bars / coins. Bullion is valued based on its weight and purity.
    • Gold Jewellery – Jewellery is generally worn for adornment; it is often considered as a source of investment. However, the returns may be influenced by the craftsmanship and design of the ornament because of making charges and its related costs.

    Digital Gold

    Investment through Online Platforms – various online platforms help investors with buying and selling digital representations of gold without physical possession. These digital gold options offer a convenient way to invest in gold without the need for physical storage.

    Sovereign Gold Bonds (SGBs)

    SGBs are government-backed securities denominated in grams of gold. It is an alternative to holding physical gold. SGBs guarantee capital preservation and offer tax benefits. The minimum investment in the Bond shall be one gram with a maximum limit of subscription of 4 kg for individuals and 20 kg for trusts.

    Apart from capital gains arising from an increase in the value of the gold, SGBs also provide a 2.5% interest p.a. on the invested amount.

    Gold Mutual Funds

    • Gold ETFs – Gold ETF is an exchange-traded fund to track the domestic physical gold price. Gold ETFs are listed on the NSE and BSE and can be easily traded like a stock. Buying Gold ETF implies that you are holding gold in electronic form.
    • Gold Fund of Funds (FOFs) – Similar to gold ETFs, gold FOFs invest in a basket of other gold funds and offer further diversification but add another layer of fees.

    Taxation of Gold in India

    Taxation of Gold

    Sovereign Gold Bonds

    No capital gains tax on SGBs if you redeem at maturity, i.e., after 8 years, and if in case you wish to redeem early, you have to pay:

    • LTCG – If you redeem the investment after 3 years, then capital gains are taxed at a rate of 20% along with indexation benefit. Indexation means your gains are adjusted for inflation.
    • STCG  – If you redeem your investment within 3 years, then capital gains are taxed as per your income tax slab.

    Further, interest received on SGBs is taxed as per the investor’s tax slab.

    Gold ETFs

    Taxation of Gold ETFs is similar to that of debt taxation in India. Investors are eligible to pay both STCG and LTCG. Long-term capital gains tax is levied at 20% after indexation benefits on gold ETFs held for more than 3 years.

    For investment held up to 3 years will be considered a short-term capital gain (STCG) and will be levied according to the applicable tax slab of the investor. No security transaction tax (STT) is charged on Gold ETFs.

    Physical Gold

    Investors possessing physical gold in the form of jewellery, coins, etc., are liable to pay 3% GST on the total buy value. If held for less than 3 years, then capital gains are taxed as short-term capital gains, which is as per your tax slab, and if investment held for more than 3 years, then long- term capital gains will apply at 20% and additional 4% cess, means effectively LTCG is 20.8%.

    Risks of Investing in Gold

    1. Gold prices can fluctuate significantly, and short-term movements can be unpredictable.
    2. Rising interest rates may lead to a decline in the price of the gold.
    3. Physical Gold has low liquidity and high transaction costs compared to Gold ETFs, which makes it harder to sell.
    4. Physical gold also requires secure storage as there are chances of risks of theft or damage.
    5. Global financial markets and geopolitical events influence gold, and any kind of turbulence in gold-producing countries can impact its price.

    Read Also: What is a good rule for investing in stocks?

    Conclusion

    Gold’s charm in India is unquestionable, woven into cultural threads and paired with financial strategies. Unlike stocks and bonds, gold is a tangible asset. Adding gold to your portfolio can help you diversify your portfolio, reduce risk, and balance your financial landscape.

    To sum it up, investing in gold is not a one-size-fits-all approach. It depends on your risk appetite. Before taking a plunge into your investment in a gold basket, seek professional suggestions. Keep in mind that gold may glitter, but true financial security sparkles through balanced investment strategies.

    Frequently Asked Questions (FAQs)

    1. How much should I invest in Gold?

      The investment amount completely depends on individual circumstances and financial objectives. As per the experts, a 10-20% allocation to gold is ideal.

    2. What are the minimum and maximum limits for investing in SGBs?

      The SGBs in India are issued in the denomination of one gram of gold. The minimum investment is one gram and the maximum is 4 Kg for individuals.

    3. Which option is best to buy gold in India?

      It depends on your preference whether you want to buy physically or digitally, however, SGBs are considered an ideal option if you don’t need physical gold and are buying for a long tenure.

    4. Can I invest in Gold through my regular savings account?

      Yes, some banks offer gold-saving schemes where you can collect gold units based on your deposits. Further, many banks provide the facility for buying SGBs.

    5. Is TDS applicable to SGBs?

      No, TDS does not apply to SBGs.

    Disclaimer: The securities, funds, and strategies mentioned in this blog are purely for informational purposes and are not recommendations.

  • ELSS Funds: 3 Years Lock-In Worth It?

    ELSS Funds: 3 Years Lock-In Worth It?

    Have you ever planted a seed and nurtured it for three years? ELSS funds are similar to those seeds. In today’s blog, we will uncover how investing in ELSS funds can help you reap the seeds of tax-optimised returns.

    ELSS stands for Equity Linked Saving Scheme. ELSS is an equity mutual fund investment that invests at least 80% of its assets in equity and equity-related instruments. Investors choosing ELSS funds as an investment option can claim deductions under Section 80C of the Income Tax Act of up to INR 1.5 lakh. The amount that you invest in ELSS is deducted from your taxable income and helps you pay a lesser amount of income tax. Investments in ELSS attract a 3-year lock-in period.

    ELSS

    Some of the important features of ELSS funds are as follows.

    1. ELSS funds primarily invest in equity-related instruments of companies with significant growth potential. This means they can generate higher returns as compared to other tax-saving options like the Public Provident Fund (PPF) or National Savings Certificate (NSC).
    2. ELSS options can be a go-to option for investors who want to save tax and seek high returns.
    3. Gains from ELSS investments after the lock-in period are taxed as long-term capital gains at a rate of 10%.
    4. You cannot redeem your investment amount before three years from the date of investment. 
    5. Investments in ELSS funds can be done through both lump-sum and SIP.

    Read Also: What is an Open-Ended Mutual Fund & How to Invest in it?

    ELSS vs Other Tax-Saving Options

    PPF

    Apart from ELSS mutual funds, there are a variety of tax-saving options available to the investors like PPF, NPS, ULIPs, etc. 

    Public Provident Fund 

    PPF is a debt-oriented, government-backed saving scheme offering guaranteed returns. It is exempted from taxation, i.e., interest earned and the amount received on maturity are tax-free.

    However, it comes with a lock-in period of 15 years. Only partial withdrawals are allowed after specific years and offer returns of around 7-8%.

    PPF is suitable for risk-averse investors seeking stable returns and is ideal for long-term savings goals.

    National Pension Scheme

    NPS was introduced by the central government to help individuals have recurring income in the form of a pension after the retirement. These funds are market-linked and invest in equities, bonds and other assets, leading to higher and volatile returns.

    NPS invests in asset classes such as equity and related instruments, corporate and debt-related instruments, government bonds, and alternative investment funds. NPS is open to all Indian citizens aged between 18 to 65 years. Investors can claim tax deductions of up to INR 2 lakh. Maturity corpus is partially taxable, while annuity income is fully taxable.

    It attracts a lock-in period up till the age of retirement. Only 25% of the invested amount can be withdrawn after three years from the date of investment in case of an emergency.

    NPS is suitable for investors who are looking for retirement savings and are comfortable in taking risks.

    ULIP

    ULIP, or Unit-Linked Insurance Plan, is a financial product that offers both investment and insurance benefits. It provides life cover and an investment component wherein premiums are invested in numerous funds like equity, debt, or hybrid. The policyholder can choose the fund based on their risk appetite. 

    Moreover, ULIPs provide flexibility to switch between funds and allocate premiums accordingly. Returns depend on the market performance, which influences the policy’s value. Consequently, it provides the benefit of both, life insurance as well as the wealth creation. In ULIP, you can get a tax deduction of up to INR 1.5 lakh under Section 80C of the Income Tax Act.

    The table below shows the difference between ELSS and other tax-saving options:

    ParticularsELSSPPFNPSULIP
    StructureEquity-orientedDebt-orientedMarket-linkedUnit-linked insurance Plan
    Tax Deduction Up to INR 1.5 lakhsUp to INR 1.5 lakhs Up to INR 2 lakhs Up to INR 1.5 lakhs
    Lock-in period3 years15 yearsUp to retirement.5 years
    Risk profileRisk is high because of equity market fluctuationsLow risk and returns are guaranteedDepends on fund structureModerate Risk

    Further, there are multiple other tax savings instruments available such as the National Savings Certificate (NSC), Tax saving Fixed Deposit, etc. 

    Should I invest in ELSS for 3 years?

    Investing in ELSS is entirely depends on the individual preference and financial situation. However, there are some of the benefits of investing in the ELSS funds that you must know:

    1. You can claim tax deductions of up to 1.5 lakh.
    2. ELSS funds carry the potential for higher returns when compared to other tax-saving investment options.
    3. If the investments in ELSS are done through SIP, more units can be purchased when the market falls, lowering the average cost per unit.
    4. Unlike PPF and NPS, ELSS has a short lock-in period of only 3 years.

    Read Also: Long-Term Capital Gain (LTCG) Tax on Mutual Funds

    Conclusion

    Whether the three-year lock-in period of ELSS funds is worth it or not, depends on your financial goals. There is no simple yes/no answer to this question. If you can handle market fluctuations, know how to stay calm during market volatility, and are looking for some good tax saving options, then ELSS funds will be a great option for you to choose. 

    However, ELSS funds might not be suitable if you have an investment horizon of less than three years. Make sure that you fully understand all the implications before investing in ELSS funds, and remember to do thorough research on ELSS funds. With the right approach, even those 3 years might fly by as your investment grows towards a brighter financial future!

    Frequently Answered Questions (FAQs)

    1. What’s the catch with a three-year lock-in period in ELSS?

      You can consider ELSS funds as a short to mid-term commitment since you cannot withdraw them for 3 years, but the potential for higher returns makes ELSS funds attractive.

    2. ELSS funds invest in equity; will there be a volatility in returns? 

      Buckle up! You might see some bumps along the way. Stock markets can be volatile, but don’t worry, ELSS funds come with a lock-in period of three years, and staying invested for the longer term can make your journey smooth.

    3. What will happen to my investment amount once the 3-year lock-in period is over?

      After 3 years of lock-in, you have the freedom to redeem the investment, or you can stay invested. The choice is all yours! However, if you stay invested the fund will continue to generate returns.

    4. Three years of lock-in seems like a long time; why should I choose ELSS funds?

      ELSS has the shortest lock-in as compared to other tax-saving investment options. NPS lock-in is till retirement, PPF has a lock-in of 15 years, Tax saving FD and NSC have 5-year lock-in period. 

    5. Is premature withdrawal possible in ELSS funds?

      No, while other tax savings investments have the option of premature withdrawal with a certain penalty, however, in ELSS, there is no option available for the investors to withdraw before 3 years. 

  • Top Alcohol Stocks In India

    Top Alcohol Stocks In India

    Partying with friends without alcohol is like dancing without music, isn’t it! Jokes apart, have you ever thought of investing in alcohol stocks. Yes, you heard it right! Raise your glass to your success of investment and have a look on some of the top liquor stocks in India.

    India’s alcohol market is a complex and dynamic landscape that offers distinct flavours and fulfils diverse consumer preferences.

    India’s alcohol industry is expected to reach $64 billion over the next five years according to a report by ISWAI (International Spirits and Wines Association of India). Let us delve deeper and analyse India’s alcohol industry.

    Alcohol Market Overview

    India boasts the third-largest liquor market by volume, generating over $35 billion annually and is projected to grow at a CAGR (compounded annual growth rate) of 7% for the next decade. Factors like urbanisation, rising disposable income and changing social lives will drive the growth. Further, we produce over 48% of all whisky in the world.

    Did you know?

    In Dec 2023, Indian whiskey “RAMPUR” wins the best world whisky award in the prestigious John Barleycorn Awards!

    Top Alcohol Stocks in India

    Read Also: 7 Top Aluminium Stocks in India to Add to Your Portfolio

    Market Segment

    Indian-Made-Foreign-liquor (IMFL)

    IMFL is the official term that is used in India and refers to all types of liquor in the country except indigenous alcoholic beverages. It includes a wide range of beverages such as whiskey, rum, vodka gin, etc. IMFL signifies a historical difference from traditional Indian drinks and offers from affordable value brands to premium labels.

    Indian-made-Indian Liquor (IMIL)

    It is also a category of alcoholic beverages produced in India. The term encloses several locally produced alcoholic drinks using age-old recipes and ingredients such as grains, flowers, and fruits. IMIL is widely known as “Desi Daru”. The alcohol content in such drinks is around 30%. This category is often cheaper than commercially produced IMFL and can be easily accessed by the wider population.

    Beer

    This segment comprises all the beers produced in the economy and has witnessed rapid growth in recent years specifically among urban millennials and professionals.

    Wine

    The wine category in India is experiencing steady and consistent growth. The segment is dominated by domestic wines with 90% domestically produced and consumed. Indian wines are considered more affordable than imported wines and are expected to grow at a CAGR of 10.7% by the year 2027.

    Top Stocks Companies of Alcohol in India

    In India, we have more than 15 listed companies on NSE and BSE. If you’re looking for a comprehensive liquor stock list, let’s discuss some of the top companies:

    Read Also: Top Real Estate Stocks In India

    1. United Spirits

    United Spirits Limited, a subsidiary of Diageo, is the largest alcohol company in India by market capitalisation. Further, it is the second largest alcohol company in the world by volume. It produces a wide range of products which houses an outstanding collection of premium brands, including but not limited to: Royal Challenge, McDowells, Black Dog, Johnnie Walker, Antiquity, etc. Currently, they have over 37 manufacturing facilities in India and boast a strong distribution network.

    2. Sula Vineyards

    Sula Vineyards is a leading wine producer in India. The company was founded in the year 1999 by Rajeev Samant in Nashik, Maharashtra. Sula’s distribution network covers India and several international markets. Sula Vineyards produces a diverse range of wines including red, white, rose, sparkling and dessert wines. Sula Vineyards is well-positioned for continued success.

    3. United Breweries

    The company was bought by the late Mr Vittal Mallya in 1947. Since then, it has consistently grown and never looked back. United Breweries is considered the largest manufacturer in India with over 60% market share in the beer market and is headquartered in Bangalore. The company was established in the year 1915 with five breweries in south India. The company owns numerous iconic brands like Kingfisher, McDowell, Royal Stag, etc.

    4. Radico Khaitan

    Radico Khaitan is a top Indian manufacturer of Indian-Made-Foreign-Liquor (IMFL). It was founded in the year 1943 as Rampur Distillery & Chemical Company Limited. It has now become a major bulk spirits supplier and bottler, now have over fifteen organically grown brands. Khaitan’s portfolio includes a wide range of IMFL products such as Black Magic, 8 PM, Magic Moments, Rampur, etc.

    Radico Khaitan is the fourth largest company in India with a strong presence in North India and exports its products to over 30 countries. It has also created an international division, namely Radico International in the year 2003 and introduced brands such as Beck’s Beer and wines from E&J Gallo in the Indian alcohol market.

    5. Tilaknagar Industries

    Tialknagar Industries is a prominent Indian liquor company and is well-recognised for its assorted portfolio of IMFL and extra-neutral alcohol (ENA). The company was established in the year 1933 under the leadership of the Dahanukar family. Their journey began with the Maharashtra Sugar Mills and the company still holds a rich history in the Indian liquor market.

    Tilaknagar Industries offers a wide range of products such as brandy, whiskey, vodka, gin, rum etc. The company has a strong distribution network and its products are also exported to international markets in East & South Asia, Europe, Africa, etc.

    6. Globus Spirits

    Globus Spirits was established in the year 1993 as Globus Agronics Limited. Today Globus Spirits is one of the largest manufacturers and sellers of IMFL in India. The company offers a variety of brands that cater the consumer preferences and include premium, value, and bulk alcohol. The premium segment includes GR8 Times, White Lace, Napoleon, Governors’ Reserve Blue etc. Value segment includes Winner Gold, Marvel Blue, Golden Grape, etc. The bulk alcohol segment includes Grain Neutral Alcohol, Fusel, Bioethanol etc. Globus Spirits operates four fully integrated plants across West Bengal, Bihar, Haryana, and Rajasthan.

    7. Som Distilleries and Breweries

    Som Distilleries & Breweries Ltd. (SDBL) is a prominent integrated AlcoBev, Bhopal-based manufacturer. The company was founded in the year 1993 and has established itself as a major player in the Central Indian Market, especially in the segment of beer and whiskey. Some of the widely sold products include beers like Hunter Strong Premium beer, Woodpecker Wheat, etc. And whiskeys like Pentagon, Milestone 100, etc. Vodkas like White Fox, rums, and other ready-to-drink beverages.

    Factors Affecting Liquor Stocks

    Factors affecting alcohol stocks

    Several factors impact the performance of the liquor stocks. Let us look at some of the key factors that affect the performance of the liquor stocks.

    • Inflation – Rising inflation can increase the production cost of the alcohol companies squeezing the profit margins and stock prices.
    • Taxation & pricing – Liquor stocks are sensitive to changes in taxation policy. Higher taxes can lead to increased costs for companies and can discourage consumption.
    • Economic Growth – Strong economic growth of the economy results in increased disposable income in the hands of consumers and leads to a sudden rise in spending on discretionary items like alcohol.
    • Regulatory Procedures – Complex licensing & regulatory procedures can be a hurdle for liquor companies thereby increasing the operational costs. And negatively affecting their profitability.
    • Consumer Trends – Shifts in consumer preferences with people trying to adopt a healthy lifestyle can also affect the demand and sales of liquor. Companies need to adapt to the evolving trends of consumers and produce accordingly.
    • Currency Exchange Rates – Companies with international operations and exporting their products to other foreign countries can be deeply affected by exchange rate fluctuations affecting both producers and importers.

    Market Capitalisation and Current Price

    The table below shows the current market price and market capitalisation of the above-mentioned alcohol stocks (as of 15 January 2024):

    StockCurrent Market Price (INR)Market Capitalisation (INR crs)
    United Spirits1,32796,548 
    United Breweries                                                            1,800                                                                   47,581 
    Radico Khaitan3,049                                                                   40,813 
    Sula Vineyards283                                                                     2,393 
    Tialaknagar Industries459                                                                     8,899 
    Globus Spirits1,076                                                                     3,118 
    Som Distilleries and Breweries135                                                                     2,633 

    Read Also: How to find and identify undervalued stocks

    Conclusion

    Each alcohol company in India comes with its own set of strengths and weaknesses. Indian liquor industry offers a wide range of products and people can choose according to their tastes and preferences.

    Remember that the alcohol industry is always subject to various regulations and concerns. Taxation & Alcohol Bans can significantly affect the alcohol industry.

    S.NO.Check Out These Interesting Posts You Might Enjoy!
    1Top Sugar Companies In India
    2Business Cycles of a Company
    3Miniratna Companies in India
    4How Many Companies Are Listed on NSE & BSE?
    5Mukesh Ambani Companies List 2024: Mukesh Ambani Stocks

    Frequently Asked Questions (FAQs)

    1. What is the full form of IMFL?

      Indian-Made-Foreign-liquor.

    2. Mention the top alcohol stocks of India.

      United Breweries, Globus Spirits, Sula Vineyards, Radico Khaitan, Tilaknagar Industries, etc.

    3. What factors can affect the alcohol stocks?

      Factors like inflation, regulatory changes, currency exchange rates, economic growth, etc.

    4. How many listed alcohol stocks are there on Indian exchanges, i.e., NSE and BSE?

      As of January 2024, there are more than 15 listed alcohol stocks in India.

    5. Who manufactures “Rampur” whiskey which recently won the best world whisky award in the prestigious John Barleycorn awards?

      Rampur is manufactured by Radico Khaitan Limited.

    Selection Methodology and Important Disclaimer

    The stocks included in this list are selected primarily on the basis of their market capitalisation, which represents the total market value of a company’s outstanding shares. The companies are arranged in descending order of market capitalisation, with larger companies appearing first, followed by relatively smaller companies. This methodology is intended to provide a structured approach for identifying companies based on their market size and overall presence within a sector.

    However, market capitalisation should not be considered the sole factor while evaluating investment opportunities, as it does not guarantee future performance, profitability, or returns. Investors should also assess other important factors such as financial health, business fundamentals, management quality, valuation metrics, industry outlook, and market conditions before making investment decisions.

    The information provided is for educational and informational purposes only and should not be construed as investment advice, recommendation, solicitation, or an offer to buy or sell any securities by Pocketful Fintech Capital Private Limited.
  • Regular vs Direct Mutual Funds: Make The Right Investment Decision

    Regular vs Direct Mutual Funds: Make The Right Investment Decision

    As of December 2023, the Indian Mutual Fund Industry has over 50 lakh crores under management, and if your majority of the investments are in Mutual Funds, then it is high time that you should know the difference between Regular and Direct mutual funds.

    What are Mutual Funds

    Mutual funds collect money from several 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 are chosen by the fund manager to invest your money in. Furthermore, SIPs and lump-sum are different ways through which we can invest in mutual funds.

    Benefits of Investing in Mutual Funds

    Benefits of Direct Mutual Funds
    1. Mutual funds help you diversify your capital across asset classes. This spreads your risk and mitigates the impact of losses, if any, in a single holding.
    2. Mutual funds are managed by professional fund managers who understand market dynamics. These managers help you reduce the pressure of managing your portfolio.
    3. Investing in mutual funds is a hassle-free way to access a diversified portfolio. You do not need to keep an eye on every asset class, such as stocks, bonds, debentures, etc.
    4. Investment amounts for mutual funds are low as compared to directly buying stocks or bonds. You can start your investment journey today with an amount as low as INR 500.
    5. There’s a vast array of mutual funds available catering to diverse investment goals, risk appetites, and time horizons. You can choose the fund that best aligns with your objective.

    Regular Mutual Funds

    Every mutual fund scheme offers two ways to invest: Direct Route and Regular route. A regular mutual fund is a type of mutual fund that is sold through intermediaries such as brokers and distributors. Investment in mutual funds through regular mode attracts a higher TER* because of commission involved.

    If you’re not familiar with the word TER, it stands for Total Expense Ratio, or say, Expense Ratio. Fund Managers charge an annual fee that is charged to investors basis their total investment and the same can be analysed through TER.

    Did you know?

    Every mutual fund in India comes under Regulation 52 of the SEBI MF Regulations, in which the maximum TER allowed is 2.5% for the first INR 100 crores of total net assets.

    Here are some interesting features to know about regular mutual funds:

    • Regular mutual funds carry a high expense ratio, i.e., a larger portion of your investment will be eaten up by fees, thereby reducing your returns.
    • The expense ratio is the cost linked with managing and operating a mutual fund. It is expressed as a percentage of the fund’s average net assets and represents the total annual expenses charged to the fund.
    • Regular mutual funds are a good investment option for investors who do not have enough time and knowledge to do their research on mutual funds, and are willing to pay a higher expense ratio and seek professional investment advice.
    • Regular mutual funds are distributed through multiple channels such as, banks, SEBI-registered financial advisory firms, and brokerage firms.

    Direct Mutual Funds

    Investing in Direct mutual funds means buying directly from the Asset Management Company (AMC) without the involvement of any intermediaries like brokers or distributors. The investor invests through the website of the AMC, mobile app or offline. Further, there are certain new-age brokers as well which provide the facility of investing in direct plans.

    Here are some interesting features to know about direct mutual funds:

    • Since there are no distributors involved, direct plans have a low expense ratio.
    • The lower expense ratio leads to a higher net asset value (NAV).
    • The investor in direct mutual funds has more flexibility as compared to regular ones.
    • Direct mutual funds are the best fit for individuals who understand the fundamental concept of mutual funds, prefer a do-it-yourself (DIY) approach, and are willing to do thorough research and analysis.

    Regular Mutual Fund vs. Direct Mutual Fund

    1. Regular mutual funds are sold through intermediaries such as distributors and brokers, whereas direct mutual funds are bought directly from the asset management companies who manages the fund.
    2. Unlike direct mutual funds, regular mutual fund has a high expense ratio because of intermediaries. The regular mutual fund has a lower NAV because the distributor’s commission is deducted from the invested capital whereas direct mutual funds offer a high NAV for the same investment amount because of the low expense ratio.
    3. A higher expense ratio leads to lower returns in regular plans as compared to direct plans.
    4. Regular mutual fund often comes with professional advice (investment advisor), while direct funds are self-directed and DIYs.

    Breakdown of Expenses

    The fee structure of direct and regular mutual funds is more or less the same. Let us dive deeper to know the difference.

    • Expense Ratio – As discussed above, this covers the fund’s operating costs such as management fees, custodian fees, and administrative expenses and is generally expressed as a percentage of the asset under management. The expense ratio for direct mutual funds is lower, and in the case of regular mutual funds expense ratio is generally higher due to the inclusion of distribution charges.
    • Transaction charges – Some of the direct or regular mutual funds may charge a small amount for buying or selling mutual fund units.

    How to identify a Mutual fund as Direct or regular?

    How to identify if plan is regular or direct

    Suppose you want to invest in a mutual fund scheme but want to avoid seeking professional advice. Then how will you recognize whether the fund you have chosen is direct or regular? We got you covered!

    1. The word ‘direct’ will be there in the name of the scheme.
    2. The expense ratio of a direct scheme will always be lower than that of a regular scheme.
    3. You can also refer to your consolidated account statement. If the plan is direct, no ARN* number will be mentioned in the account statement.

    *ARN Number is the AMFI registration number issued to the mutual fund distributors and brokers.

    Impact of Expense Ratio on Returns

    Impact on returns

    Let’s understand this with an easy example:

    • Initial Investment – INR 1 lakh
    • Time Period – 20 years
    • Rate of Return – 15%
    • Expense Ratio – 2.5% in regular plan and 1.5% in direct plan

    After 20 years, your investment:

    In Direct Plan– INR 12.58 lakhs

    In Regular Plan – INR 10.54 lakhs

    That’s a difference of almost INR 2 lakhs, so now you can get an idea of how the difference of just 1% can significantly impact your returns over a long period.  

    Conclusion   

    If you are muddled between the two and cannot decide what to choose then Regular mutual funds are the best fit for investors who value professional guidance, are new to the world of investing, and lack financial literacy.

    Direct mutual funds can be a match for investors whose primary focus is to maximise the returns and who are cost-conscious. They are experienced investors who are comfortable with independent research and decision-making and are well-versed in managing investments directly.

    Eventually, the choice depends on the individual preferences and their financial goals. However, we would suggest seeking professional advice if you are not sure which fund aligns perfectly with your investment objective.

    Frequently Asked Questions (FAQs)

    1. What is the difference between direct and regular mutual funds?

      Direct mutual funds are bought directly from the AMC, whereas regular funds are bought through intermediaries like brokers and distributors.

    2. Which is better: Direct or Regular Mutual funds?

      The answer to this question depends on the individual’s needs and preferences. However, direct funds come with a lower expense ratio and provide better returns than regular mutual funds.

    3. Can I change my investment plan from a regular to a direct mutual fund?

      Yes, you can change your investment plan from a regular to a direct plan by contacting the asset management company. However, there are certain things which investors should keep in mind before switching from a regular to a direct plan:The change in investment plan will be treated as a withdrawal, which means if there is any exit load, then you have to incur exit load charges if you redeem your investment before the exit load period. Further, there are tax consequences depending on the type of fund and time horizon.

    4. Which one gives higher returns?

      Generally, direct funds have a lower expense ratio as compared to regular funds because there is no intermediary involved in direct mutual funds. Therefore, effectively, direct funds provide better returns than regular funds.

    5. How to know the expense ratio of regular and direct plans of the same scheme?

      You can know the expense ratio from the factsheet of mutual funds, which is available on the website of the Asset management company.

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