Category: Personal Finance

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

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

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

Possible causes of losses in your portfolio

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

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

Let’s understand above mentioned reasons in depth:

Volatile Markets

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

Focus on a specific sector

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

Wrong Entry and Exit

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

Leveraged positions

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

Psychological Reasons

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

Poor selection of stocks

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

How to deal with red portfolio

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

Revaluation

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

Long-term perspective

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

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

Portfolio-review

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

Follow Stop-loss

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

Invest practically and not emotionally.

Risk-Appetite

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

Diversification

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

Exit your mistakes in Bull Market

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

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

Advice from professionals and experience.

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

Invest at regular intervals

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

Also, check out the blog on ATR.

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

Conclusion

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

The decision is tough but will be worth it!

Frequently Asked Questions (FAQs)

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

November 29, 2023

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

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

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

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

Types of Saving Instruments

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

Traditional Savings instrument
Investments

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

Fixed deposits
Recurring Deposits
Post Office

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

Stocks
Mutual Funds
Commodities

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

What are fixed deposits?

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

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

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

Merits & Demerits of Investing into FDs

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

Merits of Investing in Fixed Deposit

1. Guaranteed Rate of Interest

2. Easy to Monitor

3. Tax Benefits

4. Loan Against FD

5. Flexible Period

6. Better option for senior citizens

Demerits of Fixed Deposits.

1. May not beat inflation

2. Lower rate of return

3. Penalty on pre-mature withdrawal.

4. Lack of re-investment opportunity.

Taxation of Fixed Deposits in India (Example):

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

What do you mean by investing in stocks?

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

Large-cap

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

Mid Cap

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

Small cap

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

From where can we buy or sell stocks?

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

Taxation of Equity in India

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

Short-Term Capital Gain

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

Long-Term Capital Gain

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

Merits & Demerits of Stocks

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

Merits of investing in stocks

1. Inflation rate adjusted Returns

2. Dividend income

3. Liquidity

4. Tax benefits

5. Wealth creation

Demerits of investing in stocks

1. Volatility of markets

2. Higher Risk of Loss

3. Brokerage

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

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

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

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

Conclusion

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

Frequently Answered Questions (FAQs)

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

November 27, 2023

How Interest Rate Changes Affect the Stock Market

What is Interest Rate?

Interest rate is defined as the price that you pay when you borrow money from someone or it can also be known as income that you earn on your investments like bonds, FDs, and government securities. We will talk about interest rates in the context of lending and borrowing money. Interest rates in India are managed and regulated by RBI and play an important role in the economic growth of a country.

RBI manages various types of interest rates. Let’s have a glimpse at these rates.

Repo Rate
The rate at which the RBI lends money to commercial banks. Any kind of change in repo rate can affect the cost of borrowing for banks as well as retail consumers. The repo rate is considered a key tool to control inflation and stimulate economic growth.
Reverse Repo rate
The rate at which RBI borrows money from commercial banks. This rate is comparatively lower than the repo rate.
Cash Reserve Ratio
CRR, or cash reserve ratio, is the amount that commercial banks need to maintain with RBI in the form of cash. Banks do not receive any kind of interest on this from RBI.
Statutory Liquid Ratio
SLR is the minimum amount in percentage that a bank needs to keep either liquid or as investments in government securities.

The RBI uses these interest rates and tools to manage monetary policy, control inflation, and maintain financial stability. Our major focus today will be on the repo rate and how even a slight change can have wide-ranging effects on the broader economy.

Why interest rates are changed?

RBI changes these repo rates as a part of its monetary policy so that it can achieve its financial objectives. Now, what is monetary policy? Policy framed by the RBI to control and manage the supply of money in the economy. Monetary policy can either be contractionary or expansionary. When the money supply is increased and interest rates are reduced. This is known as the expansionary monetary policy. The vice-versa is known as the contractionary monetary policy. Coming back to our topic RBI changes the repo rate because of the following reasons,

To control inflation in the economy.
To focus on the economic growth of the economy.
Situations prevailing in the global economy

The decisions related to the repo rate are made during the RBI’s monetary policy meetings, which occur at regular intervals. Before moving further, we will give you some basic idea about the concept of inflation and deflation. Inflation is the general increase in the price level of goods and services in an economy. Consumers tend to pay more than the actual value of the good. The purchasing power of consumers decreases. In such a case under the monetary policy, the government of India increases the interest rate to fight inflation. This will decrease the flow of money in the economy.

Deflation is the opposite concept of inflation. A general decrease in the price level of goods and services is called deflation. The purchasing power of the consumer is increased. RBI, in this situation, will lower the interest rate in order to increase the flow of money in the economy. We all know that the stock market of any economy is a true indicator that signals the pace of economic growth. So, we need to analyze the fact of how a change in repo rate can impact the markets.

Impact of rate change on the Indian stock market.

The impact depends on the direction and magnitude of the interest rate changes, as well as the broader economic context.

Interest rates can be changed in two ways

Interest rate hikes
Interest rate cuts

When it comes to interest rate hikes, the cost of borrowing money increases which will make it difficult for the companies to avail loans and this will eventually reduce the profitability of the businesses. This will lead to lower earnings of the companies and decreased prices of the stock.

Any sort of increase in the rate of interest can make other investment options more attractive. From the consumer’s point of view, there can be a significant change in his spending habits since there we be lesser disposable income in his hand thereby affecting his savings and investments. Interest Rate cuts, on the opposite side, lead to a decline in the cost of borrowing making it easier for the investor to grow which will lead to higher earnings and higher stock growth.

The immediate impact of interest rate changes on the stock market may vary. Short-term interest rate changes might lead to short-term stock market volatility, while long-term rate trends can have a more lasting effect on the stock market.

Impact of change in rate by the US Federal Reserve on the Indian stock market

Federal Reserve, since we all know is the central bank of the United States, can either increase or decrease the interest rate depending on the situation and needs of the economy. A change in the rate of the U.S. Federal Reserve affects the economy globally. The relationship between the actions of the Fed and the Indian stock market is influenced by several factors. Some of these factors are listed below.

If the Fed increases the rate of interest, foreign investors will find the U.S. markets more lucrative to invest in. They will withdraw their funds from the Indian stock market and deploy it in the U.S. so that they can enjoy higher returns.
A slight change in the rate of interest by the Fed can have a significant impact on the exchange rates of currency. If the interest rate increases the U.S. dollar will strengthen and the Indian rupee will weaken.
If U.S. rates rise substantially, it may lead to higher interest costs for Indian companies that have borrowed in U.S. dollars or have exposure to foreign currency debt.

Conclusion

To conclude interest rate and stock market share an inverse relationship. If you wish to receive consistent returns investing for a longer horizon is suggested. These short-term stances of rate change will create many complications. However, an investor should be well aware of the consequences of the rate change on the market so that he can make informed decisions. They should adopt a diversified investment strategy and take into account their own financial goals, and risk tolerance.

Frequently Answered Questions (FAQs)

How does interest rate affect bond prices?
Bond prices and interest rates have inverse relationships i.e., when the central bank increases the interest rates, bond prices decrease, and vice versa.
Do all stocks react to interest rate changes in a similar way?
No, stocks across sectors react differently to interest rate changes.
Who regulates and manages the interest rate in the stock market?
Reserve Bank of India controls and manages the interest rates.
Why does RBI increase the interest rate?
RBI increases the interest rates in order to control inflation and for the overall growth of the economy.
What happens to borrowing costs when RBI increases the interest rates?
Borrowing cost for the companies increases if RBI increases the rates.

November 22, 2023

Which is Better: Fixed Deposit or Residential Property Investment

What is Real Estate?

Real Estate is considered as a long-term investment option. It is a kind of risky investment when compared to fixed deposits. Despite fluctuations in the prices of the property over the years, real estate carries great potential to appreciate your invested capital. It’s a broad and diverse asset class that encompasses various types of properties, ranging from residential homes and commercial buildings to undeveloped land and industrial facilities. Real estate is crucial in many aspects of our lives and the economy. Real Estate means a tangible property, including land and buildings.

Real estate can be a source of rental income from properties for investors and potentially benefit from appreciation in the value of the asset over time. Real estate investment trusts (REITs) allow individuals to invest in real estate without owning physical properties directly. REITs are a source of indirect investment in Real Estate. Location is often considered one of the most critical factors that affect property values in the case of real estate.

Types of Real Estates

There are various types of real estate which you should be aware about

Residential
Commercial.
Industrial
Land
Special Purpose

Let us go through each of them in detail.

Residential Real Estate
Any property or area used for residential purposes, i.e., for living, e.g., Individual houses, apartments, etc.
Commercial Real Estate
Properties used to carry out a business like office buildings, hotels, etc.
Industrial Real Estate
This real estate comprises property used for manufacturing, production, storage, and distribution.
Land Real-Estate
Any area that is vacant, raw, and underdeveloped that can be bought and sold is called Land real estate.
Special-purpose Real Estate
Religious places like temples, schools, libraries, etc, serve a special purpose for the general public.

After having an overview of the concept of real estate, in today’s blog, we will be analyzing closely the difference between residential property, which is a type of real estate, and FDs as an investment option. Investment in residential properties involves buying houses, flats, or any kind of residential unit that can provide you with rental income. Though these properties are a good investment option, you should plan and do proper research before investing. Residential properties are a long-term investment option if you want a capital appreciation, and you should also have an exit strategy. Consider factors like when you might sell the property, how you’ll handle market downturns, and whether you’ll reinvest the proceeds. Consulting with a professional who deals in residential properties and financial advisors can be valuable and useful in the investment process.

Real Also: Top Real Estate Stocks In India

Pros of investing in Residential properties

Generation of high returns over the long term.
A significant increase in the invested capital.
Rental income can also be a source of primary or alternative income after retirement.
Real estate investment can provide investors with tax advantages, such as deductions for mortgage interest, property taxes, and depreciation.

Cons of Investing in Residential Properties

Initially, it would be best to have a lot of money when choosing residential properties as an investment option.
Lack of liquidity is one of the major disadvantages when investing in real estate because you cannot sell the property immediately. Certain legal procedures are followed while selling, which can be time-consuming.
Maintenance costs can be very high, like property taxes, renovation costs, repairs, and insurance.
A decline in the real estate market will affect property values.

What are Fixed Deposits?

Fixed deposits are a kind of investment option and are a traditional method of saving. Fixed deposits are offered by banks and NBFCs (Non-Banking Financial Institutions). Investment in FDs is a safe option since it gives a fixed return over the years. FDs also offer tax benefits, such as deducting interest income up to Rs. 50,000 per year under Section 80TTA of the Income Tax Act, 1961. FDs are a low-risk investment option with a fixed interest rate, which helps you preserve your capital. You can withdraw your capital whenever you want to, but after a lock-in period only. If capital is withdrawn before the maturity date, a certain penalty amount is charged.

To invest in FDs, you just need to visit your nearest bank branch or apply online. The process takes a few minutes. Suppose you received an amount of Rs.20000 after winning a match, and instead of buying something expensive, you decided to go for a Fixed Deposit. Now, you will visit your nearest bank branch and deposit your money to earn some amount of interest and will just sit back for some years. You will reach out to the bank once again when your Fixed Deposit matures to get your principal amount as well as the interest that you have earned over the years.

Types of FDs

Regular FDs
Cumulative FDs
Non-Cumulative FDs
Corporate FDs

Let us explain each of them in detail.

Regular FDs
FD, which offers you a fixed interest rate, and you get back your principal amount with interest at the time of maturity.
Cumulative FDs
In the case of cumulative FDs, the investor gets a return in a lump sum at the time of maturity. Till then, the interest is accumulated and then added to your principal amount.
Non-Cumulative FDs
Regarding non-cumulative FDs, interest is paid to the investor at regular intervals as he chooses.
Corporate FDs
FDs are offered by private organizations and non-banking financial companies (NBFCs) that collect deposits for a fixed tenure and a pre-decided interest rate. The interest rate offered is high when compared to normal bank FDs.

One of the major drawbacks that any investor can face while choosing FDs is that the investor won’t be getting the benefit of inflation-adjusted returns and can also get negative returns at times. How? Let us understand this with an example.

Suppose your investment amount is 5 lakhs. Per the current interest rate (6.7%), interest received would be 33,500. If you lie in a tax slab of 30%, an amount of approximately 10,000 will be deducted from your interest amount, and you will receive a net amount of 23,000 as interest, which is 4.6% when expressed in percentage. Since current CPI, i.e., consumer price inflation, is 7.6%. So, the real interest received is 3% only.

Now, let us come back to our better question. FDs or Residential Investments.

Also, check out Fibonacci Retracement: Complete Guide On How To Use And Strategy.

Conclusion

Fixed deposits (FDs) and real estate are two distinct investment options with advantages and disadvantages. The choice between the two depends on your financial goals, risk tolerance, investment horizon, and circumstances. Choosing between both investment options can be a tough task. However, if you are willing to take on more risk to generate higher returns potentially, then real estate may be a better option for you.

FAQ (Frequently Answered Questions)

Which is the better investment option, Residential properties or FDs?
Both investment options have their own merits and demerits. It would be best if you chose as per your financial goals.
Are FDs tax-free?
No, fixed deposits are not tax-free.
What are cumulative fixed deposits?
The investor gets a return in a lump sum at the time of maturity. Till then, the interest is accumulated and then added to your principal amount.
Are FDs more risky than residential properties?
No, FDs are less risky, whereas investments in residential properties are riskier.
What kind of income can we earn from residential property?
Rental income can be earned from residential property.

November 15, 2023

Why Debt Funds Are Better Than Fixed Deposits of Banks?

Debt mutual fund is a category of mutual fund that invests in fixed-income instruments such as Corporate and Government bonds, commercial papers, treasury bills, state development bonds etc. The primary objective of debt mutual funds is to generate income for investors through interest payments while preserving the capital invested. Debt mutual funds diversify their holdings across various debt instruments to diversify the risk. This helps reduce the impact of poor performance by any single security. Debt mutual funds are open-ended funds, which means investors can buy or sell fund units on any business day at the fund’s net asset value (NAV). When considering debt mutual funds, it’s important to assess your investment goals, risk tolerance, and time horizon, and select funds that align with your financial objectives.

Who should invest in Debt Funds?

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

How to invest in Debt funds

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

Types of Debt Mutual Funds

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

1. Liquid Funds

Liquid funds invest in very short-term debt instruments like T-bills, Certificates of deposits, and commercial paper and have a maturity of 91 days to generate optimum returns.

2. Short-term Funds

These funds invest in money and debt market instruments and government securities. The investment duration of these funds is longer than that of Liquid Funds.

3. Floating Rate Funds (FRFs)

FRFs invest in instruments that offer a floating rate of interest on your investments in bonds, government securities and debentures.

4. Gilt Funds

Gilt in Gilt funds stands for government securities. This fund invests your capital in government securities that are issued by central and state governments. This fund offers you low credit risk and moderate returns.

5. Dynamic Bond Funds

These funds invest in debt securities that have a different maturity period

and actively manage the fund’s interest rate risk. Returns vary based on market conditions.

Above mentioned are some of the types of debt mutual funds. There are various other types which we shall discuss later.

Taxation of Debt in India

Taxation in debt is divided into 2 parts.

Short-term gain and long-term gain where the duration of short-term is less than 3 years as per your income tax slab and for long-term it is more than 3 years at the rate of 20% with indexation benefit.

(Indexation- means adjusting your purchase cost based on inflation)

Now let us understand the concept of Fixed Deposits before jumping to any conclusion as to why to choose debt funds.

What are fixed deposits?

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

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

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

Merits of Investing in Fixed Deposit

1. Guaranteed Rate of Interest

2. Easy to Monitor

3. Tax Benefits

4. Loan Against FD

5. Flexible Period

6. Better option for senior citizens

Taxation of Fixed Deposits in India (Example)

In India, the interest income earned from fixed deposits is subject to taxation under the Income Tax Act. Here’s a simplified example to explain how FD interest is taxed

Suppose Mr A has a bank FD of Rs.1 lakh and as per the current rate he is earning an interest 6.5% per annum on his FD which amounts to 6500 (6.5% of 1 lakh). Now he is liable to pay tax on 6500 as per his income slab.

After an in-depth analysis of debt funds and fixed deposits let us have an overview of why you should invest in debt funds and not in traditional saving methods like bank FDs.

Why choose Debt Funds over Bank Fixed Deposits?

The returns generated both on FDs and debt funds are fixed and assured but interest rates in debt funds can be repriced according to the movements in the markets. Portfolio rejig by the fund managers can also lead to fluctuations in returns of debt funds whereas when it comes to FDs, returns are fixed.
In the case of FDs pre-mature withdrawals can lead to penalty whereas when it comes to debt funds only a minimal exit load is charged and that too only if withdrawal is done before the stipulated time period.
Bank FDs are generally considered risk-free or possess lower risk as they are insured to the extent of Rs 5 lakh for the principal and the interest by the Deposit Insurance and Credit Guarantee Corporation. Although Debt funds have more credit risk they offer higher yields unlike FDs and these funds are suggested for risk-averse investors.
In bank FDs, at the time of investment, the rate of interest offered by banks depends on the tenure of the FD meanwhile in debt funds the fund manager uses his expertise to invest the capital into different papers or bonds according to the scheme objective which can lead to variation in returns generated per year.
You can invest in Debt funds either through SIPs or in a lump sum. It entirely depends upon you whereas in the case of FDs, you can only invest in a lumpsum amount thereby making it difficult for the lower-income group to invest.

Conclusion

On parting ways, both financial instruments be it debt funds or FDs have their own set of merits and demerits. Depending upon the investors’ risk appetite debt funds are always suggested who are willing to take risks on their capital and are risk-averse. Unlike FDs, debt funds help the investor in the diversification of their portfolio and achieve their financial goals. Debt funds offer you more tax efficiency if your investment period is more than 3 years. Fixed deposits are best suited for investors who have lower income and have an investment horizon of less than 3 years otherwise debt funds are the best to opt for!

FAQs (Frequently Asked Questions)

What are Debt Funds?
Debt mutual fund is a category of mutual fund that invests in fixed-income instruments such as Corporate and Government bonds, commercial papers, and treasury bills.
Are debt mutual funds riskier than bank FDs?
Yes, debt mutual funds are riskier as compared to bank FDs.
Is debt fund good for the long term?
If you have an investment horizon of more than 3 years and have a low-risk appetite, debt funds are a perfect investment option for you.
Bank FDs or Debt, which provide better tax efficiency?
Debt funds provide more tax efficiency.
Does a debt fund provide a higher return than bank FDs?
Yes, debt funds offer more returns than bank FDs.

November 7, 2023

Understanding the Difference Between Credit and Debt

What is Debt?

Debt refers to the money that you borrowed & is yet to be paid. Debt is an obligation, and a fixed amount of interest is charged. It is suggested to avoid taking debts since later you may find it difficult to repay. Examples of debts are home loans, credit card bills, car loans, mortgages, personal loans, etc. Debt characterizes a financial burden.

Types of Debt

Debts can be categorized into the following types

Secured Debt
Unsecured Debt
Revolving Debt

Let us go through each of the types in detail.

Secured Debt

Secured debts are backed by collateral such as assets, investments, or property. In this debt, if the borrower fails to repay the debt amount, the lenders seize the borrower’s collateral, and the debt is covered from the same.

Unsecured Debt

Unlike secured debts, unsecured debts are not covered by any collateral as security. These debts are granted to the borrower once the lender relies on him. The approval depends on the payment of the past debts. For example, education loans and automobile loans.

Revolving Debt

A debt that does not have a fixed payment amount every month is known as a revolving debt. The payment amount and interest rate depend upon the amount that you borrow. Once the borrower repays the existing debt amount, he can again borrow either the same or a different amount. It is like a line of credit. Credit card is an example of revolving debt.

Merits Of Debt

Debt can help you achieve your financial goals by leveraging your current resources.
Debt can offer individuals, corporations, and governments immediate access to funds in case of emergency.
Paying your debts on time can help you improve your credit score.

Demerits of Debt

Borrowing money typically comes with interest costs. The interest payments can add up over time, making the overall cost of the debt higher than the initial borrowed amount.
Failing to make debt payments can lead to default, resulting in penalties, fees, and damage to credit score.
High debt can lead to anxiety and financial stress because monthly payments can be a burden.
Long-term debts can land you in a cash crunch, and your savings capacity will also be affected.
Debt can also lead to loss of collateral security that you must have given to the lender at the time of agreement.

Having discussed the debt, let us understand the concept of credit.

What is Credit?

Credit means an individual can borrow the fund to repay it later. Let’s say that you have a credit limit of 2 lakhs and the amount that you used from this amount to 50 thousand; then 2 lakh is your credit, and 50 thousand is the amount you owe to the creditor. Creditors decide an individual’s eligibility for credit after analyzing their past debt repayments.

Types of Credit

Credits can be majorly categorized into 3 types

Open credit
Revolving credit
Installment credit

Open Credit

Credits are like trade credits in which the goods can be exchanged between the buyer and the seller based on the buyer’s ability to repay it later on a pre-decided date.

Revolving Credit

Revolving credit allows borrowers to use credit continuously as long as they make minimum payments, including the interest charged.

Instalment Credit

When an amount is borrowed for a fixed period and fixed interest rate, you repay it monthly. EMIs (easy monthly installments) are an example of installment credit. Our readers should also know that when you pay your debt on time, you earn a credit score, which increases your creditworthiness.

What is a Credit score?

A credit score is several 3-digit, which lies somewhere between 300 to 850. The higher the credit score, the chances of you to avail a loan are more likely. A credit score of 700+ indicates that you make timely repayments of your debt amount. Some companies are known as credit rating agencies like CRISIL and ICRA that helps creditor generate a credit score.

Merits of Credit

Just like debt, credit also provides immediate access to the funds
Credit cards can offer the consumer financial flexibility or take advantage of time-sensitive opportunities.
Timely repayment of credit will help you secure your loans more easily and conveniently.

Demerits of Credit

Non-payment or late payments can lead to default and heavy interest expenses, reducing your credit score.
Credit availability can lead to overspending, as individuals may be tempted to make purchases they cannot afford.
If credit is used to cover recurring expenses and debt payments, it can lead to a cycle of increasing debt.
Also, read the case study of Satyam Scam.

Conclusion

Credit and debt are closely related financial concepts, but they have distinct meanings and implications in personal finance. In summary, credit represents the ability to access resources or make purchases with the promise of future repayment. In contrast, debt represents the obligation to repay borrowed funds, goods, or services with interest, often over a specified period. Irresponsible use of credit can lead to debt accumulation, but not all credit usage necessarily results in debt if payments are made promptly.

Frequently Answered Questions (FAQs)

Are debt and credit the same?
No debt and credit are not same.
Name of credit rating agencies?
CRISIL & ICRA are 2 credit rating agencies.
Are home loans a debt or credit?
Home loans are a kind of debt.
Explain secured debt.
Secured debts are backed by collateral such as assets, investments, or property if the borrower fails to repay the debt amount, the borrower’s collateral is seized by the lenders.
Define Credit.
Credit means an individual can borrow the fund to repay it later.

November 7, 2023

Why It Is Essential To Teach Your Children About Saving And Investing

According to the Pew Analyzed Census Bureau data, only 24% of adults are financially independent before age 22, to that of 32% in 1980. Most adults today complain that they were, never taught about financial independence in schools or at home. It is because of this reason, they struggled with their finances in the later years of life. Financial knowledge is not something that you can learn in one day, month or year. It takes years of discipline and hard work to be financially independent. Parents must teach their kids the basics of financial literacy, like saving and investing, from a young age.

Addressing the above problem. Today, we will discuss about the importance of teaching your children about saving and investing.

Why Do We Need To Teach Financial Literacy To Our Kids?

Have you ever seen the construction of a building? Laying a strong foundation for the building is important, to make it last for years. Similarly, to achieve financial independence, it is necessary to give financial literacy to children from a young age.

But, what exactly is financial literacy?

Financial literacy

Financial literacy is understanding the behaviour and working of money to make sound financial decisions like budgeting, asset building, loan financing and debt repayment. Having financial knowledge helps a person to feel empowered. Moreover, people with better financial education are less likely to be financially vulnerable in future. According to research in India, only 27% of the people are financially literate. It means only 1 out of 5 Indians are capable of making their crucial money decisions by themselves. The numbers are bizarre because dealing with money is one of the most customary aspects of human well-being.

Thus, it is the responsibility of the parents to instil this basic human understanding in their children.

Why Build a Strong Financial Foundation?

To build a strong financial foundation, children should be made familiar with basic concepts like saving and investing from a young age.
Saving is that part of your income that is left, after spending upon your consumption. Any person who has just started earning spends a prominent chunk of their income on consumption and saves little to no amount.
But, as they grow professionally, they start saving more for their future & the people dependent on them. Saving helps to build a cushion to rely on during uncertain times.
Investing is putting your money to work. Heard this famous quote, “Rich doesn’t work for Money, Money works for them” Weird right? But true.
By putting your money into Assets, you can make your money work for you even when you are not working. For example, investing in real estate could earn you a rental income and give you capital appreciation in the long run.

Parents should focus on securing their children’s future financially but also focus on building and developing their characters. So that, in case of future uncertainties, they can fight through.

Preparing for Future Financial Challenges

The majority of the people feel anxious when asked about their financial situations. As we grew, we realised that we weren’t ever, taught about financial education in our schools or colleges on which we’re supposed to make real-life decisions. How many of you have learned about finances in your schools or colleges?

I could confidently say that none. Our educational curriculum was never designed in a way to help us with our day-to-day problems. Most adults even today, don’t even know that there are options other than FD and mutual funds to invest in the markets.

Providing your children with early financial knowledge could help them to have a better future.

Introducing Financial Concepts to Children As They Grow

First, introduce them to the notion of money at a young age. Its importance, how it works, why it is necessary & other things related to it

Rewarding- Reward them every time they progress in their work, like for every book they read. Give them a certain amount of money as a reward or when they complete their homework on time.

Budgeting- Give them a monthly or weekly allowance and tell them to manage their expenses in that fixed amount. Explain how they should allocate their money towards their needs, wants and savings.

Savings- explain to your kids why saving is important and how it can help them. Encourage them to Save a portion of their allowances or paychecks (when they start working).

Taxes- When they grew a little old and started doing part-time work. Teach them how taxes work and how employer deducts taxes from their paycheck.

Investing- When they start to work, teach them about investing and financial markets. Explain to them how they should build assets.

Compounding- Teach them about compounding and the significance of early investing in life. Financial literacy is something that everyone should learn about. No matter your profession or field of interest, money is something that we all deal with daily.

Therefore, every person needs to be financially independent & financially literate in life because life is very uncertain.

Conclusion

If you are a parent or a guardian to any child, now you know why you must teach them about finances. No parent wants to see their child. Therefore, they must teach kids about money, which they were never taught about by their parents. It is easy to instil good habits in children at a young age as they are growing. Apart from just giving financial learning, parents should also start to save and invest early to give their children a more secure future.

FAQs (Frequently Asked Questions)

Why financial literacy is necessary?
Financial literacy is necessary to make sound financial decisions in life. Money is something that we all deal with on a day-to-day basis.
How to improve financial literacy?
To improve financial literacy you can read finance books like ‘Rich Dad, Poor Dad, ‘Think and Grow Rich’, ‘And Intelligent Investor’ to learn about the stock market.
Why financial literacy is essential for students?
Financial literacy is essential for students as it helps them understand how to make real-life money-related decisions once they start earning.
Is it necessary for children to learn how to wisely spend their money?
Yes, children need to learn to wisely spend their money.
How to explain investing to a beginner?
You can learn investing by understanding the basic technical jargon like return, risk, portfolio etc. After that, you consume content from different sources like books, online platforms & courses.

September 20, 2023

What are ETFs? Are ETFs good for beginner investors?

Recently, Exchange Traded Funds abbreviated as ETFs have gained popularity among investors. For the various benefits they offer. ETFs are a good investment option for beginner investors as they offer a collection of stocks with similar characteristics in one place. Investing in ETFs enables investors to have a diversified portfolio without doing research for individual stocks. ETF helps to minimise the risk of the investor & maximise his return on his portfolio.
By the time you finish reading this article. You will have a clear idea of whether you should invest in ETFs or not.

What are ETFs or Exchange- Traded Funds?

In simpler words understand like, that it is a box filled with many pebbles,& these pebbles are individual stocks or bonds with similar characteristics. An interesting fact is that specific ETFs track the movement of indices like NIFTY50, SENSEX, etc. So, you expect the same returns on your investment as the index’s annual CAGR.

Looking into the history of ETFs in India, we see that. The first ETF in India was launched in 2002 by Nippon India Mutual Fund (erstwhile Benchmark Asset Management Company Ltd). Listed on January 8th 2002, it witnessed a trading of 1.30 crores on the first day. The journey to listing of the 100th ETF on NSE took more than 19 years. The last one-year period has seen a lot of activity in the ETF space, with 21 ETFs getting listed on the NSE. The assets under management of ETFs in India are now at Rs. 3.16 lakh crores (end of May 2021), witnessing more than 13.8 times increase in five years,  compared to Rs. 23,000 crores (end of April 2016).

ETFs offer the best of both worlds, like Mutual Funds, ETFs represent professionally managed collections or baskets of stocks or bonds. And just like individual stocks, they trade on the stock exchanges, which means you can buy and sell them like individual stocks.

Types of ETFs in India

There are different types of exchange-traded funds (ETFs) available in India, offering investors a variety of options to choose from according to their financial goals and risk tolerance.

Equity ETFs : Equity ETFs track stock market indices such as Nifty 50, Sensex, or Nifty Next 50. They provide investors with broad market exposure and are suitable for the long term.
Debt ETFs : Debt ETFs invest in government or corporate bonds, such as Bharat Bond ETFs. These are known for stable income and low risk and are suitable for retirement or capital preservation. Investments in them can generate regular interest income.
Gold ETFs : Gold ETFs track gold prices and give investors an opportunity to invest in gold without buying physical gold. They are suitable for inflation protection and portfolio diversification.
International ETFs : International ETFs track stocks or indexes from foreign markets such as the US, China, etc. They offer global diversification and the opportunity to invest in foreign markets but also carry certain risks.
Smart Beta ETFs : Smart Beta ETFs move away from traditional index tracking and focus on tracking smart beta indices focused on value, growth, etc. They provide investors with an opportunity to earn better risk-adjusted returns.

Investors should consider their investment goals, risk tolerance, and time horizon when choosing among these different types of ETFs. Choosing the right ETF can improve portfolio performance and help achieve financial goals.

What are the pros of investing in ETF?

Investing in ETF has several benefits, some of which are listed below.

1. Diversification:

ETFs enable the investor to diversify their portfolio without the hassle of individually picking out each stock. Investors seeking to invest in a specific type of sector or industry. ETFs are a go-to option for people who do not want to spend their time researching each company individually. They cover most of the asset classes and sectors for the most part.

2. Low expense ratio:

The expense ratio is the operating expense of the Security, divided by the value of that security. In other words, it is the expense that the investor has to bear for the Security. An expense ratio below 1 is good. And ETFs offer an expense ratio below 1.

3. Easily tradeable:

Investors can trade ETFs just like individual stocks, which makes them highly liquid, meaning you can sell and buy them anytime during market hours.

4. Tax-efficiency:

Due to its low turnover, ETF offers tax relief to investors. The investors are charged 15% on short-term equity gains. And 10% on long-term equity hains after the exemption of the first 1 lakh rupees.

5. Transparency:

ETFs typically have the same securities as the index or the benchmark they track. Some ETFs disclose their holdings regularly, while others disclose them on a monthly, or quarterly basis.

What are the cons of investing in ETFs?

Investing in ETF has several disadvantages, some of which are listed below.

1. Low trading volumes:

Even though ETFs have become popular lately, their trading volume is considerably low compared to the other securities listed. Volume is the total buying and selling of a specific security over the trading exchange.

2. Lack of liquidity:

Due to low trading volume, sometimes it becomes hard to sell the ETFs because there is no one willing in the market to buy them at the price you are offering at that time. Therefore, ETFs are not the most liquid asset to hold.

3. Composition risk:

Since ETFs are already tailored-made investment options. Sometimes, they may have some securities in the group that you do not want to hold. Therefore, you do not have a choice for customisation.

4. Issue of control:

ETFs offer less control as the investor does not choose the securities in the ETF by his own will. Also, the portfolio manager swaps or churns the portfolio depending on his expertise.

ETFs vs. Stocks vs. Mutual Funds: Which is Better?

Before starting to invest, it’s important to understand the difference between ETFs, stocks, and mutual funds and which option is suitable for whom.

Feature	ETF (Exchange Traded Fund)	Stocks	Mutual Funds
Risk	Moderate (Diversified portfolio)	High (Investment in a single company)	Low to High (Depends on type of fund)
Returns	Index-based, relatively stable	Can be very high or very low	Depends on fund manager’s performance
Cost	Low (Lower expense ratio)	Brokerage charges	Slightly higher (Includes fund management fee)
Liquidity	High (Traded throughout the day)	High	Lower (Redeemed at NAV, once daily)
Diversification	Yes (Index-based spread across many stocks)	No (Single stock exposure)	Yes (Diversified portfolio by fund manager)
Management	Passive (Tracks an index, no active manager)	Self-managed (Investor makes decisions)	Actively managed (By professional managers)
Ownership	Indirect (Holds a basket of underlying assets)	Direct (Ownership of shares in a company)	Indirect (Units of pooled fund investments)

ETFs are a better choice for those who want low costs and good diversification and are comfortable trading on their own.
Stocks are suitable for active traders and high risk takers.
Mutual funds are for investors who like the convenience of professional management and prefer regular SIPs.

Points to keep in mind before investing in ETFs

First, determine the assets, in which you want to invest. Choose the best possible ETF according to your risk appetite and availability of funds.
Go for those ETFs that offer a low expense ratio. So, you can save on your operating costs.
Invest in ETFs with high liquidity so you can sell them without any hassle whenever you want. Otherwise, it would be a hectic task.
Check the ETF disclosure reports to ensure that your financial goals align with the objectives of that particular ETF.
Lastly, regularly check the performance of the ETFs and take the required measures according.

Conclusion

From the above article, we can conclude that, as a beginner investor, ETFs could be an adequate option to start your investing journey. Keep in mind that everything has pros and cons & the same applies to ETFs. Keeping a check on a few things and investing with patience and discipline can yield lofty returns for investors.

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	ETF vs Index Fund: Key Differences You Must Know

FAQs (Frequently Asked Questions)

What are ETFs in the stock market?
ETFs or exchange-traded funds are financial securities that resemble the characteristics of both Mutual Funds and Stocks. In simpler words, a collection of different stocks to track the performance of a specified index.
How do ETFs work?
ETFs are like common stocks on the stock exchanges. They track the movement of the underlying asset and perform accordingly.
What are the types of ETFs?
Different types of ETFs are present in the market like index ETFs, sector ETFs, and commodity ETFs.
Which are the best-performing ETFs in India?
Kotak PSU Bank ETF, CPSE Exchange Traded Fund, UTI S&P BSE Sensex ETFETF are the top-performing ETF funds for the past year.
What are CPSE ETFs?
CPSE ETF (Central Public Sector Enterprises Exchange-Traded Fund). An investment instrument that allows you to invest in Central Government public sector enterprise.

September 12, 2023

5 points to be considered before buying or selling any stocks

Choosing the right stock to invest in is a very grinding task and selecting the right Stock at the time is even more gruelling. So many Investors find it hard to decide when to Buy and Sell a stock. Even after doing a thorough analysis of a company or an industry if you fail to enter the investment at the right time, all the research goes in vain. Similarly, not exiting from the Stock at the right time can also result in losses. So, what to do in that case?

5 Points to Consider Before Buying and Selling

Below We have mentioned five such points that could help you to make Buying and Selling decisions timely. So that you could invest in the stock market with ease.

1. Invest in the industry of your interest:

The first step for anybody, when they start investing in the stock market, is choosing the right industry. Choosing the right industry, sector or business is the core foundation for building a strong portfolio.
Legends like Warren Buffet always suggest investing in companies in which you have an interest or you are familiar with their business. It encourages you to regularly update yourself on the company’s performance.

To make an appropriate Buy or Sell decision it is very important to be updated with the company’s performance. When you are familiar with a company, or industry and know how the price reacts to market dynamics, it becomes simple to ignore unnecessary news and stick to your target.
Therefore, it is always suggested to invest in companies that you know well. Who’s business model excites you and you are willing to hold the stock for a longer period?

2. Understanding the Market sentiment:

For example,

We have seen that during COVID-19 the markets were affected badly because of fear among the people. At that time the market had a bearish sentiment, the stocks of so many companies were at a price lower than their actual value. Which was a very good buying opportunity in certain specific sectors like FMCG, Healthcare, etc.

3. Evaluating the financial reports:

Understanding and interpreting the company’s financial reports helps you to have a clear viewpoint on Buying and Selling decisions. The financial reports of the company consist of the balance sheet, profit and loss statement and the cash flow statement.

A Balance Sheet is a concise summary of the company’s current market standing. Showing what all the company’s assets and liabilities are and how are they financing their operations.
The Profit and Loss Statement depicts the performance of the company during a financial year. It shows how effectively the company is using their resources to generate revenue and how much expense they are incurring.

Cash is considered to be the lifeline of any business. Having a positive cash flow is a big green flag for any company. The Cash Flow Statement shows the net flow of cash in the business during a financial year, from the operating, financing and investing activities of the business.
Being able to read and understand the financial reports of the company helps the individual to make optimum buying and selling decisions.

Financial reports provide you with insight into the sales growth, gross and net margins, and profitability of the company which helps you to determine whether the company is making any progress or not.

4. Determining the fair value of the stock:

Evaluating the fair price of the share is very important before buying or selling it. Many financial ratios help you assess that if the share is fairly valued or not, on the stock exchange.

Three Important ratios that you can look at

P/E Ratio
Debt to Equity Ratio
Intrinsic value

Let’s briefly understand each one of them-

P/E Ratio:
The P/E ratio shows the relation between the stock price and the company’s earnings. It is calculated by dividing the current market price of the stock by the earnings per share.

Debt to Equity Ratio:
The debt-to-equity ratio is a financial ratio that is used to assess how much proportion of debt to equity a company is using to finance its assets.
Debt is the creditor or debt holders’ money that is invested in the company against which they receive a payment in the form of interest regularly.

Intrinsic value:
Intrinsic value is the anticipated value of any stock. Based on specific parameters the IV of any stock is calculated. Taking into consideration both tangible and intangible factors.

Intrinsic value = Future cash flows(1+ discount rate)#of periods

5. Investment goal

While investing in the stock market or building your portfolio it is very important to set your financial investment goals. Some Goals are short-term, and some are long-term. It is very important for an individual to correctly pre-define them to make the buy and sell decision at the right time.
Various factors determine one’s investment goals like the need for money in the coming years. A person who might not need his money for a decade can invest in more riskier assets. On the other hand, a person who might need his money in the coming years will invest in more liquid assets.

Conclusion

Summarising the above article We can conclude that while making a Buying and Selling decision we should always consider the market dynamics at the given point. Always try to invest in the industry or sector you are familiar with or are interested in. We have also seen that even at Rs.1000 a stock could be undervalued. Whereas, a stock trading at Rs.50 could be overpriced for what the company is offering.

And remember at the end of the day, investing in the stock market is a very whelming experience and you should always have control over your emotions. Often people get carried away with their emotions and end up making rash decisions and having to bear the consequences over the years.

FAQs (Frequently Asked Questions)

How to start buying and selling stocks?
To start buying and selling stocks, you first need to have a Demat account. There are several brokers present online, so it becomes complicated to choose the right one. Now. you can open a Demat account using Pocketful’s app within a few seconds.
Which are the best apps for buying and selling stocks?
There are many applications present online which facilitate the buying and selling of stocks. It depends on the use case and preference of the customer. Pocketful offers a trading platform for both your investing and trading needs. Simple interface combined with modern technology to make your finance journey smooth.
What are the buying and selling of stocks?
When you buy a stock you are not buying it with the company but the shareholder. Similarly, when you sell a stock the company is not buying it but some other investor.
What points should one consider before buying and selling stocks?
In the above article, five key points are mentioned that you should consider before buying and selling stocks. Never buy a stock in a company or industry, you do not know about. Analyze what the market dynamics are and how other investors are reacting.

September 6, 2023

Category: Personal Finance

What is Value Investing?

Key features of Value Investing

Margin of Safety

Long-Term Perspective

Contrary Approach

Advantages of Value Investing

Better Returns

Lesser Risk

Disciplined Approach

Challenges of Value Investing

What is Intraday Trading?

Key facts about Intra-day trading

Benefits of Intra-day Trading

Quick profits

Lesser risks.

Leverage

Challenges of Intraday Trading

Value Investing vs Intra-day Trading

Conclusion

Frequently Answered Questions (FAQs)

Which is riskier? Value investing or intra-day trading

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

Which investment approach uses fundamental analysis?

Mention two value investors in India.

What is the intrinsic value of a stock?

Possible causes of losses in your portfolio

Volatile Markets

Focus on a specific sector

Wrong Entry and Exit

Leveraged positions

Psychological Reasons

Poor selection of stocks

How to deal with red portfolio

Revaluation

Long-term perspective

Portfolio-review

Follow Stop-loss

Risk-Appetite

Diversification

Exit your mistakes in Bull Market

Advice from professionals and experience.

Invest at regular intervals

Conclusion

Frequently Asked Questions (FAQs)

If your portfolio is stuck in losses what should be the first step?

Should an investor consider selling stock immediately once the portfolio turns red?

How can diversification help you minimise your risk?

Can professional advice help you reduce losses?

How to control emotions when trading in the stock market?

Types of Saving Instruments

What are fixed deposits?

Merits & Demerits of Investing into FDs

Merits of Investing in Fixed Deposit

Demerits of Fixed Deposits.

Taxation of Fixed Deposits in India (Example):

What do you mean by investing in stocks?

Large-cap

Mid Cap

Small cap

From where can we buy or sell stocks?

Taxation of Equity in India

Merits & Demerits of Stocks

Merits of investing in stocks

Demerits of investing in stocks

Conclusion

Frequently Answered Questions (FAQs)

Which is considered safer, Fixed deposits or stocks?

Which investment option offers higher returns between stocks and FDs?

Who provides FDs?

What is STCG in stocks?

Who decides the interest rate on FDs?

What is Interest Rate?

Why interest rates are changed?

Impact of rate change on the Indian stock market.

Impact of change in rate by the US Federal Reserve on the Indian stock market

Conclusion

Frequently Answered Questions (FAQs)

How does interest rate affect bond prices?

Do all stocks react to interest rate changes in a similar way?