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Buying vs Renting: Which Is The Better Choice?
The majority of people in India live in rented homes, yet many aspire to own their own homes someday. They start saving early in their careers or seek home loans to make this dream a reality. However, due to the interest costs associated with these loans, they often postpone their plans and continue with renting.

Now the question is buying your dream house worth it? In this blog, we will discuss whether you should rent or purchase a home.

Buying a House

Purchasing a home is like realizing a dream. It is where you raise your family, create memories, and take pride in owning it. However, nowadays, the cost of buying your dream home can burn a big hole in your wallet. In India, it is common to assume that a home is a sign of well-being and stability within the family.

Pros of Buying a House
1. Building an Asset – The amount that you will be using for paying rent can be utilized towards paying some part of the home loan EMI and it will create an asset for life.
2. Tax Benefit – If you have a home loan, you can claim a deduction of up to INR 2 lakhs on the interest paid under section 24 for a self-occupied house and INR 1.5 lakhs under section 80C on the principal amount.
3. Permanent Resident – You do not need to worry about moving houses if the landlord wants you to leave, as you are the proud owner of your own home.
4. Emotional Security – Having your own house provides you with mental peace and stability as you can keep it as you want.
Cons of Buying a House
1. Expensive – Buying a house can be costlier than renting a house in most of the cases, as the down payment to purchase the house is very high. Along with this, you will have to bear the cost of monthly EMI.
2. Illiquid Asset – Real estate is often considered the most illiquid form of asset, which means if you need money, you cannot immediately sell your house.
3. Other expenses – If you purchase a house, you will be piled up with the EMI burden along with it; you will have to pay additional costs such as house taxes, water taxes, maintenance costs, etc.
4. Relocation – If you are looking to relocate to a newer location or you are transferred to some other location, then in that case it will get difficult for you to sell your house and shift to another house.
Read Also: Which is Better: Fixed Deposit or Residential Property Investment

Renting a House

It means living in a home owned by someone else and giving the landlord a monthly rent payment. The owner of the property will give you the house in exchange for rent through a formal agreement that specifies the monthly rent and the length of time he/she will rent the property to you.

A house’s suitability for rental depends on a variety of aspects, including the number of bedrooms, preferred location, amenities, and budget.

Pros of Renting a house
1. Lower financial burden – Paying monthly rent will have less impact on your pocket as rent will be lower than your home EMIs.
2. Down Payment – If you are going for a rented house, then you are not required to make any large down payments initially. In renting, you are just required to provide only a security deposit which can vary from 1 – 6 months.
3. No additional cost – While living in a rented house, you don’t need to worry about paying property taxes, repair bills, maintenance costs, etc.
4. Easy to relocate – In case if you are into such kind of jobs in which transfer is frequent then relocating is much easier in the case of a rented house.
5. Flexibility of location – You can easily decide where do you want to live depending on proximity to your workplace or school, reducing your transportation costs.
Cons of Renting a house
1. Rise in Rent – The landlords generally increase the rent on an annual basis, but they can do so anytime in between.
2. No Tax Benefits – Paying rent will not fetch you any tax benefits. However, one can claim an HRA deduction.
3. Expense after retirement – If you are not able to buy a house while you are in your earning stage of life, then you might face a financial crunch after retirement as you will not have any source of income.
4. No Modifications – Even if you love to decorate your house, then you have no choice but to make any structural change without the approval of the landlord.
5. No emotional security – Owning your own home provides peace of mind and stability, freeing you from the worries of a landlord potentially asking you to move out. If you rent a house, you’ll miss this peace.
Tax Benefit of Housing Loan
1. Deduction of Principal Amount Repayment – You can deduct up to INR 1.5 lakhs from your primary amount paid each financial year under section 80C of the Income Tax Act. The highest deduction that can be made is INR 1.5 lakhs, regardless of the total principal that you pay over a year.
2. Deduction on Interest Paid – For self-occupied property, an individual may deduct up to INR 200,000 in interest each financial year.
Which is right for you?

The answer to this question is very individualized and depends on a person’s unique circumstances, including their financial situation and life aspirations. Renting is a less expensive choice that allows you to move about more easily than buying, even if buying a property might be a smart investment due to its high cost. Therefore, a person must weigh all the advantages and disadvantages before choosing to buy or rent.

Read Also: IndiGo vs SpiceJet: Which is Better?

Conclusion

There will always be debates about whether it is better to rent or buy a home. Some people think buying a house is a smart option since they will feel proud to own it. Some, however, will choose to rent a home as they lack the funds to buy a new one.

In summary, if you are financially stable, buying a home can be a good option. However, if you are not, taking on loan payments and other debts might lead to financial difficulty, making renting a more suitable choice. Further, it is advisable to consult your financial advisor before making a decision, as buying a home is a long-term commitment.

Frequently Asked Questions
1. What are the tax implications of renting vs buying a house?
  Living in a rented house does not offer any tax benefits, although salaried individuals can claim an HRA deduction for the rent they pay.On the other hand, homeowners are eligible for deductions on their home loans.
2. I am a 25-year-old individual who got a new job with a salary of around INR 50,000 per month. Should I buy a home or live in a rented house?
  As you have just started your career therefore, there are various other goals in your life which you are required to fulfill. Buying a house is a long-term commitment, hence you should consider all the expenses of buying a house or consider living in a rented house.
3. What financial factors are to be considered before deciding on renting and buying?
  One must consider financial factors like upfront cost, loans, EMIs, property taxes, insurance and maintenance, and potential appreciation in the value of the property, etc.
4. I want to customize my home, should I go for renting or buying?
  Owning a house allows you to personalize things the way you want, which you cannot do easily in a rented house as every time you need permission from the landlord.
5. Does buying a house create wealth in the long run?
  If you are buying a piece of land, the value of it will generally appreciate over some time, but there are several other costs that comes with owning a house such as property taxes, and EMIs of the house. Therefore, one must consider all the factors before purchasing a home.

May 22, 2024

Liquid Funds Vs Ultra Short Fund: Which One Should You Choose?

Looking for alternatives to park your short-term money beyond savings accounts and short-term bank FDs? If you haven’t explored Liquid funds and Ultra-short duration funds yet, you’re missing out on some excellent opportunities.

This blog post explores the universe of these two investment vehicles, outlining their unique characteristics, returns to assist you in selecting the best option for your financial needs.

Debt Mutual Funds – Overview

A debt fund is a mutual fund that invests primarily in fixed-income securities such as corporate bonds, government bonds, treasury bills, etc. The debt funds generate gains via interest income from underlying debt securities and appreciation of the same in the secondary market.

Generally speaking, they are less risky and volatile than equity fun ds since the fixed-income instruments in their portfolio provide predictable returns and less volatility.

Nonetheless, interest rate volatility, liquidity risk, and the credit risk of the underlying bonds are usually the risks connected with debt funds. As per the SEBI, based on the securities’ maturity length, mutual funds in the debt category comprise 16 subcategories.

If you want to explore all of them, check out our blog on Debt categorization of mutual funds: Debt Mutual Funds

Ultra-short Fund

It is a type of debt mutual fund that invests in debt instruments with maturities ranging from three to six months, such as money market instruments or fixed-income securities.

The fund has minimal risk and a lot of liquidity. Securities of ultra-short funds have low volatility because of their short maturity. Investors wishing to invest in the debt category of mutual funds for a six-month term might choose ultrashort funds.

Read Also: Types of Mutual Funds in India

Features of Ultra-short duration fund

The portfolio of these funds consist of securities having maturity up to 6 months.
As compared to longer-duration funds, the ultra-short fund carries a low-interest rate sensitivity.
The fund generally provides low returns as compared to debt funds with higher maturity, but the risk involved in this fund is also on the lower side. Further, returns of ultra-short funds generally hover around returns of fixed deposits of scheduled commercial banks.
Due to the short duration of the portfolio, the fund aims to maintain a high level of liquidity, which makes it easy for investors to enter and exit this fund without any exit load.

Performance of Ultra-short Funds

Let’s have a look at the performance of some of the top ultra-short funds (annualized return):

Scheme Name	6 Months (%)	1 Year (%)	3 Years (%)
Mirae Asset Ultra Short Duration Reg Growth	3.8	7.38	5.57
ICICI Pru Ultra Short-Term Growth	3.78	7.24	5.56
Bandhan Ultra Short-Term Reg Growth	3.73	7.21	5.39
HDFC Ultra Short-Term Growth	3.72	7.18	5.44
SBI Magnum Ultra Short Duration Reg Growth	3.71	7.21	5.39
Mahindra Manulife Ultra Short Duration Fund Reg Growth	3.63	7.07	5.31
Tata Ultra Short Term Reg Growth	3.48	6.7	5.01
DSP Ultra Short Fund Reg Growth	3.47	6.87	5

Liquid Fund

A “liquid fund” is an open-ended debt mutual fund that invests in debt instruments having maturities of less than 91 days. The portfolio consists of high-credit-grade fixed-income securities.

Liquid funds are regarded as the lowest-risk debt mutual funds. They offer a slightly higher return than a savings bank account.

Features of Liquid Fund

Investors can earn a bit more than a savings account by parking their excess funds in a liquid fund.
It is the only fund whose NAV is calculated daily, whether it is Saturday or Sunday.
Although liquid funds post higher returns than savings bank accounts, their returns can fluctuate depending on market and economic conditions.
Liquid funds prioritize safety and liquidity, so their returns are lower as compared to other debt funds.

Performance of Liquid Funds

Let’s have a look at the performance of some of the top liquid funds (annualized return):

Scheme Name	6 Months (%)	1 Year (%)	3 Years (%)
HDFC Liquid Growth	3.72	7.24	5.46
ICICI Pru Liquid Growth	3.73	7.26	5.46
Nippon India Liquid Growth	3.71	7.24	5.46
ABSL Liquid Growth	3.72	7.27	5.51
Edelweiss Liquid Ret Growth	3.68	7.17	5.37
Kotak Liquid Reg Growth	3.69	7.22	5.44
Baroda BNP Paribas Liquid Plan Growth	3.68	7.24	5.52
White Oak Capital Liquid Reg Growth	3.65	7.13	5.21

Liquid Vs Ultra-short Funds

Particulars	Ultra-short Fund	Liquid Fund
Average Maturity	It invests in debt securities with a maturity from 3 to 6 months.	It invests in debt securities that have a maturity of up to 91 days.
Returns	It provides slightly higher returns than the liquid fund.	The returns of liquid funds are on the lower side as compared to ultra-short duration funds.
Liquidity	These are less liquid than Liquid funds.	The liquid funds provide higher liquidity than the ultra-short duration funds.
Exit Load	It generally has a nil exit load.	Liquid funds have an exit load of up to 7 days.
Risk	It carries a slightly higher risk than liquid funds.	It carries the lowest risk.
Cut off timings	The cut-off timing for purchasing liquid funds is 1:30 p.m., while the time for redemption is 3 p.m.	The cut-off time for purchase and redemption of liquid funds is 3 p.m.

Conclusion

In summation, while ultrashort funds carry a more significant risk than liquid funds, they also offer marginally higher returns. Liquid funds offer high liquidity and safety and are attractive to investors who are looking for alternatives to the savings accounts. Investors with short to intermediate investment horizons and moderate risk tolerance may find ultra-short-term funds appealing.

However, before investing in debt funds, you must weigh all the risks involved and consult with your financial advisor.

Frequently Asked Questions (FAQs)

Is there a lock-in period for ultra-short funds?
Ultra-short funds invest in debt securities having a Macaulay duration of 3 to 6 months. The lock-in period depends on the fund to fund. Generally, there is no lock-in period in ultra-short funds as there is adequate liquidity because of the short duration of investments.
What is the duration of the ultra-short funds?
The ultra-short duration funds invest in debt securities, the maturity duration of which ranges from 3 months to 6 months.
Is there any exit load in liquid funds?
Liquid funds do carry a graded exit load of up to 7 days.
Can I lose money in liquid funds?
As liquid funds invest only in short-term debt securities, ranging up to 91 days, they do not respond much when interest rates change in the market, so they do not have significant capital gains or losses.
Do liquid funds provide guaranteed returns?
Liquid funds do not provide guaranteed returns; however, due to the nature of their portfolio, their returns are generally stable.

May 20, 2024

Explainer On Geopolitical Tensions

You enjoyed a delicious dinner last night and woke up this morning to the news of one nation launching an airstrike against another. Your first thought might be about how these geopolitical tensions will impact the stock markets and your portfolio.

In this blog, we will give answer to all such questions; keep reading to find out.

Geopolitics refers to the political interactions between countries and regions. Now, geopolitical tension, as the term suggests, relates to conflicts or political concerns between two or more countries.

What is happening around?

Geopolitical tensions are not new. They occur frequently, whether through major events or smaller incidents around the world. Things can get messy when we struggle to understand how these situations impact the global markets or, say our Indian stock market.

If we take the recent case, Iran’s consulate in Damascus, Syria, was destroyed by Israel in the early hours of April 1, 2024, killing eight Iranian officers, including a senior member of the Iranian Islamic Revolutionary Guards.

Following the assault, Iran directly attacked Israel with about 300 drones and missiles in retaliation. Subsequently, Iran intercepted a container ship near the coast of the United Arab Emirates, alleging it had ties to the Zionist dictatorship in the Gulf.

This prompted a military intervention by the United States, the United Kingdom, and France to intercept some Iranian missiles, a move that signals an escalation of hostilities between Iran and Israel, as well as a reaction from the G7 and UN Security Council.

Because of this, the global markets fell around 2% in a single day.

Impact of the Geopolitical Tensions

Crude Oil Prices

The price of oil will be directly impacted in case of geopolitical tensions. Crude oil prices can exacerbate market uncertainties.

Investors can closely watch the oil prices. The Middle East countries—Iran, Saudi Arabia, and Iraq, for example—produce over 36% of the world’s oil and hold roughly 52% of its reserves.

Did you know

Israel and Iran combined produce around 4.1% of global production of oil, roughly around 3.8 million barrels per day.

Supply Chain Disruption

War scenarios significantly influence imports and exports. Maritime chokepoints like the Red Sea and the Strait of Hormuz pose significant risks to international trade and economic stability if the situation worsens. The commerce routes could be negatively impacted by any disruption to these channels.

Inflationary Conditions

Increased oil prices would cause inflationary conditions to grow, and the government might implement harsh measures to manage those conditions. Furthermore, if the central banks take a cautious stance in reaction to unstable market conditions, the possibility of interest rate reductions may be further postponed.

Indian trade with Israel and Iran

India’s import and export of goods to Israel totalled approximately 2.3 billion USD in FY 23 and 8.4 billion USD in FY 24. The country’s top exports to Israel were diesel (worth 5.5 billion USD) and polished and cut diamonds, which were estimated to be worth 220 million USD.

India mostly imports petroleum ($85 million) and methanol ($176 million) whereas its main exports to Iran are rice ($1.03 billion) and organic chemicals ($113 million).

What should Investors do?

In Geopolitical tensions, there are a number of scenarios that could occur, such as correction in equity markets, rise in inflation, trade delays, import-export misbalance, etc. A protracted conflict situation would negatively affect the global economy and could cause each country’s GDP to drop by 1% to 2%. In such a scenario, the market may correct sharply, perhaps by more than 10%.

Any investor with a longer investment horizon needs to view such circumstances as a chance to build wealth over time. Further, it would help if you build your portfolio based on your risk tolerance. For example, when it comes to the equity asset class, small and mid-cap stocks will be the most volatile during any correction. If you want to be extra cautious, you can move toward large-cap stocks, which are thought to be more defensive during market downturns.

On the other hand, as the conflict intensifies, inflation will rise, which can raise interest rate risk in fixed-income instruments.

Every market correction should see the gradual deployment of fresh money, with some tactical calls also being taken into account.

Conclusion

In summation, geopolitical tensions are nothing new; they occur regularly around the world. One can keep an eye on events involving the USA as there’s a great saying, ‘When America sneezes, the world catches a cold”.

Regarding the Israel and Iran case, the Indian stock market may have a knee-jerk reaction in response to the increasing tension between Israel and Iran, as this could result in an increase in crude oil prices and ultimately widen India’s trade deficit.

Investors should view corrections as a chance to build wealth by investing extra capital in such times, rather than panicking and liquidating their holdings. Further, it is wise to get in touch with your financial advisor before making any investment decision.

Frequently Asked Questions

What happened between Iran and Israel on 1 April 2024?
Israel launched an airstrike on Iran on 1 April 2024, killing 8 Iranian officers in the process. Iran responded by attacking Israel with more than 300 airstrikes, which exacerbated the situation and brought on a state of war.
What are the major sectors that will be impacted by the Iran and Israel war situation?
The primary industries that will be impacted by the conflict between Iran and Israel are oil, gas, and energy
How could India play a role in mediating or de-escalating the tension situation between Israel and Iran?
India has the ability to defuse the situation by supporting diplomatic efforts and peaceful conversations, as well as by offering relief and support to those in need.
Could a disruption in the shipping route in the Gulf region will affect India?
Yes, a disruption in the shipping route will impact the Indian economy, as the Persian Gulf is an essential route for India’s oil imports. A significant portion of crude comes from this route, and any disruption will affect India’s energy sector.
Does Israel have nuclear weapons?
As per intel agencies, Israel has nuclear weapons, but officially, the country is denying that it does not possess nuclear weapons.

May 20, 2024

Top Sugar Companies In India

When something pleasant happens to us, we all want to eat something sweet. When a child starts crying, we buy them chocolate, but have you ever considered how much profit sugar companies make and how they operate?

No worries. Read the blog and explore the performance of India’s top five sugar companies based on the market capitalization.

Overview of Sugar Companies

Sugar companies specialize in producing, processing, and distributing sugar, sweeteners, and associated products such as ethanol and power. The Indian sugar sector dominates the global market, producing 37 million metric tons in 2022. The sugar industry is India’s second most agro-based sector, behind cotton. Sugar production contributes significantly to India’s GDP and economic growth.

Reasons to invest in India’s Sugar sector

There are numerous reasons why one should invest in sugar companies, a few of which are mentioned below:

Sugar is a commodity with steady global demand; it is utilized not just for direct consumption but also as a raw material in various sectors, including the food and beverage industry.
Sugar firms have direct exposure to food and beverage markets. Rapid income and urbanization result in increasing consumption of processed food and beverages.
Sugar firms also produce ethanol, which, when combined with gasoline, can be considered a valuable complement to the company’s growth.

Factors to be considered before investing in the Sugar sector

One should consider the below mentioned factors before investing in Sugar companies:

Sugar prices are regarded as highly volatile due to demand and supply factors, which directly impact a company’s revenue and stock price movements.
The numerous government policies could substantially impact the company’s growth and profit margins.
The shift toward healthy behavior can directly affect sugar demand; any negative impact could significantly impact the companies’ revenues.

Overview of the best Sugar Companies in India

Let’s analyse the top sugar companies in India based on their market capitalisation:

Triveni Engineering & Industries Ltd.

The company was founded in 1932 by Shri Ganga Prasad Agarwal, and its main office is in Kanpur, Uttar Pradesh. Over time, the company has entered several new industries. The company is well known for employing efficient manufacturing processes and for creating sugar goods of the greatest quality. The company operates seven factories, each producing 61,000 tons of sugar.

Bajaj Hindusthan Sugar Ltd.

Former freedom fighter turned businessman Shri Jamnalal Bajaj founded Bajaj Hindusthan Sugar Limited on November 24, 1931. The company opened its first plant at Gola Gokaran Nath in the Lakhimpur Kheri area of Uttar Pradesh. From 400 to 13,000 tonnes of crushed cane per day, the company’s capacity increased. The districts of Pratappur, Rudauli, Kundarkhi, and Utraula in Uttar Pradesh are home to the company’s four production sites.

Balrampur Chini Mills Ltd.

It is one of India’s leading sugar-producing firms, formed in 1975 and headquartered in Kolkata, West Bengal. The company is part of the K.K. Birla Group. The company’s operations include the manufacture of ethanol, power, and sugar and generating biogases as a byproduct of sugarcane processing. The corporation operates several sugar mills in Uttar Pradesh. The corporation has an extensive distribution network via which it exports its sugar to numerous foreign markets.

Shree Renuka Sugars Ltd.

The company was founded in 1995 by Narendra Murkumbi and his mother, Vidya Murkumbi. The company has a total crushing capacity of 46,000 TCD (tons crushed per day) and a refining capacity of 1.7 MTPA (million tons per year). They proudly operate one of the world’s largest sugar refineries at Kandla on the western coast and another in Haldia on the eastern coast. The firm is India’s largest ethanol manufacturer, with a capacity of 1,250 kiloliters per day.

EID Parry (India) Ltd.

The company sells sweeteners and nutraceuticals. It was started in 1788 by a British trader, Thomas Parry, who opened its first sugar mill at Nellikuppam, Chennai, in 1842. EID Parry became an Indian firm in 1975, changing its name to EID Parry India Limited, and it was eventually acquired by the Murugappa group in 1981. The company has six sugar factories and has a crushing capacity of 40,000 tons.

Comparative study of top Sugar Companies:

Company	Share Prices (INR)	Market Capitalization (INR crores)
Triveni Engineering & Industries Ltd.	363	7,947
Balrampur Chini Mills Ltd.	382	7,711
Shree Renuka Sugars Ltd.	42.8	9,110
Bajaj Hindusthan Sugar Ltd.	33.6	4,288
EID Parry (India) Ltd.	636	11,282

(As of 18th May 2024)

Income Statement Analysis (F.Y. 2023 | INR crore)

Company	Total Income	Total Expenses	Net Profit
Triveni Engineering & Industries Ltd.	6,390.51	5,844.40	1,791.80
Balrampur Chini Mills Ltd.	4,728.65	4,331.68	275.53
Shree Renuka Sugars Ltd.	8,686.20	8,808.90	-135.7
Bajaj Hindusthan Sugar Ltd.	6,360.34	6,498.50	-134.74
EID Parry (India) Ltd.	3,152.90	2,797.50	196.8

Financial Statement Analysis (F.Y. 2023 | INR crore)

Particular	Total Asset	Inventory	Total Equity	Current Liabilities – Borrowings
Triveni Engineering & Industries Ltd.	4,454.44	1,996.49	2,665.25	222.4
Balrampur Chini Mills Ltd.	5,402.16	2,318.68	2,875.43	1,449.87
Shree Renuka Sugars Ltd.	7,494.40	2,237.00	412.7	1,248.40
Bajaj Hindusthan Sugar Ltd.	15,939.34	2,612.72	4,434.80	3,851.15
EID Parry (India) Ltd.	3,985.60	978.6	2,882.10	397

Cash flow analysis (F.Y. 2023 | INR crore)

Particular	Triveni Engineering & Industries Ltd.	Balrampur Chini Mills Ltd.	Shree Renuka Sugars Ltd.	Bajaj Hindusthan Sugar Ltd.	EID Parry (India) Ltd.
Cash Flow from Operating Activities	397.44	452.91	856.6	792.31	-366.55
Cash flow from Investing Activities	1,413.65	-858.75	-344.7	12.33	76.08
Cash flow from Financing Activities	-1762.36	405.82	-453.1	-833.2	268.98

The cash flow from operational operations for EID Parry India Ltd. in FY 2023 was negative, as seen in the above table, whereas all other firms reported positive figures.

Key Performing Indicators (FY 2023)

Particulars	Triveni Engineering & Industries Ltd.	Balrampur Chini Mills Ltd.	Shree Renuka Sugars Ltd.	Bajaj Hindusthan Sugar Ltd.	EID Parry (India) Ltd.
Net Profit Margin (%)	31.6	5.9	-2.18	-1.42	9.17
ROCE (%)	19.67	12.96	17.12	0.7	27.71
P/E Ratio	3.64	29.29	-47.42	-42.1	8.78

Future of the Sugar Industry

The government has implemented several initiatives to stimulate ethanol production, which is essential for the industry’s growth. The “National Policy on Biofuels” indicates that the government set a target of 20% ethanol blending in petrol by 2030, which was later moved to 2025-26.

In addition, the processed food and beverage industry, particularly alcohol and soft drinks containing sugar, is expanding rapidly. As a result, the sugar industry’s future seems more promising.

Read Also: List Of Best FMCG Stocks In India

Conclusion

In summation, the sugar industry is considered a defensive sector because sugar demand is consistent. Including sugar stocks in your investment portfolio can provide good diversification. However, before making any investment decision, you should extensively study the companies and industry difficulties. Further, it is suggested that you consult with your financial advisor before making any investment decision.

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4	List Of Best PSU Stocks in India 2025
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Frequently Asked Questions (FAQs)

Which Indian state is a leader in sugarcane production?
Uttar Pradesh is the highest sugarcane-producing state in India, followed by Maharashtra and Karnataka.
Which is the largest sugar company in India?
Based on market capitalisation, as of May 2024, EID Parry (India) Limited is the largest sugar company in India.
How do we evaluate the performance of sugar companies’ stocks?
Sugar companies’ stock performance can be evaluated based on various factors, such as revenue, net profit margins, inventory turnover ratios, geographical diversification, and production capacity.
What are the long-term prospects of the sugar sector?
Sugar companies’ future outlook is bright due to the increase in the population and disposable income of consumers, which will raise the demand for sugar. Further, the government of India has set a target of 20% ethanol blending in petrol by 2026, which will further improve sugar stocks’ revenues.
What are the various factors that affect sugar stock prices?
Various factors affect sugar stock prices, including but not limited to: government regulation, commodity prices, technological development, etc.

May 20, 2024

Why Are PSU Stocks Falling? Key Insights and Considerations

The Indian infrastructure sector is the backbone of the nation’s economic growth. Financing these large-scale projects is crucial, and project finance has filled the gap. However, the RBI recently introduced draft guidelines aimed at revamping this system.

In this blog, we will learn about these new RBI regulations and explore their impact on lenders and borrowers. Further, we will also understand whether they usher in a new era of prudence in project finance.

PSU Stocks – An Overview

PSU stocks refer to the shares of companies that are categorised as Public Sector Undertakings. These are businesses where the Indian government holds a majority stake, i.e., at least 51% ownership. Examples of PSUs include LIC, BHEL, Indian Oil, BSNL, NTPC, ONGC, SBI, etc.

These companies operate across sectors like energy, oil & gas, power, banking, insurance, infrastructure, manufacturing, and telecommunications.

PSUs have a profound impact on the economic growth of India through the provision of vital goods and services, the promotion of balanced development, as well as the effective implementation of government policies.

Why there was a fall in the PSU stocks?

The share of PSU stocks witnessed a sharp decline of up to 13% after the Reserve Bank of India’s implementation of more stringent regulations regarding project finance on 7 May 2024.

But, what is Project Finance?

Project Finance is a way to fund long-term infrastructure and industrial projects. It is distinct from conventional corporate loans, as it depends on the project’s cash flow for debt repayment rather than the creditworthiness of the sponsoring companies. In the event of default, lenders generally have limited recourse to the sponsor’s assets due to the project’s status as a distinct entity. The primary concern revolves around the security of the project’s assets and revenue.

It is often used for large and complex projects that have high initial expenses, such as power plants, toll roads, bridges, tunnels, dams, etc.

Let us have a quick overview of RBI’s new guidelines for project finance:

As per the RBI letter dated 7 May 2024, Banks must increase their provisions for loan defaults during the project’s construction phase. The provisioning amount for this loan can be as high as 5% in contrast to the existing 0.4%. This may result in higher borrowing costs for developers and infrastructure companies.

The proposed implementation of the 5% provisioning requirement is set to be carried out gradually until the fiscal year 2027.

The provisioning requirements shall be alleviated as the project advances towards the operational phase. Once operational, banks may be required to only set aside 2.5% of the outstanding loan and this reduction can be further minimised to 1% if the project meets the specific financial performance benchmarks.

The RBI has proposed minimum exposure requirements for projects that are financed by multiple lenders, also known as consortium lending. This means that each participating bank needs to have a minimum loan portion relative to the total project cost.

Additionally, it is stipulated that when the participant lenders collectively have an exposure of up to INR 1,500 crore, no individual lender shall be permitted to have an exposure that is less than 10% of the aggregate exposure, and for projects where the aggregate exposure of lenders is more than INR 1,500 crore, the individual exposure floor will be 5% or INR 150 crore, whichever is greater.

Objectives of RBI Guidelines

There are two main objectives behind RBI’s new guidelines on project finance:

The primary objective behind this is to prompt lenders, i.e., banks and financial institutions to exercise greater caution when providing financing for projects. The RBI has mandated banks to allocate higher provisions (up to 5% during construction) to ensure careful assessment of project risks before allocating funds. This can make project finance more stable in the future, with fewer loan defaults.
Implementing more rigorous loan approval procedures and emphasizing risk mitigation measures could catalyse project developers to enhance their project planning, feasibility, and overall execution. This will lead to higher quality projects with better chances of success and timely completion.

Impact of the New RBI Guidelines

The new draft guidelines for project finance by the RBI are anticipated to have a diverse influence on the myriad of stakeholders participating in this domain:

Lenders will need to set aside more money, which can go as high as 5%, for lending during construction. As a result, developers can expect borrowing rates to increase by 100-150 basis points. This means that loans will become more costly.
The implementation of more rigorous loan approval procedures and the presence of a cautious lending climate may result in setbacks in obtaining project finance.
New reporting requirements and consortium lending norms might add complexity to the loan approval process for banks.

Read Also: RBI Retail Direct Platform

Conclusion

To sum it up, the RBI’s new guidelines for project finance aim to create a more balanced and risk-averse project financing environment. However, short-term challenges for borrowers and lenders may arise, but the long-term benefits of better project quality and stability could be substantial. The success of these guidelines will depend on effective implementation and open communication between lenders, borrowers and regulators.

Frequently Asked Questions (FAQs)

How will new RBI guidelines on project finance impact borrowing costs?
With new guidelines, the Banks have to raise interest rates by 100-150 basis points because of increased provisioning needs, making project finance more expensive.
Will new RBI guidelines on project finance affect borrowers?
The Borrowers will face stricter loan approvals and higher borrowing costs, and there can be project delays.
Can RBI’s new project finance guidelines slow down project financing?
Tighter regulations and higher costs might cause a tentative slowdown, especially for smaller projects.
Are project finance guidelines released by RBI the final one?
No, these are draft guidelines. The final regulations may differ after considering the feedback of all stakeholders.
When will RBI’s new guidelines for project finance come into effect?
A phased implementation of new guidelines is expected, with full effect by March 2027.

May 17, 2024

RBI Action On Kotak Mahindra Bank: Should You Invest?

You must have watched in the news that India’s central bank, the Reserve Bank of India (RBI), has taken action against Kotak Mahindra Bank. And if you have a Kotak Bank account, you must be concerned about what will happen to your savings.

Don’t worry—we’ve answered all your questions; simply read the blog to clarify the uncertainties.

Overview of Kotak Mahindra Bank

Kotak Mahindra Bank’s origins date back to 1985, when Uday Kotak started Capital Management Finance as an investment and financial services company. Later, in 1986, Anand Mahindra and his father, Harish Mahindra, invested in the company and renamed it Kotak Mahindra Bank. The company initially offered lease and hire-purchase services, as well as bill discounting. In 2003, it was India’s first non-banking financial institution (NBFC) to receive a commercial banking license from the RBI.

Further, in 2017, Kotak Mahindra Bank launched the Kotak 811 platform – India’s first full-service digital banking platform.

Did you know?

Kotak’s 811 draws its name from 8-11-2016, the day when the government announced demonetization in India. According to Uday Kotak, it was the day that changed India.

The Problem with Kotak Bank

The RBI audits all banks to ensure every bank maintains its online systems properly. The audit of Kotak Mahindra Bank has been ongoing for the past two years. In 2022 and 2023, the bank was found to have too many errors in its IT risk management and infrastructure, which could lead to data leakage. Despite many warnings from the RBI, the bank failed to address the matter promptly.

Then, on April 15, 2024, there was a system outage caused by an issue with their IT system, which harmed customers by preventing them from using UPI payment, debit cards, and so on.

The Reserve Bank of India imposed stern action on Kotak Mahindra Bank on April 24, 2024, by making a press release and prohibiting them from issuing new credit cards and onboarding new customers via digital channels. However, clients can open new accounts with the bank by visiting their branch, and there is no impact to the existing customers.

Further, The RBI will appoint an independent firm to audit the Kotak Mahindra Bank’s IT systems. The limitations will be released only when the bank resolves the concerns discovered during the audit.

Clarification by Kotak Mahindra Bank

Kotak Mahindra Bank published a statement following the RBI’s limitations. The Bank’s management wants to reassure their existing customers of uninterrupted services, including credit card, mobile, and net banking. They also said that their branches continue to welcome and onboard new customers, providing them with all the bank’s services other than the issuance of new credit cards..

Impact on the Stock Price

The following day, on April 25, 2024, the stock price of Kotak Mahindra Bank fell by around 11% due to this news. The company’s market capitalization fell by INR 10,225 crore in one day. On April 25, 2024, the company’s share price reached a 52-week low of INR 1,602 per share. Following this descent, Axis Bank became the 4th largest bank in India in terms of market capitalization, and Kotak Bank slipped to 5th rank..

According to the report issued by the National Payments Corporation of India (NPCI) in March 2024, Kotak Mahindra Bank is ranked 9th on the UPI remitter list, with a total volume of 703.56 million, of which 93.66% is approved.

Should you worry if you have an account in Kotak Bank?

If you have a bank account with Kotak Bank, then you don’t have to worry because you can continue using their bank account as usual. All services, including credit cards, will work uninterruptedly.

However, to open a new bank account with Kotak Mahindra Bank online or apply for a new credit card, you must wait until the bank restores its IT infrastructure and receives RBI approval to re-launch those services. Meanwhile, one can open a new account with the bank by visiting a physical branch.

Analyst’s view on Kotak Mahindra Bank

According to S&P Global, Kotak Mahindra Bank’s credit card portfolio expanded 52% yearly as of December 2023, compared to 19% loan growth.

This step may hamper the credit card business and cause the bank to rely more heavily on physical branches, harming credit growth and profitability. However, when it comes to the physical branches, as of March 2024, the bank has only 1,948 branches, which is significantly less than its competitors. In contrast, Axis Bank has 5,100+ branches, and HDFC Bank has 8,000+ branches.

Limitations on accounts opening digitally coupled with a smaller number of physical branches will hamper growth for Kotak Bank at least in short run. Many analysts and brokerage houses anticipate that the bank will take around one year to address the RBI’s IT related concerns.

Can RBI take action on any bank?

According to Section 35A of the Financial Regulation Act guidelines, the RBI can intervene if a bank is not operating efficiently or is caught in wrongdoing. It can take action in the public’s best interests, such as keeping the financial system clean and digital transactions running smoothly.

Conclusion

The RBI’s action on Kotak Mahindra Bank is in the interest of account holders, as the RBI does not want the customers to suffer in any way, whether in terms of service or data security. However, from an investor’s perspective, you must assess the numerous parameters associated with the company’s business plan. It is recommended that you contact your financial advisor before making any investment decisions.

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Frequently Asked Questions (FAQs)

What was the RBI’s action on Kotak Mahindra Bank?
The RBI has observed severe deficiencies in its IT system, which can lead to data leaks and scams and make its customers suffer. Therefore, in view of the interests of customers, the RBI has taken action by stopping the bank from issuing new credit cards and opening new bank accounts through online mode.
When was Kotak 811 launched?
Kotak Mahindra Bank launched the Kotak 811 platform in 2017.
Is it safe to keep my money in Kotak Mahindra Bank?
Yes, it is safe to keep your money in Kotak Mahindra Bank just like any other Scheduled Commercial Bank in India. The RBI has observed IT infrastructure-related issues that are not related to the company’s liquidity or creditworthiness.
Who is the founder of Kotak Mahindra Bank?
Mr. Uday Kotak founded the Kotak Mahindra Bank in 1985.
Should I invest in Kotak Mahindra Bank shares after the RBI action?
The RBI’s action on Kotak Mahindra Bank will impact its profitability because it cannot onboard new customers digitally. Hence, an investor should consider all the risk parameters and future growth before making any investment decision.

May 17, 2024

Debt Mutual Funds: Meaning, Types and Features

Want to park your money for the short term, or are you looking for relatively safe investment options other than equities? In most cases, investors look for bank FDs or savings accounts, but there are different investment options known as Debt Mutual Funds that can provide relatively higher returns than bank savings accounts and fixed deposits.

In this blog, we will learn about debt funds and their different types.

Overview – Debt Mutual Funds

Debt Mutual funds primarily invest in fixed-income assets such as treasury bills, bonds, government securities, and other debt instruments. All of these investments have a predetermined maturity date and coupon that an investor will receive upon maturity. These funds are professionally managed by asset management firms and are ideal for investors seeking a consistent return.

Debt funds provide diversification across a variety of debt instruments, assisting investors in risk management. If you want to learn more about debt mutual funds, check out our blog on the same: What are Debt Mutual Funds?

Features of a Debt Mutual Fund

Debt funds generally offer lower returns than equity-oriented funds because their portfolios are invested in fixed-income securities.
It diversifies your investment into numerous debt instruments, allowing you to obtain a consistent return, which is why they are popular among low-risk investors.
Most debt mutual funds have high liquidity and no exit load, allowing investors to withdraw their cash at any moment, depending on the current net asset value.

Types of Debt Funds

As per the Association of Mutual Funds in India (AMFI), there are 16 types of debt funds that cater to the needs of investors; let’s explore each one of them:

Liquid Funds—These funds invest in money market securities with a maximum maturity of 91 days. They could be a good alternative to a savings bank account.
Overnight Funds – The securities of overnight funds have a maturity of one day. These are regarded as the safest type of debt fund because credit and interest rate risk are minimal in such funds.
Ultrashort Duration Fund—This fund invests in money market instruments, with a Macaulay duration ranging from 3 to 6 months.
Short Duration Fund—This fund invests in debt instruments with maturities of 1 to 3 years. It generally earns higher returns than money market funds.
Money Market Funds – The portfolio of money market funds is invested into debt securities having maturity of up to 1 year.
Low Duration Funds- These funds invest in Debt & Money Market instruments with Macaulay duration ranging from 6 months to 12 months.
Medium Duration Fund – The medium duration fund invests in the maturity of debt securities, which ranges from 3 to 4 years.
Medium to Long Duration Fund—The portfolio of a medium to long duration fund holds securities maturing from 4 to 7 years.
Long Duration Fund – It invests in debt securities having a maturity of more than seven years.
Corporate Bonds Fund – This fund invests at least 80% of its total assets in AA+ or higher-rated corporate bonds. These bonds offer higher returns than government securities but also carry higher risk.
Banking & PSU Debt Fund – This fund’s portfolio consists of debt securities issued by public sector undertakings (PSUs) and banks, which constitute about 80% of its total portfolio.
Gilt Fund—It invests a minimum of 80% of its investible corpus in government securities across varying maturities. These funds have a very low credit risk; however, they carry interest rate risk.
Gilt Fund (10 Year) – These funds are similar to Gilt funds; the only difference is that they invest a minimum of 80% of corpus in government securities with a Macaulay duration of 10 years.
Dynamic Bond Fund – These funds don’t have any restrictions on the security type or maturity profile for the investment. They change their portfolio according to the market dynamics.
Floater Funds – This fund invests at least 65% of its total assets into floating-rate instruments (including fixed-rate instruments converted to floating-rate exposures using swaps/ derivatives). These funds carry less mark-to-market risk because the coupon of these floating-rate bonds is reset periodically based on the market rates.
Credit Risk Fund—This fund invests a minimum of 65% of its total assets into corporate bonds with a rating below AA. It tries to generate high yields compared to corporate bond funds. However, this fund carries high default risk, so investors in credit risk funds need to be cautious.

Read Also: Types of Mutual Funds in India

Risks in Debt Mutual Fund

Primarily, the credit risk and interest rate risk are two different types of risk associated with investing in debt mutual funds.

Credit Risk

Credit risk arises when the borrower fails to repay the principal and interest. An investor can analyze the bond ratings issued by credit rating organizations before investing. Generally, debt securities issued by the Government carry lower credit risk as compared to securities issued by Corporations.

Interest Rate Risk

There is an inverse relationship between Bond prices and interest rates. When interest rates fall, bond prices rise, and when interest rates rise, bond prices fall. It is because when interest rate rises, new bonds are issued at a higher interest rate, causing the value of existing bonds to fall, which negatively impacts the performance.

Taxation of Debt Fund

We have discussed multiple categories of Debt Mutual funds above. Taxation of debt mutual funds depends on the equity component of a fund, investment horizon, and individual tax slab.

The income tax regulations governing capital gains generated by debt mutual funds have recently changed (removal of indexation benefit).

If any debt mutual fund has less than 35% of the investments in equity, then gains from that will be taxed as per the income tax slab without any indexation benefit. Further, there will be no STCG and LTCG in this case..

However, if a debt mutual fund has 35 – 65% in equity or equity-oriented securities, then STCG or LTCG will apply:

Short-Term Capital Gain Tax (STCG): If you remain invested in a debt mutual fund for less than three years and have a capital gain, you will be taxed based on your income tax bracket, without any indexation benefit.
Long-Term Capital Gain Tax (LTCG): If you sell your investment after three years, it will be categorized as long-term capital gain and taxed at a rate of 20% with an indexation benefit.

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

Who should invest in Debt Mutual Funds?

Debt funds are a suitable for investors who want to meet short-term financial goals and are looking for Bank FD alternatives, because they are less volatile than equity mutual funds and provide stable returns. They are also an alternative for investors seeking a higher return than traditional fixed-income products and ready to accept a moderate amount of risk.

Did you know?

Bank FDs are insured to the extent of INR 5 lakhs by the Deposit Insurance and Credit Guarantee Corporation (DICGC). There is no such protection in debt mutual funds.

Conclusion

There is a wide selection of debt mutual funds available in the market, and choosing one can be challenging for an investor because each category has its own set of features, risks, and returns. As a result, investors should assess their risk profile and align their investment objectives properly before making any investment in debt mutual funds. Furthermore, it is always recommended that investors seek advice from financial advisors before making investing decisions.

Frequently Asked Questions (FAQs)

How do debt mutual funds differ from Bank FDs?
In bank FDs, the rate of interest offered by banks at the time of investment depends on the tenure of the FD and prevailing interest rates. Meanwhile, in debt funds, the fund managers use their expertise to invest in different papers or bonds according to the scheme objective, which can lead to variation in returns generated per year.However, both the debt mutual funds and FDs carry risks, such as credit risk and interest rate risk.
Can I do SIP in the debt mutual funds?
Yes, just like equity mutual funds, one can do SIP in debt mutual funds.
How does a debt mutual fund work?
A debt fund invests in fixed-income securities such as corporate bonds, government bonds, treasury bills, etc. It earns coupon income from these investments and also benefits from the price appreciation of the debt securities.
How are debt funds taxed?
The taxation of debt funds depends on multiple parameters such as equity component, duration of holding, income tax slab, etc.

May 17, 2024

Inheritance Tax: Past, Progression, And Controversy

Have you ever thought what happens to your money after you are gone? In India, inheritance has traditionally been a way to transfer wealth across generations. But what about the tax implications?

In this blog, we will explore the history of inheritance tax, find out why it was eventually removed, and the ongoing debate about its potential return.

What Is Inheritance Tax

Inheritance Tax, also known as death duty in some regions, is a levy on assets or money that someone inherits after a person dies.

However, there is a subtle difference between inheritance tax and estate tax. Inheritance Tax is a tax on the value of the inheritance received by the beneficiary. In contrast, the estate tax is a tax on the total value of a deceased person’s estate before it is given to their heirs.

The objectives of the Inheritance Tax vary across countries, including generating government revenue, redistributing wealth, and preventing wealth concentration within families.

The tax is paid by the person who inherits the assets, and the amount of tax depends on the value of the inheritance and the relationship between the beneficiary and the deceased. Close relatives often get tax exemptions that lower their tax burden. Tax rates differ depending on the country and can be as high as 40%.

India does not currently have an inheritance tax. And if we talk about developed nations such as USA, there is no federal inheritance tax exists, although certain states impose their own. For example, states in USA such as Pennsylvania and New Jersey have inheritance taxes that apply to a broader range of wealth, irrespective of the federal threshold.

Did you Know?

Japan has the highest inheritance tax rate, i.e., 40%.

Evolution of Inheritance Tax

Inheritance taxes have roots in ancient civilizations such as Egypt and Rome. In the US, these taxes were introduced during the Civil War to raise revenue but were revoked soon after.

The 19th and 20th centuries saw a sharp increase in inheritance taxes globally, and many countries, including the US, implemented them to address wealth concentration and raise revenue.

However, inheritance taxes gradually lost favour among the government because some countries found them challenging to manage, while others considered them a barrier to investment and creating wealth.

From 1953 to 1985, India had an inheritance tax called the Estate Duty, introduced under the Estate Duty Act of 1953. However, India abolished its inheritance tax in 1985.

Why was the Inheritance Tax abolished in India?

The estate duty in India was introduced to reduce wealth inequality. It functioned like a progressive tax. People inheriting smaller estates were not subject to taxation. In contrast, those inheriting substantial wealth were liable to pay a higher percentage, with rates reaching as high as 85% for the largest estates.

For your reference, a progressive tax is a tax system in which the tax rate increases as the taxable income increases. In simpler terms, the more you earn, the higher the percentage of your income you pay in taxes, which is determined by the tax brackets.

The tax rate you pay depends on which bracket you fall into. Suppose you have an income within the 22% bracket. You will only pay 22% tax on the portion of your income that falls within the bracket, and for any income exceeding that amount, you might pay a higher rate according to the next tax bracket.

Despite its good intentions, the Estate Duty fell short for several reasons:

Many estates were not taxed because of a high threshold for consumption.
People started looking for methods to avoid paying taxes, such as concealing assets or engaging in benami property transactions.

Furthermore, discussions about reintroducing have emerged in recent years, which is fuelled by the following reasons:

The gap between rich and poor is widening, and some argue that inheritance tax helps redistribute wealth.
Many developed countries have the concept of inheritance tax, and some consider it a standard wealth management tool.
Taxing inheritances can generate revenue for the government, which can be used to create social programs that help those in need.

The Ongoing Debate

Sam Pitroda, the president of the India Overseas Congress, has caused trouble for the Congress party with his controversial comments about the inheritance tax. His remarks have been the subject of debates and intense criticism.

He caused controversy by advocating for an inheritance tax as a means of wealth distribution, citing its implementation in America. He stated that there is an inheritance tax in America where 45% of a $100 million estate goes to the children and 55% goes to the government.

Two national political parties in India, i.e., the Congress and the BJP, are arguing over the statement made by Sam Pitroda. However, the former clarified that the statements did not represent the party’s official stance and accused the BJP of trying to gain political advantage and divert attention during ongoing Lok Sabha elections.

Conclusion

To sum it up, India’s story with inheritance tax is one of a brief implementation, abolition, and a recent resurgence in debate. While there is no inheritance tax currently, the conversation surrounding its return highlights the complexities of managing wealth inequality and the government’s revenue. The future of this tax remains uncertain. We will have to wait and see how this exciting story plays out.

Frequently Asked Questions (FAQs)

Does India have an inheritance tax?
As of April 2024, India does not have a national inheritance tax.
Why is inheritance tax being discussed again?
Growing wealth inequality and aligning it with global trends are common discussion topics.
What are the arguments in favour of inheritance tax?
Common arguments include reducing inequality, ensuring fairness, and aligning with global trends.
Would I be liable to pay for the money I inherit?
Not directly, but you might pay tax on any income the inherited asset generates.
Should inheritance tax be brought back?
That is a matter of debate. You can consider listening to both sides’ arguments and then shape your own perspective on this.

May 17, 2024

Explainer On REITs: Should You Invest?

Have you ever dreamed of possessing a portion of that luxurious house? Buying real estate can be a good investment in the long run, but it usually requires a lot of money. And don’t forget about the illiquidity that comes with real estate.

What if there existed a means of investing in real estate with a reduced amount of capital, allowing one to reap the associated advantages without encountering the additional inconvenience?

In this blog, we will explore REITs, their types, how they operate, and the features they have.

REITs Overview

REITs stand for Real Estate Investment Trust. REITs own, operate, or finance income-producing real estate. Think of REITs as a mutual fund for real estate. REITs pool money from many investors to buy and manage several properties. Investors can participate in the growth of real estate market without buying or managing any property themselves.

Features of REITs

REITs come with some distinct features that make them attractive investment options. Some of their key characteristics are listed below:

They are generally listed on the stock exchanges, i.e., NSE and BSE for public trading. Also, they may operate as privately owned, known as non-traded real estate investment trusts.
REITs are allocated to various revenue-generating properties, such as apartments, offices, buildings, shopping centres, warehouses, and healthcare facilities.
These trusts are generally required by law to distribute a minimum of 90% of their taxable income in form of dividends, which translates into a consistent and regular source of income for prospective investors.

Did you know?

Real Estate Investment Trusts (REITs) in the USA have outperformed equities for over 50 years-time frame.

Types of REITs

REITs offer various options based on the investor’s inclination toward property type and preferred risk-return profile.

1. Equity REITs

These are the most common types of REITs. They directly own and operate income-producing real estate properties. They invest in properties like apartments, office buildings, shopping malls, and hotels and generate income primarily through rent collected from tenants and appreciation of their property value.

2. Mortgage REITs

Unlike Equity REITs, mREITs do not own physical properties. Instead, they invest in mortgages or mortgage-backed securities. They earn income from the interest paid on the mortgages and securities they hold and are considered less volatile than equity REITs. However, their returns can be more sensitive to interest rate fluctuations.

3. Hybrid REITs

These REITs combine the characteristics of both equity and mREITs. They invest in a mix of real estate properties and mortgages and generate income from rent and interest payments. The risk-return profile of a Hybrid REIT depends on its specific mix of investments.

4. Public & Private REITs

Public REITs are the most common and trade on major stock exchanges like any other stock. On the contrary, private REITs are not publicly traded and are generally offered by investment firms to accredited investors with a higher net worth.

Who should Invest in REITs?

REITs can be a good fit for a variety of investors. The following is an analysis of who may find them attractive.

Income-Oriented Investors – REITs are known for their steady stream of dividend income, making them ideal for retirees or investors seeking additional income generation within their portfolios.
Long-term Investors – REITs are designed for investors with long-term investment horizons. While short-term fluctuations may occur, they provide stable returns and capital appreciation over time.
Diversification Seekers—REITs introduce a new asset class to your investment portfolio, mitigating overall risk by not relying solely on equities or bonds. REITs’ performance exhibits a limited correlation with conventional investment options.
Investors with limited capital – Investing in REITs offers the opportunity to access the real estate market with a reduced initial capital outlay compared to buying real estate directly. This creates opportunities for individuals who may not have the funds for a conventional real estate acquisition.
Passive Investing—REIT ownership entails a lower need for management than direct real estate ownership. Investors benefit from collecting dividends without the burden of property maintenance or tenant management.

How REITs operate

REITs function similarly to companies that pool money from investors. This can be done through an IPO or subsequent share offerings. These companies use this pooled fund to acquire and manage income-producing real estate properties. Real Estate Investment Trusts generate income primarily through two ways, i.e., rent and property appreciation.

Furthermore, comprehending how REITs function can help determine whether they are compatible with your investment objectives and risk tolerance.

REITs in India

The concept of REITs is relatively new in India compared to other developed countries such as the USA, UK, etc. The Securities and Exchange Board of India (SEBI) introduced REIT guidelines in 2007, which were later updated in 2014. As of now, there are only five REITs registered with SEBI in India, which are as follows

Embassy Office Parks REITs
Mindspace Business Parks REITs
Brookfield India Real Estate Trust
Nexus Select Trust
360 ONE Real Estate Investment Trust

These REITs primarily focus on income-generating commercial properties like office buildings and business parks.

Points to consider before investing in REITs

Vacancy Rate: This refers to how many floors, offices or houses are vacant. Always look for REITs that have lower vacancy rates.
Portfolio Mix: Watch the properties owned by REITs and analyse them properly. What kind of properties does each REIT own, and in which location. There should not be any concentration.

Further, also look for a concentration of top tenants. There can be a case that most of the properties in a REIT are owned by a select few tenants.
Dividend History: Have a look at the track record of dividend and analyse the dividend yield before investing in REITs.

Conclusion

The realm of REITs is continuously developing. As the market matures and new players emerge, thrilling opportunities will unfold. Conduct additional research on specific Real Estate Investment Trusts that align with your investment objectives, and seek guidance from a financial expert to explore your investment options further.

Frequently Asked Questions (FAQs)

What are REITs?
REITs are similar to companies that own, operate or finance income-producing real estate.
Are REITs a good investment?
It depends on your goals and risk tolerance. They offer several benefits but are also affected by the market fluctuations.
How can I invest in REITs?
You can buy shares of REITs (individual units) on a stock exchange or invest in REIT mutual funds or ETFs. Further, one can start investing in REITs from as low as INR 500.
What are the drawbacks of REITs?
There are a few drawbacks of REITs such as risk of broader real estate market, lack of control over investments, etc.
Are REITs 100% safe?
No investment is 100% safe. In case of REITs, they carry inherent risks, but diversification can help mitigate them.

May 16, 2024

MCX Exchange Case Study: Evolution, Products, And Financials

Did you know an Indian exchange known as Multi Commodity Exchange, or MCX, allows you to trade in commodities such as gold, silver, crude, etc?

Read the blog to learn about the company’s history and evolution, as well as the products currently trading on it.

Company Overview

Multi Commodity Exchange, or MCX, is India’s first and largest commodity derivative exchange, allowing online commodity trading. The company’s headquarters are located in Mumbai, Maharashtra. It was founded in 2002 and began operations in November 2003. Gradually, the company expanded its product portfolio to encompass various commodities, such as metals, energy, and agriculture. Throughout its journey, the company has spent time in its research department, ensuring technological advancements in its trading platform.

The Securities Exchange Board of India regulates the MCX’s operations.

MCX in Numbers

MCX is the 5th largest commodity option exchange in the world.
It is also the world’s 7th largest commodity future exchange.
They account for about 96.7% of India’s market share in commodity trading.
In 2022-23, the average daily turnover in options was about INR 33,998 crores, whereas the average daily turnover of futures contracts was INR 23,514 crores.
As of 15 May 2024, the company has a market capitalization of app. INR 19,900 crores.
As of June 2023, the MCX has 556 members and 47,573 authorized persons in 706 cities of India.

Evolution of MCX Exchange

2002 – 2005 – The company began its operations and signed a licensing agreement with London Metal Exchange.
2006 – 2008 – The company established a product licensing agreement with New York Mercantile Exchange (NYMEX), and became a member of the International Organization of Securities Commissions (IOSCO).
2012 – 2015 – The company signed an MOU with Chicago Mercantile Exchange (CME) Group, and became India’s Listed exchange.
2017 – 2019 – MCXs launched its first-ever options on gold futures in India and launched a new series of iComdex commodities indices.
2020 – 2023 — The company launched its new trading software version, enabling investors to trade at hostile prices.

Read Also : What is Commodity Market in India?

Products Offered

The company has positioned its products according to the growing demand for commodity trading in India and abroad. The products offered by MCX are as follows:

Metals

a) Gold – One can trade in gold futures and option contracts based on the price movement of gold.

b) Silver – Through silver contracts, investors can take a position on the silver price.
Energy Metals

a) Crude Oil – MCX provides crude oil derivative contracts, available in different variants that track the price of Brent crude oil.

b) Natural Gas – It allows investors to speculate on the price movement of natural gas.

c) Base Metals – MCX also allows investors to trade in commodities like copper, nickel, aluminium, zinc, lead, steel rebar, etc.
Agricultural Commodities

a) Agri Futures – It offers contracts of various agricultural commodities such as palm oil, cotton, menthe oil, kapas, etc.

Financial Highlights

Let’s have a look at the financials of the MCX Exchange:

Balance Sheet (INR crore)

Particulars	31st March 2023	31st March 2022	31st March 2021
Non-Current Asset	1,396.81	978.06	1,374.18
Current Asset	1,625.94	1,822.48	1,128.33
Total Asset	3,022.75	2,800.54	2,502.51
Equity	1,479.30	1,418.11	1,418.23
Long Term Liability	56.09	65.78	57.27
Current Liability	897.6	791.06	557.78

Income Statement (INR crore)

Particulars	31st March 2023	31st March 2022	31st March 2021
Revenue from operations	513.51	366.81	390.56
Total Income	581.17	433.31	494.34
Total Expenses	385.62	227.57	227.68
Profit before tax	190.57	184.05	266.75
Profit after tax	148.97	143.45	225.22

The company’s income for FY 2023 climbed by 34% compared to FY 2022, although its profit after tax increased by only 3% in FY 2023.

Cash Flow Statement (INR crore)

Particulars	31st March 2023	31st March 2022	31st March 2021
Net Cash flow from operating activities	141.42	391.3	-184.43
Cash flow from investing activities	-8.08	-142.22	-38.78
Cash flow from financing activities	-89.48	-141.65	-153.89

The above graph illustrates that the company’s cash flow from operating operations has declined compared to FY 2022, but its cash flow from investment activities has improved in FY 2023, albeit with a negative value.

Ratio Analysis

Particulars	31st March 2023	31st March 2022	31st March 2021
Operating Profit Margin (%)	38.12	56.15	68.32
Net Profit Margin (%)	29.97	39.45	57.64
Return on Capital Employed (%)	9.21	10.25	13.71
Current Ratio	1.81	2.3	2.02
Return on Net Worth (%)	10.07	10.11	15.88

SWOT Analysis

Strengths

MCX is the largest commodity exchange in India and has a strong market presence across the industry.
The company has a wide product portfolio consisting of metal, energy, agriculture commodities, currencies, etc.

Weakness

The performance of the company depends on various factors such as geopolitical situations, supply and demand, market sentiments, commodity prices, etc.
MCX faces competition from various other players in the industry (NCDEX, IEX, etc.) which can limit its market share.

Opportunities

The company can collaborate with international exchanges, to help them with technical expertise and increase brand visibility.
MCX can introduce more innovative products to attract a new set of traders.

Threats

Any changes made by the regulatory body, i.e., SEBI, could impact their operation and profit margins.
Any economic turndown in the economy can decrease the trading activities, which significantly hampers the revenue of the company.

Read Also : List of Stock Exchanges in India

Conclusion

In summation, the Multi Commodity Exchange provides investors with a diverse product range; as the population of traders grows, so will the trading volume and profit. The company nearly has a monopoly in the market when it comes to commodity trading. However, you need to examine your risk tolerance and undertake a thorough investigation of the company if you’re looking to invest in it.

Frequently Asked Questions (FAQs)

Can we trade currencies on MCX?
No, as of May 2024, currency derivative contracts are not available on MCX.
Who are the competitors of MCX?
There are multiple competitors of MCX who facilitate trading in commodity derivatives, such as the National Commodity and Derivates Exchange (NCDEX), Indian Commodity Exchange (ICEX), etc.
Who is the founder of Multi Commodity Exchange?
The MCX was incorporated in the year 2002 and began its operation in 2003 under the leadership of Mr. Jignesh Shah.
What is the trading time of MCX?
Investors can trade in the commodities derivatives segment at MCX in two parts:⦁ Morning Session: 9:00 a.m. – 5:00 p.m.⦁ Evening Session: 5:00 p.m. – 11:30/11:55 p.m.Further, except for Saturdays and Sundays, trading occurs every day of the week.
What is the difference between MCX, NSE, and BSE?
The National Stock Exchange (NSE) or Bombay Stock Exchange (BSE) allows participants to trade primarily in stocks of the publicly listed companies, whereas the Multi Commodity Exchange allows trading in commodities such as Gold, Silver, Copper, etc.

May 16, 2024

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