Category: Investing

Performance Of IPOs Launched In 2023

The Indian markets have performed exceptionally well in calendar year 2023. All major sectors are in green, and broader indices like Nifty 50 and Sensex gave more than 18% returns.

There were 234 IPOs launched in calendar year 2023, 176 SME, and 58 mainboard IPOs. In this blog, we will uncover the top IPOs launched in 2023 by listing gains.

What is an IPO?

If you’re not familiar, IPO stands for Initial Public Offering. When a company raises capital in the primary market by selling shares to the public, it is referred to as an IPO. An IPO is an imperative step in the growth of a business. Once listed on the Stock Exchanges (NSE & BSE), the shares of a company can be easily bought and sold.

Top IPOs of 2023

As stated above, a total of 234 IPOs launched in 2023 out of which mainboard included 58 IPOs and SME included 176 IPOs.

Mainboard IPOs are for large companies with a post-issue paid-up capital of at least INR 10 crore, whereas SME IPOs are for small and medium enterprises with a post-issue paid-up capital of a minimum of INR 1 crore and a maximum of INR 25 crore.

1. Tata Technologies

Tata Technologies IPO is a book-built issue of INR 3,042.51 crores. The issue was a complete offer for sale (OFS), i.e., the entire issue was sold by existing shareholders.

Tata Technologies was founded in the year 1994. It is a leading Indian multinational product engineering company known for its expertise in the automotive, aerospace, and industrial heavy machinery sectors. The company was incorporated as ‘Core Software Systems’ in the year 1989 as the automotive design unit of Tata Motors with a major focus on car designing and development and was later renamed Tata Technologies in the year 2001.

Checkout our detailed case study on Tata Technologies: Tata Technologies Case Study: Business Model and Marketing Strategy

Tata Technology IPO details

IPO Date: 22 November 2023 to 24 November 2023
Listing date: November 30, 2023
Price Band: INR 475 – INR 500 per share
No of shares offered: 60,850,278 shares
Lot Size: 30

Performance Analysis

Tata Technologies shares were listed at a premium of 163% above the issue price. The opening price on the listing day was INR 1,200 per share. On the day of listing, the shares rallied 10% to close at INR 1313.

The shares of Tata Technologies are currently trading at INR 1,180 and are down almost 10% from the listed price of INR 1,313.

2. Motisons Jewellers

Motisons Jewellers IPO was a book-built issue of INR 151.09 Crore. The issue was a completely fresh issue of 2.75 Crore shares.

It was established in the year 1997. The company sells gold, diamond, and other jewellery products with over three lakh designs. The flagship store – Motisons Tower is located in Jaipur. The latest branch of Motisons was opened in 2021, in Vaishali Nagar, Jaipur.

Motisons Jewellers IPO Details

IPO Date: December 18, 2023 to December 20, 2023
Listing date: December 26, 2023
Price Band: ₹52 to ₹55 per share
No of shares offered: 25,829,700
Lot Size: 250 Shares

Performance Analysis

Shares of Motisons Jewellers were listed at a premium of 84% above the issue price. The company’s opening price on the listing day was INR 109 per share. However, on the listing day, the shares closed at INR 104.

As of 1 Jan 2024, the shares of Motisons Jewellers are trading around INR 103, which is close to the listing day’s price.

3. Netweb Technologies

Netweb Technologies India IPO is a book-built issue of INR 631 crores. The issue was a combination of a fresh issue of 0.41 crore shares and an offer for sale of 0.85 crore shares.

It is a producer of high-performance computing and data centre solutions. The company specialises in designing, developing, applying, and integrating HPC solutions for businesses and research organisations.

Newteb Technologies IPO Details

IPO Date: July 17, 2023 to July 19, 2023
Listing date: July 27, 2023
Price Band: ₹475 to ₹500 per share
No shares offered: 12,620,000 shares.
Lot Size: 30 Shares

Performance Analysis

Shares of Newteb Technologies India were listed at a premium of 82% above the issue price. The opening price price of the company on the listing day was INR 947 per share. However, on the listing day, the shares closed at a discount of nearly 4%, i.e., INR 910 after making a high of INR 953.

The shares of Newteb Technologies India are currently trading around INR 1,187 and are up nearly 25% from the listed price of INR 910.

4. Ideaforge Technology

Ideaforge Technology was a book-built issue of INR 567.29 Crore. The issue was the combination of a fresh issue of 0.36 crore shares and an offer for sale of 0.49 crore shares.

The company was founded and incorporated in the year 2007. The company is involved in the business of manufacturing Unnamed Aircraft Systems (UAS), also called drones. Ideaforge is a market leader and holds approximately 50% market share in the manufacturing of drones. The major focus of the company is on security and surveillance products.

Ideaforge IPO Details

IPO Date: June 26, 2023 to June 30, 2023
Listing date: July 7, 2023
Price Band: ₹638 to ₹672 per share
No of shares offered: 4,648,870 shares
Lot Size: 22 Shares

Performance Analysis

Shares of Ideaforge were listed at a premium of 93% above the issue price. The opening price of the company on listing day was INR 1,300 per share. However, the share price closed at a discount of nearly 1%, i.e., INR 1,295 after making a high of INR 1,344.

As of 1 Jan 2024, the shares of Ideaforge Technologies India are trading around INR 835 and are down nearly 35% from the listed price of INR 1,295.

5. DOMS Industries

DOMS IPO was a book-built issue of INR 1,200 crore. The issue was a combination of a fresh issue of 0.44 crore shares and an offer for sale of 1.08 crore.

The company is a leading Indian manufacturer and supplier of stationery and art products. It was started in the year 2005, and since then the company has achieved significant growth and brand recognition.

It offers a wide range of products such as drawing materials, gifting items, pens and geometrical instruments, paper materials, kits & combos, etc. The company has a strong distribution network in over 45 countries.

DOMS Industries IPO Details

IPO Date: December 13, 2023 to December 15, 2023
Listing date: December 20, 2023
Price Band: ₹750 to ₹790 per share
No shares offered: 15,126,581 shares
Lot Size: 18 Shares

Performance Analysis

Shares of DOMS Industries were listed at a premium of 68% above the issue price. The opening price of the company on the listing day was INR 1,400 per share. However, the shares closed at a discount of nearly 5%, i.e., INR 1,326 after making a high of INR 1,434.

As of 1 Jan 2024, the shares of DOMS Industries are currently trading around INR 1,250 and are down nearly 5% from the listed price of INR 1,326.

Apart from the above-mentioned IPOs, several other IPOs saw a stellar debut on the stock exchange. The list of other IPOs is as follows:

Company Name	Type of IPO	Listing Gain (%)	Listing Price (INR)	CMP (INR)*
GOYAL SALT	SME IPO	242%	130	153
BASILIC FLY STUDIO	SME IPO	179%	271	297
UTKARSH SMALL FINANCE BANK	Mainboard	92%	40	53
PLAZA WIRES	SME IPO	56%	76	100
IREDA	Mainboard	87%	50	104

*CMP as of 1 January 2024

Conclusion

The IPO market of 2023 in India was marked by high volatility and uncertainty. While the number of listings remained strong, the overall performance of the IPOs was mixed, with some companies exceeding expectations and others falling short. It is important to understand that thorough research is necessary before investing in any IPO.

Frequently Asked Questions (FAQs)

What is the full form of IPO
Initial Public Offering.
What is the issue size limit of SME IPO?
1 Crore – 25 Crore.
Was Tata Technologies a mainboard IPO?
Yes.
How many IPOs launched in the year 2023?
234.
What is an Offer Document?
Offer Document or Prospectus, carries information about the company business, background, experience of the management team, company’s financial statements, etc.

January 2, 2024

Asset Management Companies (AMC) in India

If you are looking forward to beginning your journey in mutual funds and are not familiar with the term AMC or Asset Management Company, you have come across the right place!

What is AMC?

AMC stands for Asset Management Company. AMCs are financial institutions that manage and invest funds on their client’s behalf through pooled investments such as mutual funds, ETFs or other financial instruments.

AMC employs professionals fund managers, and analysts to make investment decisions. These professionals research and analyse the market conditions to fulfil the fund’s choices and investment needs.

And for all these services, they charge fees for managing the funds. The fees include a management fee, a performance fee and other miscellaneous expenses. The fees are the percentage of the assets under management (AUM) – It is the total value of the investments managed by the AMC.

In India, AMCs are regulated by the Securities & Exchange Board of India (SEBI). Further, AMCs are also passively regulated by the Association of Mutual Funds in India (AMFI).

Now, you must be thinking about how these AMCs operate. AMCs invest the pooled money in professionally managed funds based on the investor’s financial goal, investment horizon and risk appetite. They rebalance these funds on different frequencies, such as quarterly or annually to maintain the desired asset allocation.

AMCs distribute these funds through various channels including banks, online platforms, NBFCs, distribution houses, agents, etc. The revenue of an AMC primarily comes from the fees it charges from the investors.

Indian Mutual Fund Industry Analysis

Assets Under Management (AUM) of the Indian Mutual Fund Industry stood at INR 49.05 lakh crores as of 30 November 2023.

The AUM of the Indian Mutual Fund Industry has grown from ₹8.90 trillion as of 30 November 2013 to ₹49.05 trillion as of November 30, 2023, more than a 5-fold increase in 10 years.

The proportionate share of equity-oriented schemes is 54.9% and for debt-oriented schemes it is 18.5% of the industry’s assets. Individual investors hold a relatively higher share of industry’s assets, i.e., 59.2% in November 2023.

Institutional investors account for 40.8% of the assets, of which corporates are 95%. The rest are Indian and foreign institutions.

From the above data, we can interpret that AMCs have experienced steady growth over the years, reflecting investors’ participation in the mutual fund industry. Rise in disposable incomes and increasing financial awareness are key factors leading to the growth of the mutual fund industry in India.

Emerging Trends in the Indian Mutual Fund Industry

We all understand the financial landscape of India, which is continuously evolving and AMCs are launching new schemes every year. In the calendar year 2023, AMCs in India launched 198 New Fund Offers (NFOs).

Some of the key emerging trends in the mutual Fund industry are:

Fintech and Robo-advisors are playing an important role in managing investments. Robo-advisors use algorithms to provide automated suggestions on your investments are continuously gaining attention.
Investors these days generally look for investment opportunities that align with their values. Thematic and Overseas funds play a major role by providing sector-focused and global investments opportunities respectively.
ESG investing or environmental, social and governance factors are crucial for new-generation investors. AMCs that curate ESG-friendly funds are attracting ample inflows.
Direct investment platforms are gaining traction because of their low expense ratio and easy registration process.

Broadly, there are two types of mutual funds – direct funds and regular funds. Their expense ratio is the primary distinction between them. Regular mutual funds are chosen by investors who prefer investing with financial advisors, whereas Direct mutual funds are meant for those investors who make their own investment decisions.

Top Asset Management Companies of India

As of December 2023, there are 44 registered Asset Management Companies in India. The top 5 AMCs in India are:

1. SBI Asset Management Company

SBI mutual fund is a leading AMC in India. It was established in the year 1987 and has 36 years of experience in the fund management. It is a joint venture between the State Bank of India and Amundi Asset Management company. State Bank of India currently holds a 63% stake in the SBI mutual fund, and Amundi Asset Management company holds a 37% stake through a wholly owned subsidiary.

SBI currently manages 306 open-ended and 215 close-ended funds with an AUM of INR 828,152 crores as of September 2023.

2. ICICI Prudential Asset Management Company

ICICI is another major player in the Indian Mutual Fund Industry. It was established in 1998 and is a joint venture between ICICI Bank and Prudential Plc, a leading Pan-Asia & Africa-focused group that provides health protection and saving solutions.

ICICI AMC manages 436 open-ended and 17 close-ended funds with an AUM of INR 594,204 crores.

3. HDFC Asset Management Company

Established in the year 2000, HDFC is also a major player in the mutual fund industry with a strong track record and robust product portfolio.

HDFC AMC is a joint venture between HDFC Limited & ABRDN Investment Management Limited (formerly known as Standard Life Investments Limited).

HDFC AMC manages 277 open-ended and 57 close-ended funds with an AUM of INR 518,132 crores.

4. Kotak Asset Management Company

Kotak AMC is the wholly owned subsidiary of Kotak Mahindra Bank Ltd., which started operations in the year 1998 and holds a large investor base of over 8.1 million.

It currently manages 237 open-ended and 34 close-ended funds with an AUM of INR 330,703 crores.

5. Nippon Asset Management Company

Nippon India Mutual Fund (NIMF) is one of the fastest-growing mutual funds in India and was established in the year 1995. NIMF was previously known as Reliance Mutual Fund.

Nippon currently manages 441 open-ended and 24 close-ended funds with an AUM of INR 329,831 crores.

Read Also: Top AMCs in India

Conclusion

To wrap it up, there are 44 registered AMCs in India offering a diverse world of mutual funds. Remember, even though the Indian asset management industry is poised for consistent growth in the coming years, always conduct thorough research and analysis before starting your investment journey and consult with financial advisors.

Also, if you are a keen investor and want to update yourself on the taxation of different mutual funds in India, checkout our blog: Decoding Mutual Funds Taxation In India

Frequently Asked Questions (FAQs)

What is the full form of AMC?
Asset Management Company.
Does AMC charge fees from investors?
Yes.
Who regulates AMCs?
Securities & Exchange Board of India.
How many registered AMCs are there in India?
As of December 2023, there are 44 registered AMCs.
What is Assets Under Management (AUM)?
It is the total value of the investments managed by the AMC.

December 29, 2023

Decoding Hedge Funds In India – Types, Advantages And Distinctions

Hedge Funds are attractive, yet often misunderstood financial products. In our today’s blog, we will learn about these funds and understand what place they hold in the investment landscape.

What are Hedge Funds?

Hedge funds are investment funds that pool capital from high-net-worth individuals (HNIs) and institutional investors.

These funds are managed by professional fund managers and deploy capital in complex products and strategies like listed and unlisted derivatives, real estate, convertible debt, etc. They have the potential to deliver significant returns but also carry significant risks.

They play a significant role in portfolio diversification since they help in diversifying the portfolio and provide a chance to invest in complex strategies.

Hedge Funds in India

Hedge Funds are considered as Alternate Investment Funds (AIFs) in India. As per SEBI, “AIF is a privately pooled investment vehicle incorporated in India which collects funds from sophisticated investors, whether Indian or Foreign, for investing it in accordance with a defined investment policy for the benefit of its investors”.

There are three categories of AIFs classified by SEBI:

1. Category I AIF: Venture Capital Funds, Angel Fund, etc.

2. Category II AIF: Funds that do not fall in Category I and Category III.

3. Category III AIF: Hedge Funds

Hedge funds fall in Category 3 AIFs. These funds are not pass-through entities and are taxed at the fund level. In other words, tax will be paid by the fund, and investors are not required to pay tax. However, this is generally less tax efficient as compared to other investment options.

As per SEBI, there are 1,220 Alternative Investment Funds registered in India as of December 2023.

Features of Hedge Funds

1. Hedge Funds can be registered as a trust, company, or LLP. Generally, partnership structure consists of General Partners and Limited Partners.

General Partners (GPs): GPs actively manage the operations of the fund and also invest in it. They have unlimited liability.

Limited Partners (LPs): LPs are the investors that do not take participation in the management. Further, they have a limited liability.

2. Hedge funds employ a plethora of strategies, including long and short positions, arbitrage, derivatives trading, etc. although they are flexible and can also invest in equity, currency, and commodities.

3. Hedge funds try to generate alpha over benchmark returns, i.e., the main objective of hedge funds is to generate positive returns irrespective of the market conditions.

4. Hedge funds carry high charges & fees. These funds charge both management fees and a share of the investor’s profit.

5. Hedge Funds are generally targeted to sophisticated investors, i.e., HNIs, Institutional Investors, Family offices, etc. as the minimum investment amount is in crores. As per SEBI, the minimum amount to start investing in a Hedge fund is one crore, and the entire fund should have a corpus of at least INR 20 crs.

6. Hedge Funds are less regulated as and when compared to mutual funds. Periodic disclosures of NAVs of hedge funds to SEBI are not mandatory. Further, there is no requirement for these funds to register with the Securities and Exchange Board of India (SEBI).

7. Hedge funds have low liquidity, and investors may need to face lock-in periods. They can be open-ended or close-ended.

Hedge Funds Strategies:

Hedge Funds are generally classified by strategies. Such strategies change over time when new strategies are introduced in the market. There are four broader hedge fund strategies:

1. Equity Hedge – They focus on equity and equity related instruments. These funds focus on both long and short positions. Equity Hedge includes strategies such as Market Neutral, Fundamental Value, Sector specific, etc.

2. Event Driven – Event Driven strategies focus on generating profits from certain corporate actions. These include strategies like Merger Arbitrage, Special Situations, etc.

2. Relative Value – These funds capitalise on pricing differences in the market and try to generate profits from relative price movements. These include Volatility trading, Multi Strategy, Fixed Income, etc.

4. Macro Strategies: These funds follow a top-down approach to identify various macro events such as economic activities, interest rates, fluctuation in currencies, etc.

There are also Fund of Hedge Funds (FoHF), which are similar to Fund of Funds (FoF). These funds invest in a diversified portfolio of multiple hedge funds.

Fee Structure of Hedge Funds

Here is a breakdown of the fee structure:

1. Management Fees

Management fees range from 1-2% and are charged irrespective of the fund’s performance.

2. Performance Fees

Performance fees are a percentage of the fund’s profit and are generally around 20%

3. Hurdle Rate

It is a pre-decided minimum level of return that the fund needs to achieve before the performance fee is charged. It can be of multiple types: Soft hurdle, Hard hurdle, or Blended Hurdle.

Apart from these, hedge funds may charge transaction costs from investors. The above-mentioned fee structure can change depending on the type of hedge fund. It is suggested for the investors to carefully review and analyse the fee structure before investing.

Difference between Mutual Funds and Hedge Funds

Investors with low capital can also invest in mutual funds, whereas investments in hedge funds are allowed only for HNI and institutional investors as the minimum investment amount is in crores.
Mutual funds are subject to stricter regulations and disclosure requirements about investments as compared to hedge funds. Hedge funds are less regulated and riskier than mutual funds.
Mutual fund is suitable for investors who seek long-term growth and lesser risk and hedge funds are meant for investors who have a high-risk appetite.
Mutual funds do not charge any fees on profits earned by investors whereas, in the case of hedge funds, fund managers can ask for a share in the profits of the investors.

Benefits of Investing in Hedge Funds

Diversification: Hedge funds allow diversification that can reduce the overall risk of the portfolio. Hedge fund returns may not move in sync with stock or bond markets, potentially offering greater diversification and stability.
Returns: Hedge funds aim to generate good returns irrespective of the prevailing trends in the market.
Professionally Managed: They are professionally managed. Fund managers earn performance fees from the investors. This encourages them to strive for strong and better performance.

Demerits of Investing in Hedge Funds:

1. Not transparent: Hedge Funds operate in a less regulated world and are not obliged to issue performance reports, portfolio holdings, etc. Further, they are not allowed to advertise in India.

2. Not for all: As discussed above, hedge funds deploy capital in complex strategies and carry higher risk as compared to other investment options. Further, the minimum investment amount is generally in crores, whereas in other investment options like Mutual funds, you can invest from as low as INR 100.

3. Expensive: Hedge Funds are substantially more expensive than traditional investments and may not be tax efficient as compared to other investment options.

Conclusion

On a parting note, hedge funds appeal to investors who seek high returns from the financial markets. Even though they are not meant for every investor out there, these funds still hold a unique and powerful place in the financial world. Understanding their strengths, weaknesses, and proper due diligence is important for investors before considering them as an investment option.

Frequently Asked Questions (FAQs)

Can hedge funds advertise in India?
No, as per SEBI, AIFs are privately pooled investments that raise funds via private placement only.
Hedge Funds fall under which category of AIF
Hedge funds are Category III AIF.
What is the most common fee structure charged by hedge funds?
Most Hedge Funds follow 2 / 20 structure means a 2% management fee and 20% performance fee.
Is NAV disclosure mandatory for hedge funds?
No, NAV disclosure is not mandatory for hedge funds.
Are Hedge funds more regulated than mutual funds?
No, hedge funds are comparatively less regulated than mutual funds.

December 20, 2023

Best Alternatives To Fixed Deposits

Tired of investing in FDs, and looking for another option to invest?

FDs are the most preferred choice for risk-averse investors in India. They are convenient, simple to understand, and safe….wait, are they really safe? It may or may not.

After the recent fiasco of Yes Bank and PMC Bank, it can be understood that FDs are not 100% safe. Further, there are a few drawbacks, such as penalty for premature withdrawal, not so-flexible tenure, etc.

What is the safest investment then? What are the other options that provide more flexibility or tax efficiency than Fixed Deposits? In this blog, we will explore answers to all such questions.

Alternatives to FDs

Let’s explore the options available to Investors:

1. Mutual Funds

These are pooled investments managed by a professional fund manager. There’s an entire universe of mutual funds.

Check out our blog to learn more: Mutual Funds: Meaning, Types, Features, Benefits and How They Work.

Broadly, there are Equity and Debt mutual funds. While equity mutual funds are riskier and more volatile, debt funds can be an alternative to fixed deposits. In finance, there’s one simple rule: The higher the returns, the higher the risk.

Debt funds are classified on the basis of:

1. Duration: The longer the duration, higher the sensitivity of change in price of the bond.

2. Types of investment: Debt funds invest money in several instruments ranging from money market instruments to corporate bonds. Gilt funds carry less default risk than credit-risk funds.

Check out our blog to learn more: What is Debt Mutual Funds: Invest in the Best Debt Funds in India

2. Bond Market

Another method to get exposure to bonds is to directly invest in bonds. There are several methods to do so. You can directly place bids for various new offerings via brokers. Further, RBI recently launched a Retail direct platform to facilitate investment in govt. securities – Treasury bills, Central / State govt. Bonds, etc. However, direct investing in bonds requires thorough research and carries more risks. For newbies, investing in debt funds is ideal.

Fact: Government securities offer the maximum safety as they carry the Sovereign Guarantee.

3. National Savings Scheme (NPS)

It is a defined contribution voluntary pension scheme launched by Govt. of India. It is a low-cost product that can provide attractive market-linked returns. They invest in equity, bonds, and govt. securities and are managed by fund managers. Further, tax benefit upto INR 50,000 is available under this scheme. However, this is a pension scheme. Therefore, it comes with a lock-in period until the age of 60.

3. Floating Rate Saving Bonds (FRSB)

FRSBs are issued by the Reserve Bank of India (RBI) on behalf of Govt. of India. As the name suggests, coupon rate is not fixed in FRBs like bonds. The coupon is linked to the National Savings Certificate (NSC) + 35 bps spread. They have a maturity of 7 years and do not provide any tax benefit, but coupon rate is generally higher.

4. Post Office Schemes

There are multiple post office schemes available to investors:

1. Public Provident Fund (PPF) – A long term tax-saving investment option where the lock-in period is 15 years.

2. Sukanya Samriddhi Account (SSA) – A govt. of India initiative targeted to the parents of girl children.

3. National Savings Certificate (NSC) – A government savings bond scheme targeted to investors looking for tax savings. NSC has a lock-in period of five years.

5. Hybrid Funds

As the name suggests, they are a mix of equity and debt. They are further classified in the Aggressive or Conservative approach. Aggressive invests more in equity and less in debt instruments, while Conservative hybrid funds take more exposure in debt. Taxation of it depends on the equity exposure of the fund.

Check out our blog on taxation to learn more: Decoding Mutual Funds Taxation In India

6. Alternate FDs

There are multiple types of Fixed Deposits available to investors, however, only bank FDs are common. List of other FDs that one can consider investing in:

1. Corporate FD – These FDs are issued by companies. Generally, they provide higher returns than Bank FDs. The interest rate of FDs can be significantly influenced by the credit rating of the FDs issued. The lower the rating, the higher the interest rate.

However, direct investing in them is more-riskier, they are not insured by Deposit Insurance and Credit Guarantee Corporation (DICGC). Investing via debt funds is the ideal route.

2. Senior Citizen FDs: Investors aged more than 60 years are eligible to invest in Senior citizen FDs. They carry higher interest than regular FDs.

3. Tax Saving FDs: Unlike regular FDs, they provide tax benefit of up to INR 1,50,000 under section 80C but comes with a lock-in period of five years.

Options for Senior Citizens

1. Senior Citizen Savings Scheme (SCSS): SCSS is a post office scheme offered to senior citizens, i.e., 60 years and above. The interest rate in SCSS is higher as compared to other options, and also tax benefit under section 80C is there. However, a maximum of INR 30 lakhs can be invested in this, and they come with a lock-in period of five years.

2. Bank FDs: As the name suggests, senior Citizen FDs are targeted to senior citizens only. They offer higher interest rates and flexible tenure as compared to regular bank FDs. However, no tax benefit is available in such FDs.

Why Alternate Options?

Now, you will ask why all this when one can simply invest in FDs, well there are multiple reasons:

1. Taxation: Capital gains from fixed deposits are taxed as per your income slab rate. If you fall in the bracket of 30%, then it might not be efficient for you.

2. Maturity: For long-term investment, FDs provide fewer options. In Bonds, you can even invest for 40 years.

3. Safety: After recent cases of PMC and Yes Bank, we can say that FDs are not 100% safe and so are the other investment option. Generally, the central govt. issued securities like Treasury Bills, Bonds are the safest instrument to invest as they are backed by Sovereign Guarantee. If such securities give higher returns, then investment in these is preferred over regular FDs.

Fact: Bonds issued by State Government / State Development Loans (SDLs) generally provide higher returns than regular bank FDs.

4. Withdrawal: In case of premature withdrawal in FDs, one has to pay penalties. However, in the case of instruments like bonds, you can sell in open market as well, even before the maturity (considering enough liquidity is available). Further, if market conditions are in favour of you, then apart from fixed coupons, you can also get capital gains.

Conclusion

FDs are the most preferred investment option in India, but considering their recent fiasco and returns potential, exploring other investment options as per risk appetite and investment horizon can provide better diversification and safety. Few can give you better returns, and few instruments are more tax efficient.

Consider the risk profile, investment horizon, and financial goal, then select the best available option that aligns with your goal and invest money there.

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Frequently Asked Questions (FAQs)

Which is more liquid: Liquid funds or Short duration funds?
Liquid funds.
What is the maximum limit to invest in Senior Citizen Savings Scheme (SCSS)?
One can invest up to INR 30,00,000 in SCSS.
What are the investment options in which tax benefit under section 80C is available?
Tax Savings FDs, National Savings Certificate (NSC), ELSS Funds, SCSS for Senior citizens, etc.
Are Fixed Deposits insured in India?
Fixed deposits in India are secured till INR 5,00,000 by Deposit Insurance and Credit Guarantee Corporation (DICGC).

December 19, 2023

Risk Management In Trading: Meaning, Uses, and Strategies

First, we need to understand what is risk and the factors that create risk in the stock market before we learn about risk management.

In mathematical terms, risk is measured by standard deviation. It is a standardised measure of variation from the mean whether upside or downside. However, traders are more concerned about downside deviation. In simple language, risk in trading means traders fear losing the capital deployed in the market.

Various factors like market fluctuations, interest rate changes, volatility, and poor financial results can cause risk.

What is Risk Management?

Risk management is considered a cornerstone for effective trading. It involves identifying, analysing and mitigating potential risks in capital preservation while trading and achieving long-term success.

Traders, when trading in stocks, commodities, currencies, or any kind of financial instrument, implement different risk management strategies to control and minimise the losses incurred on their capital.

Effective risk management helps the trader to make informed trading decisions, help overcome fear and greed, and generate better returns.

Strategies of Risk Management

1. Position Sizing

Position sizing means determining the capital allocation on a particular trade depending on the total capital and risk appetite.

2. Stop-loss Orders

Setting pre-defined stop loss orders while trading not only automatically exits your positions but also reduces risk and minimises potential losses. You can trail your stop loss which means that you can modify your stop loss based on the changes in prices of the stock.

3. Risk-Reward Ratio

Aim for trades with risk-reward ratios greater than 1:1, meaning potential profit outweighs loss and try focusing on trading opportunities with limited downside potential.

4. Defining risk tolerance

Before entering into a trade, do not forget to define the maximum loss you can afford if a security slips into losses. Risk tolerance is generally based on your financial goals. Avoid taking excessive risks.

5. Hedging

Hedging is defined as a financial strategy that traders and investors use to protect their portfolios. It offsets losses with gains by taking an opposite position in the financial instrument you are trading.

6. Diversification

Remember the famous saying, “Do not put all your eggs in one basket”. Do not concentrate your capital on a single stock or financial asset. Diversification of the portfolio is crucial to avoid over-exposure to risks.

7. Cost-Averaging

When averaging the stocks, you buy them at different low prices at regular intervals. This helps in managing the price risk.

Algorithmic Trading & Risk Management

Algorithmic Trading, also known as algo trading, involves the usage of computer algorithms to execute trades.

No doubt that algorithmic trading in recent times has been revolutionary since it provides traders with speed, automation, efficiency, and no human bias while executing trades. However, it comes with risk and can amplify your losses. Therefore, it is necessary to manage the risk caused by algo trading.

Strategies for risk management are more or less similar for manual and algorithmic trading. In addition to the above-mentioned strategies, other points that a trader needs to focus on are as follows:

1. Conduct thorough back testing to analyse the past performance of the algorithm that you are using. Try implementing the strategies in different and extreme market conditions to ensure proper working. This will help you identify potential risks.

2. Do work on failover mechanisms to manage technical failures and analyse how the algo will react in such situations.

3. Regularly monitor algorithm performance, track risk metrics, and adapt strategies as needed.

Trading Psychology and Risk Management

Trading psychology and risk management are two important pillars of successful trading, intricately woven together like the warp and weft of a well-made fabric. You need to control your emotions to implement effective risk management.

Phycological factors like overconfidence, greed, and fear of loss can lead to poor risk management and impulsive decisions. Identifying your emotional triggers can help you manage your losses and mitigate the risks involved.

You need to train your mind and develop a plan while trading in the markets and cultivate the discipline to stick to your trading plan so that you can achieve long-term success.

Remember that trading psychology and risk management are ongoing processes that you need to continuously learn to refine your strategies and do not forget to seek professional advice to get valuable insights about the market.

Risk Management for Day Traders

Risk management is necessary for intra-day traders since they carry out several daily trades. This increases the chances of losses. Therefore, day traders should stick to their pre-determined risk limit and avoid overtrading.

Developing a trading plan that defines the entry/exit point for your trades can help the day-traders in risk management. If a day trader wishes to manage the risk, he or she must be particular with leverage. Leveraging can lead to an increased risk of losses.

Identify and trade with the prevailing trend. This can improve the probability of success and reduce the likelihood of being on the wrong side of a significant move. Do not trade just because you incurred a loss in your previous trade. Revenge trading often led to losses.

Risk Management – Forex and Options Trading

The above-mentioned strategies for risk management work well with forex and options trading.

But forex trading, with its high leverage and 24/7 market access, carries significant risks. By implementing the strategies discussed above and using technical analysis to understand the market trends, you can execute proper risk management to preserve your capital.

In the case of Options trading, apart from the above-listed points, additional areas to keep in mind so that the risk can be managed are

1. Aiming for delta-neutral positions to minimise exposure in direction trades.

2. Use credit spreads like bull call spreads or bear put spreads to reduce the exposure.

3. You should be aware of the effect of implied volatility on the prices of the option and adjust your positions accordingly.

4. Options lose their value with time because of theta decay. One must adjust position size and expiry dates accordingly to manage the risk.

Conclusion

On a parting note, risk management is a wise practice. It helps to safeguard your capital and guides your journey towards long-term growth. It does not matter if you are a seasoned trainer or a newbie, intraday trader or positional trader, analysing risk and understanding is important to function in the market.

There is no one-size-fits-all approach. Your risk management plan should be personalised as per your risk tolerance and capital availability.

S.NO.	Check Out These Interesting Posts You Might Enjoy!
1	What is Insider Trading?
2	What is Options Trading?
3	What Is Day Trading and How to Start With It?
4	What is Quantitative Trading?
5	How to Trade in the Commodity Market?
6.	What is Price Action Trading & Price Action Strategy?

Frequently Asked Questions (FAQs)

What is risk management?
Risk management involves identifying, analysing and mitigating potential risks in capital preservation while trading and achieving long-term success.
What are some common risk management strategies?
Some common risk management strategies are position sizing, hedging, stop loss orders, etc.
Why risk management is important for traders?
Risk management is important for traders since it helps in minimising losses and capital preservation.
What is position sizing?
Position sizing means determining the capital allocation on a particular trade depending on the total capital and risk appetite.
Is risk management the same for all traders?
Risk management is not the same for all traders because it depends on individual trading style and capital.

December 15, 2023

What Is An IPO Mutual Fund? Should You Invest?

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

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

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

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

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

The fund will invest in the recent 100 IPOs to capture listing and post-listing gains.
The fund will invest in new-age businesses that are getting listed in the Indian market.
The fund will invest in companies across sectors with a bias towards small and mid-caps that promise growth.
The fund will not invest in weak businesses that can be highly impacted by market shocks.

Characteristics of the Fund:

As of December 2023:

More than 72,000 people have invested in this mutual fund.
Its expense ratio is 0.92% and has an exit load of 2% if redeemed within six months.
Since inception, the fund has given an app. annualized return of 15%.
Only such thematic mutual fund available in the industry.
The fund’s asset under management (AUM) is INR 943 crs.

Positives if you invest in such thematic mutual funds:

Get access to a large number of IPOs with minimal investment amounts without the headache of research and analysis.
You don’t have to worry about the non-allotment of IPOs, as such funds place bids via the QIB route (Qualified Institutional Buyers).
High growth potential as the fund will invest in new-age businesses with a bias towards small and mid-caps.

Negatives if you invest in such thematic mutual funds:

IPO-themed funds are relatively new in the industry, with a minimal track record. Further, there is only one IPO-themed fund in the industry as of December 2023, so comparing its characteristics and returns can be challenging.
Thematic funds have a narrowly defined investment focus, which provides less freedom to the fund manager to invest in profitable companies.
The fund’s AUM may get smaller if the quality of new IPOs declines.
Thematic funds are not suitable for short-term horizons. These funds may have negative or poor returns during the bear market or in the short term.
Thematic funds substantially carry more risks than other categories of mutual funds, as news and events related to a particular sector can impact the entire sector.

Conclusion

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

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

S.NO.	Check Out These Interesting Posts You Might Enjoy!
1	Anchor Investors in IPOs – Meaning, Role & Benefits
2	How to Cancel an IPO Application?
3	Why Invest in anKey Difference Between IPO and FPOIPO and its Benefits?
4	What is Face What is the IPO Cycle
5	What is NII in IPO?
6	What is Pre-IPO Investing?
7	What is Prospectus?
8	IPO Application Eligibility Criteria
9	What is the IPO Allotment Process?
10	ASBA Meaning, Benefits, and Process

Frequently Asked Questions (FAQs)

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

December 11, 2023

What Is Nifty 50? How To Invest In It?

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

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

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

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

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

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

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

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

Index Variants:

There are multiple variants of the Nifty 50 Index:

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

Read Also : NIFTY Next 50

Criteria For Stocks To Be Included In Nifty 50

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

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

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

Re-balancing

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

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

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

Stocks In The Nifty 50:

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

Top constituents by weightage as of October 2023:

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

Sectoral Distribution

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

Purpose of Nifty 50

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

An index can be used for several purposes:

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

How To Invest In Nifty 50:

There are multiple ways to do it:

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

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

Check out our blog on Index Funds vs ETFs!

Benefits of Investing in Nifty 50:

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

Demerits of Investing in Nifty 50:

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

Nifty 50 Returns

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

Source: Nseindia.com

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

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

Conclusion:

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

Frequently Asked Questions (FAQs)

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

December 6, 2023

Value Investing Vs Intraday Trading: Which Is More Profitable?

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

What is Value Investing?

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

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

Key features of Value Investing

Margin of Safety

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

Long-Term Perspective

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

Contrary Approach

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

Interesting Fact: Warren Buffett is a famous Contrarian Investor

Advantages of Value Investing

Better Returns

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

Lesser Risk

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

Disciplined Approach

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

Challenges of Value Investing

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

What is Intraday Trading?

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

Key facts about Intra-day trading

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

Benefits of Intra-day Trading

Quick profits

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

Lesser risks.

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

Leverage

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

Challenges of Intraday Trading

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

Value Investing vs Intra-day Trading

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

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

Conclusion

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

Frequently Answered Questions (FAQs)

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

December 4, 2023

ETF vs Mutual Fund: Key Differences

A lot of people who are just getting started with investing hit the same wall: ETF vs mutual fund. Both sound similar on the surface, as these are regulated by SEBI, pool money from investors, and are good for diversification.

But when you actually start comparing and analysing these, you will find that there are differences that are left unnoticed, which can impact your investment journey and goals a lot. This is one of the reasons why you need to know the difference between ETFs and mutual funds well.

So, for those who are planning to start investing, this guide is everything you need. Explore the complete mutual fund vs ETF details here and ensure that you have a better plan to start with.

What Is an ETF?

ETF stands for Exchange Traded Fund. It is an investment option that pools money and then invests in various assets. These assets are like stocks, bonds, and others.

Most ETFs in India track a popular index. Like the Nifty 50 ETF tracks the Nifty 50 index. When the Nifty goes up, your ETF goes up. When it falls, so does the ETF. There is no fund manager trying to outsmart the market here. The fund just mirrors the index.

Because there is no active research or stock-picking involved, the costs are much lower. And since prices update in real time, you can buy at 10 AM and sell at 2 PM if you want to. That kind of flexibility is not possible with a regular mutual fund.

If you are willing to invest in ETFs, some of the options are:

Equity Index ETFs (Nifty 50, Sensex, Nifty Next 50)
Gold and Silver ETFs
International index ETFs like those tracking the Nasdaq 100

What Is a Mutual Fund?

A mutual fund is a pool of money. It is collected from thousands of investors, and this is managed by a professional fund manager. All this is done at an Asset Management Company (AMC). The fund manager decides where to invest this money and how much based on the goals.

Mutual funds are mostly actively managed. This means that, based on the market conditions, these funds are evaluated, and the investment in assets is changed. The investment is done based on the Net Asset Value (NAV).

You can go for lumpsum or even SIP based investment. There are certain conditions linked to the withdrawal and redemption of some of the funds. This is perfect for beginners as well.

ETF vs Mutual Fund: Quick Comparison

Features	ETF	Mutual Fund
How do you buy it	Through a stock exchange, like buying shares.	Through AMC, a broker, or an investment app
Pricing	Real-time changes throughout the day	Fixed end-of-day NAV
Management	Mostly passive (tracks an index)	Active or passive
Expense ratio	Low, often 0.05% to 1%	Higher, up to 2.5% for active funds
Demat account needed	Yes	No
SIP option	Not straight forward	Easy, starts at Rs 500
Minimum investment	Cost of 1 unit	Rs 100 via SIP
Transparency	Daily portfolio disclosure	Monthly disclosure
Best for	Cost-conscious, market-savvy investors	Beginners, SIP investors, hands-off approach

The Cost Difference – Here is What You Must Know

This is where ETFs genuinely shine. The expense ratio of an ETF is low. It can be Average something around 0.10% per year as well. But when it comes to the mutual funds, it is bit higher. This can be around 1.5% per year as well.

Now, both these numbers really look small. But when you actually calculate these, the ETF vs mutual fund choice becomes even more clear.

Check the same here.

If you invest Rs 10 lakh and your fund grows at 12% per year, here is how the expense ratio affects your returns over 20 years:

At 0.10% expense ratio (ETF): approximately Rs 94.8 lakh
At 1.5% expense ratio (active mutual fund): approximately Rs 73.7 lakh

That is a difference of roughly Rs 20 lakh, purely from fees. And you did not do anything differently. The market gave the same returns. Costs just ate into them.

This is not an argument against mutual funds. Active funds can and do outperform. But it is worth knowing what you are paying for.

Read Also: ETF vs FOF: Key Differences

Trading Flexibility: ETF Has the Edge

Because ETFs are listed on exchanges, you have full control over when you buy and sell. You can place limit orders, stop-loss orders, and buy during intraday dips. If there is a big market event and you want to act immediately, you can.

With a mutual fund, you are always at the mercy of the end-of-day NAV. Even if you place an order at 9:30 AM, your buy or sell goes through at the NAV declared at 4 PM. During volatile days, this can sometimes work in your favour or against you, depending on how the market moves after your order.

For most long-term retail investors, though, this difference rarely matters much in practice. If you are investing with a 10 to 15-year horizon, whether you bought at Rs 100 or Rs 101 today is not what determines your outcome.

ETF vs Mutual Fund: Tax Treatment

When it comes to taxation, both of these follow the same form as follows:

Held for more than 1 year: Long Term Capital Gains (LTCG) at 12.5%, with gains up to Rs 1.25 lakh per year exempt
Held for less than 1 year: Short Term Capital Gains (STCG) at 20%

So, if you see this, there is not much difference when it comes to taxes.

Active vs Passive Investing: The Real ETF vs Mutual Fund Debate

The ETF vs mutual fund discussion is often a debate. But it is not about which is better, but more about the difference between passive and active investing. Both are great choices but still you would need to make decision at times.

Most ETFs are passively managed. They aim to replicate the performance of a market index such as the Nifty 50 or Sensex. Their target is to match the performance and not outperform.

When it comes to mutual funds, these are mostly actively managed. They aim to offer higher returns to the investors. Also, these funds are being managed by experts and so changes in the composition are quite common based on the market conditions.

Index mutual funds offer a middle ground. Like ETFs, they follow a passive investment strategy, but they function like regular mutual funds. Investors can start SIPs, invest without a Demat account, and enjoy a simpler investment experience. This is good for all investors in general.

So Which One Should You Actually Go With?

Now this is one of the most important questions. This is where many people get confused. While both of these are great choices, you need to ensure that you follow based on detailed analysis and understanding of the market.

To help you out, here is a quick idea for you:

Go with a mutual fund (or index fund) if you are just starting out, want to invest via SIP every month without much effort, do not have a Demat account yet, or prefer professional management and are okay paying a slightly higher fee for it.

Go with an ETF if you already have a Demat account, want to keep costs as low as possible, are comfortable with placing buy and sell orders yourself, or want real-time flexibility in your investing.

And honestly, for most people who have been investing for a year or two, a combination works well. A few low-cost ETFs for the core of your portfolio, and selective actively managed mutual funds where you believe active management adds genuine value, particularly in mid or small cap categories.

Read Also: ETF vs Index Fund: Key Differences

Conclusion

Whether you lean towards ETFs or prefer the simplicity of mutual funds, where you invest matters as much as what you invest in. Pocketful lets you do both from a single platform, trade ETFs like shares with zero commission, and invest in direct mutual fund plans without any distributor fees cutting into your returns.

If you have been sitting on the sidelines thinking you will figure this out later, this is a good time to start. Open your Pocketful account today and put your money to work.

S.NO.	Check Out These Interesting Posts You Might Enjoy!
1	Mutual Fund vs ETF. Are They Same Or Different?
2	Best ETFs in India to Invest
3	ETF vs Stock – Which One is the Better Investment Option?
4	Gold ETF vs Gold Mutual Fund: Differences and Similarities
5	SIP in ETF: How to Invest Regularly in ETFs

Frequently Asked Questions (FAQs)

Which is better for beginners: ETF or mutual fund?
Beginners can invest in either based on their target. ETF is good when they want a passive option. A mutual fund is when they are looking for an active investment. But in general, a mutual fund is a way better choice.
Do ETFs give higher returns than mutual funds?
Not necessarily. ETF returns depend on the index they track, while mutual fund returns depend on the fund manager’s investment decisions. So, you can find mutual funds that offer better returns.
Can I start a SIP in an ETF?
Yes, but the process is not as seamless as a mutual fund SIP. You generally need to place ETF purchase orders regularly through your broker, whereas mutual funds offer automated SIP facilities.
Do I need a Demat account to invest in ETFs?
Yes. ETFs are traded on stock exchanges like shares, so a Demat and trading account are required. Mutual funds can be purchased directly from an AMC or investment platform without a Demat account.
Can I invest in both ETFs and mutual funds?
Yes. Many investors combine both. This is a good plan for diversification and a balanced result. ETF will help you with exposure and low-cost. A mutual fund can offer expert support and growth.

November 30, 2023

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

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

Possible causes of losses in your portfolio

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

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

Let’s understand above mentioned reasons in depth:

Volatile Markets

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

Focus on a specific sector

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

Wrong Entry and Exit

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

Leveraged positions

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

Psychological Reasons

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

Poor selection of stocks

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

How to deal with red portfolio

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

Revaluation

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

Long-term perspective

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

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

Portfolio-review

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

Follow Stop-loss

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

Invest practically and not emotionally.

Risk-Appetite

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

Diversification

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

Exit your mistakes in Bull Market

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

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

Advice from professionals and experience.

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

Invest at regular intervals

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

Also, check out the blog on ATR.

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

Conclusion

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

The decision is tough but will be worth it!

Frequently Asked Questions (FAQs)

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

November 29, 2023

Category: Investing

What is an IPO?

Top IPOs of 2023

1. Tata Technologies

Tata Technology IPO details

Performance Analysis

2. Motisons Jewellers

Motisons Jewellers IPO Details

Performance Analysis

3. Netweb Technologies

Newteb Technologies IPO Details

Performance Analysis

4. Ideaforge Technology

Ideaforge IPO Details

Performance Analysis

5. DOMS Industries

DOMS Industries IPO Details

Performance Analysis

Conclusion

Frequently Asked Questions (FAQs)

What is the full form of IPO

What is the issue size limit of SME IPO?

Was Tata Technologies a mainboard IPO?

How many IPOs launched in the year 2023?

What is an Offer Document?

What is AMC?

Indian Mutual Fund Industry Analysis

Emerging Trends in the Indian Mutual Fund Industry

Top Asset Management Companies of India

1. SBI Asset Management Company

2. ICICI Prudential Asset Management Company

3. HDFC Asset Management Company

4. Kotak Asset Management Company

5. Nippon Asset Management Company

Conclusion

Frequently Asked Questions (FAQs)

What is the full form of AMC?

Does AMC charge fees from investors?

Who regulates AMCs?

How many registered AMCs are there in India?

What is Assets Under Management (AUM)?

What are Hedge Funds?

Hedge Funds in India

Features of Hedge Funds

Hedge Funds Strategies:

Fee Structure of Hedge Funds

1. Management Fees

2. Performance Fees

3. Hurdle Rate

Difference between Mutual Funds and Hedge Funds

Benefits of Investing in Hedge Funds

Demerits of Investing in Hedge Funds:

Conclusion

Frequently Asked Questions (FAQs)

Can hedge funds advertise in India?

Hedge Funds fall under which category of AIF

What is the most common fee structure charged by hedge funds?

Is NAV disclosure mandatory for hedge funds?

Are Hedge funds more regulated than mutual funds?

Alternatives to FDs

1. Mutual Funds

2. Bond Market

3. National Savings Scheme (NPS)

3. Floating Rate Saving Bonds (FRSB)

4. Post Office Schemes

5. Hybrid Funds

6. Alternate FDs

Options for Senior Citizens

Why Alternate Options?

Conclusion

Frequently Asked Questions (FAQs)

Which is more liquid: Liquid funds or Short duration funds?

What is the maximum limit to invest in Senior Citizen Savings Scheme (SCSS)?

What are the investment options in which tax benefit under section 80C is available?

Are Fixed Deposits insured in India?

What is Risk Management?

Strategies of Risk Management

1. Position Sizing

2. Stop-loss Orders

3. Risk-Reward Ratio