Pocketful

Category: Personal Finance

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

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

    How credit score 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 a credit score?

    What is the need for a good Credit Score?

    What is the need of 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.

    Read Also: Understanding the Difference Between Credit and Debt

    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:

    1. 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.
    2. Bank: Nowadays, banks or credit card companies provide the facility of credit score check without any cost.
    3. 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)

    1. Which is the most widely accepted credit score in India?

      CIBIL score

    2. What is the ideal credit utilisation ratio?

      Keep it below 30% to maintain a healthy credit score.

    3. 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.

    4. Is the 810 CIBIL score considered to be good?

      CIBIL score of 810 is considered to be an excellent score.

    5. What is the full form of CIBIL?

      CIBIL stands for Credit Information Bureau India Limited.

  • Best Alternatives To Fixed Deposits

    Best Alternatives To Fixed Deposits

    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.

    Best alternatives to fixed deposit

    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

    Investment 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.

    Read Also: A Guide To Fixed Deposits: Exploring Types And Interest Rates

    Why Alternate Options?

    why go for alternative 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.

    Read Also: Which is Better: Fixed Deposit or Residential Property Investment

    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.

    Frequently Asked Questions (FAQs)

    1. Which is more liquid: Liquid funds or Short duration funds?

      Liquid funds.

    2. What is the maximum limit to invest in Senior Citizen Savings Scheme (SCSS)?

      One can invest up to INR 30,00,000 in SCSS.

    3. 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.

    4. 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).

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

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

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

    Multi cap vs flexi cap

    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 Vs Flexi-Cap Mutual Funds

    Read Also: Equity Mutual Funds: Meaning, Types & Features

    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:

    1. Investments in large-cap companies: at least 25% of the total assets.
    2. Investments in mid-cap companies: at least 25% of the total assets.
    3. 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:

    1. Parag Parikh Flexi Cap Fund
    2. Nippon India Multi Cap Fund
    Parag Parikh flexi cap vs Nippon India multi cap
    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:

    ParticularsFlexi-cap fundMulti-cap fund
    Equity ExposureAt-least 65% investment in equity and equity-related instrumentsAt-least 75% investment in equity and equity-related instruments
    Asset AllocationFund managers have flexibility in asset allocationAt-least 25% in each of the cap: large, mid and small
    RiskVery HighVery high
    VolatilityLow as compared to multi-capHigh as compared to flexi-cap
    TaxSubject to both STCG and LTCGSubject to both STCG and LTCG

    Read Also: What are Small Cap Mutual Funds? Definition, Advantages, and Risks Explained

    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)

    1. 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.

    2. Can flexi-cap funds invest in debt securities?

      Yes, as long as a fund has at least 65% of its investments in equity.

    3. 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.

    4. 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.

    5. When did flexi-cap funds launch?

      In November 2020, SEBI introduced flexi-cap funds.

  • SIP in Stocks vs SIP in Mutual funds?

    SIP in Stocks vs SIP in Mutual funds?

    Which can be a better choice?

    To choose between SIP in stocks and SIP in mutual funds, first we need to understand the fundamentals of mutual funds, stocks, and SIP. Check out this blog to get answers to all your questions.

    SIP In Stocks Vs SIP In Mutual Funds

    What is a Mutual Fund?

    It’s a pooled investment fund overseen by a professional fund manager. It gathers funds from investors who want to invest in the stock market. Depending on the type of mutual fund, these collected funds are then diversified into various asset classes. Mutual funds can differ from, open-ended to close-ended, and from actively managed funds to passively managed funds. Every mutual fund unit is allotted NAV, which is net asset value. It is the combined value of all the asset classes that you hold in your portfolio.

    What are Stocks?

    MUTUAL FUND

    A stock, also known as equity or share, represents a part of ownership that an individual holds in a corporate or government company. Investing in stocks carries a level of higher risk because the value of a stock can be influenced by various factors, including the company’s financial performance, economic conditions, and market sentiment. However, stocks have historically offered higher returns compared to other investment options.

    What is SIP?

    STOCKS IN SIP

    SIP stands for Systematic Investment Plan. It is an investment method in mutual funds and stocks where you invest a fixed amount of money at regular intervals. SIP can be done for an amount as small as INR 500. SIPs are long-term investment strategies that help you compound your money over the years.

    Having discussed the basics of mutual funds, stocks, and SIP, let us go through what SIP in mutual funds and SIP in stocks looks like.

    SIP in Stocks

    SIP in stocks involves regular investment in a specific stock at pre-determined intervals. Stock SIP can be used for averaging your shares, thereby reducing their purchase price. The concept of stock is more or less similar to SIP in mutual funds, which we shall discuss later in this blog.

    Below are some key facts an investor should know before choosing stock SIPs.

    1. SIP in stocks will give you direct exposure to individual stocks that can help you generate better returns, but as you know, reward and risk go hand in hand. This SIP method is susceptible to market fluctuations, which can significantly impact returns.
    2. SIP in stocks will give you more freedom as you are solely responsible for selecting your allocation. However, selecting specific stocks involves in-depth research and analysis of companies as well as the overall trend of the market, which can be challenging and stressful at times.
    3. Stock SIPs involve regular monitoring of the stocks and can be a tough task.
    4. Diversification of the portfolio becomes difficult when using SIPs in stocks because it can be difficult to maintain multiple SIPs and stay current on research and new developments.

    Stock SIPs can be a good option for investors who are well-versed in market fluctuations. However, for most of the investors, it is suggested to do SIP in mutual funds.

    SIP in Mutual Funds

    Mutual fund SIP involves regular investment of a fixed amount into a mutual fund. This method indirectly invests in multiple stocks and other instruments; therefore, it allows investors to allocate capital as per their risk profile. There are a plethora of mutual funds available in the industry, ranging from equity based to debt based. Check out our blog on mutual funds to learn more!

    Below are some key points that an investor should remember before choosing SIPs in mutual funds:

    1. Mutual funds offer diversification and carry less risk as compared to stock, as mentioned earlier, and reduce the impact of poor performance of a single security.
    2. Investors can start their financial journey with mutual fund SIPs from as low as INR 100, which makes it accessible to people of all income groups in a country like India, but keep in mind that mutual fund investments are always subject to market risk.
    3. Mutual fund SIPs allow disciplined and regular investing. You do not need to monitor and analyze your portfolio on a daily basis.
    4. There are two ways to transact SIPs:
      • You can manually pay the amount via UPI, Net banking, etc., at intervals.
      • You can set-up an auto mandate authorizing your bank to automatically deduct a specified amount from your bank account at every interval.
    5. Similar to stock SIP, investors can enjoy the benefits of rupee cost averaging in mutual funds SIP. With this, the NAV of the mutual fund unit will be allotted at lower prices.
    6. Investors can choose SIPs based on their risk profile and financial goals, such as equity funds for capital appreciation, debt funds for stability, or hybrid funds for a balanced approach. However, before choosing any scheme, be aware of the expense ratio and other fees associated with mutual funds.

    Read Also: SIP vs Lump Sum: Which is Better?

    SIP in stocks vs. SIP in mutual Fund

    Let’s explore the table of differences below for a better understanding:

    BasisSIP in StocksSIP in Mutual Fund
    RiskHigh – Market expertise is requiredRisk is comparatively lower as it is managed by a fund manager.
    Research RequirementHighLow to none
    ManagementSelf-directedProfessionally managed
    OwnershipDirect ownership in your de-mat accountIndirect ownership as shares are purchased by mutual funds and its units are allocated to you
    ChargesOnly transaction related expenses are incurred. Click here to learn more.It includes several charges: expense ratio (covers admin-related expenses and fund manager fees), exit load, redemption fees, etc.

    Conclusion

    stock vs mutual funds

    SIP in mutual funds offers a disciplined way of investing, and people who wish to stay committed to the markets for the long term can choose this route. However, it is suggested to only those investors who are aware of the market technicalities and are willing to research companies. It requires active involvement as compared to mutual fund SIPs.

    In summation, before starting your SIPs, carefully assess your financial goals and risk appetite. It is advised that you speak with a financial advisor to receive individualized portfolio support.

    Further, click here to explore all the different investment options!

    S.NO.Check Out These Interesting Posts You Might Enjoy!
    1Mahindra & Mahindra vs Tata Motors: Which is Better?
    2Bank of Baroda vs SBI Bank: Which is Better?
    3PNB Vs Bank of Baroda: Which is Better?
    4MRF vs Apollo Tyres: Which is Better?
    5Bank of Baroda Vs Canara Bank: Which is Better?

    Frequently Answered Questions (FAQs)

    1. What is the full form of SIP?

      SIP stands for Systematic Investment Plan.

    2. Which is better? Stock SIP or Mutual fund SIP?

      It depends on individual financial goals and preferences.

    3. How many stocks can you choose when doing Stock SIP?

      You can start SIP in as many stocks as you want. However, in a well diversified portfolio, atleast 30 stocks are suggested.

    4. Does SIP in stocks has higher risk than SIP in Mutual Funds?

      Yes. SIP in stocks is comparatively riskier.

    5. What is the minimum amount of SIP required to invest in Mutual Funds?

      SIP in a mutual fund starts from as low as INR 100.

  • Value Investing Vs Intraday Trading: Which Is More Profitable?

    Value Investing Vs Intraday Trading: Which Is More Profitable?

    Value Investing Vs Intraday Trading

    Value investing and Intraday trading are two different aspects of the stock market. Both of them carry their own set of characteristics and challenges. In today’s blog, we bring you an in-depth analysis of these concepts. If you are the one who is always confused about which is better for you, explore our blog to get answers to all your questions.

    What is Value Investing?

    value investing

    Value investing is an investment strategy that involves buying securities at a price lower than their intrinsic value with the purpose of holding them for an extended period, often years or decades. The main objective of value investing is to create wealth over time. Value investors believe that the market does react to good and bad news that results in movements in stock price, but these movements are temporary and do not leave any impact in the long run. Value investors majorly focus on fundamental analysis of the company, such as earnings quality, dividends, and financial statements. They are of the view that the market will recognize the true worth of the stocks that are trading below their intrinsic value over time.

    Rakesh Jhunjhunwala and Dolly Khanna are the biggest examples of value investors in India.

    Read Also: Top 10 Intraday Trading Strategies & Tips for Beginners

    Key features of Value Investing

    Margin of Safety

    Long-term investors seek to purchase stocks at a discount to their intrinsic value, creating a margin of safety and avoiding potential losses.

    Long-Term Perspective

    Value investors typically purchase stocks with the intention of holding them for extended periods of time, which calls for patience and self-control.

    Contrary Approach

    Value investors often take a contrarian approach. This approach includes doing the reverse of what the majority is doing. Contrarian investors believe that the majority of the participants act in a herd because of fear, greed, etc., which results in securities being temporarily overvalued or undervalued. This approach can be highly rewarding, but keep in mind that it can be a risky one, which may result in hefty losses.

    Interesting Fact: Warren Buffett is a famous Contrarian Investor

    Advantages of Value Investing

    pros of value investing

    Better Returns

    Value investing has historically achieved superior and stable returns when compared to other investing strategies. By buying undervalued stocks and waiting for them to generate returns, long-term investors can benefit from the market’s eventual recognition of the company’s true value.

    Lesser Risk

    The margin of safety reduces the risk of the investors and protects them from losses if the valuation of the stock that they are holding is slightly off.

    Disciplined Approach

    Value investing focuses on a long-term perspective and encourages a disciplined and planned approach to investment, preventing investors from making impulsive decisions.

    Challenges of Value Investing

    1. Identifying undervalued stock is a challenging task, as analyzing the financials of the company and calculating its true value can be complex.
    2. A contrarian approach to value investing can sometimes lead to holding stocks that are unpopular with the market and will not be able to generate potential gains over time. Not all the stocks trading at a seemingly low valuation are good investment opportunities.
    3. Timing the market, i.e., identifying the right time to enter the market or buy a stock, can be challenging.
    4. Psychological biases, such as overconfidence or anchoring, can influence investors and lead to poor decision-making.
    5. Value investors may face challenges when industries evolve and companies fail to adapt to new trends or technologies, leading to value destruction.

    What is Intraday Trading?

    intraday trading

    Intra-day trading is a financial approach where stocks, currencies, and commodities are bought and sold within the same trading day. Intra-day traders aim to earn profits from very short-term price fluctuations in the market, and they do not carry their positions overnight.

    Key facts about Intra-day trading

    1. Intraday trading is carried out on short-time frames on technical charts like 1 minute, 5 minutes, 15 minutes, 1 hour, and 4 hours.
    2. Intraday traders design their strategies based on technical analysis. (Read our blog, Best Options Trading Chart Patterns, to know more about technical analysis)
    3. Intraday traders get an option to leverage their trading positions. This allows them to buy more stocks with a lesser amount of capital. However, do remember that leverage is a double-edged sword.
    4. Intra-day traders are generally quick decision-makers because market timing and executions are crucial factors for them.
    5. Intra-day trading can be speculative since traders try to catch short-term market movements.

    Benefits of Intra-day Trading

    pros of intraday trading

    Quick profits

    Intraday traders can earn quick profits within a single trading day because they aim for short-term price movements, which involve multiple trades in a day. At the end of the day, these multiple small trades can significantly influence the overall P&L.

    Lesser risks.

    Intraday traders do not carry positions overnight and square off their positions within the same trading day. This eliminates the risk of gap-up and gap-down openings, as well as random market news.

    Leverage

    Intraday traders can significantly benefit from taking high leverage in intra-day trades, which can significantly influence their P&L. However, keep in mind that leverage is a double-edged sword, and it is advisable to trade with less leverage while carrying out intra-day trades.

    Challenges of Intraday Trading

    1. Excessive market volatility can lead to unpredictable swings, thereby causing losses and increasing market risks.
    2. Day traders can face constant fear of loss of capital, and the mental pressure to make instant decisions can be stressful. Fear and greed can lead to impulsive decisions.
    3. Intraday traders can end up paying higher transaction costs (brokerage, STT, stamp duty, etc.) because they might execute multiple trades on the same day.
    4. Day traders get a limited time window to execute trades, and they may face technological issues since they rely heavily on real-time data provided by the broker.
    5. Sticking to your strategy in real-time markets can be a tough task since it requires a lot of patience and discipline.

    Value Investing vs Intra-day Trading

    Since both come with their own merits and demerits, choose what aligns best with your financial goals and investment horizon. We have created a table of differences for you. Let’s have a look:

    BasisValue InvestingIntra-day Trading
    Time HorizonLong-term (generally >5 years)Within a day
    Investment PhilosophyMajor focus on fundamental analysisIntra-day traders focus on technical analysis
    Stock SelectionUndervalued stocksHighly liquid and volatile stocks are preferred
    RiskValue investing generally carries lower risk.Carries higher risk than Value investing

    Read Also: Difference Between Intraday Trading and Delivery Trading

    Conclusion

    conclusion

    To wrap it up, it completely depends on the individual preferences, risk tolerance, and time that he or she is willing to give. Value investing is considered suitable for long-term investors, while intraday trading is for short-term traders who are looking to make quick bucks. Keep in mind that intraday trading is a zero-sum game, while value investing is a positive-sum game. Both strategies carry inherent risks, and careful evaluation is required.

    Frequently Answered Questions (FAQs)

    1. Which is riskier? Value investing or intra-day trading

      Intraday trading is considered riskier.

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

      No, intra-day is speculative in nature and is generally not suggested to beginners.

    3. Which investment approach uses fundamental analysis?

      Value investing uses fundamental analysis and reading financial statements.

    4. Mention two value investors in India.

      Rakesh Jhunjhunwala and Dolly Khanna.

    5. What is the intrinsic value of a stock?

      The inherent value or true worth of the stock is known as intrinsic value.

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

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

    What Should You Do If Your Stock Portfolio Is Stuck In Losses

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

    Possible causes of losses in your portfolio

    Possible causes of losses in your portfolio

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

    1. Volatile Markets
    2. Focusing on a specific sector
    3. Wrong Entry and Exit
    4. Leveraged Positions
    5. Psychological Reasons
    6. Poor Selection of Stocks

    Let’s understand above mentioned reasons in depth:

    Volatile Markets

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

    Focus on a specific sector

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

    Wrong Entry and Exit

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

    Leveraged positions

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

    Psychological Reasons

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

    Poor selection of stocks

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

    Read Also: 10 Top Investors In India And Their Portfolios

    How to deal with red portfolio

    how to recover losses

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

    Revaluation

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

    Long-term perspective

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

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

    Portfolio-review

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

    Follow Stop-loss

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

    Invest practically and not emotionally.

    Risk-Appetite

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

    Diversification

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

    Exit your mistakes in Bull Market

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

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

    Advice from professionals and experience.

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

    Invest at regular intervals

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

    Also, check out the blog on ATR.

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

    Conclusion

    conclusion

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

    The decision is tough but will be worth it!

    Frequently Asked Questions (FAQs)

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

      The first step should be analysing the reasons for the losses – It can be either stock specific (e.g. Yes Bank) or market specific (e.g. Covid-19). Force selling in a market specific scenario is not ideal.

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

      No, by doing so s/he will be selling the stocks in a panic state. Sit back and analyze the technical and fundamentals of the stock. Always take the decision with a clear mind.

    3. How can diversification help you minimise your risk?

      Diversifying your portfolio can help you in eliminating the stock specific or sector specific risks.

    4. Can professional advice help you reduce losses?

      Yes, professionals can help you making an informed decision.

    5. How to control emotions when trading in the stock market?

      When trading in the stock market you should be disciplined. Further, educate yourself so that you can make better investment decisions and formulate profitable strategies. Always remember that Emotional biases are easier to understand but difficult to overcome.

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

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

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

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

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

    Types of Saving Instruments

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

    1. Traditional Savings instrument
    2. Investments

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

    • Fixed deposits
    • Recurring Deposits
    • Post Office

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

    • Stocks
    • Mutual Funds
    • Commodities  

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

    What are fixed deposits?

    FD

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

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

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

    Merits & Demerits of Investing into FDs

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

    Merits of Investing in Fixed Deposit

    1.     Guaranteed Rate of Interest

    2.     Easy to Monitor

    3.     Tax Benefits

    4.     Loan Against FD

    5.     Flexible Period

    6.     Better option for senior citizens

    Demerits of Fixed Deposits.

    1.     May not beat inflation

    2.     Lower rate of return

    3.     Penalty on pre-mature withdrawal.

    4.     Lack of re-investment opportunity.

    Taxation of Fixed Deposits in India (Example):

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

    What do you mean by investing in stocks?

    STOCK MARKET

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

    Large-cap 

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

    Mid Cap 

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

    Small cap 

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

    Read Also: Which is Better: Fixed Deposit or Residential Property Investment

    From where can we buy or sell stocks?

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

    Taxation of Equity in India

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

    1. Short-Term Capital Gain  

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

    1. Long-Term Capital Gain 

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

    Merits & Demerits of Stocks

    How to become aware during Stock marketplace investment?

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

    Merits of investing in stocks

    1.     Inflation rate adjusted Returns

    2.     Dividend income

    3.     Liquidity

    4.     Tax benefits

    5.     Wealth creation

    Demerits of investing in stocks

    1.     Volatility of markets

    2.     Higher Risk of Loss

    3.     Brokerage

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

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

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

    Basis of DifferenceFixed DepositStocks
    LiquidityIt has very little liquidity as compared to stocks.Stocks have high liquidity.
    RiskInvestment in Fixed Deposit is considered risk-free.Investment in stocks possesses higher risk.
    Investment HorizonPre-decided investment horizon.Suggested for individuals having high-risk appetites.
    Rate of Interest (Return)GuaranteedMarket Linked
    TaxationInterest is fully taxable.Long
    ExpensesNo expensesTransaction Cost
    Inflation RateReturns of FD may or may not beat inflation.It offers inflation-adjusted returns.
    Duration of investmentGenerally suggested for the shorter horizon.It is suggested for individuals having long-term investment horizons.

    Read Also: A Guide To Fixed Deposits: Exploring Types And Interest Rates

    Conclusion

    CONCLUSION

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

    Frequently Answered Questions (FAQs)

    1. Which is considered safer, Fixed deposits or stocks?

      Fixed deposits are generally considered safer as they provide a fixed return.

    2. Which investment option offers higher returns between stocks and FDs?

      Stocks offer higher returns than FDs.

    3. Who provides FDs?

      Banks and Non-Banking Financial Institutions provide FDs.

    4. What is STCG in stocks?

      STCG in stocks stands for short-term capital gains, which are 15% of your realized gains.

    5. Who decides the interest rate on FDs?

      Banks and NBFCs decide interest rates on FDs, which vary from bank to bank.

  • How Interest Rate Changes Affect the Stock Market

    How Interest Rate Changes Affect the Stock Market

    What is Interest Rate?

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

    How Interest Rate Changes Affect The Stock Market

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

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

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

    Why interest rates are changed?

    why interst rate changes

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

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

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

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

    Read Also: How to Start Stock Market Trading With Low or Limited Capital

    Impact of rate change on the Indian stock market.

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

    Interest rates can be changed in two ways

    • Interest rate hikes
    • Interest rate cuts

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

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

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

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

    Impact of interest rate change

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

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

    Read Also: Impact of Interest Rate Change on Financial Markets

    Conclusion

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

    Frequently Answered Questions (FAQs)

    1. How does interest rate affect bond prices?

      Bond prices and interest rates have inverse relationships i.e., when the central bank increases the interest rates, bond prices decrease, and vice versa.

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

      No, stocks across sectors react differently to interest rate changes.  

    3. Who regulates and manages the interest rate in the stock market?

      Reserve Bank of India controls and manages the interest rates.

    4. Why does RBI increase the interest rate?

      RBI increases the interest rates in order to control inflation and for the overall growth of the economy.

    5. What happens to borrowing costs when RBI increases the interest rates?

      Borrowing cost for the companies increases if RBI increases the rates.

  • Which is Better: Fixed Deposit or Residential Property Investment

    Which is Better: Fixed Deposit or Residential Property Investment

    Fixed Deposit or Residential Property Investment

    What is Real Estate?

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

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

    Types of Real Estates

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

    • Residential
    • Commercial.
    • Industrial
    • Land
    • Special Purpose

    Let us go through each of them in detail.

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

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

    Real Also: Top Real Estate Stocks In India

    Pros of investing in Residential properties

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

    Cons of Investing in Residential Properties

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

    What are Fixed Deposits?

    fixed deposit

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

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

    Types of FDs

    • Regular FDs
    • Cumulative FDs
    • Non-Cumulative FDs
    • Corporate FDs

    Let us explain each of them in detail.

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

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

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

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

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

    Conclusion

    conclusion

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

    FAQ (Frequently Answered Questions)

    1. Which is the better investment option, Residential properties or FDs?

      Both investment options have their own merits and demerits. It would be best if you chose as per your financial goals.

    2. Are FDs tax-free?

      No, fixed deposits are not tax-free.

    3. What are cumulative fixed deposits?

      The investor gets a return in a lump sum at the time of maturity. Till then, the interest is accumulated and then added to your principal amount.

    4. Are FDs more risky than residential properties?

      No, FDs are less risky, whereas investments in residential properties are riskier.

    5. What kind of income can we earn from residential property?

      Rental income can be earned from residential property.

  • Why Debt Funds Are Better Than Fixed Deposits of Banks?

    Why Debt Funds Are Better Than Fixed Deposits of Banks?

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

    Debt Funds and Fixed Deposits Of Banks

    Who should invest in Debt Funds?

    Who should invest in Debt Funds?

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

    Read Also: Debt Mutual Funds: Meaning, Types and Features

    How to invest in Debt funds

    How to invest in Debt funds

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

    Types of Debt Mutual Funds

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

    1. Liquid Funds

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

    2. Short-term Funds

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

    3. Floating Rate Funds (FRFs)

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

    4. Gilt Funds

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

    5. Dynamic Bond Funds

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

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

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

    Taxation of Debt in India

    Taxation in debt is divided into 2 parts.

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

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

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

    What are fixed deposits?

    What are fixed deposits?

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

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

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

    Merits of Investing in Fixed Deposit

    1.       Guaranteed Rate of Interest

    2.       Easy to Monitor

    3.       Tax Benefits

    4.       Loan Against FD

    5.       Flexible Period

    6.       Better option for senior citizens

    Taxation of Fixed Deposits in India (Example)

    Taxation of Fixed Deposits in India (Example)

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

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

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

    Read Also: A Guide To Fixed Deposits: Exploring Types And Interest Rates

    Why choose Debt Funds over Bank Fixed Deposits?

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

    Conclusion

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

    FAQs (Frequently Asked Questions)

    1. What are Debt Funds?

      Debt mutual fund is a category of mutual fund that invests in fixed-income instruments such as Corporate and Government bonds, commercial papers, and treasury bills.

    2. Are debt mutual funds riskier than bank FDs?

      Yes, debt mutual funds are riskier as compared to bank FDs.

    3. Is debt fund good for the long term?

      If you have an investment horizon of more than 3 years and have a low-risk appetite, debt funds are a perfect investment option for you.

    4. Bank FDs or Debt, which provide better tax efficiency?

      Debt funds provide more tax efficiency.

    5. Does a debt fund provide a higher return than bank FDs?

      Yes, debt funds offer more returns than bank FDs.

    • Open Free Demat Account

    Join Pocketful Now

    You have successfully subscribed to the newsletter

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

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