Pocketful

Blog

  • Shariah-Compliant Mutual Funds: Should You Invest?

    Shariah-Compliant Mutual Funds: Should You Invest?

    Did you know you can grow wealth while staying true to your Islamic values? Shariah-compliant mutual funds provide investors with the solution who seek the balance between ethics and investments.

    In this blog, we will explore the key features, benefits, risks, etc. of Shariah-compliant mutual funds. 

    Overview Shariah-Compliant Mutual Funds

    Sharia-compliant mutual funds are a form of investment vehicle curated for investors who want to align their investments with Islamic principles. These funds follow the guidelines of Sharia law, which forbids activities such as interest-based earnings, gambling, and investing in sin industries like alcohol and tobacco.

    What is Shariah Law?

    What is Shariah Law?

    Shariah law is a religious law in the Islamic culture. It is not a set of fixed rules but divine guidance for Muslims to lead an ethical and moral life. It is derived from two sources:

    Quran – the holy book of Islam.

    Hadith – teachings and practices attributed to Prophet Muhammad.

    The main objective of this law is to guide Muslims in every aspect of life, including religious practices, social interactions, and business & financial dealings.

    Features of Shariah-compliant Mutual Funds

    1. These mutual funds invest only in companies that follow Islamic law. They prefer investing in companies with lower debt levels and ethical business practices.
    2. Interest income is prohibited (Riba), i.e., investment in companies that deal with interest-bearing instruments are not allowed including traditional banks and financial institutions.
    3. A board consisting of Islamic scholars supervises these funds to ensure that the investments comply with the Shariah law and check the fund’s investments and strategies to ensure they follow Islamic principles.
    4. These funds use profit-sharing structures instead of earning interest, which means that the investors share the profits or losses of the companies in which they have invested.
    5. Transactions with excessive uncertainty or speculation are not permitted. This includes derivatives and speculative trading.
    6. Investments can sometimes generate income from activities that do not comply with the Sharia law. However, such income is donated to the charity.

    Shariah Indices of Shariah-Compliant Mutual Funds

    Shariah Indices

    The Shariah Indices are designed to offer investors Shariah-compliant investment solutions. In India, both the leading exchanges, i.e., NSE and BSE have their own Sharia Indices. 

    Shariah-compliant BSE Indices:

    1. BSE Tasis Shariah 50 Index: It is the first Shariah compliant equity index in India constructed using the strict guidelines and local expertise of India-based Shariah advisory board. The index consists of the 50 largest and most liquid Shariah compliant stocks within the BSE 500 universe.

    Shariah-compliant NSE Indices:

    NSE Indices Limited calculates three Shariah indices: Nifty 50 Shariah, Nifty 500 Shariah, and Nifty Shariah 25.

    1. Nifty Shariah 25: It represents 25 Shariah compliant stocks selected based on higher free-float market capitalization and aggregate traded turnover.

    2. Nifty 500 Shariah: In this, constituents of the Nifty 500 index are screened for Shariah compliance. The compliant stocks form the Nifty 500 Shariah index.

    3. Nifty 50 Shariah: In this index, the constituents of the Nifty 50 index are screened for Shariah compliance. The compliant stocks form the Nifty 50 Shariah index.

    The top constituents of Nifty 50 Shariah by weightage are as follows:

    Company’s NameWeight (%)
    Tata Consultancy Services Ltd.20.54
    Hindustan Unilever Ltd.15.21
    Sun Pharmaceutical Industries Ltd8.51
    HCL Technologies Ltd.6.45
    Asian Paints Ltd.5.73
    UltraTech Cement Ltd5.31
    Coal India Ltd.4.68
    Oil & Natural Gas Corporation Ltd.4.58
    Nestle India Ltd.4.22

    Read Also: How to Check Mutual Fund Status with Folio Number?

    Shariah-compliant Funds in India

    Tata Ethical Fund

    This is the mutual fund offered by Tata Mutual Fund in India. It invests in equity and equity-related instruments of companies that comply with Islamic investment guidelines and is meant for medium to long-term investors.

    Nippon India ETF Shariah Bees

    It is an Exchange Traded Fund (ETF) that helps investors to invest in Shariah-compliant fund. It mirrors the Nifty 50 Shariah Index.  

    Taurus Ethical Fund

    It is a Shariah-compliant mutual fund launched by Taurus Mutual Fund in April 2009. Investors looking for investment opportunities that comply with Shariah norms can invest in this fund with a medium to long term investment horizon. 

    Tax Implications of Shariah-Compliant Mutual Funds

    Tax Implications 

    Shariah-compliant mutual funds are subject to the same tax regulations as conventional mutual funds, i.e., their gains are taxed according to the existing tax laws. These funds invest majorly in equity and equity related instruments. As per current taxation law in India, if a mutual fund has at least 65% investments in equity then it will carry equity taxation.

    And for that, STCG and LTCG will apply if the holding period is less than a year and LTCG if the holding period exceeds one year. 

    • Short-term Capital Gains (STCG) – If holding period is less than a year, then STCG will apply @15% on gains without any indexation benefit.  
    • Long-term Capital Gains (LTCG) – If the holding period exceeds one year, then LTCG will apply @10% on gains. Also, there is no LTCG tax till the income of INR 1 lakh.

    Key Points to Consider

    When analysing Shariah-compliant mutual funds, it is necessary to consider multiple factors. Below mentioned are some of the factors:

    1. Companies involved in activities prohibited by the Shariah law are excluded. For example, alcohol, tobacco, gambling, etc. are prohibited. 
    2. The law discourages excessive debt financing. Hence, the company’s debt should be limited in relation to its equity.
    3. Investors must ensure that only a minimal portion of a company’s income is derived from the restricted activities mentioned in points one and two.
    4. Shariah law mandates that compliant funds must emphasize ethical business practices and social responsibility alongside financial performance.

    Benefits of Shariah-Compliant Funds

    1. These funds let investors invest in companies that function according to Islamic ethical guidelines. Investors of Shariah compliant mutual funds can grow wealth while staying true to your Islamic values. 
    2. With a major focus on lower debt levels, Shariah-compliant mutual funds can offer long-term growth to investors.
    3. The screening process assures investors that their money is being managed according to Islamic principles.

    Risks involved in Shariah Compliant Funds

    Risks involved in Shariah Compliant Funds
    1. These funds have fewer companies to invest in than traditional funds because the screening process eventually limits diversification and exposure to high-growth sectors.
    2. A smaller investment universe can lead to overall lower returns if the excluded sectors perform better than the overall market.
    3. Shariah-compliant funds focus more on specific sectors that follow Shariah law during the screening process. This increases the concentration risk for the fund if those sectors witness a significant downfall.

    Conclusion

    To sum it up, Sharia-compliant mutual funds assist you in growing your wealth in line with the Islamic values. While these funds are a great way to participate in the financial markets ethically, they also come with specific risks and considerations.

    It is crucial to understand the screening process, as well as the benefits and risks involved before investing in these funds.

    S.NO.Check Out These Interesting Posts You Might Enjoy!
    1What Is An IPO Mutual Fund? Should You Invest?
    2Mutual Fund Taxation – How Mutual Funds Are Taxed?
    3Is Your Mutual Fund Investment Safe?
    4What is an Open-Ended Mutual Fund & How to Invest in it?
    5How to Cancel Mutual Fund SIP?

    Frequently Asked Questions (FAQs)

    1. What is a Sharia-compliant mutual fund?

      Sharia-compliant mutual fund invests in companies that follow Islamic principles and prevent things like interest, alcohol, and gambling.

    2. Why should I invest in Sharia-compliant funds?

      One can invest in such funds because they align investments with Islamic values and promote ethical business practices.

    3. What lead to the evolution of Shariah-compliant mutual funds?

      The idea likely arose in the mid of 1960s as Muslim communities in regions like Southeast Asia sought financial instruments that followed Islamic principles and the evolution is not attributed to a single person.

    4. What is TASIS?

      Taqwaa Advisory and Shariah Investment Solutions, or TASIS is India’s Shariah advisory institution in the field of Finance. Their advisory board boasts internationally renowned Shariah scholars.

    5. What is Shariah law?

      It is a religious law in the Islamic culture and serves as a divine guidance for Muslims to lead an ethical and moral life. It is derived from the Quran and Hadith.

  • Top 5 Highest Dividend Paying Stocks in India

    Top 5 Highest Dividend Paying Stocks in India

    The stock market is unpredictable because stock prices can fluctuate a lot. Regular income from the stock market seems to be quite a difficult task to achieve, but not if you own shares of the companies that pay dividends. What if we told you that a small number of businesses give you the chance to receive dividends regularly?

    Dividend-paying stocks are stocks of those companies that distribute a percentage of their profits to shareholders regularly, usually on a yearly or quarterly basis. Usually, companies that pay dividends generate consistent earnings. 

    We’ll provide an overview of the top 5 dividend-paying firms in today’s blog.

    List of Best Dividend Companies in India

    Overview of Best Dividend Companies in India

    1. Vedanta Limited

    Vedanta is an Indian corporation that operates in the mining, oil, and gas industries. The firm was previously known as Sterlite Industries Limited and started its business operation in 1979. Vedanta owns India’s largest copper smelter, which contributes nearly 50% of its profits. Vedanta also takes corporate social responsibility seriously and has contributed USD 37 million towards community development. It has been ranked as one of the top ten sustainable firms in India. It has 97,015 employees.

    2. Indian Oil Corporation Limited

    The Indian Oil Corporation Limited (IOCL) operates in the oil and gas industry and is owned by the Ministry of Petroleum and Natural Gas, Government of India. The Indian Oil Company Limited and Indian Refineries Limited were two distinct businesses that were merged to form Indian Oil Corporation Limited in 1964. IOCL owns subsidiaries in other countries as well. As of 2022, the company is ranked 94th on the Fortune 500 list. The corporation serves its customers through 34,000 petrol stations across India, and it can produce approximately 3,200 kilotons of petrochemicals annually. IOCL spent Rs. 1,800 crore on healthcare, education, environmental sustainability, etc.

    3. Coal India Limited

    Coal India Limited was founded in 1975 and has its headquarters in Kolkata, West Bengal. It is one of the biggest coal mining companies in the world. The Indian government granted the corporation the designation of “Maharatna” in 2011. The company owns multiple subsidiaries that are involved in coal mining operations. It was listed on the stock market in 2010. Coal India Limited contributes approximately 85% of India’s total coal production. 

    4. Bharat Petroleum Corporation Limited

    The company was founded in 1928 and was initially known as Burmah Shell Oil Storage and Distributing Company of India Limited. It has more than 20,000 fuel stations across India. They began selling LPG cylinders to Indian households in the mid-1950s. The corporation was nationalized in 1976. Bharat Petroleum also started a joint venture named Indraprastha Gas Limited (IGL) with the Gas Authority of India Limited (GAIL).

    5. Oil and Natural Gas Corporation Limited

    The Oil and Natural Gas Corporation Limited (ONGC) is owned by the Ministry of Petroleum and Natural Gas, Government of India. ONGC was established in 1956 by the Government of India and produces 70% of India’s domestic crude oil production and around 84% of natural gas. It has a subsidiary named ONGC Videsh Limited (OVL), which manages its global production and exploration operations. 

    Read Also: Highest Dividend Paying Penny Stocks List

    What is Dividend Yield?

    What is Dividend Yield?

    The dividend yield is a financial ratio used to measure the dividend amount as a percentage of its share price.

    Dividend Yield = (Annual Dividends per Share) / (Price per Share)

    A company’s historical dividend yield does not guarantee that it will continue to pay out the same yield in the future due to several factors. For example, a downturn in the economy will always reduce the company’s profitability and cash flows, and high interest rates can occasionally deter investors from buying dividend stocks. As a result, dividend investing might be a smart choice for cautious investors. 

    Types of Dividend

    Types of Dividend

    The companies discussed above provide different types of dividends. Investors need to understand the different types of dividends mentioned below:

    1. Final Dividend – A company generally declares this type of dividend at the end of a financial year based on the company’s annual profits. This dividend is announced after financial statements are audited and released.
    2. Interim Dividend – The company declares and pays an interim dividend in the middle of the fiscal year.
    3. Stock Dividend – A stock dividend is paid in the form of additional shares rather than cash.
    4. Special Dividend – These dividends are non-recurring and are only paid out in specific circumstances. For example, when a company accumulates profit over time, it distributes it in the form of a special dividend to its shareholders.

    Annual Dividend Yields 

    CompanyAnnual Dividend Yield 
    Vedanta Ltd.6.44%
    Indian Oil Corporation Ltd.7.13%
    Coal India Ltd.5.32%
    Bharat Petroleum Corporation Ltd.13.80%
    Oil and Natural Gas Corporation Ltd.4.46%

    Comparative Study of Dividend Paying Companies

    CompanyShare PriceMarket Capitalization (In crores)
    Vedanta Limited457.851,70,192
    Indian Oil Corporation Limited168.32,37,660
    Coal India Limited479.12,95,256
    Bharat Petroleum Corporation Limited304.41,32,064
    Oil and Natural Gas Corporation Limited274.853,45,768
    (As of 2 July 2024)

    Key Performance Indicators

    ParticularVedanta LimitedIndian Oil Corporation LimitedCoal India LimitedBharat Petroleum Corporation LimitedOil and Natural Gas Corporation Limited
    Net Profit Margin (%)5.245.3625.955.758.50
    ROCE (%)24.0923.9027.8932.5315.43
    Current Ratio (x)0.660.731.700.810.88
    Debt to Equity Ratio (x)2.340.720.080.600.36
    3-Year CAGR Sales (%)27.7846.0525.7339.5345.44
    Operating Profit Margin (%)18.88.1834.578.8213.41
    Key Performance Indicator Comparison of top dividend paying stocks in india

    Out of all the companies described above, IOCL has the highest growth rate during the past three years, as demonstrated by the graph above, but it also has the lowest operating profit margin. 

    (Source – Company Financials)

    Advantages of Investing in Dividend Paying Companies

    Dividend-paying companies usually have the following features:

    1. It is suitable for investors who are looking to earn a stable income.
    2. Dividends can be reinvested to get the benefit of compounding.
    3. In addition to dividends, investors also benefit from increased stock prices over time.
    4. These companies are less volatile when compared with growth companies.

    Read Also: How to invest in dividend stocks in India?

    Conclusion

    To sum up, investing in dividend-yield companies allows you to generate consistent income over time. Since these businesses are typically regarded as stable and less volatile, they are appropriate for conservative investors. However, always consult an investment advisor before making any decisions.  

    Frequently Asked Questions (FAQs)

    1. What is the future of dividend-paying stocks in India?

      Dividend-paying stocks offer a combination of dividend income and capital appreciation as they are profitable, distribute dividends to their shareholders, and retain some profit for future growth.

    2. Is investing in dividend-paying stocks a safe and good option?

      Dividend-paying companies are suitable for a cautious investor seeking steady income with minimal risk.

    3. What is a dividend yield?

      Dividend Yield is calculated by dividing the annual dividend by the share’s current market price, showing how much a corporation pays in dividends as a percentage of its share price.

    4. A dividend yield company must declare a dividend every year.

      No, dividend companies are not required to pay dividends annually. The decision to distribute dividends depends on several circumstances, including the company’s profit and the board of director’s discretion.

    5. Name a few dividend-paying companies in India.

      A few well-known dividend-paying businesses in India are Bharat Petroleum Limited, Indian Oil Corporation Limited, Vedanta Limited, and Coal India Limited.


  • What is a Stop Loss and How to Use While Trading?

    What is a Stop Loss and How to Use While Trading?

    Before making any trades in the stock market, traders need to establish their own rules and guidelines. If they are novices, they must learn the art of using a stop-loss. The phrase “stop-loss” is frequently used in the trading community and is employed by nearly all profitable traders.

    Read our blog for an overview of stop loss, its types, advantages, and disadvantages. 

    What is a Stop Loss?

    Stock market traders use a stop-loss to guard against losing money on any kind of investment. It’s a directive given to the trading platform, telling it to square off any position (long or short) as soon as the price hits a specific level. It is not mandatory to use stop-loss in every trade, but it is always suggested that it is used as it minimizes the risk of substantial loss of capital. 

    Features of Stop Loss Order

    A stop-loss order has the following features:

    1. The trading system automatically executes the stop-loss orders.
    2. Using a stop-loss order helps traders to control their emotions while making decisions.
    3. Stop-loss is an important tool in a volatile market where prices change rapidly.
    4. You can easily change the stop-loss as per the movement of stock price.
    5. Typically, placing a stop-loss does not incur any additional cost.

    Types of Stop Loss Orders

    Types of Stop-loss Orders

    There are several types of stop-loss, a few of which are mentioned below-

    1. Fixed Stop-Loss Order: These stop-loss orders have the price set at a fixed level. If the stock price hits that fixed level, only a limit order is entered into the system, and the order will only be filled if the price hits the investor-specified level. It is usually preferred by investors who prefer a constant stop-loss level.
    2. Trailing Stop-Loss Order: This dynamic order modifies the trigger price if the market moves favourably and is used to lock in profits or limit potential losses. The order is expressed as a percentage of the asset price. If the price rises, the trailing stop-loss automatically moves up. Similarly, in the case of a short position, as the asset price goes down, the trailing stop-loss automatically moves down.
    3. Stop Loss-Market Order: In this order, a trader sets a trigger price, generally below the current price in case of a long position or above the current price in case of a short position. If the price touches the trigger price, a market order is immediately sent into the exchange to square off the open positions. However, in the case of a volatile market, the executed price might differ from the trigger price.

    Factors to Consider Before Using Stop Loss Order

    Factors to consider before using Stop-Loss order

    There are several factors that an investor should consider before placing a stop loss:

    • The most important factor one should consider is placing stop-loss based on their risk tolerance capacity. 
    • The stop-loss also depends on the trading strategy or chart patterns they use.
    • Types of trade also define the stop loss as if you are a long-term investor; then you will have a wider stop loss. If you are trading on an intraday basis, then you must have a tight stop loss.
    • It also depends on the volatility of the stock price; for example, if the stock is more volatile, then one should have a wider stop loss.

    Example: Suppose a trader wishes to buy a moderately volatile stock on an intraday basis and doesn’t want to take substantial risk. Stop loss in such a scenario can be set as 3% below the buying price. Here, it can be seen that the trader doesn’t want to lose more than 3% of the capital on this trade.

    Read Also: Lowest MTF Interest Rate Brokers in India | Top 10 MTF Trading Apps

    Advantages of Stop Loss Order

    A stop-loss order has the following advantages:

    1. It helps you protect your capital against big losses.
    2. When a stop loss order has been placed, a trader will be confident that their position will be exited if the price moves in the opposite direction.
    3. Generally, a trader gets attached to their trades, forcing them to hold their position in expectation of a rebound in prices. Putting a stop-loss will remove the emotions.

    Disadvantages of Stop Loss Order

     A stop-loss order has the following disadvantages:

    1. Market volatility can trigger a stop-loss order and then move in the favourable direction, resulting in losses even when the trader’s view is correct.
    2. A gap up or gap down in case of a stop-loss limit order can cause the order to go unfulfilled, resulting in a loss greater than specified in the stop-loss order.

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

    Conclusion

    Stop loss is a practice a trader uses to avoid substantial losses when the direction of trade goes against the predicted movement. But one should remember that placing stop loss is a risk management tool that can help you limit your losses. Along with this, it also limits your profit. Along with placing a stop loss, one should consult their investment advisor before entering any trade.

    Frequently Asked Questions (FAQs)

    1. How does a stop-loss order work?

      A stop-loss order works in a manner where the stock price reaches a certain level, and the trader’s position will be automatically squared off.

    2. Can we place a stop-loss order in volatile market conditions?

      Yes, placing a stop-loss order in a volatile market condition is essential as it protects your capital in case of sudden price fluctuations.

    3. What are the types of stop-loss orders?

      The types of stop-loss orders are fixed stop-loss orders, trailing stop-loss orders and stop-loss market orders.

    4. Do brokerage houses charge any fees for placing stop-loss orders?

      No, brokerage houses do not charge any kind of fee for placing a stop-loss order, whereas if the stop-loss order is executed, they will charge a certain amount as brokerage.

    5. Can I trade without a stop loss?

      Yes, you can trade without placing a stop-loss order, but it is suggested that you use stop-loss to protect your capital.

  • SIP vs Lump Sum: Which is Better?

    SIP vs Lump Sum: Which is Better?

    Over time, mutual funds have become an investment option for people who want to increase their wealth gradually. Systematic Investment Plans (SIPs) and lump sum investments are popular ways to invest in mutual funds. 

    This blog highlights the differences between SIP and lump sum investments and their advantages and disadvantages. We’ll also discuss examples of when one might be preferable over the other.

    What is a Systematic Investment Plan (SIP)?

    SIP, or systematic investment plan, involves investing a sum into mutual funds periodically, generally every month. If you are a salaried individual or earn income at regular intervals, investing via the SIP method makes more sense. Generally, SIPs can be started with as little as ₹ 500 a month, making them accessible to a broad range of investors.

    SIP is an organized method of investing. Rupee cost averaging, in which investment costs average over time due to fluctuating NAVs (Net Asset Values), is a significant advantage of SIP, especially in a volatile market. SIPs are quite versatile as they offer investors options to step up SIP, pause, continue, or increase their regular contributions.

    For example, consider an investor contributing ₹10,000 monthly to an equity mutual fund. The investor will get more units in a month when the NAV is lower and fewer units in a month when the NAV is higher. This strategy helps to average the purchase cost and reduces the impact of market volatility. This process is also known as rupee cost averaging.

    What is a Lump Sum Investment?

    A lump sum investment in mutual funds may be appropriate if you are a business owner, have inconsistent income, or have a sizable amount of money to invest (such as a bonus). Lump sum investment involves investing money in mutual funds in one go. The investors must be able to identify the low point of the market. You can invest and generate a good return if the market moves up from that point. However, the major challenge here is that it is difficult to analyze whether or not the market is at its lowest point.  

    For example, consider an investor who invests ₹5,00,000 into an equities mutual fund at any point for some time. The investor would only benefit if the market rises and the NAV or investment value grows with time. 

    Read Also: PNB Vs Bank of Baroda: Which is Better?

    Evaluation Metrics of SIP and Lump Sum

    There are three methods for calculating the historical returns of any mutual fund.

    • Absolute Return: This is the most basic method of calculating historical returns. It doesn’t consider the total period for which the money was invested. The formula for calculating absolute return is as follows:
    • CAGR (Compound Annual Growth Rate): Think of CAGR as the yearly growth of an investor’s capital. The assumption here is that all annual profits are put back into the invested funds. This rate is not the simple average of the returns earned each year. Rather, this rate is compounded annually, and it smoothes out fluctuations and provides a consistent growth rate, which is useful for comparing different fund’s returns.

    • XIRR (Extended Internal Rate of Return): It is best suited to calculate the mutual fund investment return through SIPs. XIRR considers multiple transactions at different points in time. XIRR gives a more accurate picture of investment returns as it calculates the returns by considering all aspects of each SIP installment, including amount, dates, cash inflows, and outflows.

    Use our XIRR Calculator to calculate the actual returns on multiple investments made at different time intervals.

    Scenario Analysis of SIP and Lump Sum

    Let’s understand the calculation of lump sum and SIP investment returns through examples under two scenarios – a bull market and a bear market. Assume an investor made a lump sum investment of ₹1,20,000 on 1 January 2021 for three years, while another investor started quarterly SIP payments of ₹10,000 on that day for 3 years.

    Bear Market Scenario

    The performance of SIP and lump sum investment strategy in a bear market is given below:

    SIP: The calculations for the SIP investment strategy are as follows: 

    DateNAV (in INR)InvestmentUnits Allotted
    01-Jan-21₹ 251.25₹ 10,00039.80
    01-Apr-21₹ 246.08₹ 10,00040.64
    01-Jul-21₹ 223.17₹ 10,00044.81
    01-Oct-21₹ 193.41₹ 10,00051.70
    02-Jan-22₹ 197.30₹ 10,00050.68
    03-Apr-22₹ 189.46₹ 10,00052.78
    01-Jul-22₹ 177.41₹ 10,00056.37
    01-Oct-22₹ 171.56₹ 10,00058.29
    01-Jan-23₹ 161.91₹ 10,00061.76
    01-Apr-23₹ 164.99₹ 10,00060.61
    01-Jul-23₹ 154.81₹ 10,00064.59
    01-Oct-23₹ 150.45₹ 10,00066.47
    Total₹ 1,20,000648.5

    Average purchase price= ₹ 1,20,000 / 648.5 = ₹ 185.05

    If the investor sells 648.5 units at ₹ 160 per unit on 1 January 2024, he receives  ₹ 1,03,760.

    XIRR = -0.08725 = – 8.73 %

    Lump sum: The calculations for the lump sum investment are as follows:

    DateNAV (in INR)InvestmentUnits allotted
    01-Jan-21₹ 251.25₹ 1,20,000477.62

    Purchase Price = ₹ 251.25

    If the investor sells 477.62 units at ₹ 160 per unit on 1 January 2024, then:

    Absolute Return = (160 – 251.25) / (251.25) = – 0.363 = – 36.3%

    CAGR = [(160 / 251.25) ^ (⅓)] – 1 = – 0.1397 = -13.97%

    In the bear market scenario, SIP generally gives the investor a higher return than lumpsum investment as the investor benefits from the rupee cost averaging in the falling market and has more units at lower NAVs.

    Bull Market Scenario

    The performance of SIP and lump sum investment strategy in a bull market is given below:

    SIP: The calculations for the SIP investment strategy are as follows:

    DateNAV (in INR)InvestmentUnits allotted
    01-Jan-21₹ 22.93₹ 10,000436.16
    01-Apr-21₹ 26.39₹ 10,000378.92
    01-Jul-21₹ 26.59₹ 10,000376.03
    01-Oct-21₹ 27.64₹ 10,000361.79
    02-Jan-22₹ 32.66₹ 10,000306.18
    03-Apr-22₹ 36.08₹ 10,000277.17
    01-Jul-22₹ 37.58₹ 10,000266.12
    01-Oct-22₹ 29.17₹ 10,000342.86
    01-Jan-23₹ 31.40₹ 10,000318.45
    01-Apr-23₹ 34.13₹ 10,000292.99
    01-Jul-23₹ 35.15₹ 10,000284.47
    01-Oct-23₹ 37.65₹ 10,000265.59
    Total₹ 1,20,0003906.73

    Average purchase price= ₹ 1,20,000 / 3906.73 = ₹ 30.72

    If the investor sells 3906.73 units at ₹ 36.16 per unit on 1 January 2024, he receives  ₹ 1,41,267.

    XIRR = 0.1031 = 10.31%

    Lump sum

    The calculations for the lump sum investment are as follows:

    DateNAV (in INR)InvestmentUnits allotted
    01-Jan-21₹ 22.93₹ 1,20,0005233.32

    Purchase Price = ₹ 22.93

    If the investor sells 5233.32 units at ₹ 36.16 per unit on 1 January 2024.

    Absolute Return = (36.16 – 22.93) / (22.93) =0.5770 = 57.70%

    CAGR = [(36.16 / 22.93) ^ (⅓)] – 1 = 0.1640 = 16.40%

    From the above calculations, we can conclude that the returns of the lump sum investment strategy are superior to those of the SIP strategy in a bull market.

    Advantages and Disadvantages of SIP and Lump Sum

    SIP

    AdvantagesDisadvantages
    SIP provides flexibility to stop, restart, or increase investment amounts.In a consistently rising market, lump sum investments outperform SIPs.
    SIP encourages regular savings and investment habits.It requires regular investment, which might be challenging for some investors
    Investors can start with a small amount, making it suitable for new investors.

    Lump Sum

    AdvantagesDisadvantages
    It offers higher returns in a bull market than the SIP strategy.It is difficult to predict market lows, risking investment at a high point.
    Investors do a single transaction without the need for regular follow-ups.Investing large amounts in one go restricts funds availability to the investor for other needs.

    Suitability for Investors of SIP and Lump Sum

    SIP Suitability

    • Salaried Individuals: People with a steady income who are ready to commit to periodic investments.
    • New Investors: They are the ones who wish to start their investments with smaller amounts.
    • Volatile Markets: Investors worried about market volatility can use the SIP strategy as the risk is reduced by spreading the investments over time.

    Lump Sum Suitability

    • High net worth individuals: They have large amounts of money to invest.
    • Experienced Investors: These are experts in studying market conditions and investing at appropriate times.
    • Rising Markets: A lump sum investment strategy is better suited to take advantage of the bull market.

    Read Also: IndiGo vs SpiceJet: Which is Better?

    Conclusion

    The choice between SIP and lump sum investments in mutual funds depends on various factors such as personal circumstances, financial goals, and market conditions. SIPs are structured to be disciplined, flexible, and accessible, which suits recurring income earners when the markets are volatile. However, lump sum investing can generate more returns during a bull market but exposes one to the risk of investing at an inappropriate time.

    Investors should consider their financial position, investment time frame, and risk appetite before making an investment decision. SIPs and lump sum investments have different advantages that enable one to achieve one’s financial objectives.

    S.NO.Check Out These Interesting Posts You Might Enjoy!
    1SIP in Stocks vs SIP in Mutual funds?
    2SBI vs ICICI Bank: Which is Better?
    3Punjab National Bank vs State Bank of India
    4Bank of Baroda Vs Canara Bank: Which is Better?
    5HDFC Bank vs Axis Bank: Which is Better?

    Frequently Asked Questions (FAQs)

    1. What key differences do SIP and lump sum investments for mutual funds have?

      SIP has regular small payments, while a lump sum is one big payment. SIP offers rupee cost averaging and flexibility, whereas a well-timed lump sum can give high returns.

    2. How does rupee-cost averaging help investors with their SIP?

      Rupee cost averaging lowers the impact of market volatility by spreading the investments over time. Investors get more units when prices are low and fewer units when prices are high.

    3. What are the techniques for calculating historical returns of mutual funds, and which one is best for SIP as opposed to lump sum investments?

      CAGR is suitable for lump sum, while XIRR is ideal for SIP because it considers multiple transactions.

    4. Who should invest in an SIP, and who should do a lump sum investment?

      Salaried individuals and beginners should prefer a Systematic Investment Plan (SIP) as they have a regular monthly income. At the same time, those with irregular income or skills in doing market analysis should consider lump sum investments.

    5. Can I stop or change the amount of my sip after starting it? How does this feature help you?

      Yes, SIP contributions can be stopped, restarted or changed. This feature helps individuals adapt to changing financial circumstances.

  • KYC Regulations Update: Comprehensive Guide

    KYC Regulations Update: Comprehensive Guide

    1.3 crore mutual fund accounts are on hold in India due to incomplete KYC, which means they cannot currently be used to buy or sell mutual funds. But why did this happen? This blog will answer all your questions regarding KYC and its issues.

    KYC Regulations Overview

    KYC stands for Know Your Customer. It is a set of regulations and procedures financial institutions, including mutual funds, use to verify customers’ identities and assess their risks. Verifying customers’ identities is a crucial measure to prevent fraudulent activities, money laundering, and the financing of terrorist activities. Financial institutions ensure that their customers are not engaging in business activities with criminals or suspicious individuals by verifying their identities.

    It protects institutions from legal and financial risks linked with illegal activities, and KYC safeguards retail investments and reduces the chance of someone else accessing the investor’s account.

    Changes in KYC Regulations by SEBI

    Documents

    The following documents are required when doing a KYC.

    Proof of Identity (POI) – this could be your PAN card, Adhar card, Voter ID, or passport.

    Proof of Address (POA) – this could be your Adhar card, utility bills, bank statements, etc.

    Overview of Updated Regulations

    The capital markets regulator, the Securities and Exchange Board of India (SEBI), has modified the roster of documents permissible for KYC compliance. These updated KYC regulations have been enforced since April 1, 2024. In its master circular, SEBI provided a list of valid documents for the POI and POA. 

    According to the circular, investors with outdated and inaccurate details will keep their mutual fund accounts on hold. These outdated documents mainly consist of older bank statements and utility bills. 

    However, SEBI has clarified that bank statements and utility bills issued within two months are still accepted as proof of address if other documents don’t contain an updated address.

    Change in KYC Regulation by SEBI

    Updated List of Permissible Documents

    Here’s the list of documents that are now accepted as POI and POA,

    • The passport
    • The driving licences
    • Proof of possession of Aadhaar number
    • The Voter’s Identity Card issued by Election Commission of India
    • Job card issued by NREGA duly signed by an officer of the State Government
    • The letter issued by the National Population Register containing details of name and address
    • Any other document as notified by the Central Government in consultation with the Regulator

    Furthermore, suppose the OVD (Official Valid Document) provided by the client does not contain an updated address. In that case, they must submit officially updated valid documents or e-documents within three months. The following documents are allowed to be submitted.   

    • Utility bills (electricity, telephone, post-paid mobile phone, piped gas, water bill) that are not more than two months old.
    • Pension or family pension payment orders (PPOs) issued to retired employees by Government Departments or Public Sector Undertakings, if they contain the address.
    • Letter of allotment of accommodation from employer issued by state or central government departments, statutory or regulatory bodies, public sector undertakings, scheduled commercial banks, financial institutions, and listed companies

    Additionally, SEBI has mandated registered intermediaries to regularly and systematically update all the documents and information about every client collected as part of the Customer Due Diligence (CDD) process.

    List of updated documents of KYC Regulation change

    How to Check KYC Status Online?

    To check your KYC Status online, follow these steps

    1. Visit any KYC Registration Agency (KRA), such as CDSL KRA, CAMS CRA, or CVL KRA.
    2. Suppose you have selected CAMS KRA, click on transactions, and then choose KYC. A new web page will pop up.
    3. Enter your PAN details, and the status will be displayed on the screen.

    One of the 3 statuses will be displayed on the screen. The status decides your restrictions, if any. Here is a list of the KYC statuses and their implications. 

    Read Also: What is Securities Transaction Tax (STT)?

    Explanation of Various KYC Status

    Validated KYC Status

    This means that the issuing source has validated the investor-provided documents, and if the information is not modified, a mutual fund investor is allowed to invest readily in any scheme.

    Registered/Verified KYC Status

    This means that the documents provided by the person cannot be verified or confirmed by the issuing authority. This applies to investors who have provided other officially valid documents (OVDs) besides PAN or Adhaar, such as passports, voter ID cards, etc., to validate address and identity during the KYC.

    If the KYC status is either ‘KYC registered’ or ‘KYC verified,’ it will not affect their current investments. However, if they wish to invest in a new mutual fund scheme, they are required to submit the KYC-related documents again. They can undergo a re-KYC process to transition to Validated KYC status.

    KYC on Hold Status

    The KYC status will be put on hold if the documents submitted at the time of the initial KYC are not official valid documents, such as voter ID cards, passports etc., but rather unofficial documents like bank statements, electricity bills, and utility bills. The issue may also arise if the investor’s mobile number and email ID still need to be validated. 

    All financial and non-financial transactions will be restricted until the required documents are submitted. This would impact the existing SIP transactions, redemption, etc.

    KYC Statuses

    Read Also: RBI Action On Kotak Mahindra Bank: Should You Invest?

    Conclusion

    A complete and up-to-date KYC is necessary for seamless access to your mutual fund account in India, as it protects the financial system from fraudulent activities. If your KYC needs to be completed, gather the essential documents to resolve the issue. A valid KYC status can help you avoid restrictions and participate actively in the Indian mutual fund market to achieve your financial goals.

    Frequently Asked Questions (FAQs)

    1. Is KYC mandatory for investing in mutual funds?

      Yes, KYC is mandatory for all mutual fund investments in India.

    2. What documents are needed for KYC?

      Proof of Identity and Proof of Address are required to complete your KYC.

    3. What will happen if my KYC status is on hold?

      If your KYC status is on hold, your transactions will be restricted. However, all the restrictions will be lifted once you provide all the updated documents.

    4. How can I complete my KYC?

      You can do it online (eKYC) or offline by submitting documents at a KYC Registration Agency (KRA).

    5. Can I still use my bank statement or utility bills for KYC?

      Yes, SEBI has clarified that bank statements and utility bills issued within two months are still accepted as proof of address if other documents don’t contain an updated address.

  • What Is an Option Contract?

    What Is an Option Contract?

    If you are familiar with the idea of stock trading and have been involved in it for some time, you have probably heard of options trading, which is a type of derivative trading. Options are available for various assets and offer a wide array of features.

    In this blog, we’ll discuss everything you need to know about different types of option contracts, their features and the associated risks. 

    What is an Option Contract?

    An option contract is a type of derivative instrument that gets its value from an underlying asset such as stocks, currencies, indexes, commodities, etc. The buyer of the option contract is granted a right, but not an obligation, to purchase or sell the underlying asset by a certain date at a certain price. Options trading can be profitable, but only if you strictly enforce a stop-loss to safeguard your investment from losses. 

    Types of Option Contracts

    Types of Option Contracts

    There are several types of option contracts:

    1. Based on the Right to Buy or Sell

    There are two types of option contracts based on the right they provide to the buyer:

    • Call Option: The buyer of the call option will have the right, but not the obligation, to purchase the underlying asset at a specified price within a specific period. Suppose the buyer believes that the underlying asset’s value will increase. In that case, they will purchase these contracts and pay the call option seller a premium that varies according to the underlying asset’s value. These contracts have an expiration date. A long-call strategy is to purchase a call option; a short-call strategy is to sell a call option. 
    • Put Option: The buyer of the put option will have the right, but not an obligation, to sell the underlying asset at a specified price within a specific timeframe. Consequently, purchasing a put option entails creating a short position in the underlying asset and anticipating a price decline. Similar to call options, these contracts contain expiration dates as well. Purchasing a put is also known as a long put strategy, whilst selling an option is known as a short put strategy.

    2. Based on Their Rules of Exercise

    There are three types of option contracts based on the different exercise options they offer:  

    • American Option: An American option contract is one in which the contract owner may exercise their right to purchase an asset, in the case of a call option, or sell it, in the case of a put option, at any time before or on the contract’s expiration date. The name does not imply that these contracts are exclusively available in the United States. It makes it possible for investors to profit quickly from market movement. An American call option is also denoted as CA, and an American put option is denoted using PA. 
    • European Option: Unlike American options, this type of option permits an investor to exercise their right to purchase, in the case of a call option, or sell, in the case of a put option, an underlying asset at a certain strike price only on the expiration day. Options available in Indian financial markets are European and referred to as CE for call and PE for put.
    • Bermudan Option: These are a special type of American option as they also allow for early contract exercise, but only on specific dates. These dates are mentioned in the option contract.

    3. Based on the Underlying Asset

    • Index Option: An index, as opposed to a single stock, serves as the underlying asset for an index option contract. An investor can profit from market index movement when they trade in index options, and because an index contains a variety of individual stocks, diversification helps to reduce risk. These kinds of contracts are usually settled in cash. 
    • Stock Option: A stock option enables an investor to purchase or sell a particular stock at a predetermined price, known as the strike price, within a specific timeframe. One can insure their portfolio against market volatility by using stock options. With call and put options, you can use your assumptions to go long or short on the stock. 
    • Commodity Option: The underlying asset in this option contract is a commodity like gold, silver, etc. The value of these option contracts changes in line with changes in the commodity’s underlying price.  

    Features of an Option Contract

    Features of an option contract are listed below:

    1. The option contract differs from buying any asset, as it derives its value from an underlying asset.
    2. Option contracts give the buyer a right but not the obligation to exercise a contract.
    3. There is a predetermined price, also known as the strike price, at which you can exercise the option contract.
    4. There are fixed dates on which one can exercise a contract.
    5. The option contract comes with a fixed contract size, known as lot size. You can buy or sell the contract in multiples of the market lot.

    Read Also: Option Chain Analysis: A Detail Guide for Beginners

    Uses of Option Contracts

    Uses of Option Contracts

    Option contracts can be used for the following purposes:

    1. Hedging: It is a risk management technique that allows one to protect their portfolio from losses. 
    2. Income Generation: An investor can receive the premium and make a consistent income by selling option contracts on their equities. 
    3. Speculation: Traders use option contracts to generate profit from their view of the market movements. They buy calls or sell puts if they expect the underlying asset’s price to increase and buy puts and sell calls if they expect the underlying asset’s price to decrease.

    Advantages of Option Contracts

    The advantages of an option contract are:

    1. Because you can obtain the underlying asset for a small portion of its total value, the option provides leverage, which can magnify investor’s returns. 
    2. Options can be used as hedging instruments in your portfolio to safeguard it from market downturns. 
    3. Selling options can help generate a regular income by receiving the premiums.

    Disadvantages of Option Contracts

    The disadvantages of an option contract are:

    1. The option market is considered risky due to various factors affecting its value simultaneously, such as the time value of money, volatility, etc., making it extremely complex to understand. 
    2. Option contracts provide leverage, which magnifies losses and can result in a complete loss of capital.
    3. Option contracts for some assets may have lower liquidity due to the non-availability of buyers and sellers, as most people do not trade in options.
    4. Trading in an option contract requires margin as you are required to pay a certain sum of money to your broker to cover the potential losses, and selling an option contract requires even higher margins than buying an option contract.

    Read Also: What is Options Trading?

    Conclusion

    Only those who thoroughly understand market dynamics and techniques and are well-versed in option trading concepts can consider it a good investment alternative. Trading in options can offer you the chance to make larger profits with fewer initial investments. Traders must always be careful as these instruments are extremely risky and can result in huge losses. Therefore, you must speak with your investment advisor before making trading decisions. 

    Frequently Asked Questions (FAQs)

    1. Can a beginner trade-in option contract?

      Yes, even a novice trader can profit from an options contract, but one must understand the concept and their types before investing.

    2. Can I earn a high profit with minimum investment while trading in options?

      Yes, the option gives you the chance to make a large profit with a small initial investment, but doing so requires a solid understanding of options, such as the time value of money, volatility, etc.

    3. What is the duration of the expiration of the option contract in India?

      While index option contracts expire every week, stock option contracts expire every month.

    4. What is the meaning of options premium?

      The option premium refers to the price paid by the buyer of the option to the seller for the rights offered in the option contract.

    5. Can I trade in the index through options?

      Yes, you can trade in index through options.

  • What is Hammer Candlestick Pattern? 

    What is Hammer Candlestick Pattern? 

    Several chart patterns available to traders can be used to determine a stock’s trend. Let’s take an example where you are searching for a trading opportunity, and you come across a stock that is consistently declining. You then notice a pattern that suggests the stock’s price may be about to reverse. One such pattern is the Hammer Candlestick pattern.

    In today’s blog post, we’ll explore more about the Hammer Candlestick pattern, how to use it, and its limitations. 

    What is a Hammer Candlestick Pattern? 

    This candlestick pattern is a bullish reversal single candle pattern, which indicates a downtrend reversal in a stock price. Candlestick generally forms at the bottom of a downtrend, suggesting that sellers are losing control and buyers are about to push prices upwards. This pattern is a powerful technical tool and is used by traders frequently.

    Read Also: Introduction to Bearish Candlesticks Patterns: Implications and Price Movement Prediction

    Types of Hammer Candlestick Patterns

    There are generally two types of candlestick patterns-

    1. Classic Hammer: This is the standard form of hammer pattern and generally appears at the bottom of a downtrend. After this, a potential uptrend in the stock price can be seen. This pattern has a small body and a long lower shadow, which is generally twice the size of the body. It suggests a strong rejection of lower prices and allows buyers to enter the rally.
    Classic Hammer
    1. Inverted Hammer: This candlestick pattern is almost similar to the regular hammer and is flipped upside down. It also appears at the end of a downtrend and has a long upper shadow instead of a lower shadow. It also suggests a potential reversal, although considered less reliable than the classic hammer. It indicates that buyers attempted to take the price high during the session but failed because of resistance.
    Inverted Hammer

    Features of Hammer Candlestick Pattern

    Hammer candlestick pattern has the following features:

    1. 3The candle can be either bullish or bearish.
    2. The lower shadow of the candle should be at least twice the length of the body.
    3. There should be no or little upper shadow, which indicates that the closing price is near the highest price of the session.

    Interpretation of Hammer Candlestick Pattern

    Interpretation of Hammer Candlestick Pattern

    This reversal pattern generally forms at the bottom of a downtrend and indicates a reversal. The lower shadow suggests that the seller has taken the prices down during the trading session, but due to strong buying pressure, the prices are pushed upwards near the end of the session. The sentiment is turning bullish, indicating that there might be a reversal in price after a downtrend. The importance of a hammer candlestick can be seen in the length of the shadow; the longer the shadow, the higher the chances of reversal. 

    Advantages of Hammer Candlestick Pattern

    Hammer candlestick pattern has the following advantages:

    1. It acts as a leading indicator, suggesting a shift in momentum.
    2. A trader can use the shadow’s low for setting a stop-loss, which helps them minimize losses.

    Limitations of Hammer Candlestick Pattern

    Hammer candlestick pattern has the following limitations:

    1. Traders consider a hammer candlestick as a potential reversal signal without waiting for proper confirmation.
    2. These patterns are less effective in volatile market conditions.
    3. The hammer candlestick pattern does not provide any upside target. Therefore, a trader is required to use other tools to determine potential entry and exit points.
    4. For a trader, it is sometimes difficult to identify the exact hammer candlestick, as the length of shadow varies, or the candle’s body does not resemble the exact hammer pattern.

    Strategy Based on Hammer Candlestick Pattern

    Strategy based on Hammer Candlestick Pattern

    Entry Point: A trade can take a long position in stock upon confirming the hammer pattern. But one should take entry once the next candle after the hammer closes above the hammer’s high.

    Stop Loss: Typically, a stop-loss should be placed below the low of the hammer candlestick to minimize the risk.

    Target: The target is generally set near the next resistance point or as per the trader’s risk-taking capacity.

    Difference Between Doji and Hammer Candlestick Pattern

    Generally, the Doji and hammer candlestick patterns are considered similar. Still, these two have a few basic differences, as the Doji appears as a small body with long lower and upper shadows. In contrast, the hammer has only a long lower shadow and a long upper shadow in the case of an inverted hammer. While the hammer indicates a bullish reversal pattern, the Doji indicates price reversal or trend continuation.

    Read Also: Introduction to Bullish Candlestick Patterns: Implications and Price Movement Prediction

    Conclusion

    The hammer candlestick pattern is very popular among traders, as it helps them identify the reversal point in a downtrend. However, a trader should wait for a confirmation of the bullish candle following the hammer pattern. It is suggested that a stop loss be placed below the low of the hammer candlestick as it helps them minimize their losses in case of market volatility.

    Frequently Asked Questions (FAQs)

    1. Is the hammer candlestick a bullish or bearish pattern?

      The hammer is a bullish reversal candlestick pattern.

    2. How do you identify a hammer candlestick pattern on a chart?

      To identify this pattern, a trader must look for a candlestick with a small body at the upper range of the trading session. It should also have a long lower shadow at least twice the length of the body, with little or no upper shadow.

    3. Is it possible that the hammer pattern provides a false signal?

      Yes, there is a possibility that hammer patterns can produce false signals. Therefore, a trader should use stop loss while executing a trade.

    4. Where can you put stop loss while trading a Hammer Candlestick pattern?

      Generally, a stop loss should be placed below the low of the Hammer Candlestick.

  • Mutual Fund Fees & Charges in India 2024

    Mutual Fund Fees & Charges in India 2024

    Mutual funds have become increasingly popular over the last few years as a solution to earn significant investment returns. But, one must also pay attention to the fees a mutual fund charges as they reduce investment returns. In today’s blog, we will discuss the various fees a mutual fund charges and their meaning.

    Depending on the goal of the investment scheme, fund managers chosen by mutual fund firms, sometimes referred to as asset management companies (AMCs), allocate their money across different asset classes. These firms charge their investors a nominal fee for the entire process to cover their ongoing costs, also known as the expense ratio. These asset management companies get their revenue from the fees that they charge. 

    Types of Fees Charged by Mutual Fund

    There are several kinds of fees charged by the AMC, a few of which are mentioned below-

    1. Entry Load: Asset management firms impose a fee on investors when they invest for the first time in the scheme. In the early stages of the mutual fund industry, this was imposed to cover the distribution expenses related to the mutual fund industry’s marketing and sales. The Securities Exchange Board of India eliminated this charge later in 2009 (SEBI). 
    2. Exit Load: This is a fee that investors must pay if they withdraw their money before a certain time. The time frame is known as the lock-in period, and it varies from plan to plan. The exit load typically ranges from 0.25% to 4% of the redemption value. There is no exit load if you redeem your money after the lock-in period. The AMC imposes this fee to deter investors from withdrawing early. 
    3. Transaction Charges: Mutual funds impose these fees on you upon buying and selling mutual fund units when the transaction amount goes above a certain threshold. In India, this threshold is INR 10,000. If you buy units worth more than INR 10,000 as a new investor, you will be charged a maximum of INR 150 as transaction costs, and if you are an existing investor, the maximum amount that can be charged is INR100. 
    4. Expense Ratio: The mutual fund companies also impose other fees, which typically include fund management fees, audit fees, marketing and sales costs, and administration and distribution costs. This charge is computed by dividing the total expenses of the scheme by the total assets managed by AMC. This fee is typically charged on an annual basis.

    Calculation of Total Expense Ratio

    Calculation of Total Expense Ratio

    The total expenses charged by the mutual fund can be calculated by using the below-mentioned formula:

    Total Expense Ratio(TER) = [(Total Costs of the Fund during the period) / (Total Fund Assets)]*100

    Let us understand this with an example.

    Assume that an AMC pays 10 crores in total expenses, which includes fund manager fees, marketing and distribution costs, etc., for a fund with a total asset value of 1000 crores. Next, the ratio of expenses will be computed as 

    (10 Crores/1000 Crores)*100 = 1%.

    Suppose an investor has invested INR 5,00,000 in the scheme, and then the total expense ratio of the scheme is 1% of 5,00,000 = INR 5,000. Investors get charged this amount annually.

    Read Also: Types of Mutual Funds in India

    SEBI Guidelines on Mutual Fund Charges

    The maximum TER (Total Expense Ratio) limit for mutual funds is determined by the Securities and Exchange Board of India (SEBI). It depends on the amount of assets the company manages. Guidelines on charges are as follows:  

    Asset Under Management (Crores)Equity-oriented mutual funds (Max. TER)Other mutual funds (Excluding FoFs, ETFs and index funds) (Max. TER)
    Up to 5002.25%2.00%
    500- 7502.00%1.75%
    750- 20001.75%1.50%
    2000- 50001.60%1.35%
    5000- 10,0001.50%1.25%
    10,000- 50,000TER decreases by 0.05% for every increase of 5000 crore in AUMTER decreases by 0.05% for every increase of 5000 crore in AUM
    > 50,0001.05%0.80%

    To boost the penetration of mutual funds in Tier 2 and Tier 3 cities in India, SEBI has further permitted the AMCs to charge an extra 0.30% on top of the previously indicated restrictions for selling their products in cities outside of the top 30 cities in the country. 

    Impact of Expense Ratio

    Impact of expense ratio

    The expense ratio directly impacts your mutual fund investment’s returns. However, these costs represent a minor amount of your investment; over time, they may consume a greater share of your return. Generally speaking, investors believe that a fund with a larger expense ratio will yield higher returns. However, this is not a suitable strategy for selecting a mutual fund because skilled fund managers can manage funds with a lower expense ratio. Therefore, it is important to review the fund’s expense ratio if you are currently investing or plan to do so. 

    Read Also: History of Mutual Funds in India

    Conclusion 

    Mutual funds are becoming increasingly popular as they provide investors access to professional market expertise to earn substantial returns. However, investors must be careful of the fees they charge and have a good understanding of them to minimize the impact of mutual fund fees on investment returns and select the best mutual fund.  

    S.NO.Check Out These Interesting Posts You Might Enjoy!
    1Shariah-Compliant Mutual Funds: Should You Invest?
    2Regular vs Direct Mutual Funds: Make The Right Investment Decision
    3A Comprehensive Guide on Mutual Fund Analysis
    4What are Small Cap Mutual Funds?
    5Who Regulates Mutual Funds in India?

    Frequently Asked Questions (FAQs)

    1. What are the charges associated with the mutual fund investments?

      Exit load, transaction charges, and expense ratio are the costs related to mutual funds.

    2. What is the exit load?

      Mutual fund firms impose this fee to prevent investors from making early withdrawals. It is based on the investor’s holding term; for instance, 1% is charged as an exit load if the withdrawal is made within a year after the investment.

    3. Is there any restriction on fees charged by mutual fund companies?

      Yes, official norms specify a threshold that no asset management business may charge fees above, as provided by the mutual fund regulatory body SEBI.

    4. Do investors pay fees to start investing in a mutual fund?

      No, there aren’t any costs to start investing in mutual funds. In the past, AMCs levied a fee known as an entry load, but SEBI eliminated that fee in 2009.

    5. Do I need to pay transaction charges every time I invest in a mutual fund?

      If you are investing or withdrawing more than INR 10,000, the regulation allows mutual funds to charge INR 100 for existing investors and INR 150 for new investors as transaction charges.

  • Top Tyre Stocks in India

    Top Tyre Stocks in India

    The Indian auto industry is a powerhouse, driven by a thriving tyre sector that keeps its wheels turning. For investors seeking to get in on the action, tyre stocks can provide a stable journey with solid growth opportunities. But with several major players, where do you begin?

    No worries, in today’s blog we will deeply do a comparative analysis of the top 5 tyre stocks in India.

    By including the focus on best tyre stocks in India, you’ll have a clearer understanding of which companies stand out in terms of market performance, innovation, and investment potential.

    MRF

    MRF is an Indian multinational tyre manufacturing company with its headquarters in Chennai, Tamil Nadu. Founded in 1946 by K.M Mammen Mappillai, it started as a toy balloon manufacturing unit and has grown into a tyre giant. The company manufactures a wide range of products including tyres for two-wheelers, cars, trucks, and even aeroplanes. They are also into the manufacturing of tyres, treads, tubes, conveyor belts, paints and toys.

    MRF is the largest tyre manufacturer in India and ranks among the top 20 globally. They are well-recognised for their high-quality tyres and extensive reach across the country.

    It was incorporated as a private company, Madras Rubber Factory Limited, and began tyre production in partnership with an American company, Mansfield Tire & Rubber Factory.

    MRF has a wide distribution network in India, serving retail stores, dealerships, and car manufacturers. The company sells tyres directly to manufacturers (B2B) for factory use and also has a strong presence in the replacement tyre market for individual consumers (B2C).

    They achieve this reach through an extensive network of franchised stores and dealers. The company focuses on offering excellent customer service through initiatives like roadside assistance programs and informative resources on its website.

    MRF Consolidated Financial Statements

    MRF Balance Sheet

    Key MetricsFY 2024FY 2023
    Total Assets26,84924,369
    Total Liabilities10,1469,662
    Total Equity16,70314,708
    (Note : All values are in INR Crore)
    MRF Balance Sheet

    MRF Income Statement

    Key MetricsFY 2024FY 2023
    Total Revenues25,48623,261
    Total Expenses22,69922,191
    Net Profit2,081769
    (Note : All values are in INR Crore)
    MRF Income Statement

    MRF Cash Flow Statement

    Key MetricsFY 2024FY 2023
    CFO3,3012,755
    CFI-2,379-1,923
    CFF-868-840
    (Note : All values are in INR Crore)
    MRF Cash Flow Statement

    Balkrishna Industries

    Balkrishna Industries Limited (BKT) is an Indian company that makes tyres for different types of vehicles and industries. They focus on off-highway tyres. The company was founded in the year 1987 and is headquartered in Mumbai. The company products include agriculture, industrial, and OTR tyres, as well as tubes and carbon black.

    The company’s expertise lies in manufacturing Off-Highway Tyres (OHT) for agricultural, industrial & construction, earthmovers & port, mining, forestry, and All-Terrain Vehicles (ATV). They have five modern production facilities in India located in Aurangabad, Bhiwadi, Chopanki, Dombivali, and Bhuj.

    Balkrishna Industries Consolidated Financial Statements

    Balkrishna Industries Balance Sheet

    Key MetricsFY 2024FY 2023
    Total Assets13,68412347
    Total Liabilities4,8304,790
    Total Equity8,8537,556
    (Note : All values are in INR Crore)
    Balkrishna Industries Balance Sheet

    Balkrishna Income Statement

    Key MetricsFY 2024FY 2023
    Total Sales9,3689,759
    Total Expenses7,7648,623
    Net Profit1,4711,057
    (Note : All values are in INR Crore)
    Balkrishna Income Statement

    Balkrishna Cash Flow Statement

    Key MetricsFY 2024FY 2023
    CFO2,0821,447
    CFI-1,475-1,783
    CFF-601358
    (Note : All values are in INR Crore)
    Balkrishna Cash Flow Statement

    Read Also: MRF vs Apollo Tyres: Which is Better?

    Apollo Tyres

    Apollo Tyres Limited is an Indian multinational tyre manufacturing company headquartered in Gurgaon, Haryana. The company was established in the year 1972 by Onkar Kanwar, and since then it has grown from a domestic Indian company to a global tyre manufacturer with a presence in over 100 countries. Apollo caters to a wide range of segments, including passenger vehicles, two-wheelers, trucks, buses, and light trucks.

    In the 1990s, Apollo Tyres expanded globally with an ambitious strategy. The company acquired manufacturing facilities in the Netherlands in 2009 to better serve the European market.

    The company employs a multifaceted business model, wherein it successfully integrates manufacturing, branding and a customer-centric approach. This strategic blend enables the company to effectively compete in the highly competitive global tyre market.

    Apollo Tyres Financial Statements

    Apollo Consolidated Balance Sheet

    Key MetricsFY 2024FY 2023
    Key MetricsFY 2024FY 2023
    Total Assets26,95727,359
    Total Liabilities13,05414,481
    Total Equity13,90112,877
    (Note : All values are in INR Crore)
    Apollo Consolidated Balance Sheet

    Apollo Tyres Income Statement

    Key MetricsFY 2024FY 2023
    Total Sales25,37724,568
    Total Expenses22,48522,651
    Net Profit1,7211,104
    (Note : All values are in INR Crore)
    Apollo Tyres Income Statement

    Apollo Tyres Cash Flow Statement

    Key MetricsFY 2024FY 2023
    CFO3,4392,134
    CFI-710-476
    CFF-2,659-1,691
    (Note : All values are in INR Crore)
    Apollo Tyres Cash Flow Statement

    JK Tyres

    JK Tyre is another leading Indian tyre manufacturer. The company was not always a separate entity. It began as part of the J.K. Organisation, a diversified Indian conglomerate founded in 1918 by Lala Kamlapat Singhania. It became the first company to manufacture radial tyres in India.

    J.K. Industries Limited, the parent company of JK Tyres, was restructured and in 2007, JK Tyres & Industries were created to concentrate more on the tyre business. They cater to a wide range of vehicles, including cars, motorcycles and off-road vehicles.

    Additionally, with operations in key regions such as ASEAN, the Middle East and Africa as part of the APMEA region, the Company continued to invest in brand building, working on the requirements of each region to bring country-specific products.  

    JK Tyre has a strong distribution network in India that serves retail outlets, dealerships, and original equipment manufacturers (OEMs) of automobiles. This helps them keep a strong position in the local market.

    The company’s manufacturing facility in Mexico serves the North American market and exports to over 100 countries worldwide. The global reach of the company enables them to access and explore untapped markets and exciting opportunities.

    JK Tyre Consolidated Financial Statements

    JK Tyre Balance Sheet

    Key MetricsFY 2024FY 2023
    Total Assets14,09412,448
    Total Liabilities9,6069,051
    Total Equity4,4883,395
    (Note : All values are in INR Crore)
    JK Tyre Balance Sheet

    JK Tyre Income Statement

    Key MetricsFY 2023FY 2022
    Total Income15,00114,644
    Total Expenses13,38813,815
    Net Profit811264
    (Note: All values are in INR Crore)
    JK Tyre Income Statement

    JK Tyre Cash Flow Statement

    Key MetricsFY 2024FY 2023
    CFO1,6141,224
    CFI-1,208-400
    CFF-413-747
    (Note : All values are in INR Crore)
    JK Tyre Cash Flow Statement

    CEAT

    CEAT Limited, previously known as Cavi Electtrici e Affini Torino (Electrical Cables and Allied Products of Turin), is a leading and recognised multinational tyre manufacturing company headquartered in Mumbai, India. It was founded in 1924 in Turin, Italy, and then moved to India in 1958. The company is a flagship entity of the RPG Group, a prominent Indian conglomerate.

    CEAT is more than just car tyres. They manufacture tyres for motorcycles, cars, trucks, buses, and other vehicles. The company has a global footprint spanning over 120 countries. Their tyres are trusted across various regions. It focuses on producing top-notch products and embracing innovation to meet the varied requirements of customers in different terrains and locations.

    The company caters to a wider range of vehicles. They make tyres for a wide variety of vehicles, including motorcycles, cars, trucks, buses and other types of vehicles.

    The company has a strong distribution network in India and abroad. It divided India into regions, and each Regional Distribution Centre (RDG) supplies tyres to Carrying Forward Agents or directly to dealers based on demand.

    Carrying Forwarding Agents (CFA) act as intermediaries between RDCs and dealers ensuring efficient delivery of tyres to local retailers.

    CEAT has over 4500 dealers and 51,000 sub-dealers in India, which makes their tyres widely available to consumers.

    CEAT Consolidated Financial Statements

    CEAT Balance Sheet

    Key MetricsFY 2024FY 2023
    Total Assets9,9949,627
    Total Liabilities5,9516,187
    Total Equity4,0423,439
    (Note : All values are in INR Crore)
    CEAT Balance Sheet

    CEAT Income Statement

    Key MetricsFY 2024FY 2023
    Total Sales11,94311,314
    Total Expenses10,85810,843
    Net Profit614174
    (Note : All values are in INR Crore)
    CEAT Income Statement

    CEAT Cash Flow Statement

    Key MetricsFY 2024FY 2023
    CFO1,7191,205
    CFI-853-849
    CFF-871-319
    (Note : All values are in INR Crore)
    CEAT Cash Flow Statement

    Read Also: Top 10 Most Expensive Stocks in India

    Tyre Stocks Comparative Analysis

    Tyre Stocks Market Capitalisation (in INR crore)

    Company NameMarket Cap (in INR crore)
    MRF55,561
    Balkrishna Industries62,060
    Apollo Tyre31,450
    JK Tyre10,263
    CEAT10,058

    Tyre Stocks Current Market Price

    Company NameCMP (in INR)
    MRF1,26,145
    Balkrishna Industries3,210
    Apollo Tyre495
    JK Tyre394
    CEAT2,486

    Tyre Stocks Price-to-Earnings Ratio

    Company NamePE Ratio
    MRF26.70
    Balkrishna Industries39.99
    Apollo Tyre17.24
    JK Tyre13.49
    CEAT15.65

    Read Also: List of Best Chemical Stocks in India

    Conclusion

    The Indian tyre industry showcases a diverse range of companies, each with its unique strengths and specialities. MRF’s legacy and brand recognition, BKT’s focus on Off-Highway Tyres, and Apollo Tyre’s global presence constitute compelling options that cater to the diverse needs of the investors. JK Tyres dominates the trucks/bus Radial segment, while CEAT offers a comprehensive portfolio across various vehicle types. So which tyre stock suits you best? Consider your investment goals, risk tolerance and the specific market segment. The Indian Tyre industry is poised for growth due to rising vehicle production, incomes and infrastructure development. As these trends continue to unfold, the top tyre companies will probably take the lead by pioneering constant innovation and adapting to the ever-evolving needs of the market.

    Frequently Asked Questions (FAQs)

    1. What factors should I consider before choosing a tyre stock?

      Legacy, product range, market presence, brand recognition and commitment to innovation should be considered before selecting a stock.

    2. How are these tyre companies adapting for the future?

      These companies are likely to continuously innovate and develop new technologies to fulfil the needs of the customers.

    3. Should I invest in the above-discussed stocks?

      Conduct your own research and due diligence before making any investment decisions.

    4. Where can I find more information about these companies?

      You can visit the company websites or search for industry reports and news articles.

  • Guide to Behavioral Finance: Definition, Biases, and Impact

    Guide to Behavioral Finance: Definition, Biases, and Impact

    Ever wondered why you tend to spend more freely with a credit card than with cash? Or why do you hesitate to sell a losing stock but quickly sell your winning holdings at a small profit?

    Behavioral finance provides interesting insights into various financial puzzles. Unlike traditional finance, which assumes that investors are rational, behavioral finance recognizes the influential role that psychology plays in our financial decision-making. 

    What is Behavioral Finance?

    Behavioral finance is a field of study that examines how psychology influences the financial decisions of investors and financial markets as a whole. In contrast, to traditional finance, which assumes investors act rationally depending on the available information, behavioral finance recognizes that emotions and biases can cloud judgment and lead to suboptimal choices.  

    It shows how psychological factors like overconfidence, herd mentality, loss aversion, etc. can affect an individual’s financial decisions. It challenges the efficient market hypothesis, which holds that markets are totally efficient and reflect all available information. 

    Evolution of Behavioral Finance

    Evolution of Behavioral Finance

    In 1912, George Selden’s groundbreaking book “Psychology of the Stock Market” laid the foundation for understanding the profound psychological elements present in the financial markets. 

    In 1979, the psychologists Amos Tversky and Daniel Kahneman presented their Prospect Theory, which effectively challenged the long-standing belief in rational decision-making. This theory sheds light on the interesting ways in which individuals perceive and prioritize gains and losses. This set the stage for behavioral finance.

    In the 1980s, Richard Thaler, a well-known economist, teamed up with Tversky and Kahneman to implement ideas for the financial markets. During this period, important ideas like mental accounting and framing effects were developed. 

    Since the 2000s, behavioral finance has emerged as a well-established field, witnessing a surge in academic research, industry adoption, etc. 

    Read Also: Top 10 personal finance lessons for self-learning

    Role of Psychology in Behavioral Finance 

    Role of Psychology in Behavioral Finance 

    Behavioral finance is all about the psychology of money. It is the core principle behind the field. Let’s see how psychology plays a major role in understanding financial decisions. 

    • Mental Shortcuts: Our brain depends on mental shortcuts to efficiently process information. Biases stem from these shortcuts. For example, the availability bias leads us to assess the likelihood of events based on how easily we can recall them. This could lead to overreacting to news and neglecting historical trends. 
    • Cognitive Bias: These are thinking patterns that can cause errors in judgement. Behavioral finance identifies and explains how biases such as overconfidence or anchoring bias can distort financial decisions. 
    • Individual Differences: People have different personalities, risk tolerance, and financial goals. Understanding your own psychology is important for making sound financial decisions. Psychology helps us in a comprehensive understanding of these aspects and their impact on financial behavior. 

    Biases in Behavioral Finance

    Biases play a central role in behavioral finance, greatly influencing the way investors make decisions. These biases are mental shortcuts that can lead to judgment errors in financial situations.

    Let’s have a look at some of the common biases: 

    • Loss Aversion: Loss aversion is when people feel the pain of losses more than the pleasure of gains. This can cause investors to keep holding losing stocks and sell winning stocks too early. 
    • Overconfidence: Overconfidence is a common pitfall for investors, who tend to overestimate their knowledge and abilities, resulting in risky decision-making and an underestimation of potential losses or black swan events. 
    • Anchoring Bias: Individuals have a tendency to rely excessively on the initial information they come across when making decisions. This could pose a problem in investing. For instance, an investor is fixated on a stock’s initial price and fails to consider evolving market conditions. 
    • Herd Mentality: Herd mentality refers to the natural inclination to follow the crowd. Investors often make decisions based on the actions of others, rather than their own analysis. This can lead to bubbles and crashes. 
    • Confirmation Bias: Confirmation bias is the tendency to search for information that supports our preconceived notions while disregarding conflicting information. This can cause investors to ignore potential risks or miss out on great opportunities. 
    • Disposition Effect: People tend to sell investments that have made money quickly and keep those that have lost money for a long time. This can hinder returns because winning stocks often have more potential for growth. 
    • Framing Bias: The presentation of information has a profound impact on our perception. For instance, an investment presented with a “90% chance of success” may appear more appealing than one described as having a “10% chance of failure.” 
    • Status Quo Bias: Most individuals generally tend to cling to the status quo and shy away from making any alterations. This can result in a lack of momentum in investment decisions, even when a change could yield better decisions. 
    • Mental Accounting: People often separate their money into different categories and treat them in different ways. For instance, you are more likely to spend your bonus amount than money you have been saving for years. This can result in unplanned expenses. 

    Impact of Behavioral Finance 

    Impact of Behavioral Finance 

    On Individuals

    • Improved Decision-Making: Identifying biases allows investors to make better decisions and avoid expensive errors. Creating a strategy that takes into account risk tolerance and objectives can help minimize the impact of emotions such as fear and greed. 
    • Reduced Risk: Behavioral finance helps recognize biases that lead to risky behavior, like overconfidence leading to excessive investment in volatile assets. Investors can use diversification and disciplined investing strategies to lessen risk.  
    • Awareness: Understanding behavioral biases empowers individuals to take control of their financial decisions. They can become more critical of financial information and avoid falling prey to biases that exploit emotional triggers. 

    On Market

    • Market Volatility: Behavioral tendencies can indeed contribute to market fluctuations. Herding and panic selling make crashes worse, while overconfidence creates bubbles. 
    • Market Anomalies: Behavioral finance helps explain market anomalies, such as calendar effects or seasonal trends, that cannot be fully explained by traditional finance. 
    • Investors protection: Regulators can use behavioral finance insights to create policies that protect investors from making emotional or biased decisions. 

    Read Also: How to achieve financial freedom before retirement

    Conclusion 

    In summation, behavioral finance focuses on the role of human behaviour in making financial decisions. It challenges the idea of rational investors and recognizes how psychology affects our financial choices. 

    Behavioral finance is not a miracle solution that guarantees financial success. However, incorporating these principles into your investment strategy can help you become an informed and mindful investor. Remember that the goal is not to get rid of emotions, but to be aware of how they can affect our financial decisions and to make choices that support long-term goals. 

    Frequently Asked Questions (FAQs)

    1. What is Behavioral Finance?

      It studies how psychology influences financial decisions, acknowledging we are not always rational.

    2. How do emotions affect investing?

      Emotions play a significant role in investing; for example, fear can lead to panic selling, while greed can make you chase risky investments.

    3. How can I be a more mindful investor?

      You can educate yourself on biases and how they might influence you. Consider your emotions and goals before making decisions.

    4. Is there a way to overcome biases?

      Not entirely, but by being aware of the biases, you can take steps to mitigate their influence.

    5. Does behavioral finance replace traditional finance?

      No, it contemplates it. Traditional finance focuses on market data, while behavioral finance considers the human element.

    • 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.