Pocketful

Category: Personal Finance

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

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

    We all must save some money, but if our risk-taking capacity does not allow us to take exposure in equity, then the option of bonds seems viable. 

    Today, we’ll explain what bonds are, how they function, and their kinds.

    Introduction of bonds

    Bonds fall within the category of fixed-income securities. Bonds are debt securities offered by private institutions and federal and state governments to raise funds to cover their costs. An entity issues bonds to investors to raise funds and, in turn, pays “coupon” payments. The payments are based on fixed interest rates, decided at the start of the tenure.

    Investing in bonds

    Characteristics of Bonds

    1. Issuer – Bonds may be issued by both private and public institutions, including business houses, state and federal governments, and municipalities. 
    2. Face Value – Also referred to as the par value or redemption value. It represents the nominal value of security in the eyes of the issuer. This value, along with the interest component, is returned to the investor on the maturity date of the bond. 
    3. Coupon Rate – It is the interest (on face value) paid out periodically to the investor.
    4. Tenure – It relates to the duration of bond issuance; for example, if a bond is issued on January 1, 2020, for a tenure of five years, its maturity date will be January 1, 2025. 
    5. Issuance of Bonds – Bonds are initially issued on the primary market and subsequently traded on the secondary market. 
    6. Ratings – The task of rating the bond based on the company’s creditworthiness is carried out by several credit rating firms that perform a thorough analysis of both the issuer and the bond itself. 
    7. Yield to Maturity (YTM) – YTM is the bond’s internal rate of return (IRR) if the investor holds the bond till maturity.

    Bond issuance process

    1. The borrowing entity prepares a bond indenture that contains all the relevant details, such as the par value, coupon rate, maturity date, tenure, and credit rating.
    2. The bond indenture is then circulated in the primary market to accept applications from investors.
    3. The borrower then regularly pays the coupon amount to the bondholder, and the borrower can default only in case of financial turmoil.
    4. The unallocated applications are returned to the investors, and allocated investors are sent the bond confirmation that acts as proof of lending to the issuer.
    5. The borrower then regularly pays the coupon amount to the bondholder, and only in case of financial turmoil can the borrower default.
    6. At the end of the tenure, the borrower pays the face value of the bond and any accumulated interest.

    Types of Bonds

    Bonds are divided into various groups according to their characteristics. 

    Treasury Bonds

    The central government issues bonds of this kind, with maturities ranging from ten to thirty years. With little to no credit risk, it is considered the safest bond.

    Municipal Bonds

    The municipal or state governments issue these bonds to generate money for the state’s welfare projects. 

    Corporate Bonds

    Corporate entities issue these bonds to generate money for various operational needs. While they often offer greater yields than government bonds, these bonds also carry a higher risk. 

    Zero-Coupon Bonds

    As the name suggests, Zero-coupon bonds do not make periodic coupon payments but pay the entire interest component at the end of the tenure. These bonds are redeemed at face value and are issued at a discount. Thus turning the discount into the interest component of the bond.

    Junk Bonds

    The bonds allocated below BBB rating by credit rating agencies are called Junk bonds. These bonds often provide the highest yield but carry the highest risk. These are generally issued by organizations that are prone to default. 

    Convertible Bonds

    This bond has an option to convert the bonds into stocks. These bonds allow the investor to earn greater returns when the company’s shares increase.

    Callable Bond

    The bond allows the issuer to redeem the callable bonds at a predetermined date before maturity. These bonds protect the borrowers if the interest rate decreases as it allows for refinancing the borrowing at the decreased rates.

    Putable Bond

    This bond allows the bearer to redeem it at a predetermined date before its maturity. This bond protects the holder from an interest rate increase as it allows the holder to sell the bond back to the issuer at a predetermined price.

    Floating Rate Bonds

    These bonds’ interest rates fluctuate in line with the repo rates set by the Reserve Bank of India. 

    Inflation Linked Bonds

    The coupon rates on these bonds are typically higher than the overall economic inflation rates. The coupon payments of these bonds are adjusted to preserve their real worth after adjustment of the inflation rate.

    Perpetual Bonds

    These bonds don’t have a maturity date because the bond’s issuer is not required to pay the par value to the bondholder. As long as they own the bond, the bondholder will continue to receive interest.

    CAT Bonds

    Insurance companies issue CAT bonds, also known as catastrophe bonds, to investors to help them assume the risk of certain calamities like earthquakes and floods. These bonds typically have a high yield as they come with higher risk.

    Capital Gain Bonds

    A select few institutions issue these bonds, allowing them to benefit from capital gains made on selling real estate, including buildings and land, under section 54EC. 

    Advantages of investing in bonds

    1. Regular Income – Bond investments provide consistent income because the bond issuer is expected to make coupon payments regularly. 
    2. Less volatile – Bonds are well-liked by investors with low-risk tolerance since they are relatively less volatile than equity investments but offer greater returns than normal bank FDs.
    3. Diversification – Allocating a portion of the portfolio to fixed-income securities lowers the overall risk. Bonds will continue to yield returns even in an equity market decline.
    4. Capital Preservation – If the company becomes insolvent, bondholders have a higher probability of receiving their principal amount than equity shareholders.
    research on bond investing

    Disadvantages of investing in bonds

    1. Credit Risk – The bondholder must bear the risk of not receiving their payment obligations in the case of default.
    2. Lower Return – Historically, in comparison to equity investing, bonds offer a lower rate of return. 
    3. Reinvestment Risk – Reinvestment risk arises when an investor cannot reinvest the interest at the same YTM rate as when the bond was first issued. Failure to reinvest the coupon at YTM rate would result in a decreased rate of return over the tenure of the bond.
    4. Inflation Risk – Rising inflation over time may cause the purchasing power of bonds, other than inflation-linked bonds, to decline more than equity shares.

    Factors that affect bond prices

    1. Interest Rate – Interest rates and bond prices are inversely correlated. This implies that bond prices may decrease when interest rates rise, and vice versa. 
    2. Maturity Date – When investing in bonds, investors must consider their investment duration. Bonds with longer maturity dates are more sensitive to interest rates, whereas bonds with shorter maturity dates are less sensitive. 
    3. Credit Quality – The price of high credit-rated bonds will rise due to investor demand outpacing that of lower-rated bonds.
    4. Supply and Demand – Bond price will be impacted by supply and demand; if supply is high and demand is low, bond price will be lower, and vice versa.

    Additional factors to be considered

    1. Credit Risk – Risks of issuer not paying the instalments is called Credit Risk. It is advisable to opt for credit-worthy issuers when shortlisting borrowers in order to limit the risk of default. 
    2. Liquidity of Bonds – An investor should consider bonds that provide greater liquidity, which generally exists in credit worthy issues. 
    3. Investment Goal – When choosing which bond to invest in, you should consider your investment horizon, risk tolerance, and investing goal.
    4. Maturity of Bonds – Bonds with shorter maturities are less susceptible to fluctuations in interest rates; conversely, the prices of bonds with longer maturities are more unstable. 
    5. Taxation – Since the interest on bonds is taxable according to the income tax bracket, an investor should think about the tax consequences before investing.

    Conclusion 

    Bonds are typically a good option for risk-averse investors who prefer steady returns on their capital rather than portfolio volatility. It is advisable to do your research to find the right kind of bond to buy because each type has a different risk-reward profile.

    Frequently Asked Questions (FAQs)

    Q1. What is the primary risk affecting corporate bonds?

    Ans. The primary risk connected to corporate bonds is default risk, often known as credit risk.

    Q2. What kind of bond is the safest?

    Ans. Bonds issued by the Government of India are regarded as the safest kind of bonds available in the Indian market.

    Q3. What is the primary distinction between YTM and coupon rate?

    Ans. The Yield To Maturity (YTM) is a bond’s internal rate of return (IRR) if the investor holds the bond till maturity, and the coupon rate is the set interest paid by the bond’s issuer on its face value.

    Q4. Are bond interest payments taxable?
    Ans. Yes, bond interest receipts are taxable according to the investor’s income tax bracket.

    Q5. Is it possible to sell the bond before it matures?
    Ans. Yes, you can sell the bonds on the secondary market before they mature.

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

  • Sectoral Funds Decoded: Riding the Investment Roller-Coaster

    Sectoral Funds Decoded: Riding the Investment Roller-Coaster

    Imagine sitting on a steep roller-coaster ride, coupled with the fear of a crash. That is the world of sectoral funds!

    If you do not want to end up stranded in the financial cosmos, read today’s blog, in which we will uncover the secrets of sectoral funds and whether they deserve a place in your investment portfolio.

    Overview of Sectoral Funds Decoded

    Sectoral Funds are a type of equity mutual fund that only invests in companies operating within a specific sector or industry of the economy.

    These funds allow the investor to gain concentrated exposure to a particular sector and amplify their returns if that sector outperforms the broader index. However, sectoral funds have increased risks due to a lack of diversification.

    These funds focus on various sectors and industries such as technology, healthcare, consumer staples, financial services, energy, and infrastructure.

    Benefits of Sectoral Funds Decoded

    Sectoral funds can offer tempting advantages to investors. Let us have a look at the benefits of sectoral funds:

    1. When a chosen sector experiences a boom, sectoral funds can outperform diversified funds. Imagine the tech boom of the late 90s; any technology-focused fund would have given incredible returns to investors.
    2. Investing in such a fund offers the investor an opportunity to gain exposure to the sector without analysing each stock within the industry. 
    3. Sectoral funds can be used for tactical portfolio diversification, allowing you to capitalise on short-term trends and sector rotation.

    Risks

    1. Sectoral funds come with a high probability of losses. If the chosen sector underperforms, sectoral funds will suffer as fund managers will not have room for diversification and protecting the capital. 
    2. These funds are inherently more volatile than diversified funds. Therefore, sharp swings in prices/NAVs are more likely to occur.
    3. Understanding the sector dynamics and prospects is essential and complex at the same time before investing. Failure to interpret the sector’s trajectory during the investment horizon could lead to significant losses in the short term. 
    4. In the race to earn benchmark-beating returns, choosing the right sectoral fund, after considering the political, economic, and technological landscape, is highly crucial because making the wrong choice might lead to inadequate returns or even losses in the short and medium term.
    Different sectors

    Performance

    The Covid-19 pandemic sent shockwaves throughout the global economy, and many sectors were impacted differently. Sectoral funds felt the heat too.

    The Sunny Side

    Pharma Funds – As the pandemic raged, demand for healthcare products soared and pharma funds were riding the wave since they delivered consistent returns.

    Technology Funds – With the world shifting online, technology companies thrived. Tech-focused funds witnessed exponential growth because of increased dependence on remote work, communication and entertainment platforms.

    The Dark Side

    If you invested in these sectoral funds, you must have witnessed their consolidation in the past couple of years.

    Technology Funds – The initial sector boom, fuelled by the growth of online platforms and digital transformation, faded away when the economies reopened, and offline activities resumed.

    Compared to their respective benchmark, some top-performing sectoral funds that doubled their returns during the Covid-19 pandemic were not even at par post-Covid.

    As of 23rd February 2024, the broader Nifty 50 index has risen over 91% since November 2020, while the Nifty IT index has risen 82%.

    Pharma Funds – Something similar happened with pharma stocks. During the height of the pandemic, these stocks surged due to increased demand for vaccines, diagnostics, and other medical equipment, eventually leading to better pharma funds’ performance. The demand for medical products flattened once the initial panic subsided and vaccine rollouts progressed. This led to a massive correction in the stock prices of the pharma sector.

    As of 23 February 2024, the broader Nifty 50 index has risen 91% since November 2020, while Nifty Pharma has only given 64% returns.

    Read Also: Decoding Credit Risk Funds In India

    Returns Comparison

    The table below shows the performance of different sectoral funds in the past 4 years relative to their benchmark.

    Technology Sector

    Scheme2023202220212020
    ABSL Digital India Regular35.75-21.6470.4759.03
    SBI Technology Opportunities Regular24.82-15.4666.4347.45
    ICICI Prudential Technology Fund Regular27.45-23.2275.7470.59
    S&P BSE IT TRI28.28-22.7058.4560.05
    *(S&P BSE IT TRI is the benchmark index for technology funds)

    Pharma Sector

    Scheme2023202220212020
    Nippon India Pharma Fund Regular39.15-9.923.9366.44
    SBI HEALTHCARE Opportunities Regular38.24-6.0220.1565.83
    ABSL Pharma and Healthcare Regular37.67-12.6819.5453.84
    S&P BSE Healthcare TRI37.97-11.521.5462.61
    *(S&P BSE Healthcare TRI is the benchmark index for pharma funds) 

    Example

    Let us understand the cycle of sectoral funds with the help of the table.

    Suppose investor A invested in technology and pharma funds during Covid 19. Some of the top-performing funds gave massive returns and significantly outperformed their respective benchmark indices, affirming the beliefs of the investor. The table shows that S&P BSE IT TRI & S&P BSE Healthcare TRI gave a return of 58.45% and 21.54% respectively in the year 2021. 

    However, investor A stayed invested in these funds with the hope of getting more profits. But after the COVID wave subsided, the market witnessed a stark contrast in the performance of both the technology and pharma sector funds, and these funds gave returns of -22.7% & -11.5%, respectively. Thus leading to catastrophic losses.

    This example indicates that sectoral funds concentrate their investments in specific sectors. This concentration leads to their performance moving in tandem with the cyclical nature of the underlying sector. Therefore, the exposure of unsystematic (diversifiable) risk increases substantially.  

    *(The funds mentioned above are for educational purposes only and are not recommendations).

    Read Also: History of Mutual Funds in India

    Conclusion

    After analysing the pros and cons and the recent performance of sectoral funds, the million-dollar question remains: Should you invest? As with most investment decisions, the answer is not a simple ‘yes’ or ‘no’. It depends on your risk tolerance and investment goals. Consider sectoral funds if you are a long-term investor, have a high-risk tolerance, and have a firm conviction in a particular sector. Avoid sectoral funds if you are a short-term and risk-averse investor lacking sector expertise.

    Ultimately, the decision is yours. Sectoral funds can be a powerful tool to maximise wealth, but they also need a deep understanding of the sector-specific risks.

    Frequently Asked Questions (FAQs)

    1. Why should I invest in sectoral funds?

      Sectoral funds offer investors the potential for higher returns (with increased risk). Thus making them a lucrative investment vehicle for those who can take the risk. 

    2. Are sectoral funds right for me?

      The answer depends on your risk tolerance, investment goals, and knowledge of the chosen sector.

    3. Is there a magic formula for picking the right sectoral fund?

      No, there is no guaranteed recipe for success. So, one should evaluate all factors before investing.

    4. Can I time the market with sectoral funds?

      Predicting market trends can be tricky. Therefore, performing self analysis is of utmost importance. 

    5. Can sectoral funds help me get rich quickly?

      Sectoral funds do carry the potential to offer high returns but simultaneously come with amplified risks and volatility. Do not invest in these funds with a get-rich-quick objective!

  • NISM Certifications: An Easy Explainer

    NISM Certifications: An Easy Explainer

    When you talk to someone about investing in mutual funds, he or she may remark, “I know someone who knows about mutual funds.” This person can then advise you which funds are suitable for you to be invested in.

    Is that correct? Can you invest based on the advice of anyone. No, things shouldn’t be that way. It is appropriate to inquire about the individual’s educational background and professional experience, whether they possess the required certificates issued by the authority and are qualified to offer financial advice.

    We will discuss such authority and certifications in this blog.

    Overview of NISM

    NISM Certifications Explainer

    The Securities and Exchange Board of India established the National Institute of Securities Markets (NISM) in 2006 as a public trust. The primary goals of NISM’s founding are to advance ethics, financial literacy, and education in the Indian security market.

    NISM’s headquarters are located on a 72-acre facility in Mumbai. The student can choose between full-time and part-time courses offered by the institute.

    The six colleges listed below are where NISM conducts its operations:

    1.     School for Securities Education (SSE)

    2.     School for Certification of Intermediaries (SCI)

    3.     School of Regulatory Studies and Supervisions (SRSS)

    4.     School of Investor Education and Financial Literacy (SIEFL)

    5.     School for Corporate Governance (SCG)

    6.     School for Securities Information and Research (SSIR)

    Why NISM?

    Obtaining an NISM Certification may boost your career aspects in the finance industry. Further, there are regulatory requirements for some of the jobs where you can’t work without getting NISM certification. Some of the benefits / features of NISM Certifications are:

    Professionalism – Possessing a NISM Certificate will make you regarded as a professional with the required abilities.

    Regulatory Requirement – In the Indian financial industry, there are numerous positions for which you must hold NISM Certification. Only with that specific certificate you can carry out your actions lawfully; otherwise, you are not permitted to provide those services.

    Career Growth – Having a certificate in hand after passing the NISM tests would boost your chances of employment and promotions. It will also undoubtedly assist you in advancing in any financial company.

    Knowledge Enhancement – The extensive and comprehensive variety of financial-related topics is covered in the NISM courses. Following your successful completion of the program, you will have a solid understanding of that particular subject.

    Compliance and Risk – The SEBI has mandated that certain NISM Certificates be held by financial firms to comply with the regulatory framework and compliance standards.

    Client Trust – Your client would think highly of you as a competent professional if you are a NISM Certified professional. 

    List of NISM Certifications

    The NISM offers two types of assessments: Certification exams and CPE (Continuing Professional and Education) programs.

    Certifications Exams

    As of February 2024, NISM offers the following Certifications Exams:

    Sr. No.NISM ExamTest DurationFees (INR)Maximum MarksNo. of QuestionsPass Marks (%)Certificate Validity(in years)
    1NISM Series I: Currency Derivatives Certification Examination2hrs1500/-100100603
    2NISM Series II A: Registrars and Transfer Agents (Corporate) Certification Examination2hrs1500/-100100503
    3NISM Series II B: Registrars and Transfer Agents (Mutual Fund) Certification Examination2hrs1500/-100100503
    4NISM Series-III-A: Securities Intermediaries Compliance (Non-Fund) Certification Examination2hrs1500/-100100603
    5NISM Series IV: Interest Rates Derivatives Certification Examination2hrs1500/-100100603
    6NISM Series V A: Mutual Fund Distributors Certification Examination2hrs1500/-100100503
    7NISM-Series­V-B: Mutual Fund Foundation Certification Examination2hrs1200/-5050503
    8NISM Series VI: Depository Operations Certification Examination2hrs1500/-100100603
    9NISM Series VII: Securities Operations and Risk Management Certification Examination2hrs1500/-100100503
    10NISM-Series-VIII: Equity Derivatives Certification Examination2hrs1500/-100100603
    11NISM Series-IX: Merchant Banking Certification Examination2hrs1500/-100100603
    12NISM-Series-X-A: Investment Adviser (Level 1) Certification Examination3 hrs3000/-150135603
    13NISM-Series-X-B: Investment Adviser (Level 2) Certification Examination3 hrs3000/-150120603
    14NISM Series-XII: Securities Markets Foundation Certification Examination+2hrs1770/-100100603
    15NISM Series-XIII: Common Derivatives Certification Examination3hrs3000/-150150603
    16NISM Series-XV: Research Analyst Certification Examination2hrs1500/-100100603
    17NISM-Series-XVI: Commodity Derivatives Certification Examination2hrs1500/-100100603
    18NISM-Series-XVII: Retirement Adviser Certification Examination2hrs1500/-100100603
    19NISM-Series-XVIII: Financial Education Certification Examination+2hrs1416/-5050503
    20NISM Series XIX-A: Alternative Investment Funds (Category I and II) Distributors Certification Examination+2hrs1770/-100100603
    21NISM-Series-XIX-B: Alternative Investment Funds (Category III) Distributors Certification Examination+2hrs1770/-100100603
    22NISM-Series-XIX-C: Alternative Investment Fund Managers Certification Examination+3hrs3540/-150120603
    23NISM-Series-XX-Taxation in Securities Markets Certification Examination+2 hrs1770/-10075603
    24NISM Series XXI-A: Portfolio Management Services (PMS) Distributors Certification Examination2hrs1500/-100100603
    25NISM Series XXI-B: Portfolio Managers Certification Examination3 hrs3000/-150120603
    26NISM Series XXII: Fixed Income Securities Certification Examination+2hrs1770/-10085603
    27NISM-Series-XXIII: Social Auditors Certification Examination+2 hrs1770/-100100603
    28IBBI- Valuation Examination in the Asset Class: Land and Building2hrs5900/-1009060N/A
    29IBBI- Valuation Examination in the Asset Class: Plant and Machinery2hrs5900/-1009060N/A
    30IBBI- Valuation Examination in the Asset Class: Securities or Financial Assets2hrs5900/-1009060N/A
    Source – https://www.nism.ac.in/

    Each exam has its own set of requirements; some include negative grading; some not. Duration for exams may vary from two hours to three hours.

    Moreover, each exam has a unique significance in its subject. For example, NISM VA is required for distributors of mutual funds, and NISM XA and XB are required for investment advisors.

    CPE Exams

    NISM Institute also offers the Continuing Professional Education (CPE) exams, which is for holders of current certificates. If the current certificate expires, it can be revalidated by completing the appropriate NISM exam before it expires.

    Revalidation of the certificate is possible through online CPE (eCPE) or a one-day session called “Continuing Professional Education.”

    You can give exam after the six-hour training session, and upon passing it, you will receive a new certification with updated validity. The NISM-certified instructors conducts the offline CPE program.

    You can participate in the online CPE session from the comfort of your home with just a laptop and an internet connection. Following your attendance for the entire session, you will receive a fresh certificate after completing the feedback form and submitting the test.

    CPE Exams

    Not every exam is offered through the CPE or eCPE program. Have a look at the table below to know the exams offered via CPE:

    SrModule NameCPE DurationCPE Fees (INR)ECPE DurationECPE Fees (INR)Certificate Validity
    1NISM Series – I: Currency Derivatives6-hrs appx2500/-3 – 5 hrs appx2500/-3 years
    2NISM Series – II-A: RTA Corporate6-hrs appx2500/-3 – 5 hrs appx2500/-3 years
    3NISM Series – II-B: RTA Mutual Fund6-hrs appx2500/-3 – 5 hrs appx2500/-3 years
    4NISM Series – III-A: Securities Intermediaries Compliance (Non-Fund)6-hrs appx2500/-3 – 5 hrs appx2500/-3 years
    5NISM Series – IV: Interest Rate Derivatives6-hrs appx2500/-N/A N/A3 years
    6NISM Series – V-A: Mutual Fund Distributors6-hrs appx2500/-3 – 5 hrs appx2500/-3 years
    7NISM Series – V-B: Mutual Fund Foundation6-hrs appx2500/-N/AN/A3 years
    8NISM Series – VI: Depository Operations6-hrs appx2500/-3 – 5 hrs appx2500/-3 years
    9NISM Series – VII: Securities Operations and Risk Management6-hrs appx2500/-3 – 5 hrs appx2500/-3 years
    10NISM Series – VIII: Equity Derivatives6-hrs appx2500/-3 – 5 hrs appx2500/-3 years
    11NISM Series – IX: Merchant Banking6-hrs appx2500/-3 – 5 hrs appx2500/-3 years
    12NISM Series – XIII: Common Derivatives6-hrs appx2500/-N/A N/A3 years
    13NISM Series – XV: Research Analyst6-hrs appx2500/-3 – 5 hrs appx2500/-3 years
    14NISM Series – XVI: Commodity Derivatives6-hrs appx2500/-3 – 5 hrs appx2500/-3 years
    15NISM Series – XVII: Retirement Advisor6-hrs appx2500/-N/AN/A 3 years
    16NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors6-hrs appx2500/-3 – 5 hrs appx2500/-3 years
    17NISM-Series-XXI-B: Portfolio Managers6-hrs appx2500/-3 – 5 hrs appx2500/-3 years
    Source – https://www.nism.ac.in/

    How to register for NISM Exams

    1.     First, you need to visit – https://certifications.nism.ac.in/

    2.     You must register your profile if you are visiting for the first time.

    3.     You must use your login credentials to access the website after registering.

    4.     The exam, day, time, and test center must be chosen.

    5.     You will next be prompted to pay the examination fees.

    6.     The study materials are available for download in PDF format following a successful payment.

    7.     You must appear at the testing location on the scheduled exam day with the necessary documentation, such as your original admit card and identity evidence.

    Conclusion

    A certificate from NISM facilitates your entry into the finance industry. It is important to note that passing the NISM exam does not grant you complete freedom in the profession; you should follow the regulations and guidelines. There is usually a three-year validity limit on all certificates, after which you must retake the exam or enrol in a CPE program if you want to continue.

    Possessing these certificates identifies a person with extensive and professional expertise in the finance industry. However, keep in mind that holding NISM certifications may give you a competitive advantage over others, but in no manner it can guarantee you a job or make you superior to others.

    To conclude, to gain professional status and pursue a career in finance, you can obtain the NISM Certifications.

    Frequently Asked Questions (FAQs)

    1. Who is the regulator of NISM?

      NISM is regulated by the SEBI (Securities Exchange Board of India).

    2. Are NISM exams costly?

      NISM examinations are not extremely expensive; the typical range of exam costs is INR 1,500 – 3,000.

    3. Can I reschedule my exam once I’ve reserved a time slot?

      You are allowed to change your exam date as long as it’s fifteen days away.

    4. When will the NISM exam results be available?

      After completing the exam, you will be prompted to fill out a survey form. Once the exam is submitted, your results or scorecard will be shown on the screen, and after 15 days, you can download the certificate from the NISM website.

    5. What is the validity period of NISM Certificate?

      The validity is three years, after which you must retake the exam or simply present for the CPE exam to have your certificate re-validated.

  • The Art of Value Investing: Meaning and Strategies

    The Art of Value Investing: Meaning and Strategies

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

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

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

    Concept 

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

    The concept of value investing functions on the following principles,

    Undervaluation: 

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

    Margin of Safety: 

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

    Contrarian Approach:

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

    Long-term Investing:

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

    Read Also: Intrinsic Value vs Book Value

    Benefits

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

    Risks 

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

    Key Metrics

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

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

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

    For example, Consider two companies

    Company A

    Stock price – INR 50

    EPS – 5

    PE Ratio – INR 50/5 = 10

    Company B

    Stock Price – INR 100

    EPS – 20

    PE Ratio – INR 100/20 = 5

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

    Debt-to-Equity Ratio

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

    For example, consider two companies

    Company A

    Debt – INR 1 lakhs

    Equity – INR 2 lakhs

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

    Company B

    Debt – INR 3 lakhs

    Equity – INR 1 lakhs

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

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

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

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

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

    For example, consider two companies

    Company A

    Stock Price – INR 20

    Book Value per share – INR 10

    P/B ratio – 20/10 = 2

    Company B

    Stock price – INR 40

    Book value per share – INR 20

    P/B Ratio – 40/20 = 2

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

    Return on Equity (ROE)

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

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

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

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

    Discounted Cash Flow (DCF)

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

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

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

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

    PEG Ratio

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

    For example, Consider 2 companies

    Company A

    P/E Ratio – 20

    Expected EPS growth rate – 10 %

    PEG Ratio – 20/10 = 2

    Company B

    P/E Ratio – 15

    Expected EPS growth rate – 5%

    PEG Ratio – 15/5 = 3

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

    Additional Tips for Value Investing

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

    Value Investing v.s. Growth Investing

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

    Value Investing for Beginners

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

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

    Conclusion

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

    Frequently Asked Questions (FAQs)

    1. Why should I consider value investing?

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

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

      No, because value investing helps you discover undervalued gems.

    3. Is value investing risky?

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

    4. How do I get started with value investing?

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

    5. Is value investing right for me?

      It depends on your specific risk tolerance and investment goals.

  • From Private to Public: Decoding the IPO Journey

    From Private to Public: Decoding the IPO Journey

    Visualize this – your once close-knit company, fostered in privacy, is about to step into the arena of the stock exchange. But the path from privacy haven to public spectacle is filled with complex steps and informed decisions.

    In today’s blog, we will discover a company’s journey from private to public. This blog will serve as a roadmap to your guide to the IPO procedure.

    What is an IPO?

    IPO stands for Initial Public Offering. It refers to the process when a private company first sells its shares to the public on the stock exchange. This transforms the company from being privately owned to publicly owned.

    Going public through an IPO can be a transformative affair for the company. However, the journey is complex and demands careful planning and execution.

    Let’s delve into the key stages of the exciting voyage.

    When the company makes its first IPO to the public, the money flows to the company as its share capital and the new shareholders become owners of the company. However, these company shareholders are free to exit their investment anytime.

    But before investing in an IPO an investor should keep in mind that not all companies that go public are successful. Some IPOs flop and the company’s stock price might fall after listing.

    IPOs can be either SME or Mainboard. Let us have a brief overview.

    SME IPO

    An SME IPO is a process through which small and medium-sized enterprises (SMEs) can raise funds from the public by issuing shares. SME IPOs are listed on a stock exchange such as BSE, SME, or NSE Emerge.

    Eligibility Criteria for an SME IPO

    1. The company should be a Small and Medium Enterprise as defined by the Ministry of Micro, Small and Medium Enterprises (MSME).
    2. The company should have a minimum post-issue paid-up capital of INR 1 crore and a maximum of INR 25 crore.
    3. The company should have a good track record of profits for the last 3 years.
    4. All SME IPOs should be 100% underwritten* and merchant bankers must underwrite at least 15% of the shares of the SME IPO company.

    Note – An underwriter is a professional or institution who analyses and assumes another party’s risk for a fee. Underwriting is a process through which an individual or institution determines and evaluates the risk of a financial agreement.

    Mainboard IPO

    A mainboard IPO is also known as a mainline IPO. As the name suggests, it is the process by which a large and established company offers its shares to the public for the first time.

    Eligibility Criteria for Mainboard IPO

    1. The company should have a minimum post-issue-paid-up capital of INR 10 crore.
    2. The company should have a good financial track record with profitable business operations.
    3. Underwriting is not necessary for a mainboard IPO. However, at least 50% of shares must be subscribed by the qualified institutional buyers (QIB).

    Note – QIB or Qualified Institutional Investors are a class of investors with a higher level of financial resources and expertise that meet specific criteria decided by the Securities and Exchange Board of India.

    Read Also: Best Smallcap IT Stocks List in India

    Steps to take a company public

    1. The company evaluates its willingness to go public and considers factors like financial statements, growth potential, regulatory compliance and market conditions
    2. The company needs to partner with experienced advisors that include merchant/investment bankers, lawyers, chartered accountants and public relations specialists.
    3. The next step is filing the IPO with SEBI, the company drafts the prospectus, a detailed document that is subject to regulatory analysis and outlines the company’s financials, business model, risks, management and promoter details, objects of the issue, capital structure, and dispute, if any.
    4. The company starts a series of presentations for investors showing its value proposition and growth outlook which is also known as a roadshow.
    5. A method called Price discovery is used to find the stock’s price based on demand of the IPO. There are two modes of price discovery, which are explained later.
    6. Your company then officially hits the stock exchange.

    Price Discovery

    Fixed Price Issue 

    In the case of a fixed price, the issue price is already selected by the company along with the merchant banker and printed in the offer document before the IPO, and no price discovery mechanism is used.

    Note – A merchant banker is a financial institution or an individual who provides a range of services including advisory, capital raising etc. to corporations and governments.

    Stages of Fixed Price Issue

    • The issuer company collaborates with SEBI-registered intermediaries except for an underwriter.
    • The lead manager then files a draft red herring prospectus (DRHP) with the SEBI/Stock Exchange.
    • After the successful approval from the SEBI and stock exchange, the issue price and issue period are determined.
    • The prospectus is then filed with the Registrar of Companies (ROC).
    • Once the issue opens, the investor submits an application form to the intermediary for uploading on the stock exchange platform.
    • The issue closes and all the important compliances related to the issue are completed. Securities are finally allocated to the investors at the fixed offer price.

    Book-Building Issue 

    Book Building Process is the more common mode of IPO. Book-building is a process to determine the final price at which the securities will be offered to the public.

    Stages in Book-Building

    • Company planning to go public appoints the lead merchant bankers as Book Runners. These banks play an important role in the book-building and ensuring a successful offering.
    • Investors give their bids to underwriters specifying the quantity of shares.
    • Underwriters then input the orders in the electronic book through bidding. The book normally remains open for 5 days.
    • The book-running lead managers (BRLM) analyse the bids received and determine the demand at multiple price levels to find the price at which the maximum number of shares can be sold.

    Note – BRLM or book-running lead managers play a pivotal role in the IPO procedure. BRLMs conducts due diligence on behalf of the company which involves in-depth analysis of company financials, operations and legal compliance and also helps in setting the offer price.

    • The issuer company with the help of book-running lead managers decides on a price band in which investors can bid. The minimum price at which bids can be made is known as the floor price
    • Once the bidding period ends, the book is closed and no more bids are accepted.
    • Depending on the bids received and the price discovered the lead managers allocate shares after determining the final price.

    Benefits of IPO

    An IPO can offer various benefits to both the company and the investor.

    For Companies

    • Helps in raising capital to fund growth initiatives, capital expenditures, acquire other companies, loan repayment and brand awareness.
    • Going public allows the shareholders to trade shares on the stock exchange providing liquidity and gains.
    • A successful IPO listing can boost a company’s reputation and credibility which will eventually attract new customers.

    For Investors

    • Adding IPOs to an investment portfolio will help in diversification.
    • IPOs offer the opportunity to invest in companies with promising growth potential before they are widely available in the stock market.

    IPO v.s. Private Funding

    Private funding refers to raising capital for a company from non-public sources, in exchange for equity in the company. It is completely in contrast to public funding which comes from selling shares of the company to the general public through an IPO.

    Sources of private funding include firms that invest in early-stage companies with the potential for high returns.

    1. Angel investors or wealthy investors who invest in companies at their nascent stage.
    2. Private equity firms, debt financing such as bank loans, crowdfunding i.e., raising smaller amounts of capital online from many individual investors.

    Private funding is a suitable option for companies seeking moderate capital for initial growth or specific projects or partnerships with investors who share their vision.

    However, the ideal option depends on the company’s goals and stage of development. If the company needs substantial capital for immediate expansion and is comfortable with public analysis, an IPO might be suitable and if a company emphasises flexibility and control, private funding can be a better fit.

    Key Considerations for IPO

    Launching an IPO is a thrilling journey and demands careful consideration of several factors.

    Some of the key considerations are listed below.

    1. Ensure that the company has a strong financial track record with audited statements. Investors will analyse the financial performance, revenue, and other financial metrics before investing.
    2. Analysis of ongoing market conditions such as the industry trends and the other upcoming IPOs. Favourable market conditions can increase the chances of a successful debut.
    3. Clearly express the company’s business model because the investor seeks companies with a compelling story and clear path to future growth.
    4. Ensure compliance with all relevant legal and regulatory requirements including corporate governance standards, working with legal advisors, etc.
    5. Investors evaluate the leadership team’s track record. Hence, the companies should have a capable and experienced management team.
    6. Develop a comprehensive investor relations strategy which includes communication plans, investor education and fostering positive relationships with the investment committee.
    7. Choose underwriters with good reputations and expertise. Underwriters play an important role in smoothing the IPO procedure.
    8. Conduct a thorough risk analysis and disclose the potential risks to the investors. Transparent communication about risks will validate a commitment.

    Read Also: What is Grey Market Premium (GMP) in IPOs?

    Conclusion

    The journey from a private company to a public company through an IPO is indeed fascinating, and filled with zeal and strategic decisions. By carefully considering the various aspects and seeking professional supervision, the IPO procedure can influence the power of public markets because an IPO is just the beginning, sustainable growth, and value creation are important for long-term success in the public eye.

    Frequently Asked Questions (FAQs)

    1. How long does an IPO generally take?

      The average timeline for an IPO is generally 6 to 12 months. Although it can vary depending on company size and complexity.

    2. What are the major costs involved in an IPO?

      Investment banking fees, legal fees, accounting and auditing fees, filing and exchange listing fees, and advertising expenses.

    3. How can I invest in an IPO?

      Participate in retail allotments by the company through your bank or buy shares on the open market listing.

    4. What happens to employees’ shares after an IPO?

      It depends upon agreements and company policies. Some employees may receive restricted stock units or employee stock options.

    5. What happens to the money raised in an IPO?

      The company may use the fund for debt repayment, capital expenditure, or research and development.  

  • Unveiling the Budget 2024: Key Takeaways

    Unveiling the Budget 2024: Key Takeaways

    Budget 2024 highlights

    Budget Day is considered one of the important days for many stakeholders, including the Individuals, Businesses, Markets, and what not! Today, i.e., 1 Feb 2024, our country’s Finance Minister, Nirmala Sitharaman, presented her 6th Union Government Budget for the Financial Year 2024-25.

    The Budget stands as a crucial point in the nation’s financial journey as it is a stepping stone for its economic landscape. However, this was the Interim Budget, which means temporary, or say, short-term budget presented by the current Government before the upcoming elections.

    The full or Regular budget will be announced by the new government in July 2024 after the general elections. Even if the same government comes back in power after the elections, the administration will change, which will announce the full budget. As of today, the dates for the upcoming general elections are yet to be announced by the Election Commission of India.

    Moving back to the Interim Budget, the finance minister completed her speech in almost an hour. Let’s delve into the key highlights:

    Budget 2024

    Infrastructure

    Infra spending increased

    A nation’s progress is often measured by its infrastructure development. The interim budget allocates significant resources to accelerate infrastructure projects across transportation and communication sectors.

    1) The Government has allocated substantial funds for the coming FY 24-25. It has allocated INR 11 lakh cr. for capital expenditure.

    2) Regarding the railways, 40,000 bogeys are to be transformed to Vande Bharat standards. Further, three major railway corridors were also announced:

    • Port connectivity corridor
    • Energy, mineral, and cement corridor
    • High traffic density corridor.

    3) FM applauded the current Infrastructure growth in our country and also mentioned in her speech that Indian carriers have placed orders for 1,000 new aircraft.

    Read Also: Budget 2024: Explainer On Changes In SIP Taxation

    Women Empowerment

    1)  The Govt. has reserved 1/3rd of the legislative seats for women of the nation.

    2) “Lakhpati Didi” Scheme – Aim to empower 2 crore women in villages, has reached 83 lakh self-help groups. It gained renowned success and benefited almost 9 crore women.

    3) FM also mentioned about the “Triple Talaq” in her speech, which is now illegal.

    Direct and Indirect Taxes

    1) FM started the Taxes part by applauding the GST collections, which touched a record high. Further, she stated that Industry leaders view the GST transition as a positive one.

    2) The IT filing processing will now take only 10 days, which is a considerable reduction in existing processing time.

    3) Regarding Direct and Indirect taxes, no such change was announced in the budget by FM. However, there was one good news amongst this; existing tax demands of up to INR 25,000 of previous years (up to FY 2009-10) are to be withdrawn by the IT department.

    Fiscal Deficit

    1) For the FY 2023-24, the revised estimate of fiscal deficit is 5.8% of GDP.

    2) Fiscal deficit for next year, i.e., 2024-25, is estimated at 5.1% of GDP.

    Other Key Announcements

    1) App. 25 crore people in the country got freedom from poverty. Further, govt. has provided financial assistance to app. 11.8 crore farmers under PM KISAN Yojana.

    2) 7 IITs, 16 IIITs, 7 IIMs, 15 AIIMS, and 390 Universities have been set up.

    3) FM emphasises focus on strengthening of domestic macro factors including Domestic Tourism and Infrastructure Investment.

    4) For the youth of the nation, Pradhan Mantri Mudra Yojana (PMMY) has sanctioned 43 crore loans amounting to INR 22.5 lakh crore.  A corpus of INR 1 lakh cr. will be established with a 50-year interest free loan. It will be for long-term financing or re-financing with low or nil interest rates.

    5) One crore households will get up to 300 units of electricity every month with rooftop solarisation.

    6) Girls in the age group of 9-14 will get free cervical cancer vaccination.

    7) The Defence budget is to be increased to INR 1,111,111 crore, which will be 3.4% of our country’s GDP.

    Market Reaction

    Market Reaction on Budget

    On Budget Day, the Market participants had a neutral reaction. The major indices, such as Nifty 50 and Sensex, remain flattish, and so do the major sectors. However, PSU banks and Auto stocks saw a minor rally. Let’s have a look at the top gainers and losers:

    Top Gainers

    Company NameSectorPercentage Change
    Maruti SuzukiAuto + 4.4%
    Bank of IndiaBanking + 4.1%
    Punjab National BankBanking + 3.88%

    Top Losers

    Company NameSectorPercentage Change
    Larsen and ToubroConstruction– 2.35%
    Ultratech CementManufacturing– 2.41%
    GrasimTextile– 2.13%

    India VIX

    There is one Index that saw the sharpest decline, i.e., India VIX. It is now trading at below 14, down almost 10%.  

    If you’re not familiar with the word VIX, it stands for Volatility Index. It represents the market perception for the next 30 days. The higher the VIX, the higher the volatility in the market. It is also known as the “Fear Index”.

    Historical Data

    Let’s see how markets reacted to the past budgets. As this was the Interim Budget, we have compiled data for the past Interim Budgets only and analysed how markets had reacted on those days. Have a look at the table below:          

    Interim Budget DateFinance MinisterSensexNifty Major Movement
    01-Feb-19Piyush Goyal+0.59%+0.58%Auto and Defence stocks were the biggest gainers.
    17-Feb-14P.Chidambaram+0.48%+0.41%Biggest Gainers: Tata Power +4.81%, Mahindra and Mahindra +2.83%
    16-Feb-09Pranab Mukherjee-3.42%-3.39%Realty and Hospitality stocks ended with heavy loss.
    03-Feb-04Jaswant Singh-1.31%-2.25%Almost all sectors were in red.

    Read Also: What To Expect In The Budget 2024?

    Conclusion

    The Union Interim Budget of 2024 addresses immediate challenges, prioritizing infrastructure related expenditures and current fiscal deficit. The government aims to propel the nation towards sustainable growth.

    As citizens like us and major stakeholders analyse the budget’s impact, the hope is that these strategic measures will lay the groundwork for a resilient and prosperous India.

    Frequently Asked Questions

    1. Is the 2024 budget an interim budget?

      Yes, the budget presented by the Finance Minister on 1 February 2024 was an interim budget before the General Elections.

    2. What are the major announcements in this Budget related to Individual Taxation?

      There were a lot of anticipations before the budget regarding the change in the tax slabs or increase in the Section 80C limit of the Income tax act. Unfortunately, no such announcement was made by the FM.

    3. How much capital the govt. allocated to Infrastructure spending in the budget?

      There were major announcements in the budget regarding the Infrastructure spending. The Govt. has increased the spending by 11.11% and allocated INR 11 lakh cr. for Capex.

    4. How did markets react on the budget day?

      Markets remained flattish on the budget day as market participants reacted neutrally.

    5. What is India VIX?

      India Volatility Index, also known as the “Fear Index” represents the market perception for the next 30 days. The higher the VIX, the higher the volatility in the market.

  • Mastering Your Finances: Beginner’s Guide To Tax Savings

    Mastering Your Finances: Beginner’s Guide To Tax Savings

    Mastering Your Finances Beginner's Guide To Tax Savings

    It is understandable that the word ‘Tax’ can bother every individual with an income. But worry not, today’s blog will break down how to save tax into bite-sized pieces!

    Generally, there are two types of taxes:

    1. Direct Tax – A tax which is levied on individuals / businesses and cannot be transferred to anyone. For example, income tax and property tax.
    2. Indirect Tax – A tax which is levied on goods and services and is charged from the final consumer. Businesses collect these taxes from consumers and give it to the Government. For example, GST, Excise duty, Customs duty, etc.

    Learning how to save on income tax is an important part of personal finance. Here are some basics of income tax and a beginner’s guide on how you can reduce it.

    What is Income Tax?

    Meaning of Income Tax

    Income tax is the tax imposed by the government on the income of individuals and businesses. It is a mandatory financial contribution in most countries.

    The Income Tax Act in India was enacted in 1961 and outlines the rules and regulations for calculating and collecting income tax from individuals. The objective of the act was to limit tax disparities and foster economic growth.

    Below listed are some key features to know about income tax:

    • In the case of individuals, salary, wages, interest income, rental income, and capital gains are taxed, whereas businesses are taxed on profits earned from business operations.
    • Your taxable income is calculated by subtracting certain deductions and exemptions from your total income, and then individuals or corporations are taxed as per their income tax slab.
    • Income tax is structured in a progressive manner, i.e., the higher income is subject to the higher taxes.
    • Income tax is one of the primary sources of revenue for the government and is utilised to fund public services such as education, infrastructure, etc.
    • Individuals are required to file income tax returns with the government annually. The filing procedure involves reporting income, deductions, and other financial information. There are various Income Tax Return (ITR) forms such as ITR-1, ITR-2, etc. We will learn about these forms in another blog.

    Heads of Income Tax

    Now, let us delve deeper and learn about the heads under which your income is taxable. Heads are categories into which your income is classified for tax purposes. There are five main heads of income:

    1. Income from Salary

    This head includes wages, bonuses, allowances, gratuity and other employment income. The employer generally deducts tax deducted at source or TDS from the employee’s salary. Under this head, exemptions that can be availed include:

    HRA (house rent allowance), conveyance allowance, leave travel allowance (LTA), and medical allowance.

    Do remember that salary income is taxable on a due basis or receipt basis, whichever is earlier.

    2. Income from House Property

    The rental income that an individual earns from letting out a property they own is taxable under the head income from house property. The property can either be a self-occupied property or deemed-to-be-let-out property. That is, if you own two properties the second one is considered as deemed-to-be-let-out, and if you have taken a loan to purchase or construct the property, you can claim a deduction for the interest paid on the loan.

    3. Income from Profits & Gains of Business or Profession

    This head comprises the profits earned from the business’s operations that involve the sale of goods, manufacturing, etc. and the income earned by professionals such as doctors, lawyers, etc. All expenses that include rent, salaries, and office expenses for business are deductible.

    4. Income from Capital Gains

    Income from capital gains refers to the profits earned from selling capital assets such as real estate, stocks, bonds, etc.

    There are two types of capital gains:

    • Long-term capital gains (LTCG) – LTCG is subject to change as per the asset class. For example, gains from the sale of equity shares held for more than one year are taxed at a rate of 10% above INR 1 lakh.
    • Short-term Capital Gain (STCG) – Similar to LTCG, these are also subject to change as per the asset class. For example – gains from the sale of debt held for a short duration of less than a year are taxed at the rate of 15%.

    5. Income from other sources

    Income from other sources, also known as the residuary head of the income, includes all income that does not fall in the other four main heads. Any income you receive that is not covered in the above-mentioned heads fits into ‘Income from other sources’. This generally includes interest income, dividends income, gifts, lottery, etc.

    Read Also: What is Non-Tax Revenue – Sources and Components

    How to save Tax?

    How to save taxes

    Knowing the heads, let us discuss some strategies individuals and businesses can implement to save tax.

    Tax Saving – Individuals

    1. Know your tax basics and understand the tax brackets as applicable to your income.
    2. Be careful about the tax implications of your investments because long-term capital gains often have lower tax rates as compared to short-term capital gains.
    3. Utilise deductions under Section 80(C) of the Income Tax Act and invest up to INR 1.5 lakh in financial instruments like PPF, ELSS funds, NPS, ULIPs, etc. These investments not only offer you fascinating returns but also tax benefits.
    1. Utilise the exemption provided for HRA (house rent allowance) if you receive HRA as a part of your salary. For example, if you live in a rented house, you can claim HRA to reduce your taxable income.
    2. Consider investing in tax-saving bonds that are issued by the government.
    3. You can also claim deductions for expenses like tuition fees for the education of your child, principal repayment on home loans, and contributions to certain retirement funds.
    4. Donate to charitable institutions since these donations qualify for deductions under section 80(G).
    5. Premiums paid for health insurance policies for your spouse, children, or oneself are eligible for deductions under section 80(D).
    6. Keep in mind to maintain all the essential documents, receipts, and proofs of your investments and expenses that you claim for deductions.

    Tax Saving – Businesses & Corporates

    1. Choosing a business structure (sole proprietorship, partnership, or LLC) can significantly affect the tax treatment.
    2. Businesses need to recognise the deductible expenses such as rent, utilities, office supplies, employee salaries, advertising, and other business-related expenses.
    3. Businesses can also claim deductions under Section 179 to expense the property purchase cost.
    4. It is suggested to provide employee benefits such as health insurance, retirement plans, etc. since these benefits provide tax advantages and aid in employees’ well-being and retention.
    5. Suppose the businesses have incurred losses in a given financial year. In that case, the net operating loss can be carried forward to offset the taxable income in other years, thereby providing the tax benefits.
    6. Deductible expenses for research and development (R&D) can reduce the taxable capital gains for businesses.
    7. Investing in tax-free infrastructure bonds issued by the government, such as REC & NHAI Bonds are qualified for deduction under section 54 EC of the Income Tax Act. Individuals can also claim deductions under section 54 EC by investing in tax-saving infrastructure bonds.
    1. Businesses can also claim tax deductions for machinery depreciation of up to 20% if acquiring new machinery in a year.

    Read Also: 5 Must-Read Best Swing Trading Books for Trader

    Conclusion

    Tax saving is not just about keeping your tax bill low; it is about making clever financial decisions to safeguard your present and future. Tax laws are complex to understand and are subject to changes. Do not forget to seek guidance from tax professionals for better understanding.

    Frequently Asked Questions (FAQs)

    1. When was the Income Tax Act of India was enacted?

      Income Tax Act of India was enacted in the year 1961.

    2. What are the 5 heads of the income tax in India?

      Income from Salary, Income from house property, Income from Profits and gains of Business or Profession, Income from capital gain, and Income from other sources.

    3. How can I reduce my taxable income?

      You can claim deductions for eligible expenses such as insurance premiums, home loan principal amount repayment, and investment in tax-saving financial instruments. Remember to consult with tax expert at the time of filing your tax return.

    4. Are there penalties for non-compliance with tax laws?

      Yes, there are certain penalties for non-compliance with tax laws. We will cover this topic in a separate blog.

    5. What is the maximum deduction limit in Section 80C?

      As of January 2023, you can claim deduction in Section 80C up to INR 1.5 lakh.

  • A Guide To Investing In Gold In India

    A Guide To Investing In Gold In India

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

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

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

    investing-in-gold

    Why Gold Matters?

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

    Did you know?

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

    Factors Affecting Gold Prices

    Factors affecting gold prices

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

    Mine production

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

    Gold Reserves

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

    Investment Demand

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

    Exchange Rates

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

    Read Also: Types of Investment in the Stock Market

    How to Invest in Gold in India

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

    Physical Gold

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

    Digital Gold

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

    Sovereign Gold Bonds (SGBs)

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

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

    Gold Mutual Funds

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

    Taxation of Gold in India

    Taxation of Gold

    Sovereign Gold Bonds

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

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

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

    Gold ETFs

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

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

    Physical Gold

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

    Risks of Investing in Gold

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

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

    Conclusion

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

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

    Frequently Asked Questions (FAQs)

    1. How much should I invest in Gold?

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

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

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

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

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

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

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

    5. Is TDS applicable to SGBs?

      No, TDS does not apply to SBGs.

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

  • A Guide To Fixed Deposits: Exploring Types And Interest Rates

    A Guide To Fixed Deposits: Exploring Types And Interest Rates

    If you are someone who is looking for hassle-free and low risk investment options, then you have come to the right place. We will uncover the Fixed Deposits – types and factors affecting them in this blog.

    What is a Fixed Deposit?

    Fixed deposit (FD) is a tenured deposit account provided by the Banks or NBFCs (Non-Banking Financial Companies) that provides investors with a higher interest rate than a regular savings account until the given maturity date. Most of the FDs offered by banks don’t allow premature withdrawal. However, some banks allow premature withdrawal under certain situations subject to penalties. Investment in fixed deposits is considered a risk-free investment.

    FDs Interest Rate

    Did you know?

    Your bank FD is secured up to 5 lakhs by DICGC* (Deposit Insurance and Credit Guarantee Corporation).

    DICGC is a specialised division of the Reserve Bank of India.

    Types of Fixed Deposits

    There are multiple types of Fixed Deposits available to invest:

    Types of FD

    Regular Fixed Deposits

    Regular FDs are the most basic fixed deposits. You deposit a lump sum for a fixed tenure, and earn an interest at a fixed rate. These are suitable for people who are not willing to take risks and looking for a safe and secure investment option.

    Senior Citizen Fixed Deposit

    It is a special type of fixed deposit account that offers 0.25% to 0.50% higher interest rate than regular FDs for individuals aged 60 and above. For a steady income, you have the option to receive the interest pay-out on a regular basis.

    Tax-saver Fixed Deposit

    Tax-saver fixed deposits allow you to save on taxes while you earn interest on your regular investments. It comes with a lock-in period of 5 years and provides you with a tax deduction of up to INR 1.5 lakh per year under Section 80 (C) of the Income Tax Act.

    Interest in tax-saver FD is paid out on regular intervals and is taxable as per your income tax slab. Tax-saver FDs can be a good option for individuals who want to save on taxes while earning a guaranteed return.

    Flexi Fixed Deposit

    A flexible fixed deposit is an account that offers you the features of both a savings account and an FD account. Unlike regular FDs, you can partially withdraw funds from your Flexi FD account without a penalty, but only up to a defined limit. However, this provision varies from bank to bank. You can also make additional deposits to your existing Flexi FD account to increase your returns. Flexi fixed deposits are suitable options for investors with short-term financial goals.

    Cumulative Fixed Deposit

    In a cumulative fixed deposit, the interest earned is not periodically paid out to the investor instead, it gets added to the principal amount. Also, the interest earned is compounded annually. Cumulative FDs offer a lump-sum payout on your maturity date.

    Non-Cumulative Fixed Deposits

    In a non-cumulative FD, interest is regularly paid out to the investor instead of being re-invested and compounded. This makes it a suitable option for investors who seek regular income from their investments.

    Corporate FD

    Corporations and Non-Banking Financial Companies (NBFCs) accumulate deposits for a fixed period from investors. These deposits, like Bank FDs, are collected at predetermined interest rates and are known as Corporate Deposits. Similar to Bank FDs, Corporate FDs offer varying investment periods and assured returns. Additionally, they offer higher interest rates as compared to Bank FDs.

    Interest rates in corporate FDs are primarily based on the credit quality of the issuer. The lower the rating, the higher the credit default risk; therefore, to compensate for this, they offer higher interest rates as compared to Corporate FDs having high credit ratings.

    Difference between Bank FD & Corporate FD      

    Difference between Corporate and Bank FD

    While investors can choose either of the FDs based on their needs, knowing the difference between the two is necessary to make an informed decision.

    Below are some key points based on which you can easily distinguish between Corporate FDs and Bank FDs.

    1. Unlike bank FDs, Corporate FDs offer a higher interest rate of 7% to 8.5%. Bank FDs offer lower interest rates depending upon the period chosen by the investor.
    2. It is a common practice among investors to withdraw their fixed deposit amount. If you do the same thing, keep in mind that corporate FDs levy additional charges on premature withdrawals, which is comparatively higher than regular Bank FDs.
    3. Corporate FDs are monitored by credit rating agencies like CRISIL, ICRA, etc., for compliance whereas Bank FDs are secured under the guidelines of the RBI.
    4. Bank FDs are a safer option to invest since they are backed by RBI while corporate FDs carry higher risk, and their safety depends upon the creditworthiness of the issuing company. Further, as discussed above, bank FDs are secured up to INR 5 lakhs by DICGC.

    Tips for maximising FD Returns

    1. Choose the right kind of FD depending on your financial needs and objectives.
    2. Compare the interest rates across banks and NBFCs to find the most competitive rates before you invest.
    3. If you do not need regular interest income, consider choosing cumulative FDs. As explained earlier, cumulative FDs provide you the benefit of compound interest, thus resulting in higher returns.
    4. Instead of investing your money in a single FD, consider creating a ladder by spreading your investments across FDs with different tenures and FDs mature, and reinvest them in other FDs with higher interest rates. This will help you maximise the returns generated.
    5. Be mindful of the penalties linked with the FDs before you withdraw your invested amount.
    6. Interest earned on FDs is taxable. Consider the tax implications and plan your investments to minimise your burden of the tax.

    Read Also: Why Debt Funds Are Better Than Fixed Deposits of Banks?

    Factors Affecting FD Interest Rates

    There are several factors that impact the Interest rate offered by Fixed Deposits. Some of the important factors are as follows:

    Inflation

      When inflation is high, banks generally offer high-interest rates on fixed deposits to compensate for the decline in the purchasing power of money.

      Repo Rate

        The repo rate is the rate at which the banks borrow money from the Reserve Bank of India (RBI). When the RBI increases the repo rate, the lending rates and fixed deposit rates of the banks also increase, and vice versa. In case of increasing interest rate scenario, consider investing in short-term investments.

        Tenure

          Generally, long-term FDs offer higher interest rates than short-term FDs because, in the case of long-term FDs, banks can use the FD amount invested with them for a longer horizon and can earn good returns on their investments.

          How to choose the right FD

          Choosing the right FD for your needs involves assessing several factors to ensure that you receive the best returns. Consider below mentioned points when choosing FD:

          1. Analyse your goals and compare the interest rates offered by different banks and NBFCs.
          2. Choose an investment tenure that best aligns with your financial goals.
          3. Go for FDs issued by recognised and well-established banks. In the case of Corporate FDs, check the credit rating of the issuer to ensure a margin of safety.

          Read Also: Best Alternatives To Fixed Deposits

          Conclusion

          Fixed deposits are considered a reliable investment option for investors who seek to preserve capital and want to earn returns at the same time. With assured returns and low risk, fixed deposits are a popular choice among investors of all ages.

          FAQs

          1. What is FD?

            Fixed deposit (FD) is a tenured deposit account provided by banks or NBFCs (non-banking financial companies), which provides investors with a fixed interest until the given maturity date.

          2. Are interest rates of FD similar in every bank?

            Interest rates of FDs vary from bank to bank. Generally, they are in a similar range.

          3. What is Repo Rate?

            The repo rate is the rate at which the banks borrow money from the RBI.

          4. Does the bank levy a penalty on pre-mature withdrawal of FDs?

            Yes, different banks have different penalty provisions.

          5. What is the lock-in period of Tax Saving FDs?

            Tax saving FDs come with a lock-in period of 5 years from the date of deposit.

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

        1. What To Expect In The Budget 2024?

          What To Expect In The Budget 2024?

          Last year, on 1 February 2023, i.e., on the budget day, the govt. made significant announcements such as increased spending on infrastructure, several aids for agriculture and entrepreneurs, increase in tax rebate, etc., for the FY 2023-24.

          Now, the budget for the FY 2024-25 is yet to be presented. Finance Minister Nirmala Sitharaman will present the interim budget 2024-25 on February 1, 2024.

          In this blog, we will discuss what to expect in the upcoming budget and past year trends.

          Budget

          What is Interim Budget?

          An interim budget is a temporary financial plan presented by the government when the general elections are forthcoming. Compared to the regular budget, the interim budget is less comprehensive and does not introduce many policy changes.

          An interim budget generally includes a review of the previous year’s budget, i.e., the government’s income and expenditure for the previous financial year and an estimate for the upcoming financial year.

          What to expect in the upcoming Budget?

          What to expect

          Finance Minister Nirmala Sitharaman will present the budget on 1 February; since it’s an interim budget before the general elections scheduled in May 2024, we are not expecting to have any major policy changes or announcements. The major focus will likely be maintaining macroeconomic stability and continuing existing schemes.

          However, there are some expectations about what can be included in the Budget 2024.

          Below are some key areas to watch:

          1. Under section 80D, the deduction limit for medical insurance premiums can be increased from INR 25,000 to INR 50,000 in the case of individuals and from INR 50,000 to INR 75,000 in the case of senior citizens.
          2. Currently, TDS deducted on property acquisitions is 1% if the value of the property exceeds INR 50 Lakhs. The government is planning to ease TDS compliance for people who wish to invest in real estate.
          3. Bangalore is to be considered a metro city for the exemption of the house rent allowance for its residents, which means 50% of basic pay will be determined as HRA. As of now, Bangalore is not classified as a metro city for HRA deduction, means only 40% of basic pay is determined as HRA.
          4. The government’s subsidy* bill can see a slight increase in the upcoming financial year 2024-25 because of the expansion of the central government’s free food scheme.

          *If you’re not familiar with the word, Subsidy is a kind of financial aid the government provides to individuals, businesses, or institutions. It can include reductions or exemptions from taxes, loans at lower interest rates, cash transfers or grants.

          1. We can also expect a new reverse charge-based mechanism to improve GST compliance. This will avoid monthly tax payment obligations by small business vendors since buyers who are large taxpayers with turnovers above INR 100 crore will directly pay the tax to the government.

          Read Also: Unveiling the Budget 2024: Key Takeaways

          A quick look at FY 2023-24 allocation of Budget.

          Quick look

          Some of the major sectors accounted for 53% of total estimated expenditure in the previous financial year budget:

          1. Defence – the budget of the defence sector was about INR 593,000 crore and accounted for over 13% of the total expenditure of the central government. In 2023-24, its allocation is estimated to be marginally lower than 2% of GDP.

          In the interim budget, we can expect a marginal rise of 1-2% for the defence sector.

          1. Railways – In the FY 2023-24, the government has allocated a budget of around INR 240,000 crore for capex in the railway sector.

          We can expect a rise of 2% for capex in the railway sector in the forthcoming FY 2024-25 budget.

          1. Road Transport & Highways – A budget of INR 270,000 crore was allocated to the road & transport ministry in the FY 2022-23, which was 25% higher than the revised estimates for 2022-23.

          This year, we can expect an estimated rise of 30% in the upcoming interim budget.

          1. Agriculture – India, an agricultural country, had an allocation of INR 125,000 crore in the FY 2023-24, which was a 5% increase over the revised estimates of 2022-23.

          A rise of 5-7% for agriculture and farmer’s welfare can be expected in this financial year.

          1. Communication – the Indian government primarily focused on this sector with a budget of INR 1 lakh crore in the previous financial year of 2023-24.

          This year we can expect a rise of 30-35% in budget allocation of this sector.

          Subsidies for FY 2023-24

          Expenditure on subsidies accounts for a major portion of the government’s total budget, with an amount of INR 400,000 crore.

          The three major types of subsidies provided by the government were food subsidies, petrol subsidies and fertiliser subsidies, other subsidies such as assistance provided to state agencies, agricultural produce, price support schemes, etc.

          Chances are likely that subsidies will remain unchanged for FY 2024-25 as well.

          Disinvestment Target

          Disinvestment is the process of the government reducing its ownership stake in the public sector undertakings (PSUs). It can be done through selling shares of the PSU, merging PSUs, and liquidating PSUs.

          The disinvestment target of the government for FY 2023-24 was INR 51,000 crore, we can expect a decline in upcoming interim budget as the target of the previous financial year is unachieved.

          Tax Regimes

          We can expect the tax regimes to remain unchanged for the FY 2024-25 since last year there was a major relief in the new tax regime. And if we analyse the previous budgets where the tax structure was changed, it is highly unlikely that this year will bring any major change in the tax structure.

          For your reference, have a look at the old & new tax regimes:

          Old Tax Regime

          Income SlabIncome Tax Rate
          Up to INR 2,50,000Nil
          INR 250,000 to INR 5,00,0005% (tax rebate is available u/s 87A upto 5 lakhs)
          INR 500,001 to INR 10,00,00020%
          More than INR 10,00,00030%

          New Tax Regime

          Income SlabIncome Tax Rate
          Up to INR 3,00,000Nil
          INR 3,00,001 to INR 6,00,0005% (tax rebate is available u/s 87A upto 7 lakhs)
          INR 600,001 to INR 9,00,00010% (tax rebate is available u/s 87A upto 7 lakhs)
          INR 9,00,001 to INR 12,00,00015%
          INR 12,00,001 to INR 15,00,00020%
          More than INR 15,00,00030%

          Read Also: Budget 2024-25: How Will New Tax Slabs Benefit The Middle Class?

          Market’s reaction on the Budget Day

          Previous year budget trends

          Budget announcement day is considered a big event for the general public and particularly for the market participants. The market’s reaction on the budget day is quite volatile, with a history of both positive and negative swings.

          Different sectors react differently to the budget depending on the announcements affecting them. Ultimately, the market’s reaction on the day of the budget can be unpredictable.

          It is interesting to note that the Budget Day reaction hasn’t been too extreme, with gains and losses not exceeding 2% in 8 out of the last 10 years. An evaluation of market history since 2013, which includes ten regular budgets and two interim budgets, indicates that the Union Budget has been a 50-50 show so far. In the year 2021, Sensex saw its best budget day gain since 1999 and ended 5% higher. We can say that it’s been a bit of a hit-or-miss situation.

          Further, experts suggest not to take directional positions before budget announcement day as the budget can significantly impact the market movement, and if the market moves in opposite direction to your trade, that will result in significant losses.

          Conclusion

          After a successful FY 2023-24, leading institutions like World Bank and RBI estimated India’s growth in FY2024 -25 to be between 6.3% to 6.4%. However, global economic uncertainty and geopolitical scenarios can influence the conclusions of Budget 2024.

          Given the elections, majority measures for farmers and middle-class families are probable. Also, investments in infrastructure to boost India’s manufacturing competitiveness can be one of the main agenda of the government in the upcoming budget.

          Frequently Asked Questions (FAQs)

          1. Who presents the budget?

            Finance Minister of India.

          2. Are markets more volatile near the budget?

            Generally, markets are more volatile near the budget day as different investors have different expectations. However, this increased volatility cools off after the announcement of the budget.

          3. Which day will the government present the budget for FY 24-25?

            1st February, 2024.

          4. What is subsidy?

            A subsidy is a financial aid that the government provides to individuals, businesses, or institutions.

          5. Will the budget for 2024 affect taxes?

            Tax changes are possible, but major reforms are unlikely in the interim budget. However, we can expect some new tax exemptions.

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

          2. Open Free Demat Account

          Join Pocketful Now

          You have successfully subscribed to the newsletter

          There was an error while trying to send your request. Please try again.

          Pocketful blog will use the information you provide on this form to be in touch with you and to provide updates and marketing.