Category: Personal Finance

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.

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

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

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.

January 24, 2024

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.

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:

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

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.

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.
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.
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.
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

Choose the right kind of FD depending on your financial needs and objectives.
Compare the interest rates across banks and NBFCs to find the most competitive rates before you invest.
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.
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.
Be mindful of the penalties linked with the FDs before you withdraw your invested amount.
Interest earned on FDs is taxable. Consider the tax implications and plan your investments to minimise your burden of the tax.

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:

Analyse your goals and compare the interest rates offered by different banks and NBFCs.
Choose an investment tenure that best aligns with your financial goals.
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.

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

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.
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.
What is Repo Rate?
The repo rate is the rate at which the banks borrow money from the RBI.
Does the bank levy a penalty on pre-mature withdrawal of FDs?
Yes, different banks have different penalty provisions.
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.

January 16, 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.

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?

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:

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.
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.
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.
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.

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.

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

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

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.

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.

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.

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.

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 Slab	Income Tax Rate
Up to INR 2,50,000	Nil
INR 250,000 to INR 5,00,000	5% (tax rebate is available u/s 87A upto 5 lakhs)
INR 500,001 to INR 10,00,000	20%
More than INR 10,00,000	30%

New Tax Regime

Income Slab	Income Tax Rate
Up to INR 3,00,000	Nil
INR 3,00,001 to INR 6,00,000	5% (tax rebate is available u/s 87A upto 7 lakhs)
INR 600,001 to INR 9,00,000	10% (tax rebate is available u/s 87A upto 7 lakhs)
INR 9,00,001 to INR 12,00,000	15%
INR 12,00,001 to INR 15,00,000	20%
More than INR 15,00,000	30%

Market’s reaction on the Budget Day

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)

Who presents the budget?
Finance Minister of India.
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.
Which day will the government present the budget for FY 24-25?
1^st February, 2024.
What is subsidy?
A subsidy is a financial aid that the government provides to individuals, businesses, or institutions.
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.

January 8, 2024

Decoding Credit Risk Funds In India

Do you know there is a category of mutual funds which specifically invests in junk bonds? If you’re not familiar with the word, Junk bonds, as the name suggests, are low quality bonds which have a high risk of default. But wait, high risk means high returns? Yes! To compensate for the high default risk, these bonds provide greater returns than other highly rated bonds.

If you’re new to the mutual fund world, check out our blog: Mutual Funds: Meaning, Types, Features, Benefits and How They Work.

What are credit risk funds?

Credit Risk Funds are a category of debt mutual funds that primarily invest a minimum of 65% only in AA and below-rated corporate bonds.

Did you know?

Credit Risk Funds are earlier known as “Credit Advantage Fund” or “Credit Opportunity Fund”.

How do Credit Risk Funds work?

Fund managers seek out debt funds with credit ratings that generally range from BBB to C since these bonds offer higher interest rates to compensate for the risk of default.

To diversify the risk, the fund manager will invest across multiple bonds of different companies to avoid overexposure in a single issue or company.

Checkout our blog on debt mutual funds: What is Debt Mutual Funds: Invest in the Best Debt Funds in India

Readc Also: Types of Mutual Funds in India

Advantages of Credit Risk Funds

High Yield

Credit risk funds offer investors high yields as compared to other debt funds. This can fascinate investors who wish to seek relatively higher returns.

Diversification

Investors can get exposure to high-yield bonds, although with higher risk. Further, credit risk funds have investments across multiple companies and issues such that exposure to any sector or company is significantly reduced. For risk-seeker investors, this enhances the overall portfolio performance.

Professionally Managed

Credit risk funds are managed by professional fund managers having specialisation in credit risk assessment. Their expertise helps the fund in generating good returns considering the risk profile.

Disadvantages of Credit Risk Funds

Risk of Default

Junk bonds carry a high possibility of default. The lower credit quality of the bonds increases the chance that the issuer may fail to repay the principal amount.

Volatility

Credit risk funds are highly volatile compared to other debt options, i.e., the fund’s net asset value (NAV) changes significantly which may not give positive returns to investors for a short period.

Not Suitable for all Investors

These funds are a fit for investors with a high-risk tolerance and long-term investment horizon.

Management Costs

Credit risk funds need active oversight and analysis. This leads to higher expense ratios and reduces the overall returns. Generally, the expense ratio of credit risk funds is more than other categories of debt mutual funds.

Impact of Interest Rate Changes on Credit Risk Funds

When interest rate rises, the value of existing bonds declines, since bond prices and interest rates share an inverse relationship. However, credit risk funds invest in low-quality bonds that have high coupon rates to compensate for the increased risk of default, i.e., a decline in the value of bonds may be less visible, and the higher coupon rates can still provide good returns even if the interest rates are rising.
Credit risk funds are sensitive to changes in credit spreads. Credit spread is the additional yield that investors demand for holding riskier bonds over safe and secure government bonds.

There is a thing called “Duration” in the bond universe, which is the measure of the sensitivity of price change of a bond for a change in the interest rate. The higher the duration, the more sensitive the bond is to the changes in interest rates. Investors should keep in mind the duration of the credit risk funds before investing as it can significantly impact the performance of funds in a short period.

Risks associated with Credit Risk Funds

Credit Risk

The primary risk that is involved in credit risk funds is “Credit Risk” or the “Risk of Default” by the bond issuers. Bonds with high coupon rates are more exposed to default risk and can lead to a decline in the fund’s value.

Liquidity Risk

Credit risk funds are generally less liquid when compared to other debt funds because these funds hold bonds that are of low credit quality, making it difficult to buy or sell them in the market.

Concentration Risk

Several credit risk funds have concentrated exposure to specific sectors, which can increase the risks if those sectors face any kind of economic downturn or challenge.

Interest Rate Risk

As we discussed above, just like other fixed-income securities, credit risk funds are sensitive to changes in interest rates. When interest rates rise, the prices of existing bonds in the portfolio may fall, leading to potential capital losses.

Credit Risk Funds vs. Other Mutual Funds

Credit risk funds carry high risk and potential of high returns since they invest in lower-rated corporate bonds, whereas the risk and returns of other mutual funds vary depending on the category of investment (equity, debt, balanced, etc.)
Compared to other mutual funds, credit risk funds are more volatile because of sensitivity to changes in credit ratings.
Credit risk funds are less liquid due to low demand than other debt mutual funds like liquid funds, low-duration funds, etc.
Credit risk funds are suitable for investors with high-risk tolerance and long-term investment horizons, and other mutual funds say liquid funds are suitable for a wide range of investors.

Historical Performance of Credit Risk Funds

Credit risk funds generally offer high returns as compared to other categories of debt funds, and annualised returns can range somewhere between 7% to 14% depending on the fund and the market conditions.

As of January 2024, there are more than 15 credit risk funds available in India from different Asset Management Companies. The table below shows the annualized performance of a few credit risk funds that we selected on a random basis:

Funds	1 Year Return (%)	3 Year Return (%)	5 Year Return (%)	7 Year Return (%)
Aditya Birla Sun Life Credit Risk Fund – Direct Plan	7.73	7.64	7.24	7.51
Axis Credit Risk Fund – Direct Plan	7.86	6.56	6.94	7.05
HDFC Credit Risk Debt Fund – Direct Plan	7.35	6.39	7.95	7.56
ICICI Prudential Credit Risk Fund – Direct Plan	8.03	6.86	8.25	8.06

Are Credit risk funds suitable for you?

Investments in credit risk funds expose your portfolio to high risk, and if your main purpose is to preserve your capital (assuming you are a risk-averse investor), then chances are likely that credit risk funds may not align with your financial goals.

However, if you are looking for diversification in your debt portfolio, can stay invested for a longer horizon, and are familiar with the risks involved, you can choose credit risk funds to diversify your portfolio and generate good returns.

But remember to seek advice from a financial advisor. A professional advisor will analyse your investment goals and curate your portfolio accordingly.

Conclusion

Credit risk funds are considered a double-edged sword. They offer high returns but at a cost of high risk. Although, the investor needs to analyse the credit quality of the bonds before investing in any credit risk fund and if in any case, the investors want to exit these funds, they need to assess and monitor the fund’s portfolio regularly.

If you are curious to learn more about the taxation of mutual funds in India, check our blog: Decoding Mutual Funds Taxation In India

Frequently Asked Questions (FAQs)

What are credit risk funds?
Credit Risk Funds are a category of debt mutual funds that primarily invest a minimum of 65% only in AA and below-rated corporate bonds.
Do credit risk funds offer higher returns as compared to other debt mutual funds?
Yes, they generally offer higher returns as compared to other categories of debt mutual funds such as liquid funds, money market funds, etc.
Credit risk funds are suitable for what kind of investors?
Credit risk funds are suitable for investors with a high-risk tolerance and long-term investment horizon.
Should you seek professional help while investing in credit risk funds?
It is recommended to seek professional advice before investing in Credit risk funds.
Credit Risk Funds are previously known as?
“Credit Opportunity Fund” & “Credit Advantage Fund”.

January 8, 2024

RBI Retail Direct Platform

Ever wondered how to invest in government securities directly without any intermediary? In this blog, we’ll uncover how you can do this at no cost with a platform launched by India’s central bank.

Retail Direct Platform

The Reserve Bank of India (RBI) launched an online platform in October 2021, the RBI Retail Direct Platform. The objective of this platform is to simplify access to government securities for retail investors who earlier invested in G-secs through intermediaries such as banks or brokers.

This scheme allows retail investors to open a Gilt Securities Account – Retail Direct Gilt (RDG). RDG account will allow investors to buy or bid government securities directly in the primary market as well as buy or sell in the secondary market.

Government securities can be a good long-term investment option for retail investors. They are considered the safest instruments as they are backed by the sovereign guarantee.

Any individual who is a natural person with a domestic savings account, a PAN card (permanent account number), any officially valid document for KYC such as aadhar card, a valid email ID, and a registered mobile number can open an RDG account.

Types of Securities

Using the RBI Retail Direct Platform, the investor can invest in the following Government Securities:

Government of India Treasury Bills (T-Bills) – Treasury bills are short-term money market debt instruments. The RBI issues the T-bills in India. Currently, T-bills are available in three maturities – 91 days, 182 days, and 364 days.
Government of India dated securities (Dated G-secs) – Dated Government securities are a type of bond issued by the government of India. These are debt instruments and maturity of these securities ranges from 5 years to 40 years. The coupon or say interest rate on these securities can be either fixed or floating. There are multiple types of Dated securities: floating rate bonds, fixed rate bonds, zero coupon bonds, inflation indexed bonds, etc.
State Development Loans (SDLs) – SDLs are dated securities. State governments issue these securities to fund their deficit. SDLs are generally issued for 10 years and Investor receives the interest half-yearly.
Sovereign Gold Bonds (SGBs) – The RBI issues the SGBs on behalf of the govt. of India. They are denominated in grams of gold. SGBs are alternatives for digital or physical gold. The SGBs will be redeemed on maturity in cash and have a lock-in period of 8 years. Further, apart from capital gains from the increase in gold prices, investors also receive 2.5% interest p.a. on the bond amount.

Dated G-secs, SDLs, and T-Bills are issued in the primary market through auctions executed by the Reserve Bank of India (RBI). An investor, depending upon eligibility, can bid in an auction under Competitive Bidding or Non-Competitive Bidding.

Features / Benefits of Retail Direct Platform

Easy Access – Investors can easily access and buy/sell Government securities such as treasury bills, Government of India bonds, etc. through the platform.
Simple to Use – The platform is user-friendly, making it easy for even first-time investors to invest in Government securities.
Higher Returns – Investors can earn good interest by investing in G-secs through RBI Retail direct platform. SDLs and other long term G-secs generally provide better returns than regular bank FDs.
No Transaction Fees – The platform does not charge any transaction fee for your investments as there is no intermediary. Further, there is no account opening fee.
Safe & Secure – RDG is an RBI-backed platform that is completely safe and secure to use.

How to open RDG (Retail Direct Gilt account)

One can easily open an RDG account by following a few simple steps:

Visit the website and register using the registration link to open an account.
Enter the details asked such as your name, PAN number, e-mail, address, etc. After that, authentication of mobile number and email address using OTP.
After completing above steps, KYC verification is needed to be done.
Once the KYC is complete, choose your nominee as it is mandatory to fill the Nominee details. And you’re done!

Maximum and Minimum Investment Amount

The are minimum and maximum limits in investing via the RBI Retail Direct platform. The maximum and minimum Investment amount through Retail Direct Platform is as follows:

Security	Minimum Investment Amount	Maximum Investment Amount
T-Bills	INR 10,000.	The allocation of all non-competitive* bids will be limited to 5% of the total nominal amount of the issue.
Government of India dated securities	INR 10,000.	INR 2 crore per security per auction.
State Developments Loans (SDLs)	INR 10,000.	1% of the total amount per auction.
Sovereign Gold Bonds (SGBs)	One gram of gold.	Upto 4 kgs of gold.

Source: Reserve Bank of India

*Non-competitive bid in Government securities means a bid that is offered to a retail investor at a discounted rate by the RBI.

Limitations of Investing in RDG

Compared to other investment platforms, RBI Retail Direct primarily focuses on government securities and lacks diversification. Further, there are limited short term investment options available as most govt. issued securities are of long term maturity.
The minimum investment amount is INR 10,000, which can be high for individual investors.
The platform relies on self-directed research and lacks comprehensive research tools.
Government securities carry various market-related risks such as interest rate risk, i.e., an investor can generate lower or higher returns due to fluctuations in interest prices if they sell their investment before the maturity. However, the credit risk, i.e., loss of capital is almost nil in the govt. securities.

Conclusion

The RBI Retail Direct Platform is a great initiative by the RBI to promote the inclusion of government securities in the portfolio of a retail investor. It is a safe and secure platform for investors looking for a investment option to directly invest in various government securities without any intermediary.

Frequently Asked Questions (FAQ)

What is the full form of the RDG scheme?
RDG stands for Retail Direct Gilt Scheme.
Mention the government securities an investor can invest in using the RDG scheme.
Treasury Bills, Dated G-secs, State Development Loans (SDLs), etc.
What is the minimum investment amount in T-bills?
The minimum investment amount in T-bills is INR 10,000.
Are govt. securities 100% safe?
No, Govt. securities are not 100% safe; there are various market related risks such as interest rate risk if you sell your investment before maturity.
Who can invest in the Retail Direct Scheme?
Any individual in India.

January 3, 2024

Performance Of IPOs Launched In 2023

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

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

What is an IPO?

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

Top IPOs of 2023

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

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

1. Tata Technologies

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

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

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

Tata Technology IPO details

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

Performance Analysis

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

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

2. Motisons Jewellers

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

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

Motisons Jewellers IPO Details

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

Performance Analysis

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

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

3. Netweb Technologies

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

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

Newteb Technologies IPO Details

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

Performance Analysis

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

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

4. Ideaforge Technology

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

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

Ideaforge IPO Details

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

Performance Analysis

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

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

5. DOMS Industries

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

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

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

DOMS Industries IPO Details

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

Performance Analysis

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

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

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

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

*CMP as of 1 January 2024

Conclusion

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

Also, check out our blog if you are curious to invest in IPOs via mutual fund route : What Is An IPO Mutual Fund? Should You Invest?

Frequently Asked Questions (FAQs)

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

January 2, 2024

Decoding Hedge Funds In India – Types, Advantages And Distinctions

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

What are Hedge Funds?

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

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

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

Hedge Funds in India

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

There are three categories of AIFs classified by SEBI:

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

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

3. Category III AIF: Hedge Funds

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

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

Features of Hedge Funds

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

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

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

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

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

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

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

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

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

Hedge Funds Strategies:

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

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

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

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

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

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

Fee Structure of Hedge Funds

Here is a breakdown of the fee structure:

1. Management Fees

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

2. Performance Fees

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

3. Hurdle Rate

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

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

Difference between Mutual Funds and Hedge Funds

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

Benefits of Investing in Hedge Funds

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

Demerits of Investing in Hedge Funds:

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

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

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

Conclusion

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

Frequently Asked Questions (FAQs)

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

December 20, 2023

Credit Score: What Is It And How It Impacts You?

You must have heard the words – Credit score, Rating, Cibil, etc.

Confused what is it and how it impacts you? Keep reading; we will learn in detail about credit score in this blog.

What is a Credit Score?

A Credit score or Credit rating is an indicator of a person’s creditworthiness, in simple words, the ability to pay the debt.

It is usually expressed as a number based on the person’s repayment history and credit files across different loan types and credit institutions. The range of a credit score is generally between 300 and 900. It’s not a simple number; in fact, it can signify your past financial behaviour. The higher the credit score, the better your perceived ability to pay the debt by Credit Institutions.

If you’re looking for a home loan, car loan, or applying for a new credit card, your credit score will significantly impact the chances of approval, interest rate, repayment terms, credit limit, etc.

In India, Credit scores are issued by Credit Information Companies (CICs), also known as Credit Information Bureaus (CIBs). CIBs are different from Credit Rating Agencies (CRAs). CIBs provide credit data of borrowers and are licensed by the Reserve Bank of India (RBI), whereas CRAs evaluate the credit quality of debt instruments offered by companies, govt. and other institutions. CRAs are regulated by the Securities and Exchange Board of India (SEBI).

What is the need for a good Credit Score?

Before going into the details, let’s understand why we need a good credit score.

At the time of taking a loan or applying for a new credit card, Banks and lending institutions use credit scores to assess whether you are worthy of credit. The better your credit score, the higher the chances of getting your loan approved or vice versa.

Further, you are likely to get additional benefits if you are maintaining a healthy credit score, such as low interest rates, better repayment terms, higher credit limit, etc.

How is Credit Score calculated?

There are numerous Credit Information Companies (CICs), a.k.a. Credit Information Bureaus (CIBs), and the calculation method of credit score is different for each company.

There are multiple factors considered in calculating credit score, and their weightage can be different across CIBs. In India, there are four Credit Card Information Companies licensed by the Reserve Bank of India (RBI). These are:

1. TransUnion CIBIL: Credit Information Bureau India Limited (CIBIL) is a part of TransUnion, an American multinational group. Incorporated in 2000, it is the most popular Credit Information Company. The CIBIL credit score is a three-digit number that ranges from 300 to 900, with 900 being the best score. Above 750 is considered to be a good score.

2. Experian: Experian PLC, incorporated in 1996, is a multinational data analytics and consumer credit reporting company headquartered in Ireland. The Experian credit score is a three-digit number that ranges from 300 to 850, with 850 being the best score.

3. Equifax: Equifax Inc., founded in 1899, is an American multinational consumer Credit Reporting Agency. The Equifax credit score is a three-digit number that ranges from 300 to 900, with 900 being the best score.

4. CRIF: CRIF High Mark Credit Information Services Private Limited, incorporated in 2005, is a credit bureau headquartered in Mumbai, India. The CRIF credit score is a three-digit number that ranges from 300 to 900, with 900 being the best score.

Factors which can impact Credit Score

1. Non-Payment

It is considered to be the most important factor which can significantly impact your credit score. Whether it is a payment of your credit card bill or an instalment of your home loan, never miss the due date.

Tips to improve – Always pay on time: Never forget to pay your bills or better, enable auto pay on your credit card payments and loan instalments.

2. Credit Utilization

Over-utilisation of the limit offered to you can signify that you are credit-hungry. It is calculated on the basis of your overall credit limit.

Consider a situation: You have two credit cards, and their aggregate limit is INR 1 lakh. Now, during Diwali, you did shopping worth INR 90,000 via credit cards. Here, your utilisation rate is 90%, which is on the higher side. It will have a negative impact on your credit score.

Tips to improve: Do not over utilize your credit limit, keep it below 30% of your overall credit limit.

3. Closure

Closing your active credit cards and loans can temporarily affect your credit score as it reduces your credit history. The older the card or loan, the higher the impact on your credit score.

Tips to improve: Keep your old cards active, even if you don’t use them. It increases your average credit age and helps you maintain a healthy credit score.

4. New Credit

Taking more credit in the form of credit cards or loans signifies that you are credit hungry, and it can have a negative impact on your credit score.

Tips to improve: If you are applying for a new credit card or loan, consider taking a gap in the new applications, as simultaneously opening multiple new credit cards and loans can significantly lower your credit score.

5. Variety

Although not significantly, but having a mix of credit instruments can positively impact your credit score.

Tips to improve: Based on your needs, consider taking a variety of credit account types in your portfolio. For example – You have a credit card and are in need of a personal loan, instead of taking a loan against your credit card limit, consider taking a personal loan which will improve the variety of your credit account type and generally personal loans from Banks are cheaper than loan against credit cards.

However, keep in mind that it is not a major factor in determining your credit card score.

6. Others

There are a few other factors as well that can impact your credit score. Although, the impact of these factors is less as compared to other factors. These are:

1. New Inquiries: If you apply for a new loan or credit card, the lending institution will assess your credit score first, which means it will go to the CICs and make an inquiry. The higher the number of inquiries, the higher the impact on your credit score. However, the impact is temporary.

2. Incorrect address: If your address or any personal details are not consistent across loans or credit cards, then it can impact your credit score.

Tips to improve: Never apply for too many credit cards or loans at one time. Further, keep checking your credit reports frequently; if you identify any discrepancies, then take a proactive approach and rectify them.

How to check Credit Score?

In India, as we discussed above, there are four Credit Information Companies (CICs) licensed by the RBI. There are multiple ways to check your credit score:

Website of CICs: You can visit the website of the CICs and check your credit score. Generally, it requires registration and one report is free to check.
Bank: Nowadays, banks or credit card companies provide the facility of credit score check without any cost.
Third parties: There are multiple third parties in India, including payment aggregators and Fin-techs, which provide a free credit score check facility.

Read Also: How to Improve Your Credit Score?

Conclusion

Your credit score is not just a simple number; in fact, it signifies your financial behaviour. It significantly impacts your loan approval chances and lending terms such as interest rate, repayment terms, etc.

Considering how important it is, maintaining a healthy score can help you in getting a new loan or credit card at better terms. It’s not difficult to maintain a healthy credit score; all you need to do is follow a few easy steps mentioned above.

Further, it is suggested to keep an eye on your credit score at-least once a month and proactively act on things or any discrepancies in reports.

Frequently Asked Questions (FAQs)

Which is the most widely accepted credit score in India?
CIBIL score
What is the ideal credit utilisation ratio?
Keep it below 30% to maintain a healthy credit score.
What is the impact of late payments on credit score?
If you have skipped payment of your credit card, you can still pay the bill within three days of the due date. There won’t be any penalty and most likely your credit score won’t be affected. However, if the due date + 3 days have passed, then you have to pay a penalty and interest charges, and your score can significantly go down.
Is the 810 CIBIL score considered to be good?
CIBIL score of 810 is considered to be an excellent score.
What is the full form of CIBIL?
CIBIL stands for Credit Information Bureau India Limited.

December 19, 2023

Best Alternatives To Fixed Deposits

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

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

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

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

Alternatives to FDs

Let’s explore the options available to Investors:

1. Mutual Funds

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

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

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

Debt funds are classified on the basis of:

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

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

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

2. Bond Market

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

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

3. National Savings Scheme (NPS)

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

3. Floating Rate Saving Bonds (FRSB)

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

4. Post Office Schemes

There are multiple post office schemes available to investors:

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

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

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

5. Hybrid Funds

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

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

6. Alternate FDs

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

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

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

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

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

Options for Senior Citizens

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

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

Why Alternate Options?

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

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

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

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

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

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

Conclusion

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

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

S.NO.	Check Out These Interesting Posts You Might Enjoy!
1	Best Places To Park Your Short Term Money
2	Which is Better: Fixed Deposit or Residential Property Investment
3	Why Debt Funds Are Better Than Fixed Deposits of Banks?
4	Best SIP Apps in India for Investment
5	Liquid Funds Vs Ultra Short Fund: Which One Should You Choose?

Frequently Asked Questions (FAQs)

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

December 19, 2023

Multi-Cap Vs Flexi-Cap Mutual Funds? Which Is Better For You?

You are a well-versed investor and recently stumbled upon multi-cap and flexi-cap mutual funds and asked yourself, what exactly is the difference. We will unfold your question in today’s blog.

Firstly, if you are new to the world of mutual funds, check out our blog: Mutual Funds: Meaning, Types, Features, Benefits and How They Work.

Mutual funds are classified according to asset class, financial goals, and structure. Multi-cap and Flexi-cap are both similar to other equity mutual funds, which are pooled investments, and they aim to provide capital growth to investors in the long term. Both funds fall under the umbrella of active mutual funds.

Multi-Cap Funds

Multi-cap funds are active equity mutual funds that invest in large-cap, mid-cap, and small-cap stocks. As per the latest circular released by SEBI, at least 75% of the investments made by multi-cap mutual funds are in equity and equity-related instruments. The investments should be made in the following manner:

Investments in large-cap companies: at least 25% of the total assets.
Investments in mid-cap companies: at least 25% of the total assets.
Investments in small-cap companies: at least 25% of the total assets.

The advantage of multi-cap funds is that your capital is invested in all three caps (at least 25%), with mid and small caps being more volatile than large caps, which can yield an ample return in the long run. However, keep in mind that there is no guarantee that multi-cap funds will outperform other mutual fund classes; in fact, multi-cap funds can be more volatile in the short run.

Flexi-Cap Funds

The Securities and Exchange Board of India (SEBI) and the Association of Mutual Funds in India (AMFI) have launched a number of initiatives in India to raise public awareness and confidence in the financial sector.

SEBI introduced this category of mutual funds in November 2020 after receiving recommendations from the Mutual Fund Advisory Committee (MFAC). As per the circular released by SEBI, it is an open-ended, dynamic equity scheme investing across large-cap, mid-cap, and small-cap stocks.

In the flexi-cap fund, at least 65% of the investments should be invested in equity and equity-related instruments. However, as compared to multi-cap funds, there is no minimum criterion to invest this 65% across large, small, or mid-cap stocks. The advantage of flexi-cap funds is that fund managers have more investment flexibility to invest money across large, mid, and small caps.

Let’s look at the below comparison. We have selected one mutual fund from each category:

Parag Parikh Flexi Cap Fund
Nippon India Multi Cap Fund

Source: Valueresearch

As you can observe, the Parag Parikh flexi-cap fund has more investment in large-cap funds than the Nippon India multi-cap fund. Further, the Parag Parikh flexi-cap fund has only a 1% investment in small-cap stocks. Flexi-cap funds provide more flexibility for investments as compared to multi-cap funds, as there is no regulatory requirement for flexi-cap funds.

Choosing Between Multi-Cap and Flexi-Cap:

Particulars	Flexi-cap fund	Multi-cap fund
Equity Exposure	At-least 65% investment in equity and equity-related instruments	At-least 75% investment in equity and equity-related instruments
Asset Allocation	Fund managers have flexibility in asset allocation	At-least 25% in each of the cap: large, mid and small
Risk	Very High	Very high
Volatility	Low as compared to multi-cap	High as compared to flexi-cap
Tax	Subject to both STCG and LTCG	Subject to both STCG and LTCG

Conclusion

We have discussed the similarities and differences between flexi-cap and multi-cap mutual funds. Both are equity mutual funds and provide diversification to your mutual fund portfolio. However, the key difference in both is the equity exposure and the asset allocation. The minimum percentage of equity and equity-related instruments that flexi-cap funds and multi-cap funds can invest in is 65% and 75%, respectively. Further, multi-cap funds must invest at least 25% in each class: large, mid, and small-cap, whereas flexi-cap funds have greater flexibility.

The best mutual fund strategy is to select mutual funds based on your risk appetite and time horizon after consulting with your financial advisor.

Frequently Asked Questions (FAQs)

Are multi-cap and flexi-cap active or passive funds?
Both multi-cap and flexi-cap are active mutual funds means they are actively managed by a professional fund manager.
Can flexi-cap funds invest in debt securities?
Yes, as long as a fund has at least 65% of its investments in equity.
What is the risk profile of flexi-cap and multi-cap funds?
The risk profile for both funds is very high, as both are equity mutual funds.
Are multi-cap funds more volatile than flexi-cap funds?
In general, the answer is yes, because multi-cap funds must invest at least 25% in small-cap and mid-cap funds due to regulatory requirements, whereas no such requirement for flexi-cap funds.
When did flexi-cap funds launch?
In November 2020, SEBI introduced flexi-cap funds.

December 11, 2023

Category: Personal Finance

Why Gold Matters?

Did you know?

Factors Affecting Gold Prices

Mine production

Gold Reserves

Investment Demand

Exchange Rates

How to Invest in Gold in India

Physical Gold

Digital Gold

Sovereign Gold Bonds (SGBs)

Gold Mutual Funds

Taxation of Gold in India

Sovereign Gold Bonds

Gold ETFs

Physical Gold

Risks of Investing in Gold

Conclusion

Frequently Asked Questions (FAQs)

How much should I invest in Gold?

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

Which option is best to buy gold in India?

Can I invest in Gold through my regular savings account?

Is TDS applicable to SGBs?

What is a Fixed Deposit?

Did you know?

Types of Fixed Deposits

Regular Fixed Deposits

Senior Citizen Fixed Deposit

Tax-saver Fixed Deposit

Flexi Fixed Deposit

Cumulative Fixed Deposit

Non-Cumulative Fixed Deposits

Corporate FD

Difference between Bank FD & Corporate FD

Tips for maximising FD Returns

Factors Affecting FD Interest Rates

Inflation

Repo Rate

Tenure

How to choose the right FD

Conclusion

FAQs

What is FD?

Are interest rates of FD similar in every bank?

What is Repo Rate?

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

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

What is Interim Budget?

What to expect in the upcoming Budget?

Below are some key areas to watch:

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

Subsidies for FY 2023-24

Disinvestment Target

Tax Regimes

Old Tax Regime

New Tax Regime

Market’s reaction on the Budget Day

Conclusion

Frequently Asked Questions (FAQs)

Who presents the budget?

Are markets more volatile near the budget?

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

What is subsidy?

Will the budget for 2024 affect taxes?

What are credit risk funds?

How do Credit Risk Funds work?

Advantages of Credit Risk Funds

Disadvantages of Credit Risk Funds

Impact of Interest Rate Changes on Credit Risk Funds

Risks associated with Credit Risk Funds

Credit Risk

Liquidity Risk

Concentration Risk

Interest Rate Risk

Credit Risk Funds vs. Other Mutual Funds

Historical Performance of Credit Risk Funds

Are Credit risk funds suitable for you?

Conclusion