Category: Personal Finance

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

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

What is an IPO?

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

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

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

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

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

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

SME IPO

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

Eligibility Criteria for an SME IPO
1. The company should be a Small and Medium Enterprise as defined by the Ministry of Micro, Small and Medium Enterprises (MSME).
2. The company should have a minimum post-issue paid-up capital of INR 1 crore and a maximum of INR 25 crore.
3. The company should have a good track record of profits for the last 3 years.
4. All SME IPOs should be 100% underwritten* and merchant bankers must underwrite at least 15% of the shares of the SME IPO company.
Note – An underwriter is a professional or institution who analyses and assumes another party’s risk for a fee. Underwriting is a process through which an individual or institution determines and evaluates the risk of a financial agreement.

Mainboard IPO

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

Eligibility Criteria for Mainboard IPO
1. The company should have a minimum post-issue-paid-up capital of INR 10 crore.
2. The company should have a good financial track record with profitable business operations.
3. Underwriting is not necessary for a mainboard IPO. However, at least 50% of shares must be subscribed by the qualified institutional buyers (QIB).
Note – QIB or Qualified Institutional Investors are a class of investors with a higher level of financial resources and expertise that meet specific criteria decided by the Securities and Exchange Board of India.

Read Also: Best Smallcap IT Stocks List in India

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

Fixed Price Issue

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

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

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

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

Stages in Book-Building
- Company planning to go public appoints the lead merchant bankers as Book Runners. These banks play an important role in the book-building and ensuring a successful offering.
- Investors give their bids to underwriters specifying the quantity of shares.
- Underwriters then input the orders in the electronic book through bidding. The book normally remains open for 5 days.
- The book-running lead managers (BRLM) analyse the bids received and determine the demand at multiple price levels to find the price at which the maximum number of shares can be sold.
Note – BRLM or book-running lead managers play a pivotal role in the IPO procedure. BRLMs conducts due diligence on behalf of the company which involves in-depth analysis of company financials, operations and legal compliance and also helps in setting the offer price.
- The issuer company with the help of book-running lead managers decides on a price band in which investors can bid. The minimum price at which bids can be made is known as the floor price
- Once the bidding period ends, the book is closed and no more bids are accepted.
- Depending on the bids received and the price discovered the lead managers allocate shares after determining the final price.
Benefits of IPO

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

For Companies
- Helps in raising capital to fund growth initiatives, capital expenditures, acquire other companies, loan repayment and brand awareness.
- Going public allows the shareholders to trade shares on the stock exchange providing liquidity and gains.
- A successful IPO listing can boost a company’s reputation and credibility which will eventually attract new customers.
For Investors
- Adding IPOs to an investment portfolio will help in diversification.
- IPOs offer the opportunity to invest in companies with promising growth potential before they are widely available in the stock market.
IPO v.s. Private Funding

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

Sources of private funding include firms that invest in early-stage companies with the potential for high returns.
1. Angel investors or wealthy investors who invest in companies at their nascent stage.
2. Private equity firms, debt financing such as bank loans, crowdfunding i.e., raising smaller amounts of capital online from many individual investors.
Private funding is a suitable option for companies seeking moderate capital for initial growth or specific projects or partnerships with investors who share their vision.

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

Key Considerations for IPO

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

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

Conclusion

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

Frequently Asked Questions (FAQs)
1. How long does an IPO generally take?
  The average timeline for an IPO is generally 6 to 12 months. Although it can vary depending on company size and complexity.
2. What are the major costs involved in an IPO?
  Investment banking fees, legal fees, accounting and auditing fees, filing and exchange listing fees, and advertising expenses.
3. How can I invest in an IPO?
  Participate in retail allotments by the company through your bank or buy shares on the open market listing.
4. What happens to employees’ shares after an IPO?
  It depends upon agreements and company policies. Some employees may receive restricted stock units or employee stock options.
5. What happens to the money raised in an IPO?
  The company may use the fund for debt repayment, capital expenditure, or research and development.

February 15, 2024

Unveiling the Budget 2024: Key Takeaways

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 6^th 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.

Women Empowerment

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

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

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

Direct and Indirect Taxes

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

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

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

Fiscal Deficit

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

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

Other Key Announcements

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

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

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

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

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

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

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

Market Reaction

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.
03-Feb-04	Jaswant Singh	-1.31%	-2.25%	Almost all sectors were in red.

Read Also: What To Expect In The Budget 2024?

Conclusion

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

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

Frequently Asked Questions

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.

February 1, 2024

Mastering Your Finances: Beginner’s Guide To Tax Savings

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

Generally, there are two types of taxes:

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%.

Checkout our blog to learn about taxation of mutual funds in India: Decoding Mutual Funds Taxation In India

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.

How to save Tax?

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.

Conclusion

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

Frequently Asked Questions (FAQs)

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.

January 31, 2024

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.

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.

Want to read more about the taxation of Mutual Funds in India? Check our blog: Decoding Mutual Funds Taxation In India.

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

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

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)

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.
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.
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.
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.
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

Category: Personal Finance

From Private to Public: Decoding the IPO Journey

What is an IPO?

SME IPO

Eligibility Criteria for an SME IPO

Mainboard IPO

Eligibility Criteria for Mainboard IPO

Steps to take a company public

Price Discovery

Fixed Price Issue

Stages of Fixed Price Issue

Book-Building Issue

Stages in Book-Building

Benefits of IPO

For Companies

For Investors

IPO v.s. Private Funding

Key Considerations for IPO

Conclusion

Frequently Asked Questions (FAQs)

How long does an IPO generally take?

What are the major costs involved in an IPO?

How can I invest in an IPO?

What happens to employees’ shares after an IPO?

What happens to the money raised in an IPO?

Unveiling the Budget 2024: Key Takeaways

Infrastructure

Women Empowerment

Direct and Indirect Taxes

Fiscal Deficit

Other Key Announcements

Market Reaction

Top Gainers

Top Losers

India VIX

Historical Data

Conclusion

Frequently Asked Questions

Is the 2024 budget an interim budget?

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

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

How did markets react on the budget day?

What is India VIX?

Mastering Your Finances: Beginner’s Guide To Tax Savings

What is Income Tax?

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

Heads of Income Tax

1. Income from Salary

2. Income from House Property

3. Income from Profits & Gains of Business or Profession

4. Income from Capital Gains

5. Income from other sources

How to save Tax?

Tax Saving – Individuals

Tax Saving – Businesses & Corporates

Conclusion

Frequently Asked Questions (FAQs)

When was the Income Tax Act of India was enacted?

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

How can I reduce my taxable income?

Are there penalties for non-compliance with tax laws?

What is the maximum deduction limit in Section 80C?

A Guide To Investing In Gold In India

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