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What should you do if your stock portfolio is stuck in losses?
You must be tired of seeing those red figures whenever you open your portfolio. We understand that if your portfolio is stuck in losses, it can be a challenging situation. You need to go through the stocks and re-evaluate the strategies. It is necessary to analyse your portfolio with a level-headed mindset and consider different factors before reaching any decision. You need not worry because we got you covered and in today’s blog, we will be exploring key steps to help you navigate the losses and work towards a more strategic approach.

Possible causes of losses in your portfolio

Below listed are some of the causes that can land you in losses.
1. Volatile Markets
2. Focusing on a specific sector
3. Wrong Entry and Exit
4. Leveraged Positions
5. Psychological Reasons
6. Poor Selection of Stocks
Let’s understand above mentioned reasons in depth:

Volatile Markets

Stock market fluctuations are normal and any sort of volatility in the short-term can lead to unrealised losses. Economic uncertainties like global economic conditions and geo-political events can contribute to volatility in the market. Therefore, if you are a short-term investor you need to be careful about the economic activities and global events.

Focus on a specific sector

Warren Buffet once said, “Do not keep all your eggs in one basket”. Hence, concentrating on one sector can expose your portfolio to sector-specific risks. Any kind of challenge in that particular sector can impact the performance of the stocks of that particular sector.

Wrong Entry and Exit

A lack of technical analysis and bad trading decisions can lead to poor timing of entry in the market. Buying stocks when they are at their highs can affect the overall performance of your portfolio.

Leveraged positions

If you do margin trading chances are likely that you will end up amplifying your losses because any kind of trend reversal in the market can worsen your situation and you will be forced to liquidate your portfolio at unfavourable prices.

Psychological Reasons

Herd mentalities won’t work when trading in the stock market. If you are someone who frequently invests or trades on tips and bets on random stocks you will lose all your capital because people can have different financial goals and risk appetite.

Poor selection of stocks

It is important to analyse any stock technically and fundamentally before investing. Without proper study, stock selection can be tough and can impact your portfolio.

Read Also: 10 Top Investors In India And Their Portfolios

How to deal with red portfolio

Let’s discuss the ways through which you can manage the losses and turn your portfolio into green.

Revaluation

Analyse the reason you initially invested in the losing stock. Are there any kind of fundamental changes since then? We say that candlestick charts are astrological graphs of any stock. Go through these charts and try to know the current trend of that stock. The initial reason for investment should still align with your long-term investment goals. If you find anything fishy then consider exiting the stock.

Long-term perspective

If you are a long-run investor and revisit your portfolio every now and then, it may lead to disappointments because those red figures might bother you. As company goes through several phases, it might be the case that your stock is in red now because of temporary reasons. If company’s philosophy is aligned and management is good then stocks often generate good returns to Investors but yes that takes patience. Since patience is the key to successful investing in the stock market you need to wait for the stock to recover from the losses.

Some wise person once said “Checking your portfolio daily is like putting up a web-cam in the forest to see if the trees are growing.”

Portfolio-review

Review your portfolio periodically say once every quarter and keep a check on your investment strategies. Consider rebalancing your portfolio quarterly, half-yearly or annually according to your current financial situation and market conditions.

Follow Stop-loss

Strict stop-loss is a prudent decision. Learn to respect the stop loss. If there is a sudden fall in the margin or ratios of the stock, consider selling and reallocating the funds. Stop loss is designed to limit an investor’s loss in a position. There is no point of staying investing in a stock that has underperformed over the years and is no longer giving you returns.

Invest practically and not emotionally.

Risk-Appetite

Reassess your risk tolerance. If the losses are causing significant stress or anxiety, it may be an indication that your risk tolerance needs adjustment. Your portfolio should match your comfort level and your goal of investments.

Diversification

Do not concentrate your investment amount on an individual stock or in stocks of the same sector. Diversify your portfolio in order to reduce stock specific and sector specific risks. This can help you in mitigating the losses because not all the stocks in your portfolio will give you losses.

Exit your mistakes in Bull Market

Go through the overall market trends including the global economy. Sometimes market gives golden opportunities to investors to exit their mistakes, as in Bull run, most of the stocks do well irrespective of their fundamentals.

“No stock in an uptrend has ever gone bankrupt.” – Walter Deemer

Advice from professionals and experience.

If you are a newbie, you must understand the fact that a journey in the stock market is a roller coaster ride. If you are not able to navigate your losses and diversify your portfolio, go for professional advice. An experienced person can give market insights and help you make investment decisions as per your risk and financial goals

Invest at regular intervals

One of the best ways to avoid losses and reduce the risk is regular investment. We have already discussed about selling the investments if they are not generating returns, but we also want to make you aware of the art of averaging the stocks. Falling markets give us losses and we all know this. But instead of panic selling, you can choose take benefit of downtrend and average the stock if it’s fundamentally strong.

Also, check out the blog on ATR.

Note: Averaging of stocks is defined as buying more shares of that stock over time to lower the average buy price of the stock provided the price of the share is trading below your initial buy price.

Conclusion

It is important to be mindful of your investments because there is no guaranteed technique to escape losses in the stock market. All an investor can do to protect his/her portfolio and minimise losses is diversification of investments in different asset classes including equities and debt. You should know that only an optimistic approach will work well with your developed strategies throughout your investment journey. The stock market inherently carries risk and it’s unavoidable. Any investor should make decisions based on his/her own rationale. You just need to be consistent and patient and the market will surely reward you with profits.

The decision is tough but will be worth it!

Frequently Asked Questions (FAQs)
1. If your portfolio is stuck in losses what should be the first step?
  The first step should be analysing the reasons for the losses – It can be either stock specific (e.g. Yes Bank) or market specific (e.g. Covid-19). Force selling in a market specific scenario is not ideal.
2. Should an investor consider selling stock immediately once the portfolio turns red?
  No, by doing so s/he will be selling the stocks in a panic state. Sit back and analyze the technical and fundamentals of the stock. Always take the decision with a clear mind.
3. How can diversification help you minimise your risk?
  Diversifying your portfolio can help you in eliminating the stock specific or sector specific risks.
4. Can professional advice help you reduce losses?
  Yes, professionals can help you making an informed decision.
5. How to control emotions when trading in the stock market?
  When trading in the stock market you should be disciplined. Further, educate yourself so that you can make better investment decisions and formulate profitable strategies. Always remember that Emotional biases are easier to understand but difficult to overcome.

November 29, 2023

FD (Fixed Deposit) vs Stocks: Which is the better investment option?

Where to invest? How much to invest? Should I go with investing in stocks, or should I go with bank fixed deposits?

These questions commonly arise whenever you have an ample amount of money and you are economical. In this blog, we will explore the difference between investing in stocks and fixed deposits. Before we learn about the key differences between stocks and fixed deposits, let’s have some basic ideas about financial planning. What is financial planning, and why do we need financial planning?

Financial Planning means channelling one’s income into consumption and savings, where consumption is defined as the unavoidable expenditure incurred by an individual on his basic needs, and the residual amount after spending is known as savings. The savings can be used to meet the financial goals.

Types of Saving Instruments

In a country like India, saving instruments can be divided into two parts

Traditional Savings instrument
Investments

Most people in India generally opt for traditional savings instruments because there is a lack of financial literacy. Some of the most common traditional methods to save are listed below.

Fixed deposits
Recurring Deposits
Post Office

Some of the most widely used new-age investment options apart from traditional saving instruments are

Stocks
Mutual Funds
Commodities

Now, let us dig deep into the concept of the most used methods of traditional and modern investing i.e., Fixed Deposits and Stocks.

What are fixed deposits?

Let’s make it easy, simplified and crisp with a short example.

Suppose, you received a Diwali Bonus of Rs.50000, and instead of buying something expensive, you decided to go for a Fixed Deposit. Now you will visit your nearest bank branch and will deposit your money to earn some amount of interest and will just sit back for some years. You will reach out to the bank once again when your Fixed Deposit matures to get your principal amount as well as the interest that you have earned over the years.

Therefore we can say that fixed deposit (FD) is a tenured deposit account provided by banks or NBFCs (Non-banking financial companies ) which provides investors with a higher interest rate than a regular savings account until the given maturity date. Investment in fixed deposits is considered a risk-free investment.

Merits & Demerits of Investing into FDs

There are certain merits and demerits of saving your money in FDs

Merits of Investing in Fixed Deposit

1. Guaranteed Rate of Interest

2. Easy to Monitor

3. Tax Benefits

4. Loan Against FD

5. Flexible Period

6. Better option for senior citizens

Demerits of Fixed Deposits.

1. May not beat inflation

2. Lower rate of return

3. Penalty on pre-mature withdrawal.

4. Lack of re-investment opportunity.

Taxation of Fixed Deposits in India (Example):

In India, the interest income earned from fixed deposits is subject to taxation under the Income Tax Act. Here’s a simplified example to explain how FD interest is taxed. Suppose Mr. Y has a bank FD of Rs.1 lakh and as per the current rate he is earning an interest 6.5% per annum on his FD, which amounts to 6500 (6.5% of 1 lakh). Now he is liable to pay tax on 6500 as per his income slab. By now, you must have understood the basics of Fixed Deposits. Now let’s throw some light on the most discussed yet so undervalued concept of investing i.e., stocks

What do you mean by investing in stocks?

A stock, also known as equity, represents a part of an individual’s ownership in a corporate or government company. Investing in stocks carries a level of higher risk because the value of a stock can be influenced by various factors, including the company’s financial performance, economic conditions, and market sentiment. However, stocks have historically offered higher returns compared to other investment options. Many investors choose to build a diversified portfolio of stocks to spread their risk. Diversification involves owning a basket of stocks from different sectors to reduce the impact of poor performance in any one stock. Stocks can be diversified into large-cap, mid-cap and small-cap companies

Large-cap

Companies are generally growth-oriented companies that are considered safer while investing. They are less risky and give lower returns than other companies since risk and reward in the stock market go hand in hand.

Mid Cap

Companies possess higher risk when compared with large-cap companies and they are suggested for investors who are well-versed with the concept and idea of investing in stocks.

Small cap

Companies carry higher risk since they are start-ups, having good potential to perform in longer investment horizon.

From where can we buy or sell stocks?

Stocks are bought and sold on stock exchanges, organized marketplaces where buyers and sellers join together to trade. Stock exchanges in India are NSE and BSE. If we talk about the returns of the stock market, they are highly volatile and are dependent on the performance of the market. If you are planning to invest in stocks from the point of view of the short term, then be ready for the volatility you might face. Still, if you stay invested for a longer horizon, the market will surely reward you for your patience with outstanding higher returns, which can fight inflation.

Taxation of Equity in India

Just like taxation on FDs, stocks are also subject to tax deductions. The taxation on equity is divided into two parts, the first being the short-term capital gain and the second being the long-term capital gain.

Short-Term Capital Gain

The realized gain within 365 days of investing is considered short-term and taxable at 15%.

Long-Term Capital Gain

The realized gain after 365 days of investing is considered long-term and is taxable at 10% over and above 1 Lakh.

Merits & Demerits of Stocks

Now, let’s discuss the merits and demerits of investing in stocks.

Merits of investing in stocks

1. Inflation rate adjusted Returns

2. Dividend income

3. Liquidity

4. Tax benefits

5. Wealth creation

Demerits of investing in stocks

1. Volatility of markets

2. Higher Risk of Loss

3. Brokerage

In India, 3% of the current population is investing in stock markets and we hope that with our blogs we will be able to make our upcoming population financially more aware.

After having an overview of the basics of Fixed Deposits and stocks.

We can now easily create a table of differences between stocks and FDs.

Basis of Difference	Fixed Deposit	Stocks
Liquidity	It has very little liquidity as compared to stocks.	Stocks have high liquidity.
Risk	Investment in Fixed Deposit is considered risk-free.	Investment in stocks possesses higher risk.
Investment Horizon	Pre-decided investment horizon.	Suggested for individuals having high-risk appetites.
Rate of Interest (Return)	Guaranteed	Market Linked
Taxation	Interest is fully taxable.	Long
Expenses	No expenses	Transaction Cost
Inflation Rate	Returns of FD may or may not beat inflation.	It offers inflation-adjusted returns.
Duration of investment	Generally suggested for the shorter horizon.	It is suggested for individuals having long-term investment horizons.

Conclusion

Therefore, it is always suggested to select between the two as per your investment objective, financial goal and risk appetite. Eventually, there is no one-size-fits-all answer, and the optimal choice depends on your preferences. Do not forget to consult a financial planner to tailor your investment strategy if you are confused.

Frequently Answered Questions (FAQs)

Which is considered safer, Fixed deposits or stocks?
Fixed deposits are generally considered safer as they provide a fixed return.
Which investment option offers higher returns between stocks and FDs?
Stocks offer higher returns than FDs.
Who provides FDs?
Banks and Non-Banking Financial Institutions provide FDs.
What is STCG in stocks?
STCG in stocks stands for short-term capital gains, which are 15% of your realized gains.
Who decides the interest rate on FDs?
Banks and NBFCs decide interest rates on FDs, which vary from bank to bank.

November 27, 2023

What is Asset Under Management (AUM) in Mutual Funds

Before learning about AUM, let us know a little about AMCs.

AMC stands for Asset Management Company and manages and operates the mutual funds. It pools money from retail and institutional investors and invests that fund in a diversified portfolio of stocks, bonds, and other financial instruments. AMCs have dedicated research teams and fund managers who make decisions on the allocation of assets and portfolio management. AMCs earn fees for managing mutual funds, a percentage of the fund’s AUM.

What is AUM?

AUM stands for asset under management. AUM in mutual funds refers to the total market value of all the assets a mutual fund manages on behalf of its customers. It is an essential metric in the financial markets. A larger AUM generally implies a larger fund with more investors. The respective mutual fund scheme AUMs can be found in the monthly fact sheet of the AMCs on their website or online mutual fund research platforms.

Indian Mutual Funds Industry

Before getting into the Indian mutual funds industry, let us know about the history of mutual funds. To make India financially stable, strong, and independent and encourage saving and investment, the first mutual fund was established in 1963, Unit Trust of India, by a combined initiative of the Government and the Reserve Bank of India by an act of Parliament. The mutual funds industry has grown significantly over the years. Unit Scheme 1964 was the first scheme that UTI launched.

In 1993, the first set of SEBI Mutual Fund Regulations existed for all mutual funds except UTI. The former Kothari Pioneer (now merged with Franklin Templeton Mutual Fund) was the first private-sector mutual fund registered in July 1993.

With the entry of private sector funds in 1993, a new age began in the Indian MF industry, giving Indian investors a wider and better choice of Mutual fund products.

The MF Industry’s AUM has grown from ₹ 22.24 trillion as of October 31, 2018, to ₹46.72 trillion as of October 31, 2023, more than a 2-fold increase in 5 years (source- AMFI website). The Indian Mutual Funds industry has witnessed robust growth over the years. The sector provides investors with different mutual fund categories like equity, debt, and hybrid funds catering to their risk profiles and preferences. Not only this, the mutual fund industry in India has also undergone a digital transformation.

Calculation of AUM

AUM in mutual funds is calculated by adding up the market value of all the securities, cash, and other assets mutual funds hold.

The formula for the same is listed below

AUM= Market Value of Securities + Cash & Cash equivalents + Other Assets

For example, a mutual fund holds the following

The market value of securities = Rs. 50 Crore

Cash & Cash equivalents = Rs. 7 Crore

Other Assets = Rs. 3 Crore

Therefore, AUM = Rs. 50 Cr. + Rs. 7 Cr. + Rs. 3 Cr. amounts to Rs. 60 Crore.

It’s important to note that the actual calculation may involve more detailed considerations, especially in a real-world scenario where the portfolio may consist of various types of securities, derivatives, and other financial instruments. Moreover, the market values of securities can fluctuate, affecting the AUM over time.

Remember that the total value of AUM keeps changing depending on the performance of the assets.

Significance of AUM in different Mutual Funds Categories

Larger AUM in equity funds, whether large or mid-cap, reflects a broader investor base and better scale of operations. However, a larger AUM while investing in small-cap companies can pose challenges. Therefore, small caps do not concentrate much on AUM.
Smaller AUM in sectoral and thematic funds may indicate a more focused approach to investment since these funds often focus on specific sectors and themes.
In the case of hybrid funds, a mixture of equity and debt, a larger AUM can provide better diversification benefits.
Fixed-income funds like bonds also need a larger AUM for better diversification.

Factors affecting AUM

Performance of the Market

When markets are performing and in a rising phase, investors are more likely to invest, resulting in increased inflows and higher AUM for investment companies. In falling markets, investors redeem the funds, resulting in a decline in AUM.

Fees & Expenses

The expenses charged by asset management companies can influence AUM. Lower fees can make the funds more eye-catching to investors.

Advertisement & Distribution of Funds

Effective marketing and distribution policies are vital in attracting new investors and growing a firm’s investor base. Successful marketing campaigns and a strong distribution network can help the MF house generate inflows and increase AUM.

Economic Conditions

The global economic environment can also affect AUM. When a country is economically stable and in its growth phase, more investments will occur, leading to higher inflows.

Past performance

The historical show of a company plays a vital role in determining AUM. Funds generating consistent positive returns will eventually attract new investors.

For this, first, we need to understand what is the expense ratio. The expense ratio is defined as the annual cost of managing and operating mutual funds. AMCs charge these expenses and are a percentage of AUM., for example, management fees, administrative expenses, and Distribution expenses. Formula for calculating Expense Ratio = (Total Fund Expenses / AUM) *100. Therefore, there is an inverse relationship between AUM and the expense ratio.

As AUM increases, the overall percentage of expenses relative to assets decreases. Keep in mind that AUM influences the calculation of the expense ratio and plays a vital role in structuring the overall cost of the fund and

Conclusion

To wrap it up, AUM is an important metric for investors when it comes to selecting mutual funds. It can only provide insight about the AMC but cannot be the sole factor when making investment decisions also, a higher AUM does not signify better returns and performance by the mutual funds. The significance of AUM can fluctuate across different fund categories.

Read Also: History of Mutual Funds in India

Frequently Answered Questions (FAQs)

What is AUM?
AUM stands for asset under management and is the total market value of all the assets that a mutual fund manages on behalf of its customers
What is the formula for calculating AUM?
The formula for calculating AUM isAUM= Market Value of Securities + Cash & Cash equivalents + Other Assets
How is the expense ratio and AUM related?
Expense ratio and AUM share an inverse relationship, i.e., an increase in AUM decreases the expense ratio.
Who manages the mutual fund?
Asset Management companies manage mutual funds.
When was the first mutual fund in India established?
1^st mutual fund in India was established in the year 1963.

November 25, 2023

What is Debt Mutual Funds: Invest in the Best Debt Funds in India

What are Debt Mutual Funds?

Debt mutual fund is a category of mutual fund that invests in fixed-income instruments such as Corporate and Government bonds, commercial papers, treasury bills, state development bonds, etc. (T-bills are short-term debt instruments or money market instruments that the government of India issues. These are generally given for 91 days, 182 days, or 364 days. They are provided to fulfill the short-term financial needs of the government).

The primary objective of debt mutual funds is to generate income for investors through interest payments while preserving the capital invested. Debt mutual funds allocate their holdings across various debt instruments to diversify the risk. This helps the fund manager reduce the impact of poor performance by any single security.

Debt funds invest in listed or unlisted securities, including corporate and government bonds. The NAV of the fund is calculated as the difference between the buy price and the sell price. Debt funds also receive regular interest from the underlying debt, which is added daily.

A debt fund’s NAV also depends on the interest rate. Debt mutual funds are open-ended funds, which means investors can buy or sell fund units on any business day at the fund’s net asset value (NAV). When considering debt mutual funds, it’s essential to assess your investment goals, risk tolerance, and time horizon and select funds that align with your financial objectives.

Who should invest in Debt Funds?

Debt Funds are suggested for individuals who prefer capital preservation to higher returns because debt funds provide investors with consistent returns and are less volatile. Investors who want a regular income but are risk-averse i.e., refrain from taking risks with their investments.

How to invest in Debt funds

You can invest in direct debt funds through Asset Management Companies (AMCs), and in the case of regular debt funds, you need to contact mutual funds distributors (MFDs).

Types of Debt Mutual Funds

These categories of debt funds cater to different investor preferences and financial goals.

1. Liquid Funds

Liquid funds invest in very short-term debt instruments like T-bills, Certificates of deposits, and commercial paper and have a maturity of 91 days to generate optimum returns. Liquid fund invests in highly liquid money market instruments and debt securities. The best liquid funds to invest in India are ABSL Liquid Fund, Mahindra Manulife Liquid, PGIM India Liquid, SBI Liquid Fund, and Nippon Liquid Fund.

2. Short-term Funds

These funds invest in money and debt market instruments and government securities. The investment duration of these funds is longer than that of Liquid Funds. The best Short-term funds to invest in India are ICICI Prudential ST, UTI SD, HDFC ST Debt, Sundaram SD, and ABSL SD.

3. Credit Risk Funds

These funds invest in lower-rated corporate bonds and debt instruments to earn higher returns. The best Credit Rating Funds in India to invest in are DSP Credit Risk, Baroda BNP Paribas Credit Risk, Nippon India Credit Risk, and ABSL Credit Risk.

4. Fixed Maturity Plans (FMPs)

FMPs are close-ended mutual fund schemes, and the maturity dates in FMPs are decided beforehand. They invest in debt instruments with a specific date of maturity. FMPs are issued for a period ranging from 30 days to 60 months, and units of FMPs are listed on the stock exchange.

5. Floating Rate Funds (FRFs)

FRFs invest in instruments that offer a floating interest rate on your investments in bonds, government securities, and debentures. The best-floating Rate Funds to invest In India are ABSL Floating Rate, Franklin Ind Floating Rate, and HDFC Floating Rate.

6. Gilt Funds

Gilt in Gilt funds stands for government securities. This fund invests your capital in government securities issued by central and state governments. This fund offers you low credit risk and moderate returns. The best Gilt Funds to invest in India are ICICI Pru Gilt Fund, SBI Magnum Gilt Fund, DSP Govt. Securities Gilt Fund, and Kotak Gilt Investment.

7. Dynamic Bond Funds

These funds invest in debt securities with different maturity periods and actively manage the fund’s interest rate risk. Returns vary based on market conditions. Above mentioned are some of the types of debt mutual funds. There are various other types, which we shall discuss later. The best Dynamic Bond funds to invest in India are ABSL Dynamic Bond Fund, ICICI All Seasons Bond Dir, HDFC Dynamic Debt, and 360 ONE Dynamic Bond.

8. Monthly Income Plans (MIPs)

MIPs are hybrid schemes that invest in a mixture of debt and equity. However, the allocation in equity is about 15-20% only. These funds offer regular income in the form of dividend payouts. However, you don’t need to receive dividend payments because it is at the discretion of the AMCs and depends on the surplus left from realized gains.

Taxation of Debt in India

Tax in debt is divided into two parts.

Short-term gain and long-term gain where the short-term duration is less than three years as per your income tax slab, and for long-term, it is more than three years at the rate of 20% with indexation benefit. (Indexation- means adjusting your purchase cost based on inflation). Now let us go through the advantages and disadvantages of investing in debt funds before jumping to any conclusion as to why to choose debt funds.

Advantages of Investing in Debt Funds

1. Stability & Safety

Debt Funds invest in fixed-income securities, which are stable and safe compared to other investment options like stocks.

2. Regular Income

Debt securities like MIPs and FMPs help the investor receive regular income through interest payments.

3. Diversification

With the help of debt funds, investors’ exposure to risk is reduced because debt funds generally have less exposure to equities, reducing the portfolio’s overall risk.

4. Tax Efficiency

If you want an escape from taxes, debt funds can be a solution because these funds carry more tax efficiency than any other traditional investment option like FDs and post office schemes. FMPs can offer investors tax advantages because of indexation benefits.

5. Liquidity

Debt funds are generally more liquid than FDs. Investors can buy or sell these funds on any business day, providing liquidity when needed, and these funds do not have any lock-in period. However, they do carry minimal exit load in some funds.

Conclusion

Debt mutual funds play a vital role in an investor’s portfolio by providing a range of fixed-income investment options. These funds offer stability, regular income, and diversification by investing in various debt instruments. The choice of debt funds depends upon factors like risk appetite, investment horizon, and financial goals. But it would help if you remember that debt funds are not entirely risk-free. Investors should consider consulting a financial advisor for personalized advice.

Frequently Answered Questions (FAQs)

What are debt mutual Funds?
Debt mutual fund is a category of mutual fund that invests in fixed-income instruments such as Corporate and Government bonds.
What are the different types of debt funds?
Different types of debt mutual funds include short-term funds, Fixed maturity period funds, gilt funds, credit risk funds, etc.
What is the taxation rate on long-term capital gains in debt mutual funds?
The tax rate on debt mutual funds for the long-term is more than 3 years at 20% with an indexation benefit.
What are T-bills?
T-bills are treasury bills that the Government of India issues to meet short-term financial needs.
What is the complete form of MIPs?
MIP stands for monthly income plan.

November 24, 2023

Option Chain Analysis: A Detail Guide for Beginners

What are the Options?

Options are defined as financial derivatives that provide the buyer with the right, but not the obligation to buy or sell an underlying asset at a predetermined rate within a fixed period of time. Options Trading involves a contract between buyer and seller. These underlying assets include stocks, commodities, indices, or currencies. There are various strategies to trade options. Some of the widely used strategies include straddle, strangle, butterfly spread, covered call, etc. which we will discuss later. Options can be used for speculation, hedging, and generating income.

What is an option Chain?

An option chain is a kind of list or a matrix that displays call options and puts options their expiration dates, strike price other information related to the contract for a particular underlying asset. The asset can either be a stock or an index. It can be a valuable tool for those who are looking forward to staying invested in the market for a longer time period. In today’s blog, we will be discussing the terminologies linked with option contracts and how a beginner can analyze the option chain and assess various contract details at a glance.

Terminologies linked with option chain

1. Call options

Options may be categorized into Call options and put options. Call options are contracts that give the holder the right to buy the underlying asset at a particular strike price before or on the date of expiry.

2. Put options

Contracts give the holder the right to sell an underlying asset at a fixed price before or on the date of expiry.

3. Strike Price

It is the price per share for which the underlying security may be purchased by the call option holder (or sold by the put option holder)

4. Spot price

It is the price at which the underlying asset is trading in the spot market.

5. Open Interest

Open interest is the total number of options contracts outstanding for an underlying asset.

6. Change in open interest

Change in OI is the number of contracts that are closed, open, or squared off.

7. Implied Volatility (IV)

It is a measure of the market’s expectation of future volatility in stock prices.

8. Volume

Volume represents the total number of option contracts traded for a particular strike price and expiry date.

9. LTP

LTP is the last traded price of an option.

10. Premium

It is the price that an investor pays to buy an option contract. The premium of the contract is influenced by various factors including the strike price, volatility, expiry date and market sentiment.

11. Lot Size

Lot size or contract size is the number of units of underlying assets in a contract. For example, the lot size of the Nifty option is currently fixed at 50.

12. Expiration Date

The day on which a derivative contract ceases to exist is known as the expiration date. Option contracts expire on the last Thursday of the month.

13. In-the-money (ITM) option

A call option is said to be in ITM when the spot price is higher than the strike price. A put option is said to be in the ITM when the spot price is lower than the strike price.

14. At-the-money (ATM) option

This leads to zero cash flow if exercised immediately, and for this option both call and put, the strike price is equal to the spot price.

15. Out-of-the-money (OTM) option

This leads to negative cash flows if exercised immediately. A call option is said to be in the OTM when the spot price is lower than the strike price and a put option is said to be in the OTM when the spot price is higher than the strike price.

16. Intrinsic value and Time value of an option

The intrinsic value of an option refers to the amount an option buyer will realize, before adjusting for the premium paid. Only in-the-money (ITM) options have intrinsic value whereas at-the-money and out-of-the-money options have zero intrinsic value. The intrinsic value of an option can never be negative.

Intrinsic value = current stock price – strike price

Time value is the difference between the premium and intrinsic value. ATM & OTM options have only time value because their intrinsic value is zero.

17. Bid & Ask Prices

A bid is the price a buyer is willing to pay and ask is the price sellers are asking for an option.

18. Option Greeks

Option premiums change with changes in the factors that decide the price of the option i.e., factors such as strike price, volatility, etc. The sensitivities captured in the market are collectively known as Greeks represented by Delta, Gamma, Theta, Vega, and Rho.

Delta – It measures the sensitivity of the option value to a given small change in the price of the underlying asset.
Gamma– it measures the change in delta with respect to the change in price of the underlying asset. It signifies the speed at which an option will go either in-the-money or out-of-the-money.
Theta– This measures an option’s sensitivity to time decay.
Vega- this measures the sensitivity of an option to changes in the volatility of the market.

Analysis of option chain

The above image is an example of an option chain that anyone can find on the official website of NSE. The option chain is divided into 2 parts. Calls on the left side and puts on the right side. As you can see there are different strike prices mentioned in the image at which these options are traded. For example, 17350, 17400, 17450, etc. We have already explained the terms that are displayed in the above image as headings. To analyse the option chain first and foremost thing that you need to do is select an underlying asset (Stock, ETF, index)

After choosing the underlying asset determine the expiration date that matches with your trading strategy. Then start reviewing call and put options and select your strike price i.e., the price at which you wish to purchase the underlying asset. Having known the strike price, examine the bid and ask prices i.e., the premiums for the call or put options whichever you want to trade. Check the trading volumes and open interest for the call and the put option whichever you want to trade. Higher volume and open interest indicate more active trading and do not forget to track changes in OI to measure market movement. For example, if the OI of a particular strike price is increasing, chances are likely that traders are predicting NIFTY to be at that level. Recognize if the call or put options are at-the-money, in-the-money, or out-of-the-money. ATM strike prices are the closest to the current level of NIFTY. Suppose the current level of NIFTY is 19670 so our ATM would be 19750. OTM & ITM have generally lesser volumes and OI than ATM options.

For ATM options, the uncertainty is highest as compared to ITM & OTM options because even a small price movement in either direction can change the option from ATM to ITM OR OTM. Premiums are generally higher for ITM options as compared to the ATM or OTM options. Before choosing an option to trade, a trader should consider the intrinsic value and time value. Do have a glimpse over the volumes of option contracts because high trading volumes can indicate increased interest in a particular option. Consider implied volatility (IV). A high or increased IV reflects uncertainty and higher premiums in the market.

The last step is the analysis and proper usage of option Greeks. This can help you analyze the sensitivity of options prices to changes in strike price, volatility, etc. Also, if you look at the option chain you will notice that some part of it is shaded while the other part is white in colour. The upper left shaded part and the lower right shaded part are ITM options while the part which is not shaded is OTM options.

Also, check out our blog about the different charges you have to bear while trading.

Read Also: What is Options Trading?

Conclusion

Analyzing an option chain involves a combination of technical analysis, understanding option pricing, and formulating trading strategies. By systematically going through the information presented in the option chain, you can make more informed decisions in options trading. Additionally, continuous learning and staying updated on market conditions are key elements of successful option chain analysis.

Frequently Answered Questions (FAQs)

What is an option chain?
An option chain is a list of all available contracts for a security or index that displays the call and put options with different strike prices.
What are the Greeks in option chain analysis?
The Greeks (Delta, Gamma, Theta, Vega) are measures that specify the sensitivity of options price to change in various factors.
What role does risk management play in options trading?
Risk management in options trading helps in capital preservation.
What is implied volatility?
It is a measure of the market expectations for price fluctuations in the future.
What is the formula for intrinsic value?
Intrinsic value = current stock price – strike price.

November 22, 2023

How does the Price of Oil affect the Stock Market?

Oil prices can significantly impact the stock market and are closely inter-related. Oil is an important commodity that contributes to the growth or downfall of an economy and is extensively applied in various industries. Oil prices are defined by a complex interplay of supply and demand dynamics, geopolitical events, production decisions by major oil-producing countries, and changes in the global economy. When the price of oil rises or falls, it can cause various effects that leave footprints throughout the financial markets.

In today’s blog, we will be discovering the ways in which changes in the price of oil can affect the stock market. Whether you’re an investor, or simply interested in knowing about the theories of the financial world, understanding the relationship between oil prices and the stock market is crucial for making sound trading decisions and analyzing the current economic trends that are prevailing in the market. The relationship between oil prices and the stock market is complex and intricate.

Below listed are some of the key points which depict the relationship between the stock market and oil prices

The direct impact of the change in oil prices is on the energy sector stocks which include oil producers and exploration companies. Increased oil prices will have a positive impact on the profitability of these companies. As a result, the stock prices of all the oil companies will soar high.
Oil prices can have a noteworthy impact on inflation. An increase in the price of oil can lead to high production and transportation costs which will increase the general price level of the economy.
Any kind of change in oil prices can also affect other sectors. For example, companies like manufacturing and chemicals that use oil as the key input can have negative effects on their production capacity and their profit margins will be reduced significantly.
Changes in oil prices can also affect the spending capacity of consumers because they will have to pay more money for oil-related products and will be forced to think before buying.
Geopolitical events in major oil-producing regions can disrupt oil supplies and lead to price spikes. These events can increase market uncertainty.
Oil prices are generally denominated in foreign currency i.e., the U.S. dollar. Any kind of increase in the oil price will strengthen the dollar and weaken the Indian currency.

Companies that are majorly affected by the change in oil prices

1. Airlines & Transportation

Fuel cost comprises one of the most important parts of the operating expenses of the aviation sector. If oil prices are low then the profit margin of these companies will automatically increase. Consumers, in such a case, may get a chance to enjoy lower airfares.

2. Paint companies

A fall in the price of oil can reduce the production costs of paint companies. Derivatives of crude oil are important in the production of paints.

3. Automobile companies

If there is a sustained increase in prices customers’ choice of fuel-efficient vehicles may change which in turn may affect the demand of some vehicles.

4. Oil refineries & Marketing Companies

Oil refineries are meant to convert crude oil into useful products like gasoline and diesel. A spike in oil prices can affect the input costs of these companies.

5. Agriculture

Geopolitical events in major oil-producing regions can disturb oil supplies and lead to an increase in prices of oil. These events can increase market uncertainty.

Oil Crisis

One of the most famous examples of oil crisis in history is the 1973 oil crisis. This had a deep impact on the global economy and energy policies. Here’s a brief overview of the 1973 oil crisis:

The oil crisis of 1973 was the end result of some geo-political events. In the year 1973, Egypt and Syria attacked Israel. The U.S. provided military aid to Israel which Arab countries did not like. In reaction, the OPEC countries applied an Oil Embargo on the United States. An Oil Embargo is defined as an economic situation where the transportation of petroleum is limited by some entities to or from an area). This led to a reduction in the global supply of oil. Oil prices at that time were at sky-highs and this caused inflation and higher energy costs. The crisis resulted in increased investment in the development of alternative energy sources, such as nuclear, solar, and wind energy. The purpose of giving the reference to the oil crisis in today’s blog was to give a historical example of how geopolitical conflicts can impact the energy sector. For our readers’ knowledge let us have some basic ideas about OPEC countries.

OPEC stands for the Organisation of the Petroleum Exporting Countries. This organization was formed in the year 1960
OPEC countries are a group of countries that collaborate to coordinate and control the pricing policies of petroleum products.
Currently, there are 13 OPEC countries.
India imports 84% crude oil to fulfill its requirements from countries like Saudi Arabia, Iraq, Iran, and UAE.

Conclusion

The relationship between oil prices and the stock market is not always the same and aligned. To conclude, some companies may take advantage of lower oil prices while others may suffer if their core business is dependent on the energy sector. The investor should take note of ongoing oil prices and news updates if any before investing in oil-related companies because chances are likely that oil prices may change and these fluctuations are unavoidable. By now you must have understood that oil prices do have a major impact on the stock market.

FAQs (Frequently Answered Questions)

How does the price of oil affect the stock market?
Oil prices affect sectors across the stock market in different ways energy company benefits if the stock prices increase and other companies might suffer losses.
What is the full form of OPEC?
OPEC stands for the Organisation of the Petroleum Exporting Countries.
From which country India imports maximum oil?
India imports 84% oil from U.A.E.
What affects the oil prices?
Any kind of change in supply-demand dynamics and geopolitical events can lead to a change in the price of oil.
How can investors navigate the impact of oil price changes?
Investors can lower their risk of loss by diversifying their portfolios and concentrating their investments in oil-related stocks.

November 22, 2023

How Interest Rate Changes Affect the Stock Market

What is Interest Rate?

Interest rate is defined as the price that you pay when you borrow money from someone or it can also be known as income that you earn on your investments like bonds, FDs, and government securities. We will talk about interest rates in the context of lending and borrowing money. Interest rates in India are managed and regulated by RBI and play an important role in the economic growth of a country.

RBI manages various types of interest rates. Let’s have a glimpse at these rates.

Repo Rate
The rate at which the RBI lends money to commercial banks. Any kind of change in repo rate can affect the cost of borrowing for banks as well as retail consumers. The repo rate is considered a key tool to control inflation and stimulate economic growth.
Reverse Repo rate
The rate at which RBI borrows money from commercial banks. This rate is comparatively lower than the repo rate.
Cash Reserve Ratio
CRR, or cash reserve ratio, is the amount that commercial banks need to maintain with RBI in the form of cash. Banks do not receive any kind of interest on this from RBI.
Statutory Liquid Ratio
SLR is the minimum amount in percentage that a bank needs to keep either liquid or as investments in government securities.

The RBI uses these interest rates and tools to manage monetary policy, control inflation, and maintain financial stability. Our major focus today will be on the repo rate and how even a slight change can have wide-ranging effects on the broader economy.

Why interest rates are changed?

RBI changes these repo rates as a part of its monetary policy so that it can achieve its financial objectives. Now, what is monetary policy? Policy framed by the RBI to control and manage the supply of money in the economy. Monetary policy can either be contractionary or expansionary. When the money supply is increased and interest rates are reduced. This is known as the expansionary monetary policy. The vice-versa is known as the contractionary monetary policy. Coming back to our topic RBI changes the repo rate because of the following reasons,

To control inflation in the economy.
To focus on the economic growth of the economy.
Situations prevailing in the global economy

The decisions related to the repo rate are made during the RBI’s monetary policy meetings, which occur at regular intervals. Before moving further, we will give you some basic idea about the concept of inflation and deflation. Inflation is the general increase in the price level of goods and services in an economy. Consumers tend to pay more than the actual value of the good. The purchasing power of consumers decreases. In such a case under the monetary policy, the government of India increases the interest rate to fight inflation. This will decrease the flow of money in the economy.

Deflation is the opposite concept of inflation. A general decrease in the price level of goods and services is called deflation. The purchasing power of the consumer is increased. RBI, in this situation, will lower the interest rate in order to increase the flow of money in the economy. We all know that the stock market of any economy is a true indicator that signals the pace of economic growth. So, we need to analyze the fact of how a change in repo rate can impact the markets.

Impact of rate change on the Indian stock market.

The impact depends on the direction and magnitude of the interest rate changes, as well as the broader economic context.

Interest rates can be changed in two ways

Interest rate hikes
Interest rate cuts

When it comes to interest rate hikes, the cost of borrowing money increases which will make it difficult for the companies to avail loans and this will eventually reduce the profitability of the businesses. This will lead to lower earnings of the companies and decreased prices of the stock.

Any sort of increase in the rate of interest can make other investment options more attractive. From the consumer’s point of view, there can be a significant change in his spending habits since there we be lesser disposable income in his hand thereby affecting his savings and investments. Interest Rate cuts, on the opposite side, lead to a decline in the cost of borrowing making it easier for the investor to grow which will lead to higher earnings and higher stock growth.

The immediate impact of interest rate changes on the stock market may vary. Short-term interest rate changes might lead to short-term stock market volatility, while long-term rate trends can have a more lasting effect on the stock market.

Impact of change in rate by the US Federal Reserve on the Indian stock market

Federal Reserve, since we all know is the central bank of the United States, can either increase or decrease the interest rate depending on the situation and needs of the economy. A change in the rate of the U.S. Federal Reserve affects the economy globally. The relationship between the actions of the Fed and the Indian stock market is influenced by several factors. Some of these factors are listed below.

If the Fed increases the rate of interest, foreign investors will find the U.S. markets more lucrative to invest in. They will withdraw their funds from the Indian stock market and deploy it in the U.S. so that they can enjoy higher returns.
A slight change in the rate of interest by the Fed can have a significant impact on the exchange rates of currency. If the interest rate increases the U.S. dollar will strengthen and the Indian rupee will weaken.
If U.S. rates rise substantially, it may lead to higher interest costs for Indian companies that have borrowed in U.S. dollars or have exposure to foreign currency debt.

Conclusion

To conclude interest rate and stock market share an inverse relationship. If you wish to receive consistent returns investing for a longer horizon is suggested. These short-term stances of rate change will create many complications. However, an investor should be well aware of the consequences of the rate change on the market so that he can make informed decisions. They should adopt a diversified investment strategy and take into account their own financial goals, and risk tolerance.

Frequently Answered Questions (FAQs)

How does interest rate affect bond prices?
Bond prices and interest rates have inverse relationships i.e., when the central bank increases the interest rates, bond prices decrease, and vice versa.
Do all stocks react to interest rate changes in a similar way?
No, stocks across sectors react differently to interest rate changes.
Who regulates and manages the interest rate in the stock market?
Reserve Bank of India controls and manages the interest rates.
Why does RBI increase the interest rate?
RBI increases the interest rates in order to control inflation and for the overall growth of the economy.
What happens to borrowing costs when RBI increases the interest rates?
Borrowing cost for the companies increases if RBI increases the rates.

November 22, 2023

How to Start Stock Market Trading With Low or Limited Capital

Financial markets are a place where financial assets or instruments are bought and sold. It acts as an intermediary between someone who needs money and someone who wants to invest money. In India, Financial Markets can be classified into two types i.e., money market and capital market. Let us understand the concept of these two markets.

Money market

The money market is a place where financial instruments with high liquidity and short-term maturities are traded. It is used by participants as a means for borrowing and lending in the short term, and maturity in this market usually ranges from overnight to just under a year. Instruments of the money market are low-risk investments because the government of India issues them. Examples of these instruments in the money market include T-bills, commercial papers or certificates of deposits.

Capital market

The capital market is a part of the financial market that facilitates the buying and selling of various financial assets such as stocks, bonds, debentures, and foreign exchange. These markets are controlled by the government and it is meant for both retail and institutional investors.

The capital market is divided into 2 parts

Primary market where new shares are listed for the first time in the market through IPOs.
A secondary market where the already issued stocks are bought and sold. The secondary market provides liquidity to investors.

The secondary market is further classified into various segments like stock market, debt market, commodity market, derivatives market, forex market etc. In today’s blog, we will be discussing about how to start your journey in the stock market with low or limited capital since in a country like India people are not aware of financial planning and there is a constant fear of losing capital which resists them from investing. Due to this people still choose traditional methods of savings like Fixed Deposits.

Trading- a brief introduction

Trading refers to the process of buying and selling financial assets, such as stocks, bonds, commodities, currencies, or derivatives, to profit from price movements.

Types of trading

Intra-day trading
Day traders open and close positions within the same trading day, often making numerous small trades to profit from intraday price fluctuations. They do not hold positions overnight.
Swing trading Swing traders aim to capture price swings or “swings” in the market for a few days to several weeks. They rely on technical and fundamental analysis to identify potential entry and exit points.
Positional Trading
Position traders take a longer-term approach, holding positions for weeks, months, or even years. They often rely on fundamental analysis to make investment decisions and are less concerned with short-term price fluctuations.

Why should one trade or invest in the stock market?

Investing in stocks can provide the opportunity to build wealth over the long term. Historically, the stock market has delivered attractive returns that have outpaced inflation whereas traders aim to profit from short-term price movements in stocks. Many people invest in stocks as part of their retirement planning. Investing in equities can potentially grow your retirement savings over time whereas some traders engage in trading as a primary source of income, while others use it as an alternative source of earnings.

Investing means diversifying your portfolio of stocks and this can not only spread risk but also reduce the impact of poor-performing assets whereas trading can be done either in one stock or in multiple stocks depending upon the choice of the trader. Now chances are likely that a person with an average income may find it difficult to trade due to a lack of funds and financial stability.

So here are some tips on how you can start investing with low capital.

Understand that with limited capital, your goal should be consistent, small gains rather than quick riches.
Identify how much of your capital you’re willing to risk on a single trade. A common rule is not to risk more than 1-2% of your total capital on a single trade.
You can use stop-loss orders to avoid excessive loss. Stick to your predefined stop-loss levels to prevent capital erosion.
Diversification can help minimise your risk. try investing in different asset classes or stocks from various sectors to reduce the impact of a single poor-performing asset on your capital.
Begin with a small position size. Invest in a limited number of shares or contracts to minimize the impact of individual trades on your capital.
Choose low-cost financial instruments, such as exchange-traded funds (ETFs) or stocks that have low share prices.

(ETFs are exchange-traded funds that are tradable on stock exchanges and track a specific index)

Go for intra-day and swing trades and buy small quantities of shares. This will boost your confidence and will help you analyse how much water are you in when it comes to live trading.
Start learning through online videos or enrol yourself in a trading education programme. Keep yourself updated on market news.
If you have low capital, trading can be emotionally exhausting since it requires a lot of patience. Stay disciplined and don’t let emotions drive your decisions. Maintain a clear and focused mindset.
Opt for a brokerage firm with low fees to reduce your trading as well as transaction costs.
Avoid aggressive trading. Overtrading can lead to higher transaction costs and increased risk. You should focus more on quality trades rather than quantity.
Make your own trading strategies and start with paper trading. Practice your trading strategies and learn about the trading platform

Read Also: What is Options Trading?

Investing in Mutual Funds

Still, if there is a fear that you might end up losing your capital, no worries you can invest in mutual funds with a small and minimum amount of Rs.500. There are various benefits of investing in mutual funds as well.

Some of them are listed below,

Professionally Managed Funds Mutual funds are professionally managed by fund managers. AMCs appoint an eligible manager who then prepares a curated portfolio as per your risk appetite and financial goals.
Diversification AMCs dealing in mutual funds offer a wide variety of schemes in various categories like in large-cap companies, mid-cap companies and small-cap companies. You can choose as per your capital and investment horizon.
Low-cost investment
Investment into mutual funds can be started with a minimal amount. You must be thinking how? Well, the answer to this question is, by starting with a monthly SIP of Rs.500.

(SIP stands for systematic investment plan wherein a fixed amount is deducted from your bank account as part of your investment journey in mutual funds).

Transparency
Fund managers provide their investors with a transparent environment. You will be told beforehand where your capital is being invested. This increases the trust and harmony between the investor and the manager.
Liquidity
Mutual funds are generally open-ended funds, which means you can buy or sell your shares on any business day at the fund’s net asset value (NAV).
Tax Benefit Some mutual funds offer tax advantages, such as tax-efficient funds designed to minimize capital gains distributions for eg. ELSS funds.

Conclusion

Trading with limited capital requires a disciplined approach and a focus on risk management. It’s important to prioritize saving your capital and gradually growing it over time. As you gain experience and build your capital, you can consider more advanced trading strategies.

FAQs (Frequently Answered Questions)

What are ETFs?
ETFs are exchange-traded funds that are tradable on stock exchanges and track a specific index.
Define the money market.
The money market is a place where financial instruments with high liquidity and short-term maturities are traded. Examples of these instruments in the money market include T-bills, commercial papers or certificates of deposits.
What is SIP?
SIP stands for a systematic investment plan. You can start SIP with a minimum amount of Rs.500.
Can you do intra-day trading with low capital?
Yes, you can do intra-day trading with low capital since brokers provide you margin facility i.e., extra funds.
Can I invest 1000 in the stock market?
There is no minimum amount of capital required since there are also stocks that are low-priced. They will help you trade with low capital and less quantity.

November 15, 2023

Types of Investment in the Stock Market

You earn money and you save money, then you get an option to channel your savings in an organised manner. These are called investments. Investments should be based on your desired goal i.e.; emphasis should be on goal-based planning. Goals can be anything marriage, foreign tour, emergency fund, retirement plans or buying a house. Only then any investor can align their investments as per his/her risk tolerance, and time horizon and decide the investment product he wants to opt for. Investments are a source that helps you achieve your desired financial goal. Stock market offers investors various avenues in order to allocate their capital and generate returns over time. Investing in the stock market offers a multitude of opportunities for individuals to grow their wealth.

In today’s blog, we will be classifying investments into three categories.

Modern investment options or investment in the stock market
Traditional investment options
Other investment options

Below is a detailed explanation of the types of investments that are widely used by investors.

Modern Investment Options

Stocks

Stocks are the most chosen and common investment option. Buying shares of a specific company is known as investing in stocks. The investor becomes the partial owner of the company and can enjoy various advantages that include capital appreciation, dividend payouts and voting rights. Stocks are issued by various companies. The initial listing of the stocks is labelled as an IPO (Initial Public Offering) and is introduced in the primary market but is traded in the secondary market. Stocks are volatile and can be risky to invest in.

Mutual Funds

Mutual funds collect money from numerous investors to invest in a diversified portfolio of stocks, bonds, or other assets. These funds are managed and curated by professional fund managers and hence become suitable for investors who have less time and expertise to manage their portfolios. When you invest in mutual funds, NAV (Net asset Value) is allotted to you which reflects the net value of the assets that are chosen by the fund manager to invest your money in. Furthermore, SIP/STP/SWP are different ways through which we can invest in mutual funds.

PMS

PMS stands for Portfolio Management Services and is generally meant for HNIs (High net worth Individuals) and has a minimum ticket size of Rs 50 Lakhs. There are 2 types of PMS. Discretionary and non-discretionary PMS. PMS fund managers charge fees from their clients based on the asset under management. Individuals, NRIs, HUF, partnership firms, and proprietorship firms can invest in PMS.

Bonds

Bonds are fixed-income investments or debt instruments that are issued by the government. When you buy a bond, you are giving money to someone who issues the bond in exchange for interest or coupon, which is paid at regular intervals, and the return of the bond’s face value at maturity. Bonds are regarded as lower-risk investments when compared to stocks. There are generally three types of bonds.

Government Bonds/Securities-

Tradeable bonds which are issued by the central and state governments. These bonds have a fixed coupon rate and maturity. For example, treasury bills.

Corporate Bonds

These bonds are issued by private companies and NBFCs which carry a bit higher yield than government bonds.

Municipal Bonds

These bonds are issued by state municipal corporations to fund projects.

AIF

AIF stands for Alternative Investment Funds. It is a privately pooled investment that collects funds from high-class investors. These investors are institutions and high net-worth individuals who have an idea about the higher risk and complex investment arrangements.

Exchange Traded Funds (ETFs)

ETFs are investments that are traded on stock exchanges just like any individual stock and provide investors with a diversified portfolio of assets. ETFs have a very low expense ratio.

Traditional Investment Options

Fixed deposits

FDs are traditional methods of saving and investment and are good for investors with low or nil risk appetite. The fund is deposited in the bank account in a lump sum for a fixed period of time and at the time of maturity, the depositor gets back the principal amount along with the interest. Interest on FDs is fixed by the banks and offers you guaranteed returns.

Public Provident Fund

PPFs are long-term saving schemes offered by the Indian government. PPFs generally have a lock-in period of almost 15 years. However, individuals can withdraw money partially after a tenure of 5 years is completed from the date they have opened the account.

Post Office Schemes

It is a fixed-income investment offered by the Post Offices. Investors are given monthly interest on their investment amount. This investment option comes with low to moderate risk.

Savings Account

A savings account is a basic, interest-bearing deposit account offered by banks. It provides a safe place to store money, and interest is earned on the balance. this account has low risk and high liquidity but has low returns.

Other Investment options

Gold

Gold is considered a safe haven when it comes to investments. Gold is highly liquid and can be easily bought and sold. At times of volatility in the market, the best option to bet upon is gold. It is a popular investment option because of its historical significance. Gold has been a store of value for ages and is believed to be a symbol of wealth. It helps to diversify the risk of your portfolio. You can invest in physical gold, gold ETFs and sovereign gold bonds.

Real-estate investment Trusts (REITs)

Real estate is a great source of rental income from properties because there is a significant growth in the value of the asset be it land or a building, over time. This increases the value of the invested capital which is considered as beneficial for the investor. Real estate investment trusts (REITs) allow investors to invest in real estate without owning physical properties directly. REITs are a source of indirect investment in Real Estate. REITs have emerged as a good option to enable investors to expose themselves to smaller outflow commitments.

Conclusion

Every investment option has different attributes, returns and risk profile. It is always suggested to investors to conduct systematic research or seek advice from financial professionals before making investment decisions. Choosing the right option completely depends on your financial goals, risk tolerance, and investment horizon. Diversification of portfolios across different investment types can help you lower the risk and shape a well-balanced portfolio that aligns well with your financial goals.

FAQ (Frequently Answered Questions)

How do ETFs differ from mutual funds?
ETFs are traded on stock exchanges like individual stocks whereas asset management companies sell mutual funds.
How to choose the right investment as per my financial objective?
Pay attention to factors like your investment horizon, risk appetite and reason for investment and seek advice from a professional.
Are FDs modern or traditional methods of investment?
FDs are a traditional way of investing.
What is the full form of REITs?
REITs stand for real estate investment Trusts.
Is gold highly liquid?
Yes, gold is considered highly liquid and is used as a hedge against inflation.

November 15, 2023

Which is Better: Fixed Deposit or Residential Property Investment

What is Real Estate?

Real Estate is considered as a long-term investment option. It is a kind of risky investment when compared to fixed deposits. Despite fluctuations in the prices of the property over the years, real estate carries great potential to appreciate your invested capital. It’s a broad and diverse asset class that encompasses various types of properties, ranging from residential homes and commercial buildings to undeveloped land and industrial facilities. Real estate is crucial in many aspects of our lives and the economy. Real Estate means a tangible property, including land and buildings.

Real estate can be a source of rental income from properties for investors and potentially benefit from appreciation in the value of the asset over time. Real estate investment trusts (REITs) allow individuals to invest in real estate without owning physical properties directly. REITs are a source of indirect investment in Real Estate. Location is often considered one of the most critical factors that affect property values in the case of real estate.

Types of Real Estates

There are various types of real estate which you should be aware about

Residential
Commercial.
Industrial
Land
Special Purpose

Let us go through each of them in detail.

Residential Real Estate
Any property or area used for residential purposes, i.e., for living, e.g., Individual houses, apartments, etc.
Commercial Real Estate
Properties used to carry out a business like office buildings, hotels, etc.
Industrial Real Estate
This real estate comprises property used for manufacturing, production, storage, and distribution.
Land Real-Estate
Any area that is vacant, raw, and underdeveloped that can be bought and sold is called Land real estate.
Special-purpose Real Estate
Religious places like temples, schools, libraries, etc, serve a special purpose for the general public.

After having an overview of the concept of real estate, in today’s blog, we will be analyzing closely the difference between residential property, which is a type of real estate, and FDs as an investment option. Investment in residential properties involves buying houses, flats, or any kind of residential unit that can provide you with rental income. Though these properties are a good investment option, you should plan and do proper research before investing. Residential properties are a long-term investment option if you want a capital appreciation, and you should also have an exit strategy. Consider factors like when you might sell the property, how you’ll handle market downturns, and whether you’ll reinvest the proceeds. Consulting with a professional who deals in residential properties and financial advisors can be valuable and useful in the investment process.

Real Also: Top Real Estate Stocks In India

Pros of investing in Residential properties

Generation of high returns over the long term.
A significant increase in the invested capital.
Rental income can also be a source of primary or alternative income after retirement.
Real estate investment can provide investors with tax advantages, such as deductions for mortgage interest, property taxes, and depreciation.

Cons of Investing in Residential Properties

Initially, it would be best to have a lot of money when choosing residential properties as an investment option.
Lack of liquidity is one of the major disadvantages when investing in real estate because you cannot sell the property immediately. Certain legal procedures are followed while selling, which can be time-consuming.
Maintenance costs can be very high, like property taxes, renovation costs, repairs, and insurance.
A decline in the real estate market will affect property values.

What are Fixed Deposits?

Fixed deposits are a kind of investment option and are a traditional method of saving. Fixed deposits are offered by banks and NBFCs (Non-Banking Financial Institutions). Investment in FDs is a safe option since it gives a fixed return over the years. FDs also offer tax benefits, such as deducting interest income up to Rs. 50,000 per year under Section 80TTA of the Income Tax Act, 1961. FDs are a low-risk investment option with a fixed interest rate, which helps you preserve your capital. You can withdraw your capital whenever you want to, but after a lock-in period only. If capital is withdrawn before the maturity date, a certain penalty amount is charged.

To invest in FDs, you just need to visit your nearest bank branch or apply online. The process takes a few minutes. Suppose you received an amount of Rs.20000 after winning a match, and instead of buying something expensive, you decided to go for a Fixed Deposit. Now, you will visit your nearest bank branch and deposit your money to earn some amount of interest and will just sit back for some years. You will reach out to the bank once again when your Fixed Deposit matures to get your principal amount as well as the interest that you have earned over the years.

Types of FDs

Regular FDs
Cumulative FDs
Non-Cumulative FDs
Corporate FDs

Let us explain each of them in detail.

Regular FDs
FD, which offers you a fixed interest rate, and you get back your principal amount with interest at the time of maturity.
Cumulative FDs
In the case of cumulative FDs, the investor gets a return in a lump sum at the time of maturity. Till then, the interest is accumulated and then added to your principal amount.
Non-Cumulative FDs
Regarding non-cumulative FDs, interest is paid to the investor at regular intervals as he chooses.
Corporate FDs
FDs are offered by private organizations and non-banking financial companies (NBFCs) that collect deposits for a fixed tenure and a pre-decided interest rate. The interest rate offered is high when compared to normal bank FDs.

One of the major drawbacks that any investor can face while choosing FDs is that the investor won’t be getting the benefit of inflation-adjusted returns and can also get negative returns at times. How? Let us understand this with an example.

Suppose your investment amount is 5 lakhs. Per the current interest rate (6.7%), interest received would be 33,500. If you lie in a tax slab of 30%, an amount of approximately 10,000 will be deducted from your interest amount, and you will receive a net amount of 23,000 as interest, which is 4.6% when expressed in percentage. Since current CPI, i.e., consumer price inflation, is 7.6%. So, the real interest received is 3% only.

Now, let us come back to our better question. FDs or Residential Investments.

Also, check out Fibonacci Retracement: Complete Guide On How To Use And Strategy.

Conclusion

Fixed deposits (FDs) and real estate are two distinct investment options with advantages and disadvantages. The choice between the two depends on your financial goals, risk tolerance, investment horizon, and circumstances. Choosing between both investment options can be a tough task. However, if you are willing to take on more risk to generate higher returns potentially, then real estate may be a better option for you.

FAQ (Frequently Answered Questions)

Which is the better investment option, Residential properties or FDs?
Both investment options have their own merits and demerits. It would be best if you chose as per your financial goals.
Are FDs tax-free?
No, fixed deposits are not tax-free.
What are cumulative fixed deposits?
The investor gets a return in a lump sum at the time of maturity. Till then, the interest is accumulated and then added to your principal amount.
Are FDs more risky than residential properties?
No, FDs are less risky, whereas investments in residential properties are riskier.
What kind of income can we earn from residential property?
Rental income can be earned from residential property.

November 15, 2023

Blog

Possible causes of losses in your portfolio

Volatile Markets

Focus on a specific sector

Wrong Entry and Exit

Leveraged positions

Psychological Reasons

Poor selection of stocks

How to deal with red portfolio

Revaluation

Long-term perspective

Portfolio-review

Follow Stop-loss

Risk-Appetite

Diversification

Exit your mistakes in Bull Market

Advice from professionals and experience.

Invest at regular intervals

Conclusion

Frequently Asked Questions (FAQs)

If your portfolio is stuck in losses what should be the first step?

Should an investor consider selling stock immediately once the portfolio turns red?

How can diversification help you minimise your risk?

Can professional advice help you reduce losses?

How to control emotions when trading in the stock market?

Types of Saving Instruments

What are fixed deposits?

Merits & Demerits of Investing into FDs

Merits of Investing in Fixed Deposit

Demerits of Fixed Deposits.

Taxation of Fixed Deposits in India (Example):

What do you mean by investing in stocks?

Large-cap

Mid Cap

Small cap

From where can we buy or sell stocks?

Taxation of Equity in India

Merits & Demerits of Stocks

Merits of investing in stocks

Demerits of investing in stocks

Conclusion

Frequently Answered Questions (FAQs)

Which is considered safer, Fixed deposits or stocks?

Which investment option offers higher returns between stocks and FDs?

Who provides FDs?

What is STCG in stocks?

Who decides the interest rate on FDs?

What is AUM?

Indian Mutual Funds Industry

Calculation of AUM

Significance of AUM in different Mutual Funds Categories

Factors affecting AUM

How Expense ratio is related to AUM

Conclusion

Frequently Answered Questions (FAQs)

What is AUM?

What is the formula for calculating AUM?

How is the expense ratio and AUM related?

Who manages the mutual fund?

When was the first mutual fund in India established?

What are Debt Mutual Funds?

Who should invest in Debt Funds?

How to invest in Debt funds

Types of Debt Mutual Funds

1. Liquid Funds

2. Short-term Funds

3. Credit Risk Funds

4. Fixed Maturity Plans (FMPs)

5. Floating Rate Funds (FRFs)

6. Gilt Funds

7. Dynamic Bond Funds

8. Monthly Income Plans (MIPs)

Taxation of Debt in India

Advantages of Investing in Debt Funds

1. Stability & Safety

2. Regular Income

3. Diversification

4. Tax Efficiency

5. Liquidity

Conclusion