Pocketful

Category: Personal Finance

  • What is Insurance? Features, Terms, Benefits, Types, and Metrics Explained

    What is Insurance? Features, Terms, Benefits, Types, and Metrics Explained

    There are always surprises in life. Some surprises are great, but some are nasty and will hurt your pocket. Imagine yourself driving on a highway when, all of a sudden, there is an accident and your vehicle breaks down. In such a situation, it is natural to be concerned about how to resolve the issue. This is where insurance comes in; if you have coverage for your vehicle, you can get repairs done without having to pay for them. 

    The blog will guide you through the world of insurance, helping you pick the best coverage for your needs and grasp the fundamentals. 

    Overview on Insurance

    An insurance policy is a financial contract that shields you against unforeseen financial losses between two parties.

    The insurance provider charges a premium to cover a person or entity against certain risks, such as mortality, accidents, medical emergencies, etc. This ensures that the insured party can avail of the provider’s insurance benefits in the case of a loss. 

    For example – Mr. A is driving to work, and en route, he gets into an accident that damages his vehicle. If Mr. A had auto insurance, he would be entitled to a claim for the total amount of compensation from the insurance provider. In order to get this amount, Mr. A would have needed to pay a premium at the start of the policy’s term or length. 

    Read Also: Prize Indemnity Insurance

    Features of Insurance

    1.  Having an insurance policy allows you to mitigate the risk.

    2.  You can transfer the financial losses to the provider by paying a small amount as a premium.

    3.  You can live a calm life and feel at ease knowing that you will be compensated in the event of an accident. 

    4.  There are certain things, like cars, for which you are required to have insurance as it is made mandatory by authorities.

    Life Insurance

    Terms of Insurance

    1.  Policy – The written agreement between the policyholder and insurer.

    2.  Insurer – The insurance company that will be covering your risks.

    3.  Policy Holder – The person who took the policy from the insurance company.

    4.  Premium – The amount that you are required to pay to the company to keep the policy effective.

    5.  Policy Term – This will be referred to as the effective period, expressed in terms of the number of years for which the insurance provider will offer coverage. 

    6.  Sum Assured – The highest sum of money that you will receive in the event of unanticipated events. 

    7.  Claim – This is regarded as a formal request for reimbursement/payment for expenses incurred after the event. 

    How does Insurance work?

    The insurance firm takes premiums from several clients, covers them for particular risks, and divides the risk among them. 

    Let’s use home insurance as an example. In a given area, there are 100 houses with a value of 1 lakh each, of which 2 burn down every year. All of the homeowners obtained insurance from a company and had their homes covered; therefore, the insurance company collected a total of about 10 lakhs in premiums. Should two of the approximately 2 lakhs worth of houses burn down in a given year, the company would pay the homeowners 4 lakh and make a profit of 6 lakhs. 

    In a similar vein, the policyholder would have the assurance that should their home burn down; they would receive a settlement of two lakh rupees for a premium of just 10,000 INR. 

    Benefits of Insurance

    There are lots of benefits to buying insurance, some of which are mentioned below-

    1.  Insurance shields you from life’s uncertainties and guards against financial losses brought on by many unforeseen circumstances. 

    2.  Few insurance policies offer both life insurance and investment rewards, giving you the chance to achieve your most important life goals in addition to receiving insurance coverage. 

    3.   Unpredictable events could result in large losses that you would have to pay out of pocket, which could negatively affect your financial situation. But insurance allows you to cushion yourself. 

    4.  You can feel more at ease knowing that your insurance provider will provide support in the form of compensation in the event of a loss. 

    5.  Insurance plans also come with tax benefits, as you can take a deduction for life insurance u/s 80(C) and for health insurance, you can claim a deduction u/s 80(D).

    Types of Insurance

    In India, insurance is divided into 2 different categories.

    1.  Life Insurance

    2.  General Insurance

    Life Insurance 

    This kind of insurance safeguards your loved ones by providing either one-time or periodic payments after the event of your death. This insurance helps your family survive after your passing. 

    There are several types of life insurance. Some of them are:

    1.  Term Life Insurance – This insurance ensures that in the event of your death, the designated beneficiary receives an agreed-upon amount from the insurer. 

    2.  Whole Life Insurance – The insurance covers an individual’s life to the age of 100 and is sometimes referred to as a standard life insurance coverage. 

    3.  ULIP Plans – The Unit Linked Insurance Plan, or ULIP, offers both investing and insurance benefits. A portion of your contribution is used to cover your life insurance, while the remaining amount is invested in securities linked to the market. 

    General Insurance 

    All other forms of insurance, excluding life insurance, are categorized as general insurance since they shield your finances from losses brought on by events that involve home, car, health, or other property. They also go by the name of non-life insurance policies. 

    There are several types of general insurance. Some of them are:

    1.  Health Insurance – When a person purchases health insurance, the insurance company pays for their medical expenses up to the sum assured, which is determined at the time the policy is taken out. 

    2.  Motor Insurance – This type of insurance offers cash support if your vehicle — a car, bike, etc.— is stolen or damaged.

    3.  Home Insurance – As the name implies, home insurance protects your home’s infrastructure and possessions from harm and devastation, including natural and man-made calamities.

    4.  Travel Insurance – If you have travel insurance, you will be protected against any mishaps that happen during your travel, like misplaced bags, cancelled flights, etc. 

    General Insurance

    How to Choose an Insurance Provider?

    1.  The most important factors to consider when choosing an insurance company are the features and benefits that they are offering.

    2.  You must obtain estimates from multiple insurance providers and evaluate them; nevertheless, you shouldn’t choose the least expensive option without also considering the value proposition. 

    3.  Customer service is another crucial component to take into account. When filing a claim, you should pay close attention to how quickly and responsively their team responds to your inquiry. 

    4.  Before purchasing any insurance policy, you should research the company’s past claim settlement ratio; the greater the ratio, the more likely the insurer will pay the claim without being denied. 

    5.  Although negative reviews or complaints filed to the insurance business are often disregarded, they may provide insight into which firms are worth considering. 

    6.  When purchasing insurance policies, it is important to consider an insurance company’s size and financial standing. In the event of a larger claim, a company with weaker financial standing may be unable to reimburse the amount due. 

    Read Also: Concurrent Insurance

    Key Comparison Metrics of Insurance Providers

    1.  Gross Written Premium – It shows the entire amount of the premium that the insurer wrote before commissions and reinsurance costs are subtracted. 

    2.  Claim Settlement Ratio – This displays the percentage of claims that the insurance company has settled relative to the total number of claims that it has received. 

    3.  Policy Renewal Rate – This indicates the percentage of policyholders who choose to renew their insurance with the same insurance company. 

    4.  Average Time to Settle a Claim – The shorter the time taken to process the claim, the more advantageous it is to the insured. 

    Conclusion

    One of the most essential advantages of insurance is that it protects your money after an unforeseen event in exchange for a nominal premium. However, you must take into account several aspects when choosing an insurance provider, including the claim process, customer service, and policy features. 

    Frequently Asked Questions (FAQs)

    1. What is the purpose of insurance?

      The primary goal of insurance is to lessen the burden of monetary loss in exchange for a minimal premium payment.

    2. What are the types of insurance?

      There are two primary categories of insurance: general insurance and life insurance.

    3. Which organization manages the workings of the insurance industry?

      The Insurance Regulatory and Development Authority of India, or IRDAI, is responsible for overseeing the general operations of the insurance sector.

    4. What is IMF in Insurance?

      IMF stands for Insurance Marketing Firm, which is a distribution channel established by IRDAI.

    5. Is there any tax benefit available in insurance?

      Yes, insurance plans offer several tax benefits. For example, you can deduct your life insurance payments under Section 80(C) and your health insurance premiums under Section 80(D). 

  • What is FIRE in Finance? Full Form, Features, Types, and Formula Explained

    What is FIRE in Finance? Full Form, Features, Types, and Formula Explained

    Are you tired of your daily grind? Feeling trapped by your income? You are not alone. Millions crave financial freedom and the chance to break free from the traditional 9-5 job. But is early retirement possible?

    This blog will dive deep into the world of FIRE and explore the sacrifices needed to achieve financial independence and early retirement.

    Overview

    FIRE stands for “Financial Independence Retire Early”. According to this theory, saving a bigger percentage of income and making prudent purchases throughout one’s earning years are the best ways for someone to retire early—typically in their 30s or 40s. 

    A person is typically expected to retire at age 60, but recently, people have a longing to retire early. The idea inspires many to save money to retire early and live a longer life. 

    Features

    The major features of FIRE are as follows –

    1.  The concept focuses on retirement earlier than traditional retirement age.

    2.  Individuals should save a significant percentage of their income—more than 50%, on average.

    3.  It is recommended that savings are invested aggressively in high-yielding asset classes like bonds and stocks. 

    4.  Implementation of the idea requires a minimalistic lifestyle, which means an individual is required to spend less and find cheaper alternatives to their habits.

    5.  Proper financial planning is required to achieve early retirement.

    6.  Discipline in saving funds is of paramount importance

    Types of FIRE

    Types of ‘FIRE’

    The 3 major types of FIRE approaches are explained below-

    1.  Lean FIRE 

    Lean FIRE assumes a low spending rate after retirement. This means that you’ll have to sacrifice many of your aspirations and live within your means. If you’re willing to make those sacrifices, then Lean FIRE might be the right option for you because it is the fastest way to achieve your goals. 

    2.  Fat FIRE

    If you dream of international travel, lavish vacations, and shopping, Fat FIRE is the way for you. It allows users to save aggressively during their careers to have above-average retirement funds. 

    3.  Barista FIRE 

    Individuals who follow the FIRE method are not interested in working a 9–5 job in the long term; instead, they engage in part-time work and live a modest lifestyle after retirement. To enjoy the freedom of work and the financial security of retiring early, many attempt to locate a less stressful job or work part-time after retirement. 

    Read Also: Military Wealth Management

    How does ‘FIRE’ work?

    If you intend to retire early, you must determine how much money you will need to continue living the way you do when you are retired. This will assist you in deciding when you can retire. 

    For example, a person with an annual income of 7 lakhs who intends to retire at 45 must have a different FIRE plan than someone with an annual income of 12 lakhs who wants to retire at 40. 

    FIRE strategy requires a unique approach, which typically includes cost-cutting and aggressive investing. One way to save costs is to purchase second-hand goods rather than brand-new ones or to spend on necessities only rather than wants. Individuals must set aside between 50 and 70 percent of their income for savings and use those funds to invest in various higher-yielding asset types, including bonds and stocks. 

    In addition to these two things, you must review your tax strategies to reduce the amount you pay for tax on your income.

    To learn about your required retirement corpus, explore our Retirement Planning Calculator here.

    Method of Calculating ‘FIRE’

    1.  To calculate FIRE, you need to determine your in-hand annual income first.

    2.  Next, you must determine your FIRE number using the widely accepted 4% thumb rule, which states that to maintain a 4% withdrawal rate, you must amass assets equal to 25 times your yearly expenses. For example – If your annual expenses are 5,00,000 INR, then your FIRE number would be 1,25,00,000, which is 25 times your annual expenses.

    3.  Then, you must adjust the FIRE number to include the impact of inflation.

    4.  The next step is to figure out how long it will take you to reach FIRE by factoring in your current savings rate, expenses, and investment return. 

    5.  The next stage would be to decide which asset class to invest in. 

    6.  Your portfolio must be periodically examined to assess investment performance and determine whether your FIRE objective is on track.

    Fire Calculation

    Advantages

    FIRE offers several advantages to those who use it for their retirement planning, a few of which are mentioned below.

    1.  It gives someone the ability to feel adaptable and free to pursue the kind of life they desire. 

    2.  An individual can have more time to follow their passions and hobbies when they retire early. 

    3.  Individuals who are financially independent and have a solid financial plan lead stress-free lives free from financial uncertainty. 

    4.  A person can leave a concentrated legacy through FIRE. Early retirement also enables one to spend more time with one’s loved ones. 

    Disadvantages

    1.  FIRE is vulnerable to uncertain and erratic returns on your investments; if the actual returns do not align with your retirement plan, you may not be able to secure enough money to retire. 

    2.  It focuses heavily on giving up short-term needs in favor of early retirement and long-term financial security, which can cause mental dissatisfaction among users. 

    3.  The growing cost of healthcare is not considered while accounting for retirement. This exposes the user to vulnerability during periods of a health crisis.

    4.  Inflation can erode purchasing power and reduce the value of your retirement savings. Hence, it is important to regularly modify the FIRE number in accordance with updated inflation figures. 

    Read Also: 10 Essential Financial Planning Tips for Military Members

    Conclusion

    The FIRE technique is a valuable strategy for early retirement and post-retirement financial independence. If you want to retire in your 40s, you should plan your retirement based on your lifestyle and income. You can apply any of the FIRE types to plan your financial future for yourself and your family. Furthermore, since retirement is a very personal choice, there is no one correct way to plan it; hence, you should do what is practical for you. 

    Frequently Asked Questions (FAQs)

    1. What does FIRE stand for in financial terms?

      FIRE refers to “Financial Independence Retire Early”. 

    2. What is the FIRE method?

      It’s the process of making significant investments and savings during your formative years so that you can retire early. 

    3. How do you calculate your FIRE number?

      To calculate your FIRE number, you must calculate your current annual expenses and multiply them by 25. This FIRE formula is derived using the 4% rule as a basis.

    4. How can I plan my retirement by FIRE?

      With the FIRE strategy, you can reduce your spending, save more money, and invest in high-yielding asset classes to prepare for retirement.  

    5. Is FIRE achievable for everyone?

      Most people can achieve it because it just takes discipline, dedication, and smart financial planning. Your ability to achieve FIRE depends on your income level, your spending habits, and your ability to generate higher returns.

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

  • Explainer on UPI Scams: Latest Scams, Economic Data, Government Actions, and Prevention Tactics

    Explainer on UPI Scams: Latest Scams, Economic Data, Government Actions, and Prevention Tactics

    Have you ever received a suspicious call about your UPI account? Or a message claiming an undelivered package requiring an urgent payment? If so, you are not alone. UPI scams are on the rise in India, and it is important to know the tricks scammers use to steal your hard-earned money.

    Today’s blog will explore the latest UPI scams and provide essential tips for protecting yourself.

    UPI Scams Overview

    UPI scams are deceptive tactics that exploit the Unified Payments Interface (UPI) system to steal money from users. These scams can trick you into revealing sensitive information or initiating unauthorized transactions.

    Scammers use several methods to manipulate you. They might pose as a trusted source like your bank, a seller, or even a friend. Their ultimate goal is to get your UPI PIN or OTP (one-time password). Once they get this, they can transfer funds from your account without your permission.

    Types of UPI Scams

    Latest Scams

    Below are some of the latest tactics used by scammers:

    Fake Customer Care Scams

    This scam involves impersonation. Scammers pretend to be customer service representatives from your bank or a popular online retailer. They might call you, claiming suspicious activity on your account or undelivered products. The goal is to pressure you to share your UPI PIN or OTP.

    QR Code Scams

    Malicious QR codes can be placed strategically to trick you. These codes could be on posters, websites, or even physical receipts. Scanning such a code could lead you to a fake UPI payment page or download malware that can steal your credentials.

    Fake Investment Schemes

    Fraudulent investments offering promising high returns are a common trap. Scammers might reach out through social media or messaging apps. They can be very convincing, so be wary of unsolicited investment advice and always research thoroughly before transferring any funds.

    SIM Cloning

    While not entirely new, SIM cloning is a growing concern. Scammers can get a duplicate SIM card with your phone number. This could allow them to intercept UPI notifications and verification codes, enabling unauthorised transactions.

    Fake Delivery OTP Scam

    This is a common tactic used by fraudsters to steal money through UPI. In this scam, you will receive a call from the fraudster impersonating a delivery agent. They would then create a sense of urgency by stating a delivery attempt was unsuccessful due to your absence or an incorrect address. The scammer will then ask for the OTP to reschedule the delivery or verify your information. The OTP that you will receive is actually for a UPI transaction.

    Phishing

    It is an attempt to steal sensitive information, generally usernames and passwords, credit card details, or any other personal data, by pretending to be a legitimate source. Phishing scams can target you through various channels, including email, text messages, phone calls and even social media. This could be an email that looks like an email from your bank or even a fake website designed to mimic a popular online service.

    UPI Scams Economic Data

    In 2022-23, 95,000 cases of UPI fraud were reported, up from 84,000 in 2021-22.

    55% of digital payment frauds in India are related to UPI transactions, and almost half of cybercrime cases since 2020 have been linked to UPI.

    While UPI boasts built-in security features, a few users unfortunately fall victim to social engineering scams.

    YearCount of casesFraud-to-Sales Ratio (value terms)
    2020-2177,2990.0017%
    2021-2284,2740.0016%
    2022-2395,4020.0015%

    Note – The fraud-to-sales ratio is a metric used to measure the percentage of fraudulent transactions compared to the total volume of transactions in a given period.

    Even though the number of UPI fraud cases has increased, the fraud-to-sales ratio remains very low, indicating that most UPI transactions are safe. However, this does not eliminate the importance of being aware of scammers’ social engineering tactics.

    Read Also: Financial Scams in India: Types, Resolution, and Awareness

    UPI Scams Government Actions

    The Indian government is aware of the rising problem of UPI scams and is taking steps to combat them. Let us have an overview:

    1. The RBI issues guidelines and regulations for UPI transactions to strengthen security measures and improve fraud detection.
    2. The government has formed an Inter-Ministerial Committee on phone frauds, which brings together various stakeholders like the Ministry of Electronics and Information Technology, the Department of Financial Services, and law enforcement agencies to work collaboratively on preventing online financial frauds, including UPI scams.
    3. RBI and NPCI run public awareness campaigns to educate users about UPI scams. These campaigns include informative videos, posters and social media messages.
    4. The Central Government has also launched the National Cyber Crime Reporting Portal, www.cybercrime.gov.in, to enable victims to report complaints about all cybercrimes, including net and online frauds.

    To sum it up, the government is consistently addressing UPI scams, but it is a continuous battle. So, you need to be vigilant and follow safe UPI practices.

    How to prevent UPI Scams

    Prevention Tactics

    1. Treat your UPI PIN and OTP with the same care you would for your ATM PIN. Never, ever share them with anyone. Banks and legitimate businesses will never ask for this information.
    2. Before approving any UPI transaction, meticulously analyse the recipient’s details. Verify the name and UPI ID; do not rely solely on nicknames or familiar-sounding names.
    3. Scammers often impersonate customer service representatives or sellers. If you receive a call or message requesting urgent UPI payments or claiming suspicious activity on your account, verify the sender’s identity directly with the bank or the company they claim to represent.
    4. Some messages often contain links that lead to fake websites designed to steal your money through UPI credentials. Therefore, do not click on links from unknown senders.
    5. Only download UPI apps from trusted sources like Google Play store or Apple App Store. Avoid downloading apps from untrusted websites or clicking on ads that promote them.
    6. Enable strong passwords or PINs for your phone as well as the UPI app. Consider two-factor authentication for additional security.
    7. Regularly monitor your UPI transaction history, look for any unauthorized transactions and report them to the bank immediately.

    Read Also: Explainer on Imitation Investing

    Conclusion

    In today’s digital world, staying safe from UPI scams requires constant vigilance. Remember, knowledge is power; you can keep yourself safe by educating yourself and following safe practices. Do not hesitate to report suspicious activity to your bank and the authorities. Together, we can create a safer digital payment environment for everyone.

    Frequently Asked Questions (FAQs)

    1. What are UPI Scams?

      UPI Scams are deceptive tricks that exploit UPI to steal money from users through fake transactions or extracting sensitive information.

    2. What are some common UPI Scams?

      Phishing messages, fake money requests, and unauthorized transactions are all common scams.

    3. How can I protect myself from a UPI Scam?

      Be cautious of unknown messages, double-check the recipient details, and download apps carefully to protect yourself.

    4. Is using UPI safe?

      UPI has built-in security features, but user awareness is important. Following safe practices minimise your risk.

    5. What should I do if I suspect a UPI scam?

      Do not respond to the scammer; immediately report the incident to your bank and change your UPI PIN if needed. 

  • NEFT vs RTGS vs UPI vs IMPS: A Comparative Study

    NEFT vs RTGS vs UPI vs IMPS: A Comparative Study

    In today’s digital era, electronic fund transfers have become the norm, revolutionizing how we transact money. Multiple options, such as RTGS, NEFT, UPI, and IMPS, are available. Let us delve into the blog better to understand these options.

    NEFT: An Overview

    It stands for National Electronic Funds Transfers and is a RBI-governed funds transfer method. NEFT started in November 2005 and is a safe and secure method of transferring small amounts of money. 

    Features

    • Fees and Charges: Online NEFT transactions are free of charge and offline transfers cost up to ₹50 in charges.
    • Processing Time: Processing time is in under 2 hours. In some cases, it may also take up to 12 hours. 
    • Maximum Limit: There is no maximum limit per day for NEFT transactions.
    NEFT

    RTGS: An Overview

    It stands for Real-time Gross Settlement and is used to transfer higher amounts. RTGS ensures that the funds are transferred securely and without dependence on other transactions, thus minimizing risk. 

    Features

    • Fees and Charges: RTGS online transfers do not have any levied charges.
    • Processing Time: RTGS is the fastest method to transfer higher-value amounts, and the transaction is settled in real-time, under 30 minutes.
    • Maximum Limit: The Reserve Bank of India (RBI) has not set any maximum transaction limit.

    UPI: An Overview

    It was launched in 2016 by the National Payments Corporation of India (NPCI) and stands for Unified Payments Interface. The unique feature of UPI is the ease of transferring money, this lets you send money from your bank account to another by simply entering someone’s phone number, UPI ID, or scanning a QR code. This fund transfer facility is available through your mobile 24*7.

    Features

    • Fees & Charges: UPI payments service is free and does not charge any transaction fees.
    • Processing time:  UPI is an instant payment and transfer method. 
    • Maximum Limit:  UPI’s maximum transaction limit per day is 1 Lakh.
    UPI

    IMPS: An Overview

    It stands for Immediate Payments Service and was first established by NPCI in 2010. An IMPS funds transfer is a better fit for you than UPI as it allows immediate transfer of amounts up to 5 Lakhs.

    Features

    • Fees & Charges: IMPS transfer fees can range from ₹2.5 to ₹25 + GST depending on the amount value and choice of bank.
    • Processing time: IMPS transfers amount usually within 30 minutes. 
    • Maximum Limit per day: The transaction limit of IMPS is 5 Lakhs. 

    Read Also: XIRR Vs CAGR: Investment Return Metrics

    Comparison Chart

    BasisNEFTRTGSUPIIMPS
    Minimum Transfer Limit No minimum limit₹2 LakhNo minimum limitNo minimum limit
    Maximum Transfer Limit No upper limits (max. ₹50,000 per transaction)No limit ₹1 Lakh₹5 Lakhs
    Time TakenUp to 12 hours (usually within 2 hours)Real-time (within 30 Minutes)Instant Real-time (within 30 Minutes)
    Service AvailabilityOnline + OfflineOnline + OfflineOnline + Offline Online + Offline (chargeable)

    Security     		Safe, backed by RBISafe, backed by RBISafe, backed by NPCISafe, backed by NPCI
    Service FeesNo charges on online NEFT transactionsOffline NEFT transactions are charging between ₹2.5 to ₹50No charges for online transactionsFor offline: ₹2L to 5L transaction: up to ₹25 applicable₹5L & above transaction: ₹25 to ₹50 applicable Free of cost ₹2.5 to ₹25 (varies from bank to bank)
    GST chargesGST charges are applicableNo GST charges for online RTGS transaction₹15 + GST is charged for offline RTGS transactionNo chargesGST charges are levied 
    Service Availability during Bank HolidaysAvailableAvailableAvailableAvailable
    SuitabilitySuitable for loan repayment and credit card paymentsSuitable for transactions exceeding ₹2 lakhs. Suitable for instant transfers upto ₹1 lakhSuitable for transactions ranging between ₹1 lakhs to ₹2 lakhs
    Operated by RBIRBINPCINPCI

    Charges

    Let’s have a look at which one is cheaper NEFT vs  RTGS vs UPI vs IMPS:

    AmountNEFTRTGSUPIIMPS
    Below 2 LakhsFreeNot ApplicableFree₹2.5 to ₹15 + GST charges
    2 Lakhs to 5 Lakhs ₹25 to ₹30 + GST charges if applicable Free of cost Not Applicable ₹2.5 to ₹15 + GST charges
    5 Lakhs & above ₹25 to ₹50 + GST charges if applicable maximum ₹50 + GST chargesNot ApplicableNot applicable

    Read Also: SIP in Stocks vs SIP in Mutual funds?

    Conclusion

    In conclusion, NEFT, RTGS, UPI, and IMPS are distinct electronic fund transfer systems with varying features and benefits. NEFT is suitable for small transactions, RTGS for higher amounts, IMPS for instant transfers up to 5 Lakhs, and UPI for quick transfers up to 1 Lakh without charges. Each method caters to different needs and preferences in online transactions.

    S.NO.Check Out These Interesting Posts You Might Enjoy!
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    Frequently Asked Questions (FAQs)

    1. What is the minimum amount for an IMPS transfer?

      The amount transferable through an IMPS can be as low as Re.1.

    2. What is the limit of IMPS in Indian bank?

      Account holders can transfer up to Rs. 2 lakh through IMPS in a day. 

    3. Is RTGS mode of payment safe?

      RTGS is a highly safe and secure mode of payment which is monitored by the RBI. It is even more secure as it is used majorly for money transfers of higher amounts.

    4. Which is better, NEFT or UPI?

      It depends on the user’s preferences and amount of transfer. While UPI transactions are processed instantly, NEFT transactions may take upto 2 hours to process.

    5. Is IMPS a better mode of transfer than NEFT and RTGS?

      IMPS allows immediate transfer of funds and this service can be accessed even on bank/public holidays. That is why this service is often considered better than NEFT and RTGS.

  • Explainer on Green Bonds: History, Process, Pros, Cons, and Future Outlook

    Explainer on Green Bonds: History, Process, Pros, Cons, and Future Outlook

    Ever wondered how your investments can benefit both your wallet and the environment? That is the power of Green Bonds! These innovative financial instruments are shaking up the investing world, offering investors a chance to earn great returns while supporting sustainable projects that promote environmental well-being.

    In our today’s blog, we will discuss green bonds – regular bonds with an eco-friendly twist.

    Green Bonds Overview

    Green bonds are a type of debt security used to finance projects with environmental benefits. These projects can include renewable energy, energy efficiency, clean water, sustainable agriculture and conservation. The government, corporations, and non-profit organisations issue these bonds. The average maturity is comparatively longer for green bonds, i.e., 17 years.

    Did you Know?

    The Swedish Environment Protection Agency issued the first-ever environmental bond in 1993.

    Green Bonds application for environmental research

    Green Bonds History

    It took decades for green bonds to evolve from a niche concept to a major sustainable finance topic.

    The Story

    In 2007, the Intergovernmental Panel for Climate Change, a UN agency, focused on providing scientific data about climate change and its economic implications.

    A report was released that established the connection between human activities and global warming. This revelation, coupled with the rising frequency of natural disasters, provoked Swedish pension funds to ponder how they could leverage the funds that they managed to resolve the aforementioned problem.

    Seeking guidance, they approached their bank, SEB (Skandinaviska Enskilda Banken AB). The bank then recognised the synergy and fostered a unique solution bridging the financial needs with environmental expertise. SEB then facilitated the connection between these financial endeavours and the World Bank and provided its extensive expertise in investing in environmental projects globally.

    The solution was obvious in observation. But despite the World Bank’s promising environmental projects and proven issuance record of bonds, a critical question remained: how could investors gain absolute confidence that their contributions directly managed climate issues?

    This sparked another collaboration with CICERO, the Centre for International Climate and Environmental Research – an interdisciplinary research centre for climate research in Oslo. CICERO scientists were leading experts on climate issues who could provide a sound and reliable view of whether a project would positively impact the environment.

    In 2008, this initiative led to the discovery of the first ‘labelled green bond’ by the World Bank and catalyzed the entire green bond market.

    Did you Know?

    The global green bond market has surpassed the threshold of INR 134 trillion in cumulative issuance.

    Eco impact of green bond

    Green Bonds in India

    To reduce the carbon intensity of the economy, the Union Budget 2022-23 announced the issue of green bonds.

    The categories of green bonds include renewable energy, energy efficiency, sustainable management of natural resources, clean transportation, sustainable water, green building etc.

    For the same, a framework known as Green Bond Principles was designed by the International Capital Market Association (ICMA).

    The four core components as outlined by ICMA green bond principles are as follows

    1. Use of Proceeds

    The government of India will use the proceeds raised from Sovereign Green Bonds (SGrB) to finance and refinance expenditure either partially or wholly for eligible green projects and it will be made sure that proceeds get allocated to projects within 24 months after the issuance.

    2. Project Evaluation and Selection

    The Ministry of Finance has constituted a “Green Finance Working Committee” (GFWC) headed by the Chief Economic Advisor and GFWC. They will meet twice a year to support the Ministry of Finance with the selection and evaluation of projects. However, the initial evaluation of the project will be done by the concerned Ministry with the help of experts.

    3. Management of Proceeds

    The proceeds will be deposited to the Consolidated Fund of India (CFI) and then the funds from CFI will be withdrawn as and when needed for eligible green projects.

    A separate account will also be created by the Ministry of Finance (GOI) to monitor the proceeds allocation and avoid any malpractice. Additionally, the Public Debt Management Cell (PDMC) will keep track of proceeds within the existing guidelines

    4. Reporting

    The Indian Government has pledged to offer investors transparent reporting about the allocation of the proceeds from green bonds and the environmental impact of projects funded.

    Read Also: What are Bond Yields?

    The Process of Issuance of Green Bonds

    1. The concerned Ministry will conduct an initial evaluation to identify the list of eligible green projects depending on the framework and submit it to GFWC.
    2. Members of the GFWC under the guidance of a climate specialist from Niti Aayog as well as the Representative from the Ministry of Environment, Forest and Climate Change, will evaluate and analyse the complete list of the submitted projects.
    3. Once the Finance Bill is passed, the Ministry of Finance will notify the Reserve Bank of India (RBI) about the amount of eligible green expenditures for which proceeds from green bonds can be used.
    Process of issuing Green Bond

    India’s First Green Bond

    India issued the first tranche of its Sovereign Green Bonds worth INR 8000 crore on January 25, 2023, and the proceeds were used for green projects such as solar power, wind and small hydro projects and other public sector projects that help reduce the economy’s carbon footprint.

    This offering was sold in 5-year and 10-year tenors through a uniform price auction on January 25, 2023. A similar offering was scheduled for February 9, 2023.

    Also, driven by the shared goal of sustainable development, the World Bank Group and the Indian Government joined forces. The World Bank Sustainable Finance and ESG Advisory Services provided technical assistance and expertise to launch the sovereign green bond program, a key initiative to maximise finance for India’s climate transition and green growth.

    Did You Know?

    In 2015, Yes Bank, a private sector bank in India, successfully issued India’s first-ever green infrastructure bond, raising INR 1,000 crores.

    Green Bonds Future Outlook

    India has set an ambitious target of achieving net zero carbon emissions by 2070. Green Bonds are expected to play an essential role in mobilising the massive investments needed for this transition.

    The Indian Government plans to issue more sovereign green bonds and encourage more involvement from private companies and municipalities.

    Are green bonds good for long-term investing?

    Green Bonds can be a good option for both long-term investing and ethical investing, but it depends on your individual goals and preferences.

    Pros

    1. Green bonds can offer similar returns as traditional bonds, depending on the creditworthiness of the issuer and the conditions prevailing in the market. These bonds may even outperform conventional bonds in some situations.
    2. These bonds can diversify your portfolio, potentially spreading the risk and enhancing its resilience.
    3. By choosing green bonds, you can contribute to financing environment-friendly projects that best align with your values.

    Cons

    1. The green bond market is relatively young in India, so long-term history data might be scarce.
    2. The bonds may have lower trading volumes compared to traditional bonds, which will impact the bond’s liquidity.
    3. The extremely long tenure of these bonds may make them undesirable.

    Remember –  Prioritizing ethical choices may affect your returns as compared to a purely profit-driven investment strategy.

    Read Also: CAT Bonds: An Easy Explainer

    Conclusion

    To sum it up, whether green bonds are a good choice depends entirely on your financial goals, risk tolerance and ethical values. Analyse carefully what matters most and do proper research before investing because not all green bonds are perfect.

    Frequently Asked Questions (FAQs)

    1. What are green bonds?

      Green bonds are a type of fixed-income security issued by the Government, municipalities, and corporations.

    2. Why should I invest in green bonds?

      You should invest in green bonds to make a positive impact, diversify your portfolio, and align your values with your investments.

    3. Are green bonds risky?

      Green bonds are riskier than traditional ones because of the limited availability of past data and lack of liquidity.

    4. Are green bonds only for ethical investors?

      No, anyone can invest in green bonds. But research well to ensure they meet your specific goals.

    5. When was the first tranche of sovereign green bonds launched in India?

      The first green bond in India was launched on January 25, 2023

  • Non-Convertible Debenture (NCD) vs Fixed Deposit (FD): Meaning, Features, and Differences Explained

    Non-Convertible Debenture (NCD) vs Fixed Deposit (FD): Meaning, Features, and Differences Explained

    Are you unable to choose between putting your money into Non-Convertible Debentures (NCDs) and Fixed Deposits (FDs)? You’re not alone! Both options are popular among investors looking for safety and consistent returns, but they both come with their own sets of pros and cons. In today’s blog, we’re comparing NCDs with FDs. 

    Fixed Deposits – An Overview

    It’s a well-known conventional investing choice for risk-averse investors. Fixed deposits are financial instruments offered to the general public by banks and non-banking financial organizations (NBFCs) that allow them to deposit money for a predetermined amount of time and receive a guaranteed fixed return. Both cumulative and non-cumulative options are available with the fixed deposit, giving investors the choice of receiving interest payments periodically or all at once when the fixed deposit matures. 

    Features of Fixed Deposits

    1.  The length of a fixed deposit may usually be chosen with flexibility; it can be anywhere from seven days to ten years.

    2.  Many banks provide an automatic renewal option that lets investors reinvest their money without having to go through any extra steps. 

    3.  Fixed deposits often provide flexibility in the amount invested, with most banks allowing a minimum investment of INR 5000. 

    4.  Fixed deposits are extremely low-risk investing options since they provide a guaranteed return. 

    5.  Senior citizens benefit further from fixed deposit investments by earning interest rates higher than standard rates. 

    FD

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

    Non-Convertible Debentures (NCDs) – An Overview

    Debt instruments, known as NCDs, are issued by corporate entities to raise long-term capital from the general public. Investing in debentures entails lending money to corporate entities in exchange for a fixed interest rate for a predetermined length of time. The principal amount of the loan is repaid by the company on the maturity date. 

    Two forms of debentures exist: convertible debentures, which can be converted into equity shares of the company after a specific length of time, and non-convertible debentures, which cannot be converted into equity shares. NCDs are issued in the primary market initially, but they can also be traded in the secondary market, offering investors greater liquidity. 

    Features of NCDs

    1.  NCDs have a fixed interest rate that is set at the time of issue by the issuing firm. 

    2.  An investor will get consistent, recurring income from NCDs. 

    3.  NCDs are issued for a particular period, after which the principal amount is repaid.

    4.  Purchasing NCDs entitles you to become a creditor of the business, allowing you to make claims against its assets in the event of its insolvency. 

    5.  Due to the high risk associated with investment in corporate houses, these NCDs are rated by the credit rating agencies based on the creditworthiness of the issuing company.

    NCD

    Difference between NCD and Fixed Deposit

    We’ll now explain the distinction between a fixed deposit and an NCD. 

    Interest Rate – Fixed deposit interest rates typically range from 4 to 7% annually, whereas NCD interest rates often range from 8 to 10%. 

    Issuer – Corporations issue NCDs to generate capital, whereas banks or other financial organizations issue fixed deposits.  

    Risk – NCDs possess higher risk as private business houses issue them. As some business houses have low credibility, investing in their NCDs can put your money at higher risk. On the other hand, FDs are issued by banks and other financial institutions that the Reserve Bank of India regulates.

    Liquidity – Investment in NCDs offers higher liquidity than Fixed Deposits as they can be traded in the secondary market. Still, no such benefit is available in fixed deposits, although a premature withdrawal option comes with a penalty.

    Taxation – NCDs held by an investor in demat are exempted from tax deducted at source while keeping the NCD in physical form attracts TDS if the annual payout is more than 5000 INR. Interest earned from a fixed deposit is fully taxable as per your tax slab if it is above 40000 INR (50000 INR in case of a senior citizen) in a financial year.

    Credit Rating – The rating of NCDs by credit rating agencies is mandatory, while the fixed deposits issued by the banks are not required to get rated by any agency; however, corporate fixed deposits issued by non-banking financial companies are required to get the rating from any credit rating agency.

    Interest Rate Risk – As NCDs are tradable in the secondary market, their price may vary based on interest rates prevailing in the economy, while fixed deposits don’t have any such kind of risk.

    Safety – Assets of the company generally back the issuance of NCDs while the fixed deposit issued by the bank is insured against the bank’s insolvency up to 5 lakh INR.

    Comparison b/w FD and NCD

    Read Also: Debentures: Meaning, Features, Types, Benefits and Risks

    Conclusion

    Investment in fixed deposit is suitable for the investor with lower risk-taking ability and is happy with a lesser return on their investment. At the same time, NCDs can be opted for by investors looking to earn some extra return and can take additional risk for that. Overall, the above comparison shows the features of both fixed deposits and NCDs.

    On a short note, investors must consider their risk profile, investment goal & objective before deciding between fixed deposits and NCDs.

    Frequently Asked Questions (FAQs)

    1. Can I withdraw my investment from a fixed deposit before maturity?

      Yes, you can withdraw your investment before maturity, but you need to pay some penalty to the issuing authority.

    2. Can I sell NCDs in the secondary market?

      Yes, after NCDs are issued in the primary market, they are listed in the secondary market like any other securities.

    3. What is the shortest and longest duration for which an NCD can be issued?

      NCDs cannot be issued for less than 90 days and more than 20 years.

    4. What is the minimum and maximum duration for which a fixed deposit can be issued?

      The fixed deposit can be issued for a period ranging from 7 days to 10 years.

    5. Is investment in NCD better than investment in fixed deposits?

      NCDs generally carry higher risk as compared to bank fixed deposits but offer higher returns; hence, it is suitable for only those investors who can take risks for higher returns.

  • Financial Scams in India: Types, Resolution, and Awareness

    Financial Scams in India: Types, Resolution, and Awareness

    Did you know that during the financial year 2023, the Reserve Bank of India (RBI) registered bank frauds exceeding INR 30,000 Cr in value? Nowadays, financial scams have become more prevalent, making it difficult to distinguish fraudulent activities from genuine ones. 

    As per the reports of Statista in 2023, the Reserve Bank of India reported 9,103 financial scams across India. In this blog, we will understand how to avoid scams with the aim of increasing awareness.

    Prevalence of Financial Scams in India

    In 2023, India’s financial sector witnessed a surge in sophisticated scams and frauds that exploit evolving technologies and capitalize on unsuspecting individuals. Here are some facts pertaining to the year of 2023:

    • The national cyber crime helpline receives around 50,000 Calls every day, totalling over 13.1 lakh complaints in the entire year.
    • During investment and due process, a total of 2.95 lakh fake SIM cards, 46,000 devices, 2,810 websites, and 595 mobile applications were blocked.
    • Approx. 35% of the total scams focussed around customer service and KYC.
    • Approx. 24% of the total scams focussed on sextortion. 
    • Approx. 22% of the total scams were focused on online bookings and QR codes. 

    While scams are spread out in the entire country, some states witnessed more than others. Data for some of the individual states (& UTs) are as follows:

    • Uttarakhand – 243 cyber crimes per capita
    • Gujarat – 226 cyber crimes per capita
    • Haryana – 381 cyber crimes per capita
    • Telangana – 261 cyber crimes per capita
    • Delhi – 755 cyber crimes per capita

    It is an undisputed fact that the country is facing an epidemic of scams and frauds. Hence, we must know about the varied types of scams happening around the country. 

    Financial Scams in India

    UPI Scam

    The advent of UPI transactions marked an important milestone in the digital era of payments in India. However, fraudsters and scammers are using different social media platforms like WhatsApp to gain access to a number of individuals and defraud them via various means, such as claiming to be bank representatives, NGOs, etc. They feed on fear of the victims and compel them to adhere to the fraudsters’ demands. 

    • In the year 22-23, reported UPI fraud cases exceeded 95,000, a notable increase from the 84,000 cases reported in 2021–2022, as per the Ministry of Finance. 
    • Shockingly, 55% of all digital payment frauds in India are associated with UPI transactions.
    • According to the reports, it has been witnessed that 50% of these scams have an average ticket size of less than Rs 10,000.
    • In 2023, UPI fraud, bank fraud, and email scams resulted in a staggering financial loss exceeding INR 200 cr. 

    QR code scam alert

    Nowadays, QR code scams are on the rise in India, with fraudsters employing deceptive tactics to lure victims into scanning fraudulent QR codes, resulting in the direct theft of funds from their bank accounts.

    • As per police statistics, 41% of the 50,000 reported cybercrime incidents in Bangalore revolved around QR codes.

    Part-time job scams

    Fraudsters are using social media to target their audiences with promises of easy part-time work and handsome salaries. 

    • As per a report in 2023, Delhi police addressed 467 complaints about internet fraudsters advertising part-time work—an alarming increase from the 32 complaints reported in 2020.

    Courier Scam

    These kinds of scammers are targeting young audiences and claiming that courier parcels, allegedly containing drugs or other illegal items, are being sent in their names to foreign countries.

    • Bengaluru police addressed around 163 such courier reports in 2023, and the cumulative financial loss from these scams was more than Rs 5 cr.

    Malware warning frauds

    Fraudsters are increasing in delusive tactics, like fake customer support, cashback links, or emails, to convince unsuspecting consumers to install malware, screen mirroring, or remote access apps.

    • Tech support scams are becoming a worrying factor where 7 out of 10 consumers fall victim to such schemes.
    Cyber crime in India

    Read Also: Scam 1992: Harshad Mehta Scam Story

    Financial Scams Awareness

    Protecting yourself from financial scams and fraud in India requires awareness and caution. Frauds and scams exist in different forms: phishing, emails, and phone calls. Some steps to protect yourself are stated below.

    Educate yourself

    Knowledge is a great way to defend yourself from scams and frauds. Stay informed and updated about scams and fraud. Government bodies provide information about current scams and how to avoid them.

    Verify PIN  

    Do not share your PIN or any other personal information with anyone. Reputed organizations will not ask for your PIN. 

    Two-step -verification 

    It is essential to enable the two-step verification factor. This will help you to give an extra layer of security.

    Use strong passwords

    Create strong and unique passwords for your files, including social media sites, banking files, etc. Always use a combination of letters, numbers, and special characters, and avoid using the same passwords for multiple portals.

    Beware of fraud phone calls 

    Avoid picking up calls from suspecting numbers and do not provide any confidential details on such calls, even if they claim to be representatives of corporations.

    Ask help

    If you become the victim of a scam, then consult with the police and legal professionals to seek resolution as quickly as possible. 

    Financial Scams Resolution

    In a recent interview, the Director General of Police (DGP) of Uttarakhand, Ashok Kumar, spoke on cyber crimes in India. He explained a few preventive steps to minimize cyber crimes, fraud, and scams. The pointers are stated below:

    1. Notify your bank’s customer service immediately, report your incident to them, and ask for help to cease your bank details.
    2. File a complaint with NCRP (National Cyber Crime Reporting Portal).
    3. Contact your local police station and also file an FIR. 
    4. Keep a close eye on your account’s transactions.
    Resolution of Cyber crime in India

    Read Also: Explainer on UPI Scams: Latest Scams, Economic Data, Government Actions, and Prevention Tactics

    Conclusion

    In conclusion, it is crucial to stay informed and cautious to avoid falling victim to scams and fraud in India. By educating themselves, verifying identities, enabling two-step verification, using strong passwords, being wary of fraudulent phone calls, staying updated, and seeking help when needed, individuals can protect themselves from financial scams and fraud.

    Frequently Asked Questions (FAQs)

    1. What is Fraud?

      It is defined as the false representation of facts or providing false statements to another party for the specific purpose of gaining something that may not have been supplied without the deception. 

    2. What are two basic types of Fraud?

      The courts classify fraud under two major types: criminal and civil.

    3. What is an example of a fraud scheme?

      Common frauds include Ponzi schemes, phoney job offers, false billings, bogus investment opportunities, etc.

    4. Why is it important to understand fraud?

      Fraudsters have evolved their methodology in recent times. Therefore, we need to stay aware of their movements so that we can protect ourselves from getting defrauded. 

  • Explainer on Portfolio Management Services (PMS): Features, Types, Charges, Taxation, and Risks

    Explainer on Portfolio Management Services (PMS): Features, Types, Charges, Taxation, and Risks

    If you have accumulated significant wealth during your career and wish to seek professional help in managing the funds, then Portfolio Management Services (PMS) can prove helpful to you. 

    Today’s blog will focus on individuals who wish to gain more profound knowledge of Portfolio Management Services (PMS).

    Portfolio Management Services Overview

    Portfolio management services, or PMS, is a financial service offered by financial institutions. This service primarily focuses on investing investors’ funds with a larger portfolio than the average individual. Such investors can invest their money in this service, and a team of qualified fund managers will allocate it to various asset classes based on their investment goals. 

    Typically, investors allocate a portion of their portfolio to equity but cannot manage it effectively due to a lack of professional knowledge. This is where PMS comes in; with a minimum investment of 50 Lakhs, your entire investment amount will be given to a portfolio management company, and their team of seasoned professionals will allocate it among various asset classes based on market and economic conditions. In exchange, they will charge a fee for their services. 

    The first announcement of the SEBI regulation for PMS dates back to 1993. All Portfolio Management Companies are required to adhere to the compliance standards established by SEBI.

    HNI involvement in PMS

    Minimum Investment Amount

    Over time, PMS’s minimum investment amount has undergone modifications. The PMS legislation was first established in 1993, with a minimum investment value of 5 lakh. In 2012, the minimum investment amount was raised to 25 lakh; in November 2019, it was further increased to 50 lakh. 

    Features of PMS

    1. Investment in PMS provides customized solutions as per investors’ objectives.

    2. The fund managers have vast experience in managing funds

    3. PMS fund managers generally diversify the investment across different asset classes, ultimately lowering the risk.  

    4. Reports like transactions, profit and loss, etc., will be sent periodically to investors, and they can also check the same on the online platform provided by PMS companies.

    5. PMS is a product with a minimum ticket value of 50 lakhs, which is generally suitable for HNI investors.

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

    Types of PMS

    A financial institution offers a variety of portfolio management services, including 

    1. Discretionary Portfolio Management– The portfolio managers make all investment-related decisions under this category of portfolio management services on the client’s behalf. Before making any investments, the fund management is at liberty and is not required to confer with the investor. The majority of the clients choose this type of service. 

    2. Non-discretionary Portfolio Management– The fund manager must obtain the client’s confirmation before investing in this kind of service. The client receives financial advice from PMS’s investment team but ultimately decides whether or not to act on the advice. 

    3. Advisory Services – In this arrangement, a fund manager will merely offer advice to investors on various asset classes; the investor will decide whether to follow the fund manager’s recommendation. 

    4. Active Portfolio Management – The ultimate goal of active portfolio management is to maximize investor return, which is accomplished by actively allocating funds to various asset classes. The fund management actively chooses the allocation of funds and where to invest them. 

    5. Passive Portfolio Management – The fund manager uses this investment management technique to allocate the funds to stocks that track indexes and increase steadily over time.   

    Charges of PMS

    The charges of PMS can be classified into 3 different categories-

    Fixed Charges

    This is what every PMS charges as its main fee. This is an ongoing charge that depends on the average value of your investment and varies from 1% to 3%. The fee is due regardless of the fund manager’s performance ratings. This is the minimum amount that must be paid to the PMS firm regardless of the fund’s performance.

    Below is the illustrative table of the same. 

    Fees2%
    Investment Amount50,00,000
    Return on Portfolio20%
    Profit10,00,000
    Portfolio Value at the year-end60,00,000
    Fixed Charges 2%1,20,000
    Net Value of Portfolio after Fees Adjustment58,80,000

    Performance Based

    The fund’s returns are used to determine these fees. The fund management will charge a fee based on the percentage of profit made above the minimum rate, also referred to as the hurdle rate.

    We can better understand this by using an example. For example, if the hurdle rate is 8% the profit sharing ratio is 20% above the hurdle rate, and your investment of Rs. 50 lakh yields a 20% return on your portfolio, your total profit will be Rs. 10 lakh, of which Rs. 4 lakh is the minimum profit that needs to be delivered. The company will then charge a fee of 20% of the remaining profit of 6 lakhs.

    Below is the illustrative table for the same.

    FeesProfit Sharing – 20% above 8% Hurdle Rate
    Investment Amount50,00,000
    Return on Portfolio20%
    Profit10,00,000
    Value of Portfolio at the end of the year60,00,000
    Hurdle Rate 8%4,00,000
    Profit over hurdle rate6,00,000
    Profit Sharing 20% of 6,00,0001,20,000
    Net Value of Portfolio after Adjustment58,80,000

    Hybrid Fee Structure

    This fee schedule combines a profit-sharing concept with a fixed fee. In this instance, the hurdle rate is typically higher than in a performance fee-based approach, and the fixed charge rate will be lower than in a fixed charge model. This is intended for PMS managers who wish to profit from both fee structures. 

    Taxation

    Equity Taxation – If a portfolio is heavily weighted toward the equities asset class, the tax rate on the profit amount will be 15% if the holdings are sold within a year, and the appropriate rate will be 10% above 1 lakh if the holdings are sold after the year. 

    Non-Equity Taxation – The portfolio will be considered a short-term gain and included in the investor’s income at their slab rate if it is sold within three years and does not concentrate in the equity asset class. If the units are sold after three years, they will be considered a long-term gain and subject to a 20% tax with indexation benefit. 

    Dividend Income –All dividend income earned on the investment will be included in the investor’s income and taxable as per their tax slab.

    Exit Load – If you withdraw your money before a predetermined amount of time, PMS firms typically charge an exit load, ranging between 1 to 3%.

    Asset selection in PMS

    Risks

    The risks investors should consider before investing in PMS are listed below. 

    1.  Performance of Fund Manager – Evaluating the fund manager’s performance before investing is essential. Looking for a fund manager with a stable track record is usually advisable. 

    2.  Market Risk – Due to the investment’s significant exposure to the equities asset class, there is a greater chance of losses and a rise in portfolio volatility. 

    3.  Liquidity Risk – Because certain illiquid securities are difficult to sell, investing in them may affect your portfolio liquidity. 

    4.  Regulatory Risk – As previously stated, the minimum ticket size for investing in PMS has increased from 25 lakhs to 50 lakhs in 2019. Future legislative changes of this nature could affect PMS’s investment strategies and tax consequences.

    Read Also: Explainer on Imitation Investing: Psychology, Advantages, Limitations, and Strategies

    Conclusion

    We’ve gone over the benefits and risks of investing in PMS with you; this service is for high-net-worth individuals (HNIs) who understand the risks involved in this kind of investing. Suppose an investor is willing to assume the risk of this product and is seeking a better return. In that case, they should consider all the important characteristics before making a decision. 

    Before making any investing decisions, we advise you to speak with your financial advisor to better understand your ability to accept risk. 

    Frequently Asked Questions (FAQs)

    1. Is PMS investment permissible for NRIs?

      Yes, You can invest in PMS as an NRI.

    2. How do I access my PMS portfolio valuation?

      In addition to sending clients statements regularly, PMS businesses offer their clients an online portal through which they can monitor their assets, transaction statements, and profit and loss statements. 

    3. How can you evaluate PMS performance before purchasing?

      Before purchasing PMS, you can evaluate its performance by comparing its returns to the appropriate benchmark and examining the consistency of its returns over an extended duration.

    4. Does PMS have a lock-in period?

      PMS offers the flexibility of no lock-in period. However, redeeming your investment before the allotted time will incur an exit load.

    5. Is there a guaranteed return in PMS?

      No, PMS company cannot provide investors with a guaranteed rate of return.

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

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

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

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

    Introduction of bonds

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

    Investing in bonds

    Characteristics of Bonds

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

    Bond issuance process

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

    Types of Bonds

    Bonds are divided into various groups according to their characteristics. 

    Treasury Bonds

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

    Municipal Bonds

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

    Corporate Bonds

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

    Zero-Coupon Bonds

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

    Junk Bonds

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

    Convertible Bonds

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

    Callable Bond

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

    Putable Bond

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

    Floating Rate Bonds

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

    Inflation Linked Bonds

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

    Perpetual Bonds

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

    CAT Bonds

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

    Capital Gain Bonds

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

    Advantages of investing in bonds

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

    Disadvantages of investing in bonds

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

    Factors that affect bond prices

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

    Additional factors to be considered

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

    Conclusion 

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

    Frequently Asked Questions (FAQs)

    Q1. What is the primary risk affecting corporate bonds?

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

    Q2. What kind of bond is the safest?

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

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

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

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

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

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

  • Sectoral Funds Decoded: Riding the Investment Roller-Coaster

    Sectoral Funds Decoded: Riding the Investment Roller-Coaster

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

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

    Overview of Sectoral Funds Decoded

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

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

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

    Benefits of Sectoral Funds Decoded

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

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

    Risks

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

    Performance

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

    The Sunny Side

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

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

    The Dark Side

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

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

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

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

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

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

    Read Also: Decoding Credit Risk Funds In India

    Returns Comparison

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

    Technology Sector

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

    Pharma Sector

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

    Example

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

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

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

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

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

    Read Also: History of Mutual Funds in India

    Conclusion

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

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

    Frequently Asked Questions (FAQs)

    1. Why should I invest in sectoral funds?

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

    2. Are sectoral funds right for me?

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

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

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

    4. Can I time the market with sectoral funds?

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

    5. Can sectoral funds help me get rich quickly?

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

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