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  • Synthetic Futures – Definition, Risk, Advantages, Example

    Synthetic Futures – Definition, Risk, Advantages, Example

    Did you know that you can create a payoff similar to a futures contract using call and put options? We are talking about Synthetic Futures, one of the least discussed topics in options trading. Let’s have a deep dive into it.

    What are the Synthetic Futures?

    A synthetic future contract is a financial instrument that replicates the payoff of a traditional futures contract using other financial instruments such as options, swaps, or contracts for difference (CFDs). However, traders generally use options to create synthetic futures.

    In synthetic futures option version, we use options (call and put options) to replicate the payoff of a futures contract. For example, an investor buys a call option and sells a put option of same expiration date for a long synthetic future. And for a synthetic short future, the positions are reversed.

    The purpose of doing this is to replicate the payoff of the futures contract (without owning a physical asset) and or to bypass/reduce the limitations/risks associated with trading actual futures contracts.

    Risks associated with Synthetic Futures

    Risk in Synthetic Future
    • Liquidity Risk: Traders can face difficulty in executing and exiting synthetic future trades because of limited liquidity available, particularly in stock-specific contracts. Further, a higher bid-ask spread can reduce the profits.
    • Regulatory Restrictions: The use of synthetic futures contracts may be subject to regulatory compliance and restrictions in certain jurisdictions. Investors should be aware of the applicable laws and regulations governing these contracts in their respective countries.
    • Counterparty Risk: If you’re trading in Over the counter (OTM) markets, synthetic futures may involve counterparty risk, there is a risk of default or non-performance by any of the involved parties. It is crucial for investors to assess the creditworthiness and reliability of the counterparties before entering into synthetic positions.

    Benefits of Synthetic Futures

    • Lower Margin Requirements: One of the key advantages of synthetic futures contracts is that they often require lower margins compared to traditional future contracts.
    • Flexibility and Customization: Synthetic future contracts enable investors to   speculate on the various asset classes, including commodities, currencies, indices, and even individual stocks. Also, it allows traders to do certain adjustments using call and put options which is absent in future contracts.
    • Cost Efficient: The ability to make adjustments in the underlying asset helps in saving a lot of money.
    • Potential for Enhanced Returns: Due to the lower capital requirements and the ability to leverage derivative instruments, synthetic futures contracts offer the potential for enhanced returns.

    Read Also: Momentum Investing: Meaning, History, Types & Advantages

    Example

    Synthetic Future Example

    Consider that Berger paints is trading at INR 500. And a trader purchases a call option of ATM strike price, i.e., 500 strike for INR 50. This call option gives the trader the right, but not the obligation, to buy Berger Paints stock.

    Simultaneously, the trader sells a put option of 500 (ATM strike) for INR 30, with the same expiration date.

    By doing this, the trader has effectively created a synthetic long futures contract on Berger Paints stock by combining these two options. Thus, he or she can profit from the price increase if the stock price rises above INR 500.

    Based on the below formula, the net outflow of synthetic futures will be calculated as follows:

    Net Cash Outflow = Call option – Put option = 50-30 = 20

    Keep a note that we are buying the ATM Call Option and simultaneously selling the ATM Put Option. Further, the call and put options belong to the same underlying and same expiry. Synthetic Long mimics the payoff of the long futures contract. In case of short synthetic futures, we buy ATM Put Option and sell ATM Call Option of the same underlying and same expiry.

    Let us consider a few expiry scenarios:

    1. Berger Paints stock expires at 400 (Below ATM)
      • At 400, the 500 CE will expire worthless, hence we will lose call premium paid that is INR 50 but PE will have an intrinsic value of Max (Strike – Spot, 0), i.e., Max (500-400, 0) or 100 as we are short on this put option, we will lose the money from the premium, 30 – 100 = (70)
      • Total payoff from the long Call and short Put position would be, -50 – 70 = (120). Here, we made a loss of INR 120.
    • Stock expires at 500 (At ATM )
      • If the market expires exactly at 500, then both the options will expire worthless. Hence, we will lose the premium paid for the call option option = 50. But we will be able to retain the premium for the PE option = 30.
      • The net payoff from both the positions will be, 30-50 = (20). Here, we made a loss of INR 20.
    • Stock expires at 600 (Above ATM)
      • At 600, the 500 long CE would have an intrinsic value of 100, we would make, [Intrinsic value – Premium Paid] = 100 – 50 = +50. The 500 short PE would expire worthless; hence we get to retain the premium of INR 30.
      • Total payoff would be = +50 + 30 = INR 80

    We can conclude that the strategy makes money when the market moves higher and loses money when the market goes down, similar to futures. However, this does not necessarily mean that the payoff is similar to that of futures. To establish that the synthetic long payoff behaves similar to the futures, there should be a payoff symmetry around the breakeven point that is called linearity and then only it will behave like futures.

    Read Also: What is Future Trading and How Does It Work?

    Conclusion

    Synthetic futures contracts have gained popularity in the financial markets as they provide investors with a unique tool to gain exposure to the underlying assets without actually owning them. These contracts are designed to replicate the price movement and characteristics of traditional futures contracts.

    By replicating the characteristics of an actual Futures contract, Synthetic futures give flexibility, risk management and increased trading opportunities. However, it is essential to understand the risks involved and have a good understanding of options strategies with proper knowledge and skill.  

    FAQs

    1. What is a Synthetic Futures?

      A Synthetic Future is a financial instrument that mimics a futures contract’s characteristics and potential returns without having its limitations.

    2. Can I create Synthetic Futures apart from Options?

      Yes, it can be created using other financial instruments as well, like Swaps and CFDs.

    3. What are the advantages of Synthetic Futures?

      It provides alternative trading strategies and effective risk management tools.

    4. What is one of the limitations of Synthetic Futures?

      One of the limitations of Synthetic futures is the limited availability of certain synthetic instruments because of low volumes in call and put options.

    5. Is Counterparty Risk involved in Synthetic Futures?

      Counterparty risk is the risk of loss from a default of the counterparty. In case of OTC markets, it is a primary risk in synthetic futures and are subject to creditworthiness of the counterparty.

  • What is a Dividend? Meaning, Key Dates, and Types Explained

    What is a Dividend? Meaning, Key Dates, and Types Explained

    We know that one should invest a portion of their income in the securities market. But did you know that there’s a way to earn money while being invested? 

    Today, we’re going to walk you through a unique way to earn passively. We’ll cover what a dividend is, the most important dates you’ll need to know as an investor and the types of dividends that a company can pay.

    Meaning Of Dividend

    In simple terms, a dividend is a payment by a corporation to its shareholders, which is commonly realized through the company’s profits. When a company earns a profit, it can choose to either reinvest the money back into the business (retained earnings) or distribute a portion of it to shareholders in the form of a dividend. Dividends are a way for companies to reward shareholders for their investment and provide a steady stream of income.

    Therefore, dividends are seen as a sign of a company’s financial health and stability. Companies that consistently pay dividends, especially those that increase their dividend payout ratios over time, are often viewed as financially sound and stable. This can make dividend-paying stocks particularly attractive to income-focused investors, such as retirees, who rely on the steady income that dividends provide.

    Dividends

    Dividend Key Dates

    To fully understand the dividend process, it’s important to know the key dates involved:

    Declaration Date

    It is the date when the board of directors of the company declares the dividend to be paid out. It usually states how much money is to be given out and dates set for the record date and payment date. The declaration date is the first signal to investors that a dividend will be paid.

    Ex-Dividend Date

    This is the cutoff date established by the stock exchange. If you purchase a stock on or after this date, you will not be eligible to receive the declared dividend. For one to qualify to be paid the dividend, the person should own the share before the ex-dividend date. 

    Record Date

    This is the date when the company reviews its records to determine which shareholders are eligible to receive the dividend. The record date is usually one business day after the ex-dividend date. It’s the official date on which you must be on the company’s books as a shareholder to receive the dividend.

    Payment Date

    This is the date when the dividend is actually paid out to shareholders. In other words, it is the date when money is released and transferred to shareholders in their brokerage accounts.

    Key Dates of Dividends

    Read Also: What is Dividend Yield?

    Example of Dividends

    Let’s say Company XYZ declares a dividend on January 1st of $2 per share:

    – Declaration Date: January 1st, when the company announces it will pay a dividend of $2 per share.

    – Ex-Dividend Date: January 15th. To be eligible for the dividend, you need to purchase the stock by January 14th.

    – Record Date: January 16th, when the company checks its records to see who is eligible.

    – Payment Date: January 31st, when eligible shareholders receive their dividends.

    If you own 100 shares, you will receive a total of $200 in dividends (100 shares * $2 per share) on January 31st.

    Calculate Dividend Yield – Dividend Yield Calculator

    Types of Dividends

    Companies can issue several types of dividends, each with its own characteristics and implications for shareholders:

    Cash Dividends

    This is the most common type and pays the holder in cash, either to their brokerage account or with a physical check. This is the form of the dividend that most people think about and refer to when they use the term dividend.

    Cash Dividends

    Stock Dividends

    Instead of cash, shareholders receive additional shares of the company’s stock. In other words, this exercise allows more share ownership without giving out cash. Stock dividends are popular because they allow the holder’s interest in the business to widen without the holder spending money to earn new share rights. Thus, the company can safeguard its cash while satisfying the shareholders. 

    Property Dividends

    These dividends are paid out in the form of assets other than cash, such as products or physical assets owned by the company. Property dividends are rare and can include items like real estate, inventory, or other physical assets.

    Special Dividends

    These are one-time payments that a company issues, usually when it has accumulated substantial profits or has excess cash reserves. Special dividends are not recurring and are often larger than regular dividends, reflecting a particularly strong performance period for the company.

    Preferred Dividends 

    These dividends are paid to holders of preferred stock and are typically fixed amounts paid on a regular schedule, often quarterly. Preferred dividends have priority over common dividends, meaning they are paid out first. Thus making preferred shares a more predictable income source.

    Read Also: How to invest in dividend stocks?

    How can I track Dividends?

    Generally, listed companies publish all the corporate announcements at stock exchanges first, i.e., NSE and BSE in India. However, it will be cumbersome for you to monitor updates from each company individually.

    To simplify this process, we’ve created a dedicated corporate action page where you can effortlessly track all the latest corporate announcements, including but not limited to dividends, rights, splits, and bonus issues.

    You can access the corporate actions page to get the detailed list.

    But that’s not all. In addition to our corporate actions page, we recently launched our new WhatsApp service. Now, you can effortlessly stay informed about all corporate actions, including dividends, bonuses, splits, and more, delivered straight to your phone every morning by 9 A.M. for just INR 11!

    Sign up now and never miss any corporate announcement.

    Conclusion

    Understanding dividends and their associated dates is essential for any investor seeking to benefit from this form of income. By keeping track of declarations, ex-dividends, records, and payment dates, investors can ensure they are positioned to receive dividends. 

    Hence, whether you’re an amateur investor or a seasoned pro, dividends can play a valuable role in building a growing portfolio. However, you must perform your analysis before investing in any stock.

    Read Also: Highest Dividend Paying Penny Stocks in India

    Frequently Asked Questions (FAQs)

    1. What are Dividends?

      Dividends are the distribution of the company’s earnings to the shareholders.

    2. Is it mandatory for companies to continue paying dividends?

      No, a company can stop paying regular dividends if its financial situation does not allow it to part ways with cash. However, most companies continue paying dividends once they have started. 

    3. Why Are Dividends Important to Investors?

      Dividends provide a regular income stream, which is particularly important for income-focused investors such as retirees. Dividends also act as a sign of a company’s financial health. 

    4. Would I receive a dividend if I purchased the share after the ex-dividend date?

      No, the ex-dividend date determines who qualifies to receive the dividend. If you purchased the stock on or after the ex-dividend date, you will not be eligible for the declared dividend.

    5. How are dividends taxed?

      Dividends are not taxed upto INR 5000 in India. Any dividend income you receive beyond this limit will be taxed according to the applicable tax rates.

  • XIRR Vs CAGR: Investment Return Metrics

    XIRR Vs CAGR: Investment Return Metrics

    We all know that we should choose securities that generate the highest return. But have you wondered which return should we consider while evaluating securities? 

    This blog will delve deeper into two of the most popular methods to evaluate returns. 

    What is CAGR?

    CAGR stands for the Compounded Annual Growth Rate. It measures an investment’s annual growth rate over time and is often used to measure and compare investments’ past performance or to project their expected future returns. It calculates the constant average growth rate over a period of time for a long-term investment.

    The compound annual growth rate isn’t a true rate of return. It describes the growth rate at which an investment has grown, assuming that the growth rate is the same every year and that the profits are reinvested at the end of each year. In reality, this kind of performance is unlikely because the growth rate depends upon multiple outside market factors. However, the CAGR can be used to smooth returns so that they may be more easily understood compared to alternative methods.

    Mathematical formula

    CAGR = (EV / BV)^(1 / N) – 1

    where: EV = Ending value, BV = Beginning value, and N = Number of years

    Calculation

    1. Divide the value of an investment at the end of the period by its value at the beginning of that period.
    2. Raise the result to an exponent of one divided by the number of years.
    3. Subtract one from the subsequent result.
    4. Multiply by 100 to convert the answer into a percentage.

    CAGR Limitations

    1. It smooths the growth rate, so it does not give a true picture as it ignores volatility and implies that the growth during that time was steady.
    2. It doesn’t account for the inflow and outflow of the funds from the portfolio over the period of time.
    3. It ignores volatility and is hence not useful in forecasting growth rates during unstable times.
    4. It is not relevant for early growth ventures as they are naturally volatile.

    Can CAGR be improved?

    The major limitation of CAGR is that it calculates a smoothed rate of return over time, ignoring volatility. To improve these limitations, investors can use a risk-adjusted CAGR. A simple method for calculating a risk-adjusted CAGR is to multiply the CAGR by one minus the investment’s standard deviation [standard deviation measures total risk, which is the sum of systematic (market-specific) and unsystematic risk (investment-specific)]. 

    If the standard deviation is zero, the risk-adjusted CAGR is unaffected. If the standard deviation is larger, the risk-adjusted CAGR will be lower.

    CAGR

    What is XIRR?

    XIRR, or Extended Internal Rate of Return, is a method to calculate the annualized return on investment with irregular Cash flows. It considers all cash inflows and outflows, along with the dates on which they occur, to calculate the annual rate of return. XIRR considers the timing and amount of each cash flow, making it a more accurate method for investments with irregular cash flows. It is more flexible than CAGR as different time horizons and different cash flows can be easily accounted for here.

    XIRR calculation is tricky, but any financial XIRR calculator or spreadsheet can do this instantly. XIRR solves for the rate of return that makes the NPV (Net Present Value) of all cash flows equal to zero.

    What is the difference between CAGR & XIRR

    CAGRXIRR
    Simple rate of return based on Beginning and Ending Value. More complicated and takes into account both investment outlay and cash flows.
    Suitable for calculating returns of one-time investment.Suitable for calculating returns of investments with irregular cash flows.
    Doesn’t consider the timing of cash flows.Consider the timing of cash flows.
    Computes the average annual growth rate.Computes the Internal Rate of Return (IRR).
    Simple to calculate but less accurate.More complex to calculate but more accurate.

    Read Also: ITC vs HUL: Comparison of India’s FMCG Giants

    Suitable Metric to Calculate Mutual Fund Returns

    If you invest a lump sum amount without a regular series of investments, then one can use the CAGR as the timing of the investment, and periodic cash flows won’t be an issue. But when you choose to invest through SIPs, regular outlays/payments on a particular date, then using CAGR is not an appropriate way to calculate the return, as it ignores the timing of investments and considers only the first and last values. So, in such cases, one can use XIRR to calculate the actual return for your SIP investments. 

    Therefore, if it’s an open-ended fund with irregular cash flows (in the form of SIPs), then XIRR is the preferred method. If it is a close-ended fund where the fund has a constant growth rate and accepts lump sum cash outlays only, then CAGR is the preferred method. 

    XIRR vs CAGR

    Conclusion

    Both methods are used to calculate returns, and both have pros and cons. Therefore, according to the time horizon and cash inflow/outflow plan, one should decide which method to use. 

    Absolute return is best for short-term investments, but CAGR is best for longer-term investments with fixed cash outlays. However, XIRR is the most useful in cases of multiple cash flows (SIPs) as it considers the timing of each cash flow while calculating an annualized return.

    S.NO.Check Out These Interesting Posts You Might Enjoy!
    1NHPC vs NTPC
    2Swiggy Vs Zomato
    3Mahindra & Mahindra vs Tata Motors
    4Tata Power Vs Adani Power
    5Tata Steel vs. JSW Steel

    Frequently Asked Questions (FAQs)

    1. What is CAGR?

      Compound Annual Growth Rate, or CAGR, is the annual growth of your investments over a specific period of time. In other words, it measures how much you have earned on your investments per year during a given interval.

    2. What is XIRR?

      XIRR, or Extended Internal Rate of Return, is the annualized return on investment while considering irregular cash flows.

    3. Which calculation method is better, CAGR or XIRR? 

      XIRR is better than CAGR as it is more flexible and can calculate the returns on investments with multiple cash flows at different times, while CAGR can only calculate the returns for a single cash inflow and outflow. 

    4. Which method should one use to calculate mutual fund returns?

      The answer depends on the type of investment. For lump sum investments, CAGR is a good enough measure of returns. However, for investments with irregular cash flows, such as SIPs, XIRR is a better measure of returns.

    5. Can CAGR be negative? 

      Yes. A negative CAGR indicates losses over time rather than gains.

  • What are Stock Splits? Meaning, Reason, Types, and Impact Explained

    What are Stock Splits? Meaning, Reason, Types, and Impact Explained

    Stock split is a unique corporate action in which the shareholder’s shares get divided into multiple shares. While the overall value of the shares remains the same, the shares increase in number.

    But what exactly is a stock split, and why does it matter to investors in India? This blog will answer all your questions regarding stock split. 

    Stock Splits Meaning

    Meaning of Stock Split

    A stock split is when a company divides its existing shares into multiple shares. However, the total market value of the company doesn’t change, even though the number of shares increases. 

    You can imagine cutting a piece of pie into smaller portions — while the number of pieces increases, the total amount of pie remains the same. This move is generally done to make individual shares more affordable and attract a wider range of investors who were unable to enter due to the high price point.

    Reason for Stock Splits

    Companies make use of stock splits to make their shares more appealing and accessible to investors. When a company’s share price shoots up drastically, it can discourage small scale investors from buying. Therefore, by splitting the stock, companies lower the price per share, making it more affordable and thus increasing liquidity.

    For example, imagine a company’s share price has increased to ₹10,000. Many retail investors might find it too expensive to invest. However, if the company announces a 10-for-1 stock split, each share’s price would drop to ₹1,000, making it more attainable for a larger audience.

    Types of Stock Splits

    Types of Stock Splits

    There are broadly two types of stock splits. They are explained below:

    1. Forward Stock Split – This is the most common type of split, where the number of shares increases and the price per share decreases. For instance, in a 2-for-1 split, each existing share splits into two, doubling the number of shares and cutting the price per share in half.
    2. Reverse Stock Split – This type is relatively less common, it involves reducing the number of shares, which in turn increases the price per share. For example, in a 1-for-5 reverse split, five shares are consolidated into one, making the price of each share five times higher.

    Psychological Impact of Stock Split

    Stock splits can have a significant psychological impact on investors. When a company announces a stock split, it creates a perception of growth and confidence in the company’s future. This perception is largely based on the idea that the company seeks the trust of retail investors. 

    This positive sentiment can drive up demand for the stock, sometimes leading to an increase in the stock price post-split, even though the overall market value of the company remains unchanged.

    Calculations of a Stock Split

    Calculation of a Stock Split

    Let’s break down the calculation with an example. Suppose you own 100 shares of a company, XYZ Limited, with each share priced at ₹500. Your total investment is ₹50,000 (100 shares x ₹500). 

    XYZ Limited then announces a 2-for-1 stock split. After the split, you will own 200 shares, but the price per share will be halved to ₹250. Thus, your total investment remains the same at ₹50,000 (200 shares x ₹250).

    Similarly, if XYZ Limited opted for a 3-for-1 stock split, you would end up with 300 shares priced at approximately ₹166.67 each, maintaining the total value of your investment.

    The market value of the company remains the same after the stock split, thus reducing the value of each share. 

    Pros and Cons of Stock Splits

    Pros

    • Increased Liquidity – More shares at a lower price can increase trading volume and liquidity.
    • Enhanced Affordability – Lower-priced shares are more accessible to small investors, widening the shareholder base.
    • Positive Market Perception – A stock split can signal that the company is performing well and expects future growth.

    Cons

    1. No Fundamental Change – A stock split doesn’t change the company’s fundamentals. It’s more of a cosmetic change without affecting the company’s market capitalization or intrinsic value.
    2. Possible Volatility – Post-split, stocks can experience higher volatility as new investors start investing. This increase in demand can make the stock appear more valuable than it actually is.

    Read Also: What is a Bonus Issue? Meaning, Process, Key Dates, and Impact Explained

    How can I track Stock Splits?

    Generally, listed companies publish all the corporate announcements at stock exchanges first, i.e., NSE and BSE in India. However, it will be cumbersome for you to monitor updates from each company individually.

    To simplify this process, we’ve created a dedicated corporate action page where you can effortlessly track all the latest corporate announcements, including but not limited to dividends, rights, splits, and bonus issues.

    You can access the corporate actions page to get the detailed list.

    But that’s not all. In addition to our corporate actions page, we recently launched our new WhatsApp service. Now, you can effortlessly stay informed about all corporate actions, including dividends, bonuses, splits, and more, delivered straight to your phone every morning by 9 A.M. for just INR 11!

    Sign up now and never miss any corporate announcement.

    Conclusion

    Stock splits play a crucial role in making shares more accessible and enhancing market liquidity. Although they don’t alter a company’s fundamental value, they can significantly influence investor perception and market dynamics. 

    Understanding stock splits is extremely important for investors, as it equips them with the knowledge to navigate the market more effectively.

    Frequently Asked Questions (FAQs)

    1. Is it mandatory for the listed companies to declare a stock split or reverse stock split once the share price reaches a certain point?

      No, it is entirely optional for companies. For example, MRF Ltd. has never done a stock split, and its shares are currently among the most expensive shares to purchase in the Indian share market.

    2. What is the key difference between Forward Stock Split and Reverse Stock Split?

      The key difference between the two is that a forward stock split increases the number of outstanding shares, and a reverse stock split decreases the number of outstanding shares. The total market value of the organization remains the same in both cases.

    3. Is there any impact on liquidity by stock split?

      Yes, the liquidity of the stock is increased after a stock split as it increases the number of outstanding shares of the company and decreases the price per share, making it affordable to potential investors.

    4. Who announces the stock split?

      The company’s Board of Directors have the authority to announce a stock split.

    5. Is there any impact of a stock split on the company’s fundamentals?

      No, there is no impact of a stock split on the company’s fundamentals.

  • What is Right Issue of Shares: Meaning, Examples, Features

    What is Right Issue of Shares: Meaning, Examples, Features

    Have you ever asked yourself how some firms get additional capital without going to the banks and/or financial backers? This brings us to the rights issue — a powerful technique that enables organizations to give current shareholders a chance to purchase more of the same stock at a lesser price. 

    This blog will dig deeper into the world of capital structure and explain how rights issues work, its advantages, and drawbacks.

    Meaning of Right Issue of Shares

    Meaning of Right Issue of Shares

    A rights issue is a process through which businesses offer existing shareholders an opportunity to buy more shares at a lower price in their efforts to source capital in the market. This approach enables companies to look for capital for expansion, to redeem debts, or for any other purposes without causing major changes in the percentage ownership of the shareholders. 

    Features Of Right Issue of Shares

    • Companies exercise a rights issue when they need cash flow for various objectives. The process may allow the company to raise money without incurring underwriting fees. However, few rights may be underwritten if the company wants to secure the amount of capital raised.
    • These rights are usually distributed as dividends, and the number of additional shares the shareholders can purchase is generally proportional to their existing shareholding. The holder may entirely or partially exercise rights.
    • A rights issue gives privileged treatment to existing shareholders, who are given the right to buy shares at a lower price on or before a particular day.
    • Existing shareholders also have the advantage of the right to trade with other concerned market participants until the new shares can be purchased. The rights are sold in a similar way as average equity shares.
    • Existing shareholders can also disregard the rights; however, their existing shareholding will be diluted post-issue of additional shares if they do not purchase additional shares

    Read Also: What are Shares – Definition, Example, and Benefits

    Example of Right Issue of Shares

    Example of Right Issue of shares

    Suppose an investor owns 100 shares of XYZ Ltd., trading at INR 20 per share. The company set forth a rights issue in the ratio of 2 for 5, i.e., all investors holding 5 shares will be eligible to buy 2 more new shares. The company declared a discounted price, say, INR 15 per share. That means, for every 5 shares (at INR 20 each) held by a pre-existing shareholder, the company will offer 2 new shares at a discounted price of INR 15.

    • Investor’s Portfolio Value (before rights issue) = 100 shares x INR 20 = INR 2,000
    • Number of additional shares to be received = (100 x 2/5) = 40
    • Amount paid to buy rights shares = 40 shares x INR 15 = INR 600
    • Total no. of shares after exercising rights issue = 100 + 40 = 140
    • Increased value of the portfolio after exercising rights issue = 140 Shares x 20 = INR 2,800

    Key Dates of Right Issue of Shares

    Key Dates of Right Issue

    Announcement Date – It is the date on which the Board announces the Rights Issue. It is also known as the Declaration Date.

    Record Date – It is the date on which a company that has offered Rights issue decides the eligible shareholders to receive the right to buy additional shares.

    Ex-Rights Date – This is the date before which you need to purchase the shares to be eligible to receive the right. Generally, it is two days prior to the record date as settlement takes two days in most of the markets, which means shares purchased today will be credited to your demat account after T+2 days (Trading day + 2 days). As of December 2023, we have a T+1 settlement in India, so the Ex-Right Date is one day before the record date.

    Read Also: Equity Shares: Definition, Advantages, and Disadvantages

    How can I track Rights Issues?

    Generally, listed companies publish all the corporate announcements at stock exchanges first, i.e., NSE and BSE in India. However, it will be cumbersome for you to monitor updates from each company individually.

    To simplify this process, we’ve created a dedicated corporate action page where you can effortlessly track all the latest corporate announcements, including but not limited to dividends, rights, splits, and bonus issues.

    You can access the corporate actions page to get the detailed list.

    But that’s not all. In addition to our corporate actions page, we recently launched our new WhatsApp service. Now, you can effortlessly stay informed about all corporate actions, including dividends, bonuses, splits, and more, delivered straight to your phone every morning by 9 A.M. for just INR 11!

    Sign up now and never miss any corporate announcement.

    Conclusion

    Rights issue is one way a listed company can raise capital without incurring high costs by offering to purchase new shares to existing shareholders at a fixed price. This process is entirely voluntary and does not require the existing shareholders to participate.

    Although this corporate action garners a lot of attention from shareholders due to its enticing features, it is extremely important to perform your analysis before participating in the issue. 

    Frequently Asked Questions (FAQs)

    1. How is the price of the rights issue determined?

      The price of the rights issue is determined by the company based on multiple factors like current market conditions, the company’s financial position, and the discount offered to shareholders.

    2. What are the risks of investing in a rights issue?

      The issue in itself does not have any major risk outside of the risk of oversubscription, where shareholders may not be able to acquire their desired number of additional shares. However, there exists a possibility of the company not performing well financially, leading to a decline in share value.

    3. What happens if a shareholder doesn’t participate in a rights issue?

      If a shareholder chooses not to participate in a rights issue, their ownership in the company will be diluted as other shareholders will purchase additional shares. However, they can still retain their existing shares.

    4. How are shareholders notified about a rights issue?

      Shareholders are notified about a rights issue through official announcements by the company, which include information on the issue size, subscription price, and the timeline.

    5. Why do companies choose to raise money through rights issues?

      Companies choose the option of rights issues in order to raise additional capital for various purposes such as funding expansion projects, reducing debt, or strengthening their financial position.

  • Top Power Companies in India

    Top Power Companies in India

    India’s growth brings a bigger need for power. As cities and industries grow, so does the demand for electricity. Some companies lead this charge, shaping our future. With the advent of discount brokers, you can now own a part of these companies and benefit from their growth. 

    In this blog, we will provide an overview of India’s top companies engaged in the production and transmission of power to your household.

    Role of India in Energy Sector

    Role of India in Energy Sector

    As of March 2024, India is the third-largest electricity producer in the world, with an installed power capacity of 442 GW (Giga Watt). According to data released by the Ministry of Power, the country is growing at an annual rate of 7.7%. By 2047, India plans to increase the installed capacity of non-fossil fuel to 90%. 

    Factors Affecting Power Companies

    1. Changes in government regulation related to the power sector can impact the performance and profitability of the companies.
    2. The growing market of renewable energy due to increasing awareness of climate change can negatively impact the market share of traditional energy companies.
    3.  Older and inefficient infrastructure related to the power supply through grids could lead to loss of energy during the process, which could impact the company’s revenue.

    Top Power Companies in India

    Top Power Companies in India

    NTPC

    The company was established in 1975 as a public sector enterprise by the Indian government in response to the nation’s electricity needs. The corporation first prioritized using coal to generate electricity but eventually turned its attention to renewable energy sources. By 2032, the corporation hopes to reach a capacity of 130 GW. In 2023–2024, the company generated 400 billion units of electricity. 

    Power Grid Corporation Limited

    The Indian government has bestowed on this corporation the title of Maharatna. Founded as National Power Transmission Corporation Limited in 1989, it is a wholly owned government subsidy of the Indian government. In 1992, the firm changed its name to Power Grid Corporation of India, and the government’s ownership had decreased to 51.34%. In 2007, they listed themselves on the stock exchange. As of April 30, 2024, the corporation operated 278 sub-stations and 1,77,790 circuit kilometers of transmission line. 

    Tata Power Company Limited

    Power generation, distribution, and transmission are all activities carried out by the company. Established in 1915 as Tata Hydroelectric Power Supply Corporation, the corporation changed its name to Tata Power Company Limited in 2000. The company has an available maximum capacity of 14,690 megawatts. In addition to producing electricity, the company also installs solar panels on roofs and provides home automation systems and electrical charging stations. 

    Adani Power Limited

    Founded in 1996, the company primarily focused on power trading. Later, in 2009, it started producing power and started its first plant in Mundra, Gujarat. As of today, the company operates facilities in Gujarat, Maharashtra, and Rajasthan and has a capacity of 15,250 megawatts of electricity. It also has a 40-megawatt solar power facility in Gujarat. 

    JSW Energy Limited

    The business was established in 1994 and is a member of the JSW Group, regarded as one of India’s top conglomerates. It operates in several industries, including infrastructure, steel, energy, and cement. In 2007, the company went through an initial public offering (IPO) to list on a stock exchange. The company currently stands as India’s one of the top private power companies with a total power generation capacity of 6,677 megawatts, which includes 3,158 MW from their thermal power plants, 1,391 MW from hydropower plants, 1,461 MW from wind power plants, and 667 from solar power plants. The company also holds some stake in South African natural resources companies.

    Comparative Study of Power Companies

    Market Capitalization

    CompanyMarket Capitalization (In crores)
    NTPC Limited3,63,576
    Power Grid Corporation of India Limited2,96,503
    Tata Power Company Limited1,42,895
    Adani Power Limited2,72,839
    JSW Energy Limited1,04,979
    (As on 24th May 2024)
    Market Cap of Top 5 Power Companies

    We may infer from the preceding graph that NTPC has the biggest market capitalization among the aforementioned organizations, followed by Power Grid Corporation and Adani Power Limited.  

    Read Also: Different Types of Companies in India

    Financial Statement Highlights

    Income Statement (FY 2023)

    CompanyTotal IncomeTotal ExpensesNet Profit after tax
    NTPC Limited177,977.17154,426.3517,121.35
    JSW Energy Limited10,867.059,063.501,480.12
    Power Grid Corporation of India Limited46,605.6429,070.4715,417.12
    Tata Power Company Limited56,547.1055,213.613,809.67
    Adani Power Limited43,040.5235,365.8210,726.64
    (In Crores)
    Income Statement of Power Companies in India

    Among the enterprises listed above, JSW Energy Limited reported the lowest net profit after tax of INR 1,480 crore. According to the income statement above, NTPC reported the most significant profit at INR 17,121 crore. 

    Balance Sheet (FY 2023)

    ParticularsTotal AssetNon-Current LiabilitiesTotal EquityCurrent Liabilities
    NTPC Limited446,021.45207,582.38147,023.1784,534.97
    JSW Energy Limited48,741.7021,001.9018,734.188,937.71
    Power Grid Corporation of India Limited250,295.55128,975.2383,014.5128,142.29
    Tata Power Company Limited128,349.0448,816.8034,204.1243,979.22
    Adani Power Limited85,821.2738,201.0229,875.6617,744.59
    (In Crores)
    Balance Sheet of Top power Companies in India

    According to the above table, NTPC has the highest total asset, followed by Power Grid Corporation of India Limited, with JSW Energy having the lowest total asset. 

    Cash Flow Statement (FY 2023)

    ParticularsCash flow from operating activitiesCash flow from investing activitiesCash flow from financing activities
    NTPC Limited40,051.55-26,107.20-14,154.47
    JSW Energy Limited2,084.27-7,009.487,327.48
    Power Grid Corporation of India Limited38,004.74-6,125.70-29,263.98
    Tata Power Company Limited7,159.13-7,375.251,340.77
    Adani Power Limited8,430.531,544.43-10,408.46
    (In Crores)
    Cash Flow Statement of Top Power Companies in India

    The firms’ financial statements show that, except Adani Power Limited, all of them have negative cash flows from their investing activities; Power Grid Corporation Limited, on the other hand, has the largest negative cash flow from financing activities. 

    KPIs (FY 2023)

    ParticularNTPC LimitedJSW Energy LimitedPower Grid Corporation of India LimitedTata Power Company LimitedAdani Power Limited
    Net Profit Margin (%)9.2714.13341.1041.36
    ROCE (%)9.686.6612.816.8731.59
    Current Ratio (x)0.931.070.910.871.62
    Debt to Equity Ratio (x)1.51.331.521.700.80
    3-Year CAGR Sales (%)26.8711.759.8937.5338.57
    Operating Profit Margin (%)19.6925.6259.6010.3548.02

    The net profit margin of JSW Energy, as shown by the key indicators above, was 1.10, the lowest of all the firms discussed. However, the company’s YoY sales growth rate was the highest. 

    Conclusion

    The government of India’s plans for infrastructure development will require new transmission lines and sustainable energy technologies, which would spur the expansion of power industry businesses. However, the industry is also vulnerable to regulation changes, fuel price variations, and difficulties arising from infrastructural investments. Therefore, before investing, an investor must review all the risk factors associated with the companies they wish to invest in and consult an investment advisor. 

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    Frequently Asked Questions (FAQs)

    1. Which power stocks have the highest market cap?

      As of 24th May, NTPC had a market capitalization of INR 3,63,576 crores, making it the largest power firm in terms of market capitalization. Power Grid Corporation and Adani Power follow NTPC.

    2. Who are the major players in the Indian Power Sector?

      NTPC, Tata Power, JSW Energy, Power Grid Corporation, and Adani Power are the main players in the Indian power industry.

    3. How many listed power stock companies are in India?

      In India, 42 listed companies are engaged in the power generation and distribution business.

    4. Is it worth investing in power stocks?

      Power stocks are involved in vital functions like producing and distributing electricity, which is a basic necessity for contemporary society. As the nation’s population grows, so will the need for power. However, before making any investment decisions, one must take into account the risk associated with the company, including its debt load and operating profit margins.

    5. Is NTPC a government company?

      Yes, the Indian government owns about 84.5% of NTPC’s share capital. As a result, the company is regarded as a public sector initiative because the government of India is the entity that oversees its board of directors.

  • Arbitrage Mutual Funds – What are Arbitrage Funds India | Basics, Taxation & Benefits

    Arbitrage Mutual Funds – What are Arbitrage Funds India | Basics, Taxation & Benefits

    Ever notice a great deal on a shirt at one store, only to find it slightly cheaper online? That is a small example of arbitrage.

    The arbitrage funds use similar tactics to capture profits from price differences. In this blog, we will learn about arbitrage funds and their performance. 

    Overview

    Arbitrage funds are a type of mutual fund that seeks to profit from price discrepancies between different markets. This is achieved by engaging in the simultaneous purchase and sale of securities in various markets, thereby seizing the price difference as a source of profit. For example, an arbitrage fund might buy a stock in the cash market and sell it simultaneously on the futures market if the futures price is higher than the cash price. This is possible due to the occasional lack of perfect alignment between the futures and cash markets, which results in transient price disparities between the two.

    These funds are commonly considered a comparatively low-risk investment due to their minimal dependence on the stock market’s overarching trend.

    Example

    Let’s understand the workings of an Arbitrage fund with the help of an example.

    Suppose a stock is trading at INR 100 in the cash market. In the futures market, the same stock might be priced at INR 105 with delivery in a month. An arbitrage fund can buy the stock in the cash market for INR 100 and simultaneously sell the same stock in the futures market for INR 105 (locking in the contract).

    Upon the futures contract expiration after a month’s duration, the fund proceeds to fulfil its obligation by delivering the corresponding stock.

    working of an arbitrage fund

    Taxation in Arbitrage Funds

    Arbitrage funds are taxed like all other equity funds in India. Below is a breakdown of their taxation implications.

    1. Short-Term Capital Gains (STCG) – if you sell arbitrage fund units within one year of buying, the gains are considered STCG and are taxed at a rate of 15% plus any applicable surcharge or cess.
    2. Long-Term Capital Gains (LTCG) – if you hold your arbitrage fund units for more than one year before selling, the gains are considered LTCG. The taxation for LTCG is as follows: up to INR 1 lakh of LTCG earned in a financial year is exempt from tax. Gains exceeding INR 1 lakh are taxed at a concessional rate of 10% plus surcharge and cess.

    Benefits of Arbitrage Funds 

    1. Low Risk: These funds are widely considered to be among the less risky investments within the mutual fund category because they capitalize on price variations rather than relying solely on the general direction of the market.
    2. Steady Returns: Arbitrage funds can generate consistent returns, even in highly volatile markets, by effectively capitalizing on short-term price inefficiencies. This can provide a buffer against market fluctuations and offer a relatively more consistent source of income.
    3. Liquidity: These funds are highly liquid, so you can easily buy or sell your units on the exchange, allowing quick access to your invested capital.
    Arbitrage fund benefits

    Risks of Arbitrage Funds

    1. Low Return: The arbitrage opportunities these funds explore usually involve minor price discrepancies. Despite their consistency, their overall returns may be lower than those of alternative, potentially riskier investments.
    2. High Expense Ratio: The active management style and frequent trading involved in arbitrage funds strategies can lead to higher expense ratios compared to passively managed index funds. 

    Performance Analysis 

    Some popular funds’ returns are mentioned below:


    Scheme Name    		2024 (YTD)2023202220212020
    HDFC Arbitrage Retail Gr2.846.764.063.493.64
    Tata Arbitrage Reg Gr2.847.074.043.734.98
    ICICI Prudential Equity Arbitrage Gr2.867.134.193.854.3
    SBI Arbitrage Opportunities Reg Gr2.877.434.613.963.51
    (Returns are in % and as of 7th May 2024)

    Category Performance

    Out of the 27 active schemes, 18 have outperformed the benchmark index. In particular, the SBI Arbitrage Fund has outperformed its peers, yielding 2.87% year-to-date.

    The average returns of all schemes on the YTD basis are 2.33%, which is at par with the 2.34% returns by NIFTY 50 Arbitrage. For the year 2023, the average return was 7.34%, while the benchmark index registered a slightly higher figure of 8.11%.

    Did you know?

    The Nifty 50 Arbitrage Index aims to measure the performance of such arbitrage strategies. The index measures the performance of a portfolio involving investment in equity and equivalent short-position equity futures, short-term debt market investments and cash.

    Conclusion

    Arbitrage funds offer a unique proposition for investors seeking low-risk, steady returns and low taxes. Their capacity to leverage price disparities between markets possesses the potential to serve as a dependable revenue stream while functioning as a safeguard against market instability. However, they do come with limitations, such as lower overall returns than some investments. Therefore, the decision to opt for this fund should be taken after careful consideration. 

    Remember that every investment carries some level of risk, and it is important to weigh the benefits against the risks involved. Always consult a financial advisor to align your choices with your financial objectives.

    Frequently Asked Questions (FAQs)

    1. What are Arbitrage Funds?

      Arbitrage mutual funds are funds that exploit the price difference between markets to generate returns.

    2. Are Arbitrage Funds riskier than other mutual funds?

      Arbitrage funds are generally low-risk because they do not rely on overall market direction. However, there is always some inherent risk in any investment.

    3. Who should invest in Arbitrage Funds?

      Investors seeking low-risk, steady returns and lower taxes can choose to invest in Arbitrage funds.

    4. How are Arbitrage Funds taxed in India?

      Arbitrage funds are taxed like any other equity mutual fund. They are taxed on the basis of Short Term Capital Gains (STCG) and Long Term Capital Gains (LTCG).

    5. How do Arbitrage Funds work?

      One way Arbitrage funds work is to buy stock in the cash market and simultaneously sell it through a futures contract at a higher price in the futures market, pocketing the profit when the contract matures.

  • NIFTY Next 50 – Meaning, Types & Features

    NIFTY Next 50 – Meaning, Types & Features

    Are the gains offered by the Nifty 50 overwhelming you? We are here to inform you that this is only the beginning; discover the possibilities of the Nifty Next 50 market movers!

    This blog will explore the Nifty Next 50 and the recent development by NSE in detail. 

    What Is Nifty Next 50

    The Nifty Next 50 index comprises 50 large-cap stocks from the Nifty 100 after the first 50 shares of the Nifty 100 are removed. Nifty Next 50 is a tool that investors use to keep track of and find prospective future large-cap companies.  Nifty Next 50 companies can come from various industries, including finance, pharmaceuticals, FMCG, etc. As of September 2023, the Nifty Next 50 stocks comprise around 10% of the NSE’s entire free-float market capitalisation. 

    Nifty Next 50 Trading

    Correlation with Nifty 50

    Sriram Krishnan, NSE’s Chief Business Development Officer, stated that the Nifty Next 50 index has a beta value of 0.95 and a 71% correlation with the Nifty 50 index. 

    Did you know? 

    Over 40 stocks have been upgraded to Nifty 50 within the past 18 years.

    Sectoral Weightage

    SectorsCompaniesWeightageMarket Cap (in ‘000 Cr)
    Finance713.52%10,45,871.20
    Power Generation & Distribution410.63%8,22,400.78
    Insurance310.48%8,10,640.24
    Aerospace & Defence27.07%5,46,957.10
    FMCG46.49%5,01,711.57
    Retail25.88%4,54,929.85
    Capital Goods – Electrical Equipment25.54%4,28,682.07
    Banks34.95%3,82,849.35
    Cement23.20%2,47,197.61
    E-Commerce/App based Aggregator23.08%2,38,422.56
    Gas Distribution23.06%2,36,450.42
    Refineries13.05%2,36,107.11
    Chemicals22.88%2,22,560.03
    Realty12.62%2,03,000.31
    Pharmaceuticals22.53%1,95,954.21
    Auto Ancillaries22.43%1,87,787.04
    Mining & Mineral products12.19%1,69,188.64
    Air Transport Service12.09%1,62,001.05
    Consumer Durables11.53%1,18,142.28
    Steel11.39%1,07,354.07
    Automobile11.38%1,06,992.52
    Railways11.12%86,616.00
    Alcoholic Beverages11.12%86,325.64
    Edible Oil11.02%78,687.86
    Paints/Varnish10.75%57,794.34
    (As of 28th May 2024)

    Based on the above table, we can conclude that the finance sector has the highest allocation of 13.52%, followed by the power sector, which has 10.63%.

    Nifty 50 vs Nifty Next 50

    As previously established, the Nifty 50 and Nifty Next 50 are components of the Nifty 100 index. However, there is a significant disparity in the size of the companies in these two indices, which causes large differences in the returns. 

    Benchmark Name2021202220232024 (YTD)
    Nifty Next 50 TRI30.9127.213.2
    NIFTY 50 TRI25.65.721.33.7

    As the above table shows, the Nifty Next 50 Index has surpassed the Nifty 50 benchmark but reflects a higher volatility in returns. 

    Read Also: What is the NIFTY EV & New Age Automotive Index?

    Introduction of Derivative Contracts by NSE

    With approval from the Securities Exchange Board of India, the National Stock Exchange launched derivative contracts on the Nifty Next 50 index on April 24, 2024 (SEBI). In this derivative contract, the exchange will provide traders with three series of monthly index futures and option contract cycles—near-month, mid-month, and far-month. The contract typically ends on the final Friday of the expiration month. 

    Waiver of Transaction Cost

    Furthermore, to encourage more people to participate actively in the Nifty Next 50 Index, the NSE has announced that it will waive transaction costs for trading in futures and options contracts on the index for the first six months ending October 31, 2024. 

    First Monthly Expiry Insight

    The first monthly expiry is scheduled for 31 May 2024. The index has shown a turnover of more than 1100 crores within 3 weeks of its launch. The average daily turnover of the Nifty Next 50 Index is 50-60 crores, and the peak turnover is 82 crores. 7 ETFs and 13 mutual funds track the index.

    Conclusion

    The Nifty Next 50 index allows investors to profit from expanding industries and businesses. However, its volatility is comparable to mid-cap firms. Consequently, investors are urged to consider their risk tolerance before investing.

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    4Introduction to Gift Nifty: A Cross-border Initiative
    5How has Budget 2025 impacted Bank Nifty?

    Frequently Asked Questions (FAQs)

    1. In which year was the Nifty Next 50 Index introduced?

      The Nifty Next 50 Index was introduced on 1st January 1997.

    2. Which sector has the highest allocation in the Nifty Next 50 Index?

      The banking & finance sector has the highest allocation of 13.26% in the Nifty Next 50 Index, followed by the power sector, which has a weightage of 10.64%.

    3. Should I invest in Nifty Next 50 Index funds now?

      Investment in the Nifty Next 50 Index offers a higher return than the Nifty 50 Index but also comes with higher volatility. Therefore, you can consider investing in this index if you have a longer investment horizon and can take risks.

    4. Can I use the Nifty Next 50 Index derivative for trading purposes?

      You can use the Nifty Next 50 derivative for trading purposes.

    5. Is the stock in Nifty Next 50 a part of large-cap stocks?

      Indeed, the stocks that comprise the Nifty Next 50 belong to the large-cap stock category. This is because the top 100 firms, determined by their free-float market capitalization, are classified as large-cap stocks.

  • How to Improve Your Credit Score?

    How to Improve Your Credit Score?

    Have you ever been denied a loan because of your credit score? Or are you someone whose credit score is below 700?  A bad credit score can hold you back from reaching your financial goals. But the good news is, you can take control and improve it!

    In today’s blog, we will tell you the secrets to boost your credit score and uncover a world of financial opportunities.

    Credit Score – An Overview

    Credit Score

    A credit score is a numerical indicator that reflects how likely you are to repay a loan on time (individual creditworthiness). It is based on your credit history, bill payments, current debt, and how long you’ve had credit accounts open. Lenders use credit scores to decide whether to approve your requests for loans and credit cards and what interest rates you will be charged. In general, the higher your credit score, the better your creditworthiness.

    Credit Information Companies (CICs)

    In India, credit scores are provided by credit information companies (CICs) licensed and regulated by the Reserve Bank of India (RBI). These CCIs collect and maintain credit information from several lenders and generate your credit report and score.

    Below mentioned are the four major Credit Information Companies in India.

    1. TransUnion CIBIL – it is the most prominent CIC in India and maintains the widely used CIBIL score. It was formerly known as the Credit Information Bureau. The company provides services to MSMEs, corporate, individual, and financial clients. It also serves banks, financial institutions, non-bank financial businesses (NBFCs), home finance companies, microfinance companies, and insurance companies in India.
    2. Experian Credit – this is another major credit information company operating in India. It entered India in 2006 as a joint venture with Federal Bank, Punjab National Bank, Axis Bank, Magna Finance, and Union Bank of India. Experian Credit provides nationwide coverage with a database of more than 430 million loan records and has signed up more than 5,000 banking and financial organizations nationwide as members.
    3. Equifax – Equifax is a major player in the world of credit information and is considered one of the ‘Big Three’ credit bureaus alongside Experian and TransUnion. They collect and analyse data on consumers and businesses, providing credit reports, analytics and other credit-related information to several companies. Retailers, utilities, government agencies, financial institutions, and other businesses are among the many industries they target with their solutions.
    4. CRIF High Mark – CRIF High Mark is India’s leading credit information company, licensed and regulated by the Reserve Bank of India. It provides credit information, analytics, and scoring solutions to many clients, including banks, NBFCs, insurance companies, and more.

    Factors that Affect Credit Score

    Factors that Affect Credit Score

    Read Also: Best Credit Cards in India: Factors and Features Explained

    Numerous factors affect the credit score of individuals; some of them are:

    1. Credit Utilization Ratio: This compares your credit card balances to your total credit limits. It is the ratio of used credit to the total credit available. A lower ratio (~below 30%) is considered good.
    2. Payment History: This is the most impactful factor on your credit score. It reflects how timely you have made past payments on loans and credit cards. A consistent history of on-time payments is important.
    3. Credit Mix: This refers to your various credit accounts, such as credit cards, mortgages, or instalment loans. Having a healthy mix demonstrates responsible credit management.
    4. Length of credit history: The longer your credit history, the better it shows lenders you have a track record of managing credit over time.

    Additionally, internal credit models are statistical models developed and used by lenders. These models analyse borrower data to assess creditworthiness and predict the likelihood of loan repayment.

    Lenders collect data on their borrowers, such as loan history, demographics, income, and other alternative data sources. Statistical techniques, such as logistic regression, discriminant analysis, survival analysis, etc., are used to analyse the data and predict defaults.

    While statistical methods remain important, the credit scoring landscape is evolving. Machine learning algorithms, particularly random forests, gradient boosting, and deep neural networks, are increasingly used to predict default rates. Therefore, it is essential to maintain a healthy outlook across all possible factors to have a good credit score. 

    How to Boost Your Credit Score?

    How to Boost Your Credit Score?

    There are several techniques you can implement to improve your credit score.

    1. Pay your bills on time, as this is the single most important factor in your credit score. Late payments can seriously damage your score. You can set up auto payments or reminders to help you track your bills.
    2. Keep your credit card under-utilised. Ideally, you should aim to keep your credit utilization ratio below 30%. This shows that you are staying within your credit limit and that you can manage your credit responsibly.
    3. Review your credit report regularly for errors because mistakes on your credit report can bring your score down. You can get a free credit report from the three major credit bureaus. If you find any errors, be sure to dispute them with the credit bureau.
    4. Do not apply for too much credit at once. Whenever you apply for credit, a hard inquiry is placed on your credit report. These inquiries can affect your score for a short period. So, avoid applying for multiple credit cards or loans in a short period.
    5. A secured credit card can be a good way to start building credit if you have bad credit or no credit history. With a secured credit card, you make a deposit that becomes your credit limit. Your credit score will improve as you use the card and make your payments on time.

    Read Also: Understanding the Difference Between Credit and Debt

    Conclusion

    Credit scores are a numerical representation of your creditworthiness, and building a good credit score takes time and effort, but the rewards are significant. Not only will you qualify for better interest rates, but you will also establish yourself as a reliable borrower. Understanding how credit scores are evaluated and their influencing factors is vital for your financial well-being.

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    5A Guide To Investing In Gold In India

    Frequently Asked Questions (FAQs)

    1. What is a credit score?

      A credit score is a numerical figure reflecting how likely you are to repay a loan on time based on your credit history.

    2. What affects my credit score?

      Multiple factors affect credit score, like payment history, credit card balances, credit mix, and length of credit history.

    3. Who uses credit scores?

      Lenders use credit scores to decide on loan approvals and interest rates.

    4. Can I get a free credit report?

      Yes, the major credit bureaus/CICs provide free credit reports.

    5. What is a good credit score?

      Generally, a CIBIL score above 750 is considered good in India. 

  • Hybrid Mutual Funds – Definition, Types and Taxation

    Hybrid Mutual Funds – Definition, Types and Taxation

    Have you ever been confused about whether to choose an equity fund or a debt fund? If you choose an equity fund, your portfolio will be subject to numerous risks, including market volatility; however, if you select a debt fund, you will only receive a limited return.

    Is there a method to choose between the two? Yes! There is one category of mutual funds known as the Hybrid Category of Mutual Funds.

    What is Hybrid Mutual Funds

    Overview of Hybrid Mutual Funds

    Hybrid investing involves a combination of asset classes, such as equity and debt. Hybrid funds enable the investor to strike a balance between growth and stability, as exposure to stock allows them to develop wealth. In contrast, exposure to debt reduces the volatility in their portfolio.

    A fund’s equity-to-debt ratio varies depending on its aim. Hybrid funds are based on three fundamental philosophies: asset allocation, correlation, and diversification. Asset allocation refers to distributing capital across various asset classes; correlation refers to the relationship between asset movement and return; and diversification refers to having multiple assets in your portfolios.

    Hybrid Mutual Funds Features

    1. The portfolio of the hybrid category of mutual funds includes both equity and debt. Therefore, you can take benefit of both asset classes in a single fund.
    2. It is suitable for investors who can take moderate risks while investing in mutual funds.
    3. These funds manage their asset allocation based on market scenarios to take advantage of opportunities and manage risk.
    4. These funds fall between the debt and equity categories of mutual funds. They are less risky than pure equity funds because their portfolios have debt allocations.

    Types Of Hybrid Mutual Funds

    Types of Mutual Funds

    As per the SEBI guidelines on categorization of mutual fund schemes, there are seven types of hybrid mutual funds:

    1. Aggressive Hybrid Fund – These hybrid funds invest at least 65% and up to 80% in equity assets, with the remaining 35% to 20% invested in debt instruments. Because the equity allocation is higher, the fund has the potential for higher returns; nevertheless, the volatility of the portfolio is lowered by the debt portion. The gain from investing in this fund is taxed according to the equity-oriented system.
    2. Conservative Hybrid Fund—This category of hybrid fund invests 10% to 25% in the equity asset class with the remaining amount, which is around 90% to 75%, invested in debt instruments. Funds in this category provide a lesser but stable return because of the substantial allocation to fixed-income securities.
    3. Balanced Hybrid Fund – As the name suggests, they are in the middle of Aggressive and Conservative Hybrid Funds. These funds invest 40% to 60% in equity and equity related instruments and 40% to 60% in debt instruments.
    4. Multi-Asset Allocation Fund—These funds invest in at least three asset classes, with a minimum of 10% allocated to each asset class, while the remaining 70% of total capital can be invested in any asset class. In general, a multi-asset fund combines equity, debt, and gold as uncorrelated asset classes that assist in diversifying the portfolio.
    5. Dynamic Asset Allocation or Balanced Advantage Fund –As the name implies, these funds can dynamically transform their portfolio from 100% debt to 100% equity based on market conditions. The fund management decides on asset allocation using a financial model that they have constructed. It is suited for investors who want to automate their portfolio’s asset allocation.
    6. Equity Savings Fund – The fund manager of such funds invests capital in stock, debt, and derivatives. They invest 65% to 100% in equity assets and the remaining 0% to 35% in debt instruments. Investing in such funds decreases the risk by investing in derivatives (for hedging), which reduces direct equity exposure, resulting in lower volatility.
    7. Arbitrage Fund – The fund manager in this category uses an arbitrage strategy, which involves buying equities in one market and selling them in the other market at the same time to capture the spread. They generate a profit based on the price difference between the two markets. Because there is no directional call on the company, this fund has lower volatility than equity funds and provides returns similar to debt-oriented funds. This scheme’s portfolio invests 65% to 100% of its assets in equities, with the remainder invested in debt (0% to 35%).

    Did you know?

    Arbitrage mutual funds offer similar returns to debt mutual funds and are taxed similarly to equity-oriented funds.

    Points to consider before investing in Hybrid Mutual Funds

    There are a few things that investors should consider before investing in Hybrid Funds:

    1. Returns of the hybrid mutual funds are not guaranteed; they will post returns based on the performance of underlying assets.
    2. Every hybrid fund has its ideal investment horizon. Hence, an investor should account for their investment horizon before making any investment decision.
    3. Choosing an appropriate hybrid fund for your financial goal is an essential factor to be considered.
    4. It is not true that hybrid funds are entirely risk-free. Therefore, investors are required to analyze their risk profile before making any investment.

    Taxation Of Hybrid Mutual Funds

    Taxation on Hybrid Mutual Funds

    As we know, hybrid funds are a blend of equity and debt. Thus, they are taxed based on their portfolio composition.

    They can be either equity-focused or debt-focused. If equity-focused (at least 65% in equities), then equity taxation will apply else debt taxation. Further, tax rates are different for STCG and LTCG. Have a look at the below chart:

    Taxation of Hybrid Mutual Funds

    If you want to learn more about the taxation of mutual funds in India, check out our detailed blog on the same: Mutual Funds Taxation in India

    Read Also: Types of Mutual Funds in India

    Conclusion

    On a concluding note, hybrid funds are the best of both equity and debt and a versatile, balanced investment option for investors.

    When investors are unsure between equity and debt funds, they can choose hybrid mutual funds. But before investing in hybrid funds, you must align your financial goals according to your needs, after which you must analyze the fund on qualitative and quantitative parameters.

    Along with this, we always suggest discussing this with your financial advisor before investing.

    Frequently Asked Questions (FAQs)

    1. How many types of Hybrid mutual funds are there?

      There are seven types of hybrid funds: balanced hybrid funds, equity savings funds, arbitrage funds, conservative hybrid funds, aggressive hybrid funds, multi-asset funds, and dynamic asset allocation funds.

    2. Which hybrid fund is suitable for me?

      The suitability of a hybrid fund depends upon an individual’s risk tolerance, capacity, investment goal, and horizon.

    3. Is hybrid fund equity or debt?

      The portfolio composition of a hybrid fund consists of both equity and debt; the proportion depends upon the category of the hybrid fund.

    4. How are hybrid funds taxed?

      Hybrid funds are taxed based on the portfolio’s debt and equity composition.

    5. How does an arbitrage fund work?

      Arbitrage funds take advantage of the price difference between the two markets to generate profit. They provide returns similar to debt funds and taxed as equity-oriented funds.

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