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  • What is Future Trading and How Does It Work?

    What is Future Trading and How Does It Work?

    Ever wondered how farmers secure profits despite fluctuating crop prices? Or how do investors make money from rising oil prices? The solution lies within a formidable financial tool: Futures contracts and the ability to trade them.

    Now, let’s explore futures trading and learn how futures contracts work.

    What is Futures Trading?

    Before discussing futures trading, let us first understand a futures contract. A futures contract is an agreement to buy or sell an asset (such as a commodity, currency, or security) at a set price on a future date. Both the price and maturity dates are mentioned in the contract.

    What is Futures Trading

    Futures contracts are different from stock options. While stock options give you the choice to buy or sell, futures contracts are binding agreements. Furthermore, you buy a futures contract when you expect the asset price to increase, and you sell a futures contract expecting the asset’s price to fall.

    Before proceeding further, let us briefly summarize the terms used in the futures market. 

    Terminologies Used in a Futures Contract

    • Underlying Asset: The asset upon which the futures contract is based.
    • Expiry Date: The date on which the future contract will mature and delivery or cash settlement takes place.
    • Delivery Month: It is the month in which the underlying asset is scheduled for delivery upon contract expiry.
    • Spot Price: It is the current market price of the underlying asset.
    • Future Price: The price agreed upon by the parties to satisfy the futures contract at expiration.
    • Margin: It is a sum of money that the broker requires to allow an individual to start trading futures. It is a proportion of the contract value, serves as a good faith deposit, and lowers counterparty risk.
    • Open Interest: It denotes the total number of futures contracts that are outstanding and not yet settled.

    How Does Futures Trading Work?

    How Futures Trading Works?

    Trades are executed on specific exchanges, such as the Multi Commodity Exchange (MCX) for commodities and the National Stock Exchange & Bombay Stock Exchange for equities.

    Each futures contract has three main specifications:

    • The underlying asset (such as commodity or stock),
    • The standard quantity (for example, 100 shares or 1 kg of Gold) and,
    • The expiry date (also known as the settlement date).

    These contracts are standardized to ensure that trading runs smoothly.

    Indian exchanges require traders to deposit a margin before they can start trading. This margin is essential to ensure the settlement of the contract.

    Essential things to keep in mind before you start trading in futures are listed below,

    • The Securities and Exchange Board of India governs futures trading and is responsible for maintaining market integrity and fairness.
    • In India, futures contracts are settled in cash. It means that the difference between the contract price and the market price is paid in cash upon expiration.
    • Profits from futures trading in India are taxed as capital gains.

    Trading futures has two main purposes:

    Hedging

    Hedging refers to using futures contracts to shield yourself from price changes in an asset you already have. For example, Suppose you are concerned about the future price of mustard because you are about to harvest your crop in approximately three months. One can achieve this through hedging.

    Example

    You decided to hedge your risk using futures contracts on the MCX and entered into a contract to sell 100 quintals of mustard at a pre-determined price, say INR 4,000 per quintal, with a delivery date of November (expiry date). The futures contract will lock in a selling price for your harvest in November, irrespective of the market price.

    Imagine that the price of mustard drops to INR 3,500 per quintal in November because of a surplus harvest. The short position in the futures contract yields a profit of INR 500 per quintal, which offsets the loss due to the lower market price of the crop, thereby hedging away risk.

    Speculation

    Speculation means trying to make money from asset price changes.

    For example, suppose you have a view regarding the price of mustard in the future and want to profit through futures trading. Traders accomplish this through speculation.

    Example

    Consider yourself a trader who does not produce mustard but predicts its price will increase in the next few months because of a possible shortage.

    With a November expiry date, you can enter into a contract to buy 100 quintals of mustard at the current price of INR 4,000 per quintal.

    If the market price of mustard increases to INR 4,500 per quintal by November, you can buy mustard at the pre-agreed price of INR 4,000 and sell it immediately in the market for INR 4,500, making a profit of INR 500 per quintal.

    • Gold Futures
    • Crude Oil Futures
    • NIFTY 50 Futures
    • Currency Futures (NSE & BSE)

    Read Also: Synthetic Futures – Definition, Risk, Advantages, Example

    Conclusion

    Futures trading is a complex financial practice that lets traders speculate on asset prices, protect against risks, and use their positions to increase potential gains. If you get involved in this market, it is crucial to understand how future contracts work. Successful futures trading needs to know the market well and manage the risk with discipline. Traders can achieve various financial goals, such as speculative gains and reliable hedging using futures contracts.

    Frequently Asked Questions (FAQ’s)

    1. Why do people use future contracts?

      People use them for hedging and speculation.

    2. Isn’t trading futures risky?

      Yes, leverage magnifies both gains and losses.

    3. How do I get started with futures trading?

      Educate yourself first. Understand the risks and start small before investing substantial money.

    4. Who regulates futures trading in India?

      The SEBI oversees the futures trading in India.

    5. Is futures trading a good fit for everyone?

      Futures trading is not a good fit for everyone because it’s highly risky.

  • Index Derivatives in India

    Index Derivatives in India

    Various asset classes are available in the financial industry, some of which are less dangerous than others. Derivatives are regarded as one of the most risky financial instruments. When you are unsure which stock to invest in, an index derivative can help you achieve a diversified portfolio of multiple shares.

    In today’s blog, we shall describe various index derivatives available for trading in India and discuss their features, types, advantages and disadvantages. 

    Overview of Index Derivative

    A derivative is a financial instrument whose value is determined by an underlying asset, usually a market index like the Nifty 50, Bank Nifty, etc. Index derivatives are special types of derivatives which only have indices as their underlying asset. These derivatives are traded on the stock exchange. An investor can invest in a group of assets that the index reflects at a time with the help of index derivatives, eliminating the need to purchase each security separately. Futures and options contracts are two types of index derivatives available for trading in India. Both are explained below:

    1. Options Contract: On a specific day, known as the contract’s expiration date, option buyers are granted the choice, but not the obligation, to purchase or sell the underlying securities under this agreement. An investor must pay a premium to the contract seller in order to buy the contract. 

    2. Future Contract: It is an agreement to purchase or sell the underlying index at the agreed-upon price on the contract expiration date. These are binding agreements. Usually, cash settlements are used to fulfil these contracts rather than actual share deliveries. 

    Index Derivatives in India

    Index Derivatives in India

    In India, the following market indices offer index derivatives:

    • Nifty 50: It represents the weighted average of the top 50 businesses listed on the National Stock Exchange. It has both futures and options available for trading. It has a lot size of 25.
    • Nifty Bank: It comprises the most liquid and large Indian Banking stocks. It consists of 12 companies listed on the National Stock Exchange. Both futures and option contracts are available for investors to trade. The derivatives have a lot size of 15.
    • Nifty Financial Service: This index contains the top 20 companies from the financial sector. It has both futures and options available for trading. It has a lot size of 40. Its lot size will be revised to 25, with the first monthly expiry of July 2024 and the first weekly expiry of 6 August 2024.
    • Nifty Midcap Select: It aims to track the performance of a focused portfolio of 25 stocks within the Nifty Midcap 150 index. It has a lot size of 75. Its lot size will be revised to 50, with the first monthly expiry of July 2024 and the first weekly expiry of 5 August 2024.
    • Nifty Next 50: It represents the 50 companies from Nifty 100 after excluding the Nifty 50 companies. It has a lot size of 10.

    Features of Index Derivative

    Index derivatives are complex; therefore, let us understand their features in detail.

    1. The returns of index derivatives are based on the performance of underlying assets.
    2. The contracts are in standard format, making it convenient for investors to buy and sell them.
    3. These contracts provide high liquidity to investors; hence, they can buy and sell at any time during trading hours.
    4. Various brokers offer margin facilities to investors trading in index derivatives, typically buying these contracts by paying up a small portion of the contract value.
    5. Investors can protect their portfolios from unexpected volatility through hedging with the help of these contracts.

    Advantages of Index Derivative

    Index derivatives offer various benefits given below:

    • An investor can hedge their cash market position by using index derivatives.
    • Index derivative allows you to reduce the risk by diversifying the portfolio, as the underlying asset has several stocks.
    • You can earn huge profits by paying a small margin amount upfront.
    • The transaction cost for trading in index derivatives is lower than that of individual stocks.

    Disadvantage of Index Derivative

    Index derivatives are risky financial instruments and have the following disadvantages:

    • As the value of derivatives is derived from underlying market-linked securities, they can sometimes be volatile.
    • Derivatives provide leverage, which can magnify losses.
    • Almost all major index derivative contracts possess high liquidity, but some strike prices have less liquidity, making it difficult for an investor to take or exit their positions.
    • Trading in index derivatives is a complex process as the prices of the contract are also affected by factors like gamma, beta, delta, time value of money, etc.

    Participants in the Derivative Market

    Participants in the Derivative Market

    Market participants use index derivatives for various purposes. Different types of market participants are listed below based on the purpose for which they use derivatives.

    • Hedgers: Some traders use index derivatives to hedge their portfolios against unexpected changes in the price level of the underlying asset.
    • Speculators: These types of traders aim to earn profit from the change in the price level of the index; they typically make long or short positions to earn profits.
    • Arbitrageurs: These are conservative traders who typically try to exploit the opportunity to earn profit from the difference in price between derivative contracts and indexes.
    • Investors: They invest in the index using leveraged positions without buying the underlying asset directly to earn profit.

    Read Also: What is Commodity Market in India?

    Conclusion

    To sum up, investing in index derivatives gives you a chance to diversify your holdings and shield them from market risk, but using derivative instruments also necessitates having a solid awareness of risk and the complexities that surround it. Additionally, whenever you are making an investment, be careful to discuss your risk tolerance with your investment advisor. 

    Frequently Asked Questions (FAQs)

    1. What are the risks associated with investing in index derivatives?

      Market risk, margin calls due to leveraged positions, time decay for option traders, and other risks are associated with index derivatives. 

    2. Name the index derivative in which we can trade.

      Nifty 50, Nifty Bank, Nifty Financial Services, Nifty Mid Cap Select and Nifty Next 50 offer index derivatives we can trade in India. 

    3. What do you mean by margin call in the case of index derivative trading?

      A margin call occurs when the broker requests additional funds or securities because the margin value in your account is less than the minimum amount required by the broker. 

    4. Can a beginner invest in index derivatives?

      Yes, you can begin investing in index derivatives, but you should ensure that you understand concepts such as the time value of money, delta, gamma, etc. 

    5. What are the two types of derivative contracts we can trade online?

      Futures contracts and options contracts are the two categories of derivative contracts we can trade-in. 

  • What Is the National Commodity and Derivatives Exchange (NCDEX)?

    What Is the National Commodity and Derivatives Exchange (NCDEX)?

    The derivative segment for equities and indices in India gets traded on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE), but what about derivative contracts on agricultural and non-agricultural commodities? NCDEX, or National Commodity and Derivatives Exchange Limited, provides an online commodity exchange exclusively for commodities and derivatives trading. 

    In today’s blog, we will explore how to create an NCDEX account, its trading process, and its benefits.

    What is NCDEX?

    National Commodity and Derivatives Exchange Limited is an online commodity exchange dealing primarily in agricultural commodities in India. It has a diverse range of products to fulfill the needs of different participants. NCDEX is under the regulatory authority of the Securities and Exchange Board of India (SEBI). It was established in 2003 and has its headquarters in Mumbai.

    NCDEX provides market access to those who wish to protect their commodities against price volatility. It also allows traders to speculate on the price movement of the commodities to generate profits.

    What Is the National Commodity and Derivatives Exchange (NCDEX)

    The exchange offers derivative contracts for agricultural and non-agricultural commodities across seven categories. The seven categories are listed below:

    • Cereals and Pulses: Chana, Barley, Bajra, Wheat, etc.
    • Oil and Oil Seeds: Groundnut, Crude Sunflower oil, Castor seed, Soybean, etc
    • Fibers: Kapas, 29 MM Cotton
    • Soft: Gur, Robusta Cherry AB coffee, Isabgol seed
    • Spices: Turmeric, Coriander, Jeera, Jeera Mini
    • Guar Complex: Guar seed 10 MT, Guar Gum refined splits
    • Metals: Steel Long

    How to Open and Trade in an NCDEX Demat Account?

    To start trading on the NCDEX platform, we first need to create an NCDEX account by following the steps given below:

    1. Select a stockbroker by comparing its benefits and costs with other stockbrokers.
    2. Complete the application form to open an NCDEX account and give personal and bank details. Opening an account also requires documents such as a PAN card, Aadhaar Card, etc.
    3. The stockbroker verifies all your details and approves them. 
    4. When all the details have been verified, the stockbroker will open your NCDEX account. 
    5. You can deposit a margin amount in the account and start placing orders on the exchange.
    6. Once the order is executed, you can monitor the P&L and must ensure that sufficient funds are maintained.

    Examples of NCDEX

    Suppose you are a farmer who grows wheat and expects to harvest the crop three months from now. Prices three months from now can vary from the prices offered today. These unexpected price fluctuations create a risk as the market price of wheat can decline, resulting in reduced profits or even losses for the farmer. In such a situation, the farmer can create a short position in the derivative contract of wheat. Now, there can be two scenarios:

    1. If wheat prices decrease, then the farmer incurs losses on selling the crop at lower prices, but the short position in the derivative contract offsets these losses.
    2. If wheat prices increase, then the farmer profits from selling the crop at higher prices, but the short position in the derivative contract offsets these profits.

    The derivative contract hedges your long position in wheat and thus fixes your profit. 

    Read Also : What is the Timing for Commodity Market Trading?

    What are the Benefits of NCDEX?

    What are the Benefits of NCDEX

    To take advantage of the NCDEX platform, we must understand its features listed below:

    1. Participants can access market prices, expiry dates, and other important information using the NCDEX platform.
    2. Owners of the assets can use the NCDEX as an efficient price discovery platform to price their products more accurately.
    3. NCDEX has standardized underlying asset quality through contracts, which has resulted in an enhanced focus on producing high-quality crops.
    4. Agricultural commodities are prone to seasonal fluctuations, resulting in significant losses. We can hedge against these price fluctuations using commodity derivatives like futures and options available on the NCDEX. 
    5. NCDEX offers standardized contracts, which simplifies the process of trading and settlement of contracts.
    6. NCDEX follows the mark-to-market settlement cycle, in which the profits and losses are settled at the end of each trading day. This practice helps build confidence among market participants that the contract will be honored.

    What is the Difference Between MCX and NCDEX?

    Multi Commodity Exchange (MCX) and National Commodity and Derivatives Exchange (NCDEX) are prominent commodity exchanges in India. Both platforms allow trading in commodities but are different from each other as they deal in different commodities. MCX offers contracts in silver, gold, and other metals, whereas NCDEX offers products primarily related to agricultural goods.

    Read Also : MCX Exchange Case Study

    Conclusion

    National Commodity and Derivatives Exchange Limited (NCDEX) is one of the largest commodity exchanges in India. It provides market participants an opportunity to hedge against market fluctuation and trade to earn profits. 

    Trading in derivatives can be complex, often resulting in huge losses. Investors must have thorough knowledge regarding derivatives and should consult their financial advisor before making any investment decision.

    Gold Rate in Top Cities of IndiaSilver Rate in Top Cities of India
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    Gold rate in MangaloreSilver rate in Mangalore
    Gold rate in MumbaiSilver rate in Mumbai
    Gold rate in MysoreSilver rate in Mysore
    Gold rate in NagpurSilver rate in Nagpur
    Gold rate in NashikSilver rate in Nashik

    Frequently Asked Questions (FAQs)

    1. What is NCDEX?

       NCDEX, or National Commodity and Derivatives Exchange Limited, is a commodity exchange dealing in agricultural commodities in India.

    2. Who owns NCDEX?

      Major shareholders of NCDEX are NSE (15%), LIC (11.1%), NABARD (11.1%), etc.

    3. What is the difference between NCDEX and MCX?

      NCDEX primarily focuses on trading agricultural commodities, while MCX deals with a broader range of commodities, including metals, energy, etc.

    4. Where are the headquarters of NCDEX?

      The NCDEX headquarters is located in Mumbai.

    5. How can I trade on NCDEX?

      To trade on the NCDEX, one must have an NCDEX account with a registered broker. After registration, one needs to deposit a margin and start trading.

  • Margin Call: – Definition and Formula

    Margin Call: – Definition and Formula

    If you are an investor or a trader, you probably have heard the term “margin call”, especially when markets are volatile. Margin calls are a critical concept for traders using leverage, as trade can quickly lead to significant financial losses if not managed properly. This article discusses margin calls, their meaning, how they work, and their implications. 

    Before we get into the details of the margin call, let’s talk about margin trading briefly.

    What is Margin Trading? 

    When you buy securities using borrowed money (margin funding), the SEBI requires you to keep a minimum amount in your account, called the initial and final margin. 

    Say you have ₹1000 in your trading account and find a trading opportunity. But you are short of cash and need ₹4000 more to place the trade. 

    In this situation, you can open a margin trading facility(MTF) account with your broker by submitting proof of income and signing an agreement. 

    Now, against the ₹1000 in your trading account, your broker can offer you a margin fund of 4 times your account balance. So, you get a total of ₹5000 in your trading account(₹1000 initial balance and ₹4000 as margin fund). Your broker would be interested in the borrowed fund for the duration you would keep your position open. 

    You can trade using ₹5000. This process is called margin trading. If your trade is successful, you get a profit based on an investment of ₹5000 against your actual investment of ₹1000. 

    What is a Margin Call?

    What is a Margin Call?

    A margin call happens when your broker (the company via which you get to buy stocks) requests you to add money or sometimes stocks to your account. This request is made because the value of the stocks you purchased with borrowed funds goes down and falls below the minimum required balance. The formula for margin call price is given below:

    Margin Call Price = Initial Purchase Price * [(1 – Initial Margin)/(1 – Maintenance Margin)]

    Example to Understand How Margin Call Works 

    Let’s assume that the stocks you pick for trading will always be correct and the market will not give you surprises. However, markets are volatile and can move in any direction because of predictable and unpredictable factors, especially in a short period. 

    If this happens, the value of your investment will drop, and returns on your portfolio will suffer. 

    That’s where SEBi steps in. Rules require you to maintain a minimum initial and maintenance margins in your account. 

    Say the initial margin requirement is 50%, and the maintenance margin is 25%.

    On a total investment of ₹10,000: 

    • Initial margin is ₹5,000(50% of the total position) 
    • Maintenance margin is ₹2,500(25% of the total position) 
    • Margin Call Price = 10,000 * [(1 – 50%)/(1 – 25%)] = ₹6,667

    Now, the value of your account must be at ₹6,667 or above to avoid the risk of margin call.

    Now, suppose your investment value slides to  ₹6,000, then 

    Investor Equity = ₹6,000 –  ₹5,000 =  ₹1,000

    Moreover, 1000 divided by 6667 equals 15%, which is insufficient to meet the minimum margin requirement of 25%.  

    Shortfall amount = ₹6,667 – ₹6,000 = ₹667

    If your investor equity falls below the required maintenance margin percentage, you will receive a margin call. 

    Margin calls are triggered when your investment’s value falls during the volatile market phases. 

    What To Do When The Margin Call Is Triggered? 

    What To Do When The Margin Call Is Triggered? 

    When the price of a stock falls, margin calls might be triggered. You may receive a notification via SMS, email, or phone call. You can do a few things to address margin calls: 

    • Add Funds: You can deposit more money into your account, bringing your equity up to the required maintenance margin levels. 
    • Transfer Securities: Alternatively, you can add securities to your account to cover the margin shortfall based on their applicable value. 
    • Sell Holdings: You can also sell your portfolio holdings to maintain the required margin. This option may result in loss. 

    When you receive a margin call, you must act within a specified period to add the necessary margin. If you do not respond and take the required action, the broker will sell part of your holdings to cover the margin shortfall.

    Read Also: Top 10 Highest Leverage Brokers in India

    Conclusion

    Margin trading is popular because it allows you to earn high returns with less money invested. If you are looking forward to using margin trading as a part of your investment, this concept of margin call will be of utmost use to you. However, it can be risky and lead to margin calls in a market fall. Traders must closely check their margin accounts, take action immediately if they receive margin calls, and ensure they have enough funds to meet margin requirements.

    Frequently Asked Questions (FAQ’s)

    1. Can a margin call occur even if the overall market is performing well?

      Yes, a margin call can happen if the value of your leveraged positions drops, regardless of the overall market performance.

    2. Which factors can trigger a margin call aside from a drop in stock prices?

      Factors include increased market volatility, changes in margin requirements, and interest rate fluctuations.

    3. How do different brokers handle margin calls, and are there any policy variations?

      Brokers vary in margin call policies, including notification methods, timeframes to meet calls and liquidation processes. It’s essential to understand your broker’s specific policies.

    4. What are the potential consequences of not meeting a margin call promptly?

      Not meeting a margin call can lead to forced liquidation of your assets, potential financial losses, and a negative impact on your credit standing.

    5. Are there any specific strategies to manage and mitigate the risks associated with margin calls?

      Strategies include using stop-loss orders, diversifying your portfolio, and avoiding excessive leverage to manage and mitigate risks.

  • What is Earnings Per Share (EPS)?

    What is Earnings Per Share (EPS)?

    When investing in stocks, you must have heard about the term “Earnings Per Share” or ”EPS”.  The EPS metric is of great importance as it conveys the profitability of a company and the amount shareholders earn for each outstanding common stock. 

    In today’s blog post, we will introduce you to earnings per share, or EPS, and discuss its features, formula types and limitations.

    What is Earnings Per Share (EPS)?

    The amount of profit allotted to each outstanding share of the corporation is known as earnings per Share or EPS. It is a financial metric used to assess a business’s profitability. The company’s EPS value can be used to compare its profitability with its peers. A higher EPS indicates higher profitability. Various factors and metrics other than EPS must be considered to determine whether to purchase or sell this company. 

    Features of Earnings Per Share

    Features of EPS

    EPS offers the following features: 

    1. EPS measures a company’s profitability and conveys the amount earned by each outstanding share of common stock. 

    2. The company’s net earnings are divided by the number of outstanding common shares to calculate EPS. 

    3. It measures the company’s financial health, indicating whether or not it is growing steadily. 

    4. Share repurchases reduce the number of outstanding shares and can raise EPS without a change in income. 

      EPS Formula

      EPS Formula

      The formula to calculate EPS is explained below-

      Earning Per Share = (Net Income – Preferred Dividends)   / Common Shares outstanding at the end of the period.

      The common shares outstanding change over the period of time, and thus, many analysts use weighted average common shares outstanding in the denominator.

      Earning Per Share = (Net Income – Preferred Dividends)   / Weighted Average Common Shares Outstanding during the period

      Net income refers to a company’s earnings after taxes for a given fiscal year. Preferred dividends are the dividends given to preferred shareholders. Outstanding common shares denote the total number of shares currently held by shareholders. 

      To further understand this, let’s use the example of ABC Ltd., which reported earning Rs. 11 lakhs in net income for the previous fiscal year. The business distributed Rs. 1 lakh to preferred shareholders as a dividend. Additionally, there are 5 lakh outstanding common shares in total.

      Now, we can compute ABC Ltd.’s EPS using the formula mentioned above:  

      EPS = (11,00,000-1,00,000)/5,00,000 = Rs. 2

      Hence, in this case, the EPS of the company is Rs. 2 per share, which means that each shareholder earns Rs. 2 for each share held by them.

      Read Also: Top 10 Cable Stocks in India

      Types of Earnings Per Share

      Types of EPS

      The various types of EPS are mentioned below:

      1. Trailing EPS: This metric refers to a company’s earnings per share computed for the previous 12 months. Its calculation is straightforward and consistent. Trailing EPS is one of the most utilized measures. This measure uses actual data and does not depend on assumptions. 

      Trailing EPS = (Net Income of past 12 months – Preferred Dividends) / Weighted average common shares outstanding during the period.

      2. Basic EPS: EPS is calculated by dividing net income by the weighted average common shares outstanding during the period.

      Basic EPS = (Net Income – Preferred Dividends) / Weighted average common shares outstanding during the period

      3. Diluted EPS: The impact of the company’s prospective convertible securities is considered when calculating diluted earnings per share. All convertible securities are assumed to be exercised and converted to common shares. It is the most elaborate method of EPS computation.

      Diluted EPS = (Net Income – Preferred Dividends) / (Weighted average common shares outstanding + Shares from convertible securities)

      4. Adjusted EPS: EPS is determined by removing the one-time income or expenses from the net earnings of the business to get an adjusted income measure.  

      Adjusted EPS =  (Adjusted Net Income – Preferred Dividends) / Weighted average common shares outstanding during the period

      Importance of Earnings Per Share

      The following points highlight the importance of EPS:

      • Through EPS, one can easily measure the profitability of the company.
      • EPS allows you to easily compare the company’s profitability with its peers.
      • A steady increase in EPS over time ensures an investor that the company is managing its resources optimally.
      • Investors look at the company’s EPS growth rate when making investment decisions.

      Limitations of Earnings Per Share

      EPS has the following limitations:

      • Generally, a historically low or high EPS does not mean that the company will perform similarly in future.
      • Profitability can be significantly changed due to various external factors.
      • Cash flows are not included while calculating the EPS. Therefore, it might not represent the exact financial position of the company.
      • EPS can be artificially increased by reducing the number of outstanding shares. Outstanding shares can be reduced using buybacks.

      Read Also: How to Find Winning Penny Stocks? Step by Step Guide

      Conclusion

      To sum up, EPS is a crucial financial metric for assessing the profitability of the business. The profit a shareholder earns for each share they own can be determined using EPS. Earnings per share provide significant insights and can help simplify investment decisions, but it is advised that before investing, a person should speak with their investment advisor. 

      Frequently Asked Questions (FAQs)

      1. What is EPS?

        Earnings per Share, or EPS for short, is a financial metric that shows how much profit is earned by each outstanding share. It is computed by dividing the company’s net income by the total outstanding shares.

      2. Can a company have negative earnings per Share?

        A business with negative income has a negative EPS.

      3. When does the company report the EPS?

        Companies generally report EPS on a quarterly or yearly basis.

      4. What does adjusted EPS mean?

        Any one-time income or expense is subtracted from the company’s earnings to get adjusted net income in the adjusted EPS formula. One-time gains and losses are removed to provide a more accurate net income measure that a company normally earns.

      5. How does the buyback of shares impact the company’s EPS?

        The company’s share repurchase program will directly boost earnings per share (EPS) since it will reduce the number of outstanding shares while net profit remains unchanged.

    1. 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.

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      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.

    2. 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.


    3. 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.

      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.

    4. 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.

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      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.

    5. 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.

      6. Open Free Demat Account

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