Are you unable to choose between putting your money into Non-Convertible Debentures (NCDs) and Fixed Deposits (FDs)? You’re not alone! Both options are popular among investors looking for safety and consistent returns, but they both come with their own sets of pros and cons. In today’s blog, we’re comparing NCDs with FDs.
Fixed Deposits – An Overview
It’s a well-known conventional investing choice for risk-averse investors. Fixed deposits are financial instruments offered to the general public by banks and non-banking financial organizations (NBFCs) that allow them to deposit money for a predetermined amount of time and receive a guaranteed fixed return. Both cumulative and non-cumulative options are available with the fixed deposit, giving investors the choice of receiving interest payments periodically or all at once when the fixed deposit matures.
Features of Fixed Deposits
1. The length of a fixed deposit may usually be chosen with flexibility; it can be anywhere from seven days to ten years.
2. Many banks provide an automatic renewal option that lets investors reinvest their money without having to go through any extra steps.
3. Fixed deposits often provide flexibility in the amount invested, with most banks allowing a minimum investment of INR 5000.
4. Fixed deposits are extremely low-risk investing options since they provide a guaranteed return.
5. Senior citizens benefit further from fixed deposit investments by earning interest rates higher than standard rates.
Debt instruments, known as NCDs, are issued by corporate entities to raise long-term capital from the general public. Investing in debentures entails lending money to corporate entities in exchange for a fixed interest rate for a predetermined length of time. The principal amount of the loan is repaid by the company on the maturity date.
Two forms of debentures exist: convertible debentures, which can be converted into equity shares of the company after a specific length of time, and non-convertible debentures, which cannot be converted into equity shares. NCDs are issued in the primary market initially, but they can also be traded in the secondary market, offering investors greater liquidity.
Features of NCDs
1. NCDs have a fixed interest rate that is set at the time of issue by the issuing firm.
2. An investor will get consistent, recurring income from NCDs.
3. NCDs are issued for a particular period, after which the principal amount is repaid.
4. Purchasing NCDs entitles you to become a creditor of the business, allowing you to make claims against its assets in the event of its insolvency.
5. Due to the high risk associated with investment in corporate houses, these NCDs are rated by the credit rating agencies based on the creditworthiness of the issuing company.
Difference between NCD and Fixed Deposit
We’ll now explain the distinction between a fixed deposit and an NCD.
Interest Rate – Fixed deposit interest rates typically range from 4 to 7% annually, whereas NCD interest rates often range from 8 to 10%.
Issuer – Corporations issue NCDs to generate capital, whereas banks or other financial organizations issue fixed deposits.
Risk – NCDs possess higher risk as private business houses issue them. As some business houses have low credibility, investing in their NCDs can put your money at higher risk. On the other hand, FDs are issued by banks and other financial institutions that the Reserve Bank of India regulates.
Liquidity – Investment in NCDs offers higher liquidity than Fixed Deposits as they can be traded in the secondary market. Still, no such benefit is available in fixed deposits, although a premature withdrawal option comes with a penalty.
Taxation – NCDs held by an investor in demat are exempted from tax deducted at source while keeping the NCD in physical form attracts TDS if the annual payout is more than 5000 INR. Interest earned from a fixed deposit is fully taxable as per your tax slab if it is above 40000 INR (50000 INR in case of a senior citizen) in a financial year.
Credit Rating – The rating of NCDs by credit rating agencies is mandatory, while the fixed deposits issued by the banks are not required to get rated by any agency; however, corporate fixed deposits issued by non-banking financial companies are required to get the rating from any credit rating agency.
Interest Rate Risk – As NCDs are tradable in the secondary market, their price may vary based on interest rates prevailing in the economy, while fixed deposits don’t have any such kind of risk.
Safety – Assets of the company generally back the issuance of NCDs while the fixed deposit issued by the bank is insured against the bank’s insolvency up to 5 lakh INR.
Investment in fixed deposit is suitable for the investor with lower risk-taking ability and is happy with a lesser return on their investment. At the same time, NCDs can be opted for by investors looking to earn some extra return and can take additional risk for that. Overall, the above comparison shows the features of both fixed deposits and NCDs.
On a short note, investors must consider their risk profile, investment goal & objective before deciding between fixed deposits and NCDs.
Frequently Asked Questions (FAQs)
Can I withdraw my investment from a fixed deposit before maturity?
Yes, you can withdraw your investment before maturity, but you need to pay some penalty to the issuing authority.
Can I sell NCDs in the secondary market?
Yes, after NCDs are issued in the primary market, they are listed in the secondary market like any other securities.
What is the shortest and longest duration for which an NCD can be issued?
NCDs cannot be issued for less than 90 days and more than 20 years.
What is the minimum and maximum duration for which a fixed deposit can be issued?
The fixed deposit can be issued for a period ranging from 7 days to 10 years.
Is investment in NCD better than investment in fixed deposits?
NCDs generally carry higher risk as compared to bank fixed deposits but offer higher returns; hence, it is suitable for only those investors who can take risks for higher returns.
Did you know that during the financial year 2023, the Reserve Bank of India (RBI) registered bank frauds exceeding INR 30,000 Cr in value? Nowadays, financial scams have become more prevalent, making it difficult to distinguish fraudulent activities from genuine ones.
As per the reports of Statista in 2023, the Reserve Bank of India reported 9,103 financial scams across India. In this blog, we will understand how to avoid scams with the aim of increasing awareness.
Prevalence of Financial Scams in India
In 2023, India’s financial sector witnessed a surge in sophisticated scams and frauds that exploit evolving technologies and capitalize on unsuspecting individuals. Here are some facts pertaining to the year of 2023:
The national cyber crime helpline receives around 50,000 Calls every day, totalling over 13.1 lakh complaints in the entire year.
During investment and due process, a total of 2.95 lakh fake SIM cards, 46,000 devices, 2,810 websites, and 595 mobile applications were blocked.
Approx. 35% of the total scams focussed around customer service and KYC.
Approx. 24% of the total scams focussed on sextortion.
Approx. 22% of the total scams were focused on online bookings and QR codes.
While scams are spread out in the entire country, some states witnessed more than others. Data for some of the individual states (& UTs) are as follows:
Uttarakhand – 243 cyber crimes per capita
Gujarat – 226 cyber crimes per capita
Haryana – 381 cyber crimes per capita
Telangana – 261 cyber crimes per capita
Delhi – 755 cyber crimes per capita
It is an undisputed fact that the country is facing an epidemic of scams and frauds. Hence, we must know about the varied types of scams happening around the country.
UPI Scam
The advent of UPI transactions marked an important milestone in the digital era of payments in India. However, fraudsters and scammers are using different social media platforms like WhatsApp to gain access to a number of individuals and defraud them via various means, such as claiming to be bank representatives, NGOs, etc. They feed on fear of the victims and compel them to adhere to the fraudsters’ demands.
In the year 22-23, reported UPI fraud cases exceeded 95,000, a notable increase from the 84,000 cases reported in 2021–2022, as per the Ministry of Finance.
Shockingly, 55% of all digital payment frauds in India are associated with UPI transactions.
According to the reports, it has been witnessed that 50% of these scams have an average ticket size of less than Rs 10,000.
In 2023, UPI fraud, bank fraud, and email scams resulted in a staggering financial loss exceeding INR 200 cr.
QR code scam alert
Nowadays, QR code scams are on the rise in India, with fraudsters employing deceptive tactics to lure victims into scanning fraudulent QR codes, resulting in the direct theft of funds from their bank accounts.
As per police statistics, 41% of the 50,000 reported cybercrime incidents in Bangalore revolved around QR codes.
Part-time job scams
Fraudsters are using social media to target their audiences with promises of easy part-time work and handsome salaries.
As per a report in 2023, Delhi police addressed 467 complaints about internet fraudsters advertising part-time work—an alarming increase from the 32 complaints reported in 2020.
Courier Scam
These kinds of scammers are targeting young audiences and claiming that courier parcels, allegedly containing drugs or other illegal items, are being sent in their names to foreign countries.
Bengaluru police addressed around 163 such courier reports in 2023, and the cumulative financial loss from these scams was more than Rs 5 cr.
Malware warning frauds
Fraudsters are increasing in delusive tactics, like fake customer support, cashback links, or emails, to convince unsuspecting consumers to install malware, screen mirroring, or remote access apps.
Tech support scams are becoming a worrying factor where 7 out of 10 consumers fall victim to such schemes.
Protecting yourself from financial scams and fraud in India requires awareness and caution. Frauds and scams exist in different forms: phishing, emails, and phone calls. Some steps to protect yourself are stated below.
Educate yourself
Knowledge is a great way to defend yourself from scams and frauds. Stay informed and updated about scams and fraud. Government bodies provide information about current scams and how to avoid them.
Verify PIN
Do not share your PIN or any other personal information with anyone. Reputed organizations will not ask for your PIN.
Two-step -verification
It is essential to enable the two-step verification factor. This will help you to give an extra layer of security.
Use strong passwords
Create strong and unique passwords for your files, including social media sites, banking files, etc. Always use a combination of letters, numbers, and special characters, and avoid using the same passwords for multiple portals.
Beware of fraud phone calls
Avoid picking up calls from suspecting numbers and do not provide any confidential details on such calls, even if they claim to be representatives of corporations.
Ask help
If you become the victim of a scam, then consult with the police and legal professionals to seek resolution as quickly as possible.
Financial Scams Resolution
In a recent interview, the Director General of Police (DGP) of Uttarakhand, Ashok Kumar, spoke on cyber crimes in India. He explained a few preventive steps to minimize cyber crimes, fraud, and scams. The pointers are stated below:
Notify your bank’s customer service immediately, report your incident to them, and ask for help to cease your bank details.
File a complaint with NCRP (National Cyber Crime Reporting Portal).
Contact your local police station and also file an FIR.
In conclusion, it is crucial to stay informed and cautious to avoid falling victim to scams and fraud in India. By educating themselves, verifying identities, enabling two-step verification, using strong passwords, being wary of fraudulent phone calls, staying updated, and seeking help when needed, individuals can protect themselves from financial scams and fraud.
Frequently Asked Questions (FAQs)
What is Fraud?
It is defined as the false representation of facts or providing false statements to another party for the specific purpose of gaining something that may not have been supplied without the deception.
What are two basic types of Fraud?
The courts classify fraud under two major types: criminal and civil.
What is an example of a fraud scheme?
Common frauds include Ponzi schemes, phoney job offers, false billings, bogus investment opportunities, etc.
Why is it important to understand fraud?
Fraudsters have evolved their methodology in recent times. Therefore, we need to stay aware of their movements so that we can protect ourselves from getting defrauded.
If you have accumulated significant wealth during your career and wish to seek professional help in managing the funds, then Portfolio Management Services (PMS) can prove helpful to you.
Today’s blog will focus on individuals who wish to gain more profound knowledge of Portfolio Management Services (PMS).
Portfolio Management Services Overview
Portfolio management services, or PMS, is a financial service offered by financial institutions. This service primarily focuses on investing investors’ funds with a larger portfolio than the average individual. Such investors can invest their money in this service, and a team of qualified fund managers will allocate it to various asset classes based on their investment goals.
Typically, investors allocate a portion of their portfolio to equity but cannot manage it effectively due to a lack of professional knowledge. This is where PMS comes in; with a minimum investment of 50 Lakhs, your entire investment amount will be given to a portfolio management company, and their team of seasoned professionals will allocate it among various asset classes based on market and economic conditions. In exchange, they will charge a fee for their services.
The first announcement of the SEBI regulation for PMS dates back to 1993. All Portfolio Management Companies are required to adhere to the compliance standards established by SEBI.
Minimum Investment Amount
Over time, PMS’s minimum investment amount has undergone modifications. The PMS legislation was first established in 1993, with a minimum investment value of 5 lakh. In 2012, the minimum investment amount was raised to 25 lakh; in November 2019, it was further increased to 50 lakh.
Features of PMS
1. Investment in PMS provides customized solutions as per investors’ objectives.
2. The fund managers have vast experience in managing funds
3. PMS fund managers generally diversify the investment across different asset classes, ultimately lowering the risk.
4. Reports like transactions, profit and loss, etc., will be sent periodically to investors, and they can also check the same on the online platform provided by PMS companies.
5. PMS is a product with a minimum ticket value of 50 lakhs, which is generally suitable for HNI investors.
A financial institution offers a variety of portfolio management services, including
1. Discretionary Portfolio Management– The portfolio managers make all investment-related decisions under this category of portfolio management services on the client’s behalf. Before making any investments, the fund management is at liberty and is not required to confer with the investor. The majority of the clients choose this type of service.
2. Non-discretionary Portfolio Management– The fund manager must obtain the client’s confirmation before investing in this kind of service. The client receives financial advice from PMS’s investment team but ultimately decides whether or not to act on the advice.
3. Advisory Services – In this arrangement, a fund manager will merely offer advice to investors on various asset classes; the investor will decide whether to follow the fund manager’s recommendation.
4. Active Portfolio Management – The ultimate goal of active portfolio management is to maximize investor return, which is accomplished by actively allocating funds to various asset classes. The fund management actively chooses the allocation of funds and where to invest them.
5. Passive Portfolio Management – The fund manager uses this investment management technique to allocate the funds to stocks that track indexes and increase steadily over time.
Charges of PMS
The charges of PMS can be classified into 3 different categories-
Fixed Charges
This is what every PMS charges as its main fee. This is an ongoing charge that depends on the average value of your investment and varies from 1% to 3%. The fee is due regardless of the fund manager’s performance ratings. This is the minimum amount that must be paid to the PMS firm regardless of the fund’s performance.
Below is the illustrative table of the same.
Fees
2%
Investment Amount
50,00,000
Return on Portfolio
20%
Profit
10,00,000
Portfolio Value at the year-end
60,00,000
Fixed Charges 2%
1,20,000
Net Value of Portfolio after Fees Adjustment
58,80,000
Performance Based
The fund’s returns are used to determine these fees. The fund management will charge a fee based on the percentage of profit made above the minimum rate, also referred to as the hurdle rate.
We can better understand this by using an example. For example, if the hurdle rate is 8% the profit sharing ratio is 20% above the hurdle rate, and your investment of Rs. 50 lakh yields a 20% return on your portfolio, your total profit will be Rs. 10 lakh, of which Rs. 4 lakh is the minimum profit that needs to be delivered. The company will then charge a fee of 20% of the remaining profit of 6 lakhs.
Below is the illustrative table for the same.
Fees
Profit Sharing – 20% above 8% Hurdle Rate
Investment Amount
50,00,000
Return on Portfolio
20%
Profit
10,00,000
Value of Portfolio at the end of the year
60,00,000
Hurdle Rate 8%
4,00,000
Profit over hurdle rate
6,00,000
Profit Sharing 20% of 6,00,000
1,20,000
Net Value of Portfolio after Adjustment
58,80,000
Hybrid Fee Structure
This fee schedule combines a profit-sharing concept with a fixed fee. In this instance, the hurdle rate is typically higher than in a performance fee-based approach, and the fixed charge rate will be lower than in a fixed charge model. This is intended for PMS managers who wish to profit from both fee structures.
Taxation
Equity Taxation – If a portfolio is heavily weighted toward the equities asset class, the tax rate on the profit amount will be 15% if the holdings are sold within a year, and the appropriate rate will be 10% above 1 lakh if the holdings are sold after the year.
Non-Equity Taxation – The portfolio will be considered a short-term gain and included in the investor’s income at their slab rate if it is sold within three years and does not concentrate in the equity asset class. If the units are sold after three years, they will be considered a long-term gain and subject to a 20% tax with indexation benefit.
Dividend Income –All dividend income earned on the investment will be included in the investor’s income and taxable as per their tax slab.
Exit Load – If you withdraw your money before a predetermined amount of time, PMS firms typically charge an exit load, ranging between 1 to 3%.
Risks
The risks investors should consider before investing in PMS are listed below.
1. Performance of Fund Manager – Evaluating the fund manager’s performance before investing is essential. Looking for a fund manager with a stable track record is usually advisable.
2. Market Risk – Due to the investment’s significant exposure to the equities asset class, there is a greater chance of losses and a rise in portfolio volatility.
3. Liquidity Risk – Because certain illiquid securities are difficult to sell, investing in them may affect your portfolio liquidity.
4. Regulatory Risk – As previously stated, the minimum ticket size for investing in PMS has increased from 25 lakhs to 50 lakhs in 2019. Future legislative changes of this nature could affect PMS’s investment strategies and tax consequences.
We’ve gone over the benefits and risks of investing in PMS with you; this service is for high-net-worth individuals (HNIs) who understand the risks involved in this kind of investing. Suppose an investor is willing to assume the risk of this product and is seeking a better return. In that case, they should consider all the important characteristics before making a decision.
Before making any investing decisions, we advise you to speak with your financial advisor to better understand your ability to accept risk.
Frequently Asked Questions (FAQs)
Is PMS investment permissible for NRIs?
Yes, You can invest in PMS as an NRI.
How do I access my PMS portfolio valuation?
In addition to sending clients statements regularly, PMS businesses offer their clients an online portal through which they can monitor their assets, transaction statements, and profit and loss statements.
How can you evaluate PMS performance before purchasing?
Before purchasing PMS, you can evaluate its performance by comparing its returns to the appropriate benchmark and examining the consistency of its returns over an extended duration.
Does PMS have a lock-in period?
PMS offers the flexibility of no lock-in period. However, redeeming your investment before the allotted time will incur an exit load.
Is there a guaranteed return in PMS?
No, PMS company cannot provide investors with a guaranteed rate of return.
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.
Characteristics of Bonds
Issuer – Bonds may be issued by both private and public institutions, including business houses, state and federal governments, and municipalities.
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.
Coupon Rate – It is the interest (on face value) paid out periodically to the investor.
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.
Issuance of Bonds – Bonds are initially issued on the primary market and subsequently traded on the secondary market.
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.
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
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.
The bond indenture is then circulated in the primary market to accept applications from investors.
The borrower then regularly pays the coupon amount to the bondholder, and the borrower can default only in case of financial turmoil.
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.
The borrower then regularly pays the coupon amount to the bondholder, and only in case of financial turmoil can the borrower default.
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
Regular Income – Bond investments provide consistent income because the bond issuer is expected to make coupon payments regularly.
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.
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.
Capital Preservation – If the company becomes insolvent, bondholders have a higher probability of receiving their principal amount than equity shareholders.
Disadvantages of investing in bonds
Credit Risk – The bondholder must bear the risk of not receiving their payment obligations in the case of default.
Lower Return – Historically, in comparison to equity investing, bonds offer a lower rate of return.
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.
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
Interest Rate – Interest rates and bond prices are inversely correlated. This implies that bond prices may decrease when interest rates rise, and vice versa.
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.
Credit Quality – The price of high credit-rated bonds will rise due to investor demand outpacing that of lower-rated bonds.
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
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.
Liquidity of Bonds – An investor should consider bonds that provide greater liquidity, which generally exists in credit worthy issues.
Investment Goal – When choosing which bond to invest in, you should consider your investment horizon, risk tolerance, and investing goal.
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.
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.
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:
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.
Investing in such a fund offers the investor an opportunity to gain exposure to the sector without analysing each stock within the industry.
Sectoral funds can be used for tactical portfolio diversification, allowing you to capitalise on short-term trends and sector rotation.
Risks
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.
These funds are inherently more volatile than diversified funds. Therefore, sharp swings in prices/NAVs are more likely to occur.
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.
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.
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.
The table below shows the performance of different sectoral funds in the past 4 years relative to their benchmark.
Technology Sector
Scheme
2023
2022
2021
2020
ABSL Digital India Regular
35.75
-21.64
70.47
59.03
SBI Technology Opportunities Regular
24.82
-15.46
66.43
47.45
ICICI Prudential Technology Fund Regular
27.45
-23.22
75.74
70.59
S&P BSE IT TRI
28.28
-22.70
58.45
60.05
(S&P BSE IT TRI is the benchmark index for technology funds)
Pharma Sector
Scheme
2023
2022
2021
2020
Nippon India Pharma Fund Regular
39.15
-9.9
23.93
66.44
SBI HEALTHCARE Opportunities Regular
38.24
-6.02
20.15
65.83
ABSL Pharma and Healthcare Regular
37.67
-12.68
19.54
53.84
S&P BSE Healthcare TRI
37.97
-11.5
21.54
62.61
(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.
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.
S.NO.
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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.
Are sectoral funds right for me?
The answer depends on your risk tolerance, investment goals, and knowledge of the chosen sector.
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.
Can I time the market with sectoral funds?
Predicting market trends can be tricky. Therefore, performing self analysis is of utmost importance.
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!
Are you planning to build your career in financial markets? Well, if that is the case that you need to be certified. This is not just to make sure that you know the markets, but also to ensure that people can trust you.
This is where you need to know the NISM certificate benefits. Designed to help you start your career in the field of finance, these are perfect. But the question is what is NISM certification, and who should actually complete these?
In this blog, we will break everything down in a simple way. You will learn the NISM full form to the major NISM certification benefits that can help you with your career. So, let us get started without further delay.
What Is NISM?
The National Institute of Securities Markets is known as NISM. It is an educational institution. It was established by SEBI. The main aim of the NISM is:
To ensure right practices in the financial markets.
Guide people on the processes and help them gain expertise.
Offering certification to practice in the market.
Build trust and transparency.
Manage working and ensure no inefficiencies are there.
NISM conducts certification exams. These are the exams that are mainly used to teach and allow people to trade or help others trade in various assets. These include stock markets, mutual funds, and investment advisory services.
A NISM certificate course confirms that a professional meets SEBI’s regulatory standards. This brings us to the main NISM certification benefits, which are:
Better credibility
Role eligibility
Stronger career building
Eligibility for NISM Certification
NISM certification is designed to be accessible and practical for anyone interested in the Indian securities market. There are no complex entry barriers, which makes it suitable for both beginners and working professionals.
There is no minimum educational qualification required for most NISM exams.
There is no age limit, so students, fresh graduates, and experienced professionals can apply.
Market professionals, distributors, advisers, and even individuals with a general interest in finance are eligible.
The only requirement is a basic understanding of financial markets relevant to the chosen exam.
This open eligibility structure allows NISM certifications to support learning, compliance, and career growth at different stages.
NISM Certification Benefits
NISM certification offers practical value for anyone looking to build or grow a career in the securities market. It is not just about clearing an exam, but about meeting regulatory expectations and gaining professional credibility.
1. Regulatory Eligibility for Market Roles
Many positions in mutual funds, stockbroking, investment advisory, and portfolio management require a valid NISM certificate. Clearing the exam ensures you meet SEBI’s eligibility norms and can legally perform specific market functions.
2. Strong Foundation in Financial Markets
NISM exams focus on core concepts. These include topics such as market structure, products, compliance, and ethics. This helps you understand how the securities market works in practice. The focus is not on the theory alone, but also on how the market actually works.
3. Improved Career Opportunities
Holding a NISM certificate increases your chances of getting hired by AMCs, brokerage firms, banks, and advisory companies. Employers prefer certified professionals who already meet regulatory standards.
4. Professional Credibility and Trust
A NISM certification signals seriousness and discipline. It shows that you know about the market. It helps you to build credibility and ensure that people trust you. This is also an assurance for professional conduct.
5. Flexibility for Career Growth
NISM certifications are role-based and renewable. This allows you to upgrade your qualifications as your career progresses or as you move into more advanced roles.
These NISM certification benefits make the certification relevant at every stage of a financial services career.
NISM Courses List 2026
NISM offers a wide range of certification exams in 2026. Each of these courses is aimed towards financial markets. Some of the courses focus on the stock market, while others might focus on mutual funds. It is based on your personal aim that you select the course for yourself.
The NISM Certificate Exam list is as below:
S. No
NISM Certification Examination
Mandating Authority
Duration (mins)
Max Marks
Pass Mark (%)
Negative Marks (%)
Certificate Validity (Years)
Fees (₹)
1
NISM-Series-I: Currency Derivatives
SEBI
120
100
60
25
3
1,500
2
NISM-Series-II-A: Registrars to an Issue and Share Transfer Agents – Corporate
SEBI
120
100
50
NA
3
1,500
3
NISM-Series-II-B: Registrars to an Issue and Share Transfer Agents – Mutual Fund
NISM-Series-XXIV: AML and CFT Provisions in Securities Markets
Non-Mandatory
60
50
50
NA
3
885
Subjects Covered in NISM Certification
Before looking at roles or career paths, it helps to know what you actually study in a NISM exam. A NISM certificate course is built around real market knowledge. The focus is on how things work in practice, not academic theory.
1. Basics of Financial Markets
This subject explains how Indian financial markets function in real life. You learn about equities, debt instruments, derivatives, and the role of stock exchanges. This helps you to understand the market well.
2. Mutual Funds and Investment Products
Many NISM exams spend a lot of time on mutual funds and investment products. You learn how different products are structured. This allows you to guide the investors and make sure that you help them in reaching their goals.
3. Regulations and SEBI Guidelines
Regulation is a core part of every NISM exam. You study SEBI rules, compliance requirements, and the responsibilities expected from market professionals. This subject explains the regulatory purpose behind what is NISM certification.
4. Risk, Return, and Investor Protection
This subject connects risk with returns in a practical way. It also covers investor rights, grievance redressal, and fair practices that professionals must follow while dealing with clients.
5. Market Operations and Processes
You will learn about the market and how the transactions work. This information is key to ensuring that all the trades are happening in the right manner. Also, this acts as a point of guidance for you to help your clients with better trades.
6. Ethics and Professional Conduct
NISM places strong emphasis on ethics. This subject focuses on responsible behaviour. This is where you would know what to tell and how. This is important to avoid sharing wrong information and mis-selling.
Where to Find NISM Study Material and Information
Now, if you are planning to get the NISM certificate, then you must know where to get the material. You must know the sources to find the information. Some of the sources which you can use to find the information on the NISM courses are:
1. Official NISM Website
The first and most reliable source is the official NISM portal. When you register here to complete a course, you will be able to access the materials as well. This will allow you to not just learn but gain better and factual insights.
2. Workbook Provided During Registration
For most exams, NISM provides a downloadable workbook after successful registration. This is the primary study material and is usually enough if you read it properly and revise it more than once.
3. Practice Questions on NISM Portal
NISM also offers sample questions and mock-style practice tests on its website. You can use these to ensure that you practise well and know the previous formats.
4. SEBI Circulars and Guidelines
Some exams, especially compliance and advisory ones, require understanding SEBI regulations. If you go through the rulebooks, you will gain the insights needed.
5. Simple Revision Notes and Self-Made Summaries
Many candidates rely on their own short notes while revising. This works well because this helps you to revise and learn in a systematic manner.
In most cases, official NISM material plus regular practice is enough. You do not need coaching unless you are completely new to financial markets or short on preparation time.
Career Options After NISM Certification
Once you clear a NISM exam, you do not automatically land a job. What it really gives you is eligibility. It allows you to work in roles where certification is mandatory and trust matters.
1. Mutual Fund Distribution
This is one of the most common paths after NISM certification. You help investors understand mutual funds and guide them based on their goals. It suits people who enjoy planning and building long-term relationships with the clients.
2. Investment Advisory Support
Some roles involve supporting investment advisers rather than directly advising clients. This includes basic positions but they are quite important. You will analyze the portfolios and companies which will make the difference.
3. Research and Analysis Roles
If you like studying companies and markets, research roles are a natural fit. The work involves analysing data, tracking trends, and supporting investment decisions. It is more desk-based and less client-facing.
4. Trading and Market Operations
These roles focus on how trades are placed, settled, and recorded. It includes derivatives, depository operations, and risk checks. This suits people who prefer structured work and defined processes.
5. Compliance and Back-Office Roles
Every financial firm needs people to handle compliance and reporting. NISM certification is often required here. The work is detail-oriented and suits those who prefer accuracy over sales.
6. Wealth and Portfolio Support
With experience, some professionals move into wealth-related roles. This includes tracking investments and helping the HNIs with their portfolios. This is quite an important and growing role.
Conclusion
NISM certification is not about chasing a certificate. It is about understanding how Indian financial markets actually work and becoming eligible for regulated roles. Whether you want to work with clients, support advisory teams, handle research, or manage compliance, NISM gives you a valid entry point. What you build after that depends on your effort, learning, and experience. Implement your NISM skills in real markets with Pocketful—easy to use, smart, and low brokerage.
S.NO.
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NISM certification is used to become eligible for SEBI-regulated roles in financial markets such as mutual funds, advisory, research, trading, and compliance.
Is NISM certification mandatory for jobs in finance?
It is mandatory for many roles like mutual fund distributors, investment advisers, and research analysts. For other roles, it improves credibility and job readiness.
Can beginners appear for NISM exams?
Yes. There is no minimum educational qualification or age limit for most NISM exams. Beginners can start with foundation-level certifications.
How long is a NISM certificate valid?
Most NISM certificates are valid for 3 years. After that, you would need to gain a new certification either by training or exam.
Does NISM certification guarantee a job?
No. NISM certification does not guarantee a job. It helps you to gain knowledge and skills. But getting a job is not confirmed.
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.
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.
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.
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.
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.
Additionally, value investors often adopt a contrarian approach, which can lead to significant gains if markets correct their mispricing.
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
The success of value investing hinges on finding market inefficiencies. If the market is truly efficient, recognising undervalued stocks might be difficult.
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.
Going against the market sentiment and buying unpopular stocks can be emotionally challenging, and investors need to stick to their convictions.
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.
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.
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.
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
Do not choose cheap stocks, look for quality companies with strong financials that are trading at a discount.
Understand and analyse the company’s business model and competitive landscape before investing.
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
Value investing seeks stocks currently trading below their intrinsic value, whereas growth investing seeks stocks with high growth potential, irrespective of the current valuation.
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.
The former is used for longer time-frames and needs patience, while the latter can be used in medium timeframes.
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
Grasp the core principles and understand the philosophy of value investing along with the metrics used to identify them.
Make financial statements a friend and analyse the industry trends carefully.
Beginnersshould avoid making impulsive decisions and should stick to their investment goals.
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)
Why should I consider value investing?
Value investing focuses on strong fundamentals and protects from market downtrends.
Isn’t the concept of value investing outdated in the fast-paced market?
No, because value investing helps you discover undervalued gems.
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.
How do I get started with value investing?
Practice fundamental analysis and gradually add individual stocks to your portfolio while analysing their trends.
Is value investing right for me?
It depends on your specific risk tolerance and investment goals.
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
The company should be a Small and Medium Enterprise as defined by the Ministry of Micro, Small and Medium Enterprises (MSME).
The company should have a minimum post-issue paid-up capital of INR 1 crore and a maximum of INR 25 crore.
The company should have a good track record of profits for the last 3 years.
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
The company should have a minimum post-issue-paid-up capital of INR 10 crore.
The company should have a good financial track record with profitable business operations.
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.
The company evaluates its willingness to go public and considers factors like financial statements, growth potential, regulatory compliance and market conditions
The company needs to partner with experienced advisors that include merchant/investment bankers, lawyers, chartered accountants and public relations specialists.
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.
The company starts a series of presentations for investors showing its value proposition and growth outlook which is also known as a roadshow.
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.
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.
Angel investors or wealthy investors who invest in companies at their nascent stage.
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.
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.
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.
Clearly express the company’s business model because the investor seeks companies with a compelling story and clear path to future growth.
Ensure compliance with all relevant legal and regulatory requirements including corporate governance standards, working with legal advisors, etc.
Investors evaluate the leadership team’s track record. Hence, the companies should have a capable and experienced management team.
Develop a comprehensive investor relations strategy which includes communication plans, investor education and fostering positive relationships with the investment committee.
Choose underwriters with good reputations and expertise. Underwriters play an important role in smoothing the IPO procedure.
Conduct a thorough risk analysis and disclose the potential risks to the investors. Transparent communication about risks will validate a commitment.
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)
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.
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.
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.
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.
What happens to the money raised in an IPO?
The company may use the fund for debt repayment, capital expenditure, or research and development.
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:
Infrastructure
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.
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
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 Name
Sector
Percentage Change
Maruti Suzuki
Auto
+ 4.4%
Bank of India
Banking
+ 4.1%
Punjab National Bank
Banking
+ 3.88%
Top Losers
Company Name
Sector
Percentage Change
Larsen and Toubro
Construction
– 2.35%
Ultratech Cement
Manufacturing
– 2.41%
Grasim
Textile
– 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 Date
Finance Minister
Sensex
Nifty
Major Movement
01-Feb-19
Piyush Goyal
+0.59%
+0.58%
Auto and Defence stocks were the biggest gainers.
17-Feb-14
P.Chidambaram
+0.48%
+0.41%
Biggest Gainers: Tata Power +4.81%, Mahindra and Mahindra +2.83%
16-Feb-09
Pranab Mukherjee
-3.42%
-3.39%
Realty and Hospitality stocks ended with heavy loss.
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
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.
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.
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.
How did markets react on the budget day?
Markets remained flattish on the budget day as market participants reacted neutrally.
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.
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:
Direct Tax – A tax which is levied on individuals / businesses and cannot be transferred to anyone. For example, income tax and property tax.
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?
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.
Knowing the heads, let us discuss some strategies individuals and businesses can implement to save tax.
Tax Saving – Individuals
Know your tax basics and understand the tax brackets as applicable to your income.
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.
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.
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.
Consider investing in tax-saving bonds that are issued by the government.
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.
Donate to charitable institutions since these donations qualify for deductions under section 80(G).
Premiums paid for health insurance policies for your spouse, children, or oneself are eligible for deductions under section 80(D).
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
Choosing a business structure (sole proprietorship, partnership, or LLC) can significantly affect the tax treatment.
Businesses need to recognise the deductible expenses such as rent, utilities, office supplies, employee salaries, advertising, and other business-related expenses.
Businesses can also claim deductions under Section 179 to expense the property purchase cost.
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.
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.
Deductible expenses for research and development (R&D) can reduce the taxable capital gains for businesses.
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.
Businesses can also claim tax deductions for machinery depreciation of up to 20% if acquiring new machinery in a year.
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)
When was the Income Tax Act of India was enacted?
Income Tax Act of India was enacted in the year 1961.
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.
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.
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.
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.
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