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What is IPO And How Does IPO Work?

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What is IPO And How Does IPO Work?

In 2017, India recorded as many as 36 IPOs. Due to this, organization’s were able to raise a record Rs.67,147 crores. They recorded this much in the equity market via IPOs. Now, with this record, you might wonder what made companies raise this much money and what is an IPO. You are in the right place to know more about it here:

What does IPO mean in stocks?:

IPO is the short form for the phrase Initial Public Offering. In this concept, a private company lists its shares on a stock exchange. By doing this, the company makes its shares available for the general public to buy. 

Many people feel that IPOs are big-money-making opportunities. They also feel that high-profile businesses get a place in headlines with huge share price gains. They achieve this when they make their shares available for the public to buy. Of course, they are trendy. Nevertheless, IPOs are risky investments. They are known for delivering inconsistent returns in the long run. Of course, some of them are beneficial. This is why experts say that in IPOs risks and benefits go hand-in-hand.

You can understand IPO as a process, where a private company looks to get help from the public. You might wonder how the IPO can help private companies. The company gets money from the public by selling a portion of its shares. In turn, the company can make some money. 

The public, individuals with high net worth and even institutional investors can do one thing. They can know the details of the initial sale of shares in the prospectus of a company. It is nothing but a lengthy document that provides the details of the proposed offerings.

Once a company does an IPO, its shares are listed and traded freely in the open market. As the company lists its shares in the stock exchange, the exchange will impose a lesser fee on the shares. The exchange can do this either as a ratio of the total share capital or in absolute terms. In some instances, stock exchanges can follow both these approaches.

What is The Purpose of IPO:

What is IPO

Any company, be it young or old can decide to go public. With this decision, the company moves forward to get itself listed in a stock exchange. When they do this, the company can make its shares available to the public by IPO. With the funds that the company gets by selling its shares, the company can raise equity capital. The company has the option to issue new shares through IPOs. Otherwise, the company’s existing shareholders can also sell their shares to the public. In this case, the company cannot raise any fresh capital.

Companies choose IPO as the option to raise capital because they need not have to repay the capital to the public investors. Here, the company that issues its shares is referred to as the issuer. The company can do this with the help of investment banks. After the IPO, the business’s shares will be traded in the open market. Investors can again sell those shares through secondary market trading. 

Apart from raising capital, companies go public to gain popularity as well.

Some Key IPO Terms:

Now, you have an idea of what an IPO is. When you are in this market, it would be good to understand some common IPO Terminologies. Here are a few of them:

Underwriter:

An underwriter is the investment bank that manages the public offerings of an issuing company. This person or entity is responsible for deciding the issue price of shares. Even, the underwriter takes care of the task of assigning shares to investors. The investment bank also assigns shares to investors.

What is IPO Price Band:

The price band is nothing but the price range in which investors can bid for IPO Shares. In general, the price is different for each category of investor. For instance, retail investors like you will pay a different value. But, a qualified institutional buyer might pay a different value for the shares.

What is IPO Lot Size:

This term denotes the smallest number of shares that you can bid for in an IPO. Let us consider that you wish to buy more shares. In this case, you will have to bid in multiples of the lot size.

What are STP and SWP (Systematic Transfer Plan and Systematic Withdrawal Plan)?

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What are STP and SWP (Systematic Transfer Plan and Systematic Withdrawal Plan)?

For first-time mutual fund investors, three terms are confusing. They are SWP, STP and SIP. You can gain a better understanding of SIP expanded as a systematic Investment Plan here. We will get into the other two terminologies and who should invest in them here. First, SWP stands for Systematic Withdrawal Plan and STP stands for Systematic Transfer Plan. These are distinct concepts in mutual funds with their own unique benefits, uses and features. 

What is SWP and How Does it Work?

SWP is a redemption plan. It permits you to withdraw a particular amount from a fund regularly. It is the opposite of SIP, where you invest systematically, while in Systematic Withdrawal Plan, you withdraw systematically. 

How Does SWP (Systematic Withdrawal Plan) Work?

When you take the case of SIP, you invest small amounts periodically. It means that at the end of a later date, you will end up with a large corpus fund in SIP. On the flip side, in Systematic Withdrawal Plan, you will invest a large corpus fund initially. Thereafter, you will start redeeming a particular amount of money regularly. You can gain a better understanding from the example below:

Let us consider that you are investing Rs.5 lakhs in a debt mutual fund. You are choosing to redeem Rs.5000 every month. When you give this instruction, the fund manager will transfer this money regularly until the value of your investment gets to zero. It means that you can get regular income. This is why SWP (Systematic Withdrawal Plan) is considered the best option for retired people. They wish to invest their retirement benefit in a lump sum and get monthly income to manage their expenses. 

The good thing about (SWP) Systematic Withdrawal Plan is that you have an option. Yes, you can either redeem a particular amount, a particular number of units or all returns above a particular fixed value.

What is STP and How Does it Work?

A Systematic Transfer Plan will provide you with the option to shift your investments from one mutual fund scheme to another. When you have invested in a fund house with many different schemes, this becomes possible. 

How Does STP Work?

You can consider STP as another form of SIP. However, SIP involves the transfer of money from your savings bank account to a mutual fund plan at regular intervals. On the other hand, STP involves the transfer of funds from one mutual fund plan to another. With STP, you can stagger your investment over a particular term to bring down risks and stabilize returns. 

For example, let us consider that you are investing systematically in equities. When you do this, you can achieve risk-free returns even with volatile conditions in the market. Here, an Asset Management Company will permit you to invest a lump sum in one fund. But, the company will provide you with the option to transfer these funds to another scheme systematically. 

When you intend to initiate an Systematic Transfer Plan, you will have to select a couple of funds. The first is the fund from which you wish to transfer the money. The second fund is the one to which the funds should be transferred. Also, you will get the option to choose whether the fund transfer should happen, quarterly, monthly or yearly.

Know the Types of STP:

You will come across three types of Systematic Transfer Plans when you intend to invest. The first is fixed STP, the second is capital appreciation plan and the third option is a flexible plan. In the first type, you can transfer the same amount of money that you fix from one mutual fund to another. In the second type, you can move only the profit you earn from one fund to another fund. Thirdly, in the flexible plan, you can transfer a variable amount. However, in this kind, you will have to decide on a fixed amount that you wish to transfer. Thereafter, the excess money over the fixed amount will rely on the volatility of the market.

Systematic Transfer Plan (STP) will be the ideal choice for those with large money to invest in equities. However, they wish that the investment should happen in a phased manner. So, as against putting a lump sum in an equity fund, you have the option to invest a certain quantity in a liquid fund. This is a good option as liquid funds are known for low risk as compared to equity funds.

How About Taxation on SWPs and STPs?

In both SWP and STP, capital gains tax applies. The reason is that you transfer the money from one fund to another in Systematic Transfer Plan. So, it will be considered redemption. In the case of Systematic Withdrawal Plan, each withdrawal you make will be considered redemption. So, it attracts capital gain tax.

What Are Debt-Based Funds? How Are They Beneficial?

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What Are Debt-Based Funds? How Are They Beneficial?

Are you new to mutual funds? You can gain a better understanding on what are mutual funds from this page. When you learn about mutual funds from this page, you will also see that there are different types of mutual funds. One such type is debt-based fund. Here, we will gain an understanding of how this type of mutual fund can be beneficial. But, before that let us throw some light on what are debt-based mutual funds:

What are Debt-Based Funds?

A debt based mutual fund is a type of mutual fund investment that focuses mainly on fixed-income instruments. When you invest in this type of mutual fund, your money will be invested in treasury bills, corporate bonds of government securities. At the end of a fixed period, you will get a fixed rate of return when you invest in this type of mutual fund.

Who Should Invest in Debt based Mutual Funds?

Now, you know what debt-based mutual funds are. But, before investing, you will be interested in knowing whether investing in this type of mutual fund will suit you. Let us find out here:

Debt mutual funds are the best option for investors interested in taking moderate risks. In general, mutual fund investment, as you know, is subject to market risks. Nevertheless, as compared to equity mutual funds, debt mutual funds carry less risk. So, you can choose this type if you have a lower appetite for risk. 

Even, this fund suits prospective investors with surplus funds. If you are looking for ways to diversify your investment portfolio, you can choose to invest in these funds. Let us consider that you have a higher equity allocation in your portfolio. In this case, you can bring down the overall risk in your portfolio by investing in debt based fund. The reason is that the debt element can support any downside risk of returns.

How Do Debt Funds Work?

As compared to low-rated securities, debt funds that invest in higher-rated securities are less volatile. Moreover, maturity also relies on the investment strategy of the fund manager. It also relies on the overall rate of interest followed based on the economy. When the fund manager sees a fall in the interest rate regime, he will invest in long-term securities. On the other hand, when he sees an increase in the interest rate regime, he will invest in short-term securities.

Are you still thinking about whether or not to invest in debt-based funds? Then, you should understand the benefits of these funds:

Benefits of Debt-Based Fund-

Better and Greater Liquidity:

Are you looking to invest in a platform with better liquidity? Then, choosing debt-based funds can be the best choice for you. When you do this, as an investor, you will get the option to withdraw your investment in these funds. Above all, the investments that you withdraw from these funds will quickly reflect in your bank account. It will happen within a day. So, you can compare investing in these funds similar to investing in fixed income arenas. But, here, you will not have to get through the huge paper works and penalties. 

Stable Returns:

As an investor, you know one thing for sure. You know that some investments including investment in equity mutual funds will help you get returns only on the basis of market trends. But, the good thing about debt based funds is that their returns do not rely on market sentiments. So, investing in these funds is a safer move if you have a low-risk appetite. Also, debt funds are the best choice if you have some financial goals to be met within a specific period. 

Tax Efficiency: 

It is true that short-term and long-term capital gains taxes are applicable on debt-based funds. But, when you invest in these funds for more than three years, the benefit of indexation will increase after three years. Also, the indexation benefit will increase with each year passing after three years. Further, debt-based funds are not affected by TDS. 

On the other hand, alternative investment options like fixed deposits have a direct deduction of 10.3%. This will happen when your interest income from fixed deposits exceeds Rs.10,000 in a financial year. Income from fixed deposits is taxed every year right from the year of deposit. Nevertheless, you can access the total money earned only when the plan matures. All these hindrances can be eliminated when you invest in debt-based fund.

Stability:

When you invest in debt funds, there will be an increase in the balance in your portfolio. When you take the case of equity funds, they might have higher return potential. Nevertheless, they are volatile. The reason is that the returns from equity funds are associated directly with the market performance. You can considerably diversify your portfolio and can reduce risk in your portfolio by investing in debt funds. 

Flexibility:

You might have different investments in your portfolio. But, the good thing about having debt funds is that you can get the flexibility. You can choose to invest in these funds through SIP. It means that you can invest whenever you get some additional income. Also, you can set a systematic withdrawal plan to easily withdraw the money from your debt fund whenever you need money.

Conclusion:

In short, investment in debt funds is beneficial in many ways. This investment is better than equity funds and even regular fixed deposits in many ways. So, buckle up to ensure an investment area with comparatively lower risk by choosing debt funds.

What Is ETF, How Does ETFs Work and How Many Types They Are?

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What Is ETF, How Does ETFs Work and How Many Types They Are?

ETF’s – Exchange Traded Funds fall under the category of Index Funds. They are not only listed but also traded on exchanges. You might have heard about stocks being traded in exchanges. ETFs follow the path of stocks in this way. Not only in India, globally, but also ETFs have opened a new panorama of investment chances. 

Particularly, they have opened new investment opportunities to institutional money managers. Even, they help retail businesses. They help investors gain broad exposure to stock markets. Particularly, they provide this exposure at a much lesser cost compared to other investment firms in real-time.

What are Exchange Traded Funds?

An ETF can be called a pool of stocks. They generally reveal the configuration of an index like BSE, Nifty and CNX Sensex. When they are like stocks, you might be wondering how the trading value of an Exchange Traded Funds is decided. Its trading value is decided based on the net asset value of the original stock that it denotes. 

In simple terms, you can think of Exchange Traded Funds as a mutual fund. But, you can sell and buy this mutual fund in real-time. Above all, its price changes all through the day, unlike mutual funds.

Again, ETFs are similar to mutual funds to a certain extent. This similarity lies with the management, regulation and structure of ETFs. Also, similar to mutual funds, ETFs are pooled investment vehicles. They provide different investment opportunities into a varied class of options, currencies, bonds, commodities, stocks or even a combination of these things. 

ETFs are similar to stocks because you can trade them in exchanges similar to stocks. Understanding the difference between open-end and close-end mutual funds will help you. The reason is that you can gain a better understanding of ETFs.

Difference between open-end and close-end mutual funds:

Traditionally, you can buy open-end mutual funds at any time straight from the fund company. Nevertheless, close-end mutual funds provide a set number of shares through Initial Public Offering or IPO. After an IPO, shares can only be purchased from or sold to other shareholders present in the open market.

One of the key differences between open-end and close-end mutual funds is that in the former your counterparty is always the fund company. But, in close-end funds and even in ETFs, your counterparty is not the fund company. But, your counterparty will be shareholders, who trade the entire day. They can either be trading over stock exchanges or directly. So, you can understand that you can trade ETFs at a price that suits you the most.

Are close-end mutual funds and Exchange Traded Funds are similar?

They are not the same. However, they are close cousins. The reason is that you can buy and sell both of them in stock exchanges. But, the difference between these two funds is that ETFs are not actively managed. Rather, the securities in an ETF just form a pool of investments. These pools intend to imitate an index as similar as possible. 

How To Choose Exchange Traded Funds and Index Funds?

When you intend to invest in ETFs, you will have to consider three main parameters. They are liquidity, tracking error and total expense ratio. Here are some details to know about these parameters:

Liquidity: 

As against mutual funds, ETFs are bought and sold in stock exchanges. So, liquidity is an essential factor to consider. When an ETF is not liquid, you might not be able to find buyers when you intend to sell the fund.

Tracking Error: 

The difference between the index and ETF return is referred to as tracking error. This is a crucial parameter considering the performance. The reason is that as an investor, you are actually going to invest in the index.

Total Expense Ratio: 

The total expense ratio should be of the low-risk category.

How Does Exchange Traded Funds Work’s?

As mentioned earlier, ETFs share the characteristics of both mutual funds and shares. They are bought and sold in the stock market as shares produced through creation blocks. You can buy or sell them from or to popular stock exchanges during the equity trading time. When you see changes in the prices of ETFs, it can happen due to changes in the cost of underlying assets. Let us consider that the price of one or more assets increases. When this happens, the price of ETF will also rise in the same proportion.

The shareholders in ETF will get dividends based on the asset management and asset performance of the particular ETF Company. As per the norms that the company follows, these assets can either be managed vigorously or inertly. A portfolio manager will take care of actively managed ETFs. He will do it after cautiously evaluating the conditions in the stock market. When assessing, he will undertake a calculated risk. He will do it by investing in companies with high potential. On the other hand, passively managed assets follow the trends of particular market indices. In this case, the investment is done only in the companies that are listed on the rising charts.

Types of Exchange Traded Funds:

Before you invest in ETFs, it is better to know their types. In fact, different types of ETFs exist. However, only four of them are popular. They are currency ETF, Debt ETF, Gold ETF and Equity ETF.

Conclusion:

Exchange-Traded Funds are profitable investment options for institutional money managers and retail business owners. So, you can choose this investment option and can reap the benefits thereof.

Taxation on Mutual Funds – An Eye-Opener for Your Financial Planning!

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Taxation on Mutual Funds – An Eye-Opener for Your Financial Planning!

Mutual Fund Taxation – How Mutual Funds Are Taxed?

Do you have financial goals to be met in a few years? If your answer is affirmative, mutual funds are among the most interesting investment options available to you. Apart from providing wealth-generation opportunities, these financial instruments are tax-efficient as well. Of course, investing in fixed deposits is a practice that is followed for a long. But, investing in fixed deposits carries a great disadvantage. This holds particularly for people in the highest income bracket in India. The reason is that interest from fixed deposits is added to the taxable income. Then, the total is taxed at their income tax slab rate. With mutual funds, you can expect tax-efficient returns and effective money management.

Taxation on Mutual Funds

What Type of Tax Benefits You Can Get From Mutual Funds?

One factor makes mutual fund investments good. It is that the taxation on mutual funds gets into the picture only when you sell the units of a mutual fund scheme. You might wonder what other kinds of tax benefits you can get when investing in mutual funds. You can get a better idea here:

Taxes on Equity Mutual Funds:

Equity mutual funds are funds with a minimum of 65% of equity allocation in the investment portfolios. For long-term capital gains in these funds, the least holding period is one year. When you sell the units before one year, you will have to pay tax at 15% along with a 4% cess. When you sell after one year, the long-term capital gains tax percentage is 10% plus 4% cess. However, this rule applies only when the capital gain in a financial year is more than Rs. 1 lakh. The good thing here is that if the long-term capital gain is less than a lakh, it is entirely free of taxes.

For individual investors like you, the dividends you get on equity mutual funds are free of taxes. However, it is taxable at 11.648% for Asset management companies. These companies will have to pay this tax in the name of Dividend Distribution Tax.

Taxes on Debt Mutual Funds:

When it comes to debt mutual funds, the least hold period for short-term capital gains is three years. If the units are sold before these three years, the tax percentage will vary based on the tax bracket of the investor. For instance, if you come under the tax bracket of 30%, the short-term capital gains tax rate will be 30% plus 4% Cess to you. After three years, it turns out to be long-term capital gain. In this case, the tax percentage is 20% with indexation. 

What Does Indexation In Mutual Funds Mean?

Indexation is a process using which the price of acquiring mutual fund units can be inflated or adjusted. This can be done over a period to bring it to the present price after considering inflation. It gives you the option to increase the price of purchasing.

To evaluate your capital gains with indexation, you will have to index the cost at which you bought the mutual fund units. You can do this by multiplying this cost with the ratio of the cost of inflation index when you sell and the cost of inflation index of your purchasing year. Thereafter, you will have to subtract the indexed purchasing cost from the value of sales. When you invest in debt funds, indexation benefits will help with bringing down your tax obligation considerably. This is in comparison with investment in bank Fixed Deposits and other small savings schemes.

You can understand this concept better with the example below:

Mr. Akilesh invested Rs. 2 Lakhs in a mutual fund scheme in May 2016. At the time of redemption after three years, in May 2019, the investment value has turned into Rs.2.2 lakhs. So, the capital gain here is Rs.2.2-Rs.2 lakhs, which is Rs.20000. For this value, Mr. Akilesh paid a long-term capital gain. But, indexation adjusted the value of purchase of Rs.2 lakhs based on inflation. It means that the cost of purchase increases and capital gain reduces for tax purposes.

The cost of inflation index (notified values) for the year 2016-2017 and 2019-20 when the purchase and sale were made respectively by Mr. Akilesh are 264 and 289. So, the calculation is as follows:

289/264*2,00,000 = Rs/218939.3939. Now, the capital gain should be calculated as Rs.2,20,000-218939.3939 = Rs.1060.6061. So, you are not going to pay tax on the actual capital gain of Rs.20000, but, you will pay reduced tax for Rs.1060.6061 as per the example above.

Even in this case, dividends are tax-free for investors. In the case of fund houses, they are taxed as Dividend Distribution Taxes at 29.120%. 

Taxes on Hybrid Funds:

You can learn about Hybrid funds from our previous article. these funds are also called balanced funds. The tax rate on capital gains on these funds relies on the equity exposure of your portfolio. Just in case, the equity exposure is more than 65%, the fund scheme is taxed similar to an equity fund. If this does not happen, the taxation on mutual funds rules similar to debt funds apply for the hybrid fund. Here is a table to give you a better idea for different types of taxation on mutual funds investments:

Type of fund

 Long-Term Capital Gain

Short-Term Capital Gain
Equity Funds Tax exemption for up to Rs.1 lakh per year. Any gains over this amount will be taxed at 10% plus cess plus surcharge 15% plus Cess plus surcharge
Debt Funds 20% plus cess plus surcharge Taxed at the income tax slab rate of the investor
Hybrid equity-oriented funds Same as equity fund 15% plus cess plus surcharge
Hybrid debt-oriented funds Same as debt fund Same as debt fund

Capital Gains Taxation when invested through SIPs:

A systematic investment plan or SIP is an investment method in mutual funds. The purpose of this investment method is to help investors to invest a small amount of money periodically in mutual fund schemes. It means that they can invest whenever they get money. They are at liberty to choose the frequency of their investment like annually, two times a year, four times a year or even 12 times a year.

Capital Gains Taxation

When you choose this investment method, you have the option to shop for a particular number of MF units in instalments. In this case, the redemption of units is calculated on a FIFO basis. Let us consider that you plan to invest in mutual funds through SIP for a year. Also, you decide that you should redeem the entire money after 13 months. In this case, the units that you shopped in the first month will be considered long-term. So, the income you gain from these units will be calculated as long-term capital gains.

If the value is less than a lakh, you need not have to pay any tax. But, the units you purchase from the second month will be considered a short-term investment. The money you gain from the sale of these units will be considered as short-term capital gains. So, these gains will be taxed at 15% flat based on your income tax slab. Also, you will have to bear the applicable surcharge and cess.

Sovereign Gold Bond – Why Is It A Better Option than Physical Gold Investment? 

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Sovereign Gold Bond – Why Is It A Better Option than Physical Gold Investment? 

In India, for a very long time now, investing in physical gold is a practice that is followed. In fact, in many states in India, it is hard to see marriages without gold ornaments worn by brides. When investing in gold is considered auspicious physical gold comes in handy. But, for those interested in choosing gold as an investment for the future, sovereign gold bonds come in handy. What are they and how are they the best option compared to physical gold? Let us find out here:

Meaning of Sovereign Gold Bond

Sovereign Gold Bond shortly referred to as Sovereign Gold Bond is a gold bond. The Reserve Bank of India issues this bond as a representative of the Government of India. The good thing about this bond is that gold in this bond is sold on a per-unit basis similar to physical gold. Above all, the value of these bonds is derived from the underlying value of one gram of physical gold. Particularly, the value of physical gold with 999-purity is considered for deciding the price of one unit of a sovereign gold bond. 

The actual cost of the bond is calculated by taking an average of the closing prices of physical gold for the past three working days. But, from where does RBI arrives at the closing prices. These are prices that the Indian Bullion and Jeweler’s Association Limited publish every day. Even, the redemption value is arrived at on the latest base data from this source.

Is It Easy To Buy Sovereign Gold Bonds?

You can easily buy sovereign gold bonds. Also, you can keep them deposited for 8 years at an interest rate of 2.5% per annum. You will get the interest credited to your associated bank account on a half-yearly basis. There is a restriction of buying 4 kgs of gold bonds per year for a person. In the case of a trust, this restriction is 20 kgs per year. Are you wondering about any mandatory documents needed for SGP purchase? All you need is only a PAN card. Without your PAN card copy, you cannot buy these bonds.

Benefits of Investing in Sovereign Gold Bond:

Here are the benefits you can expect from this investment:

  • Assured safety, which is not possible in physical gold
  • An additional source of income as you can get the interest credited to your bank account
  • You can gain an edge against inflation as the value of your bonds will increase similar to the physical gold cost.
  • You can buy these bonds easily online
  • You can get indexation benefit if you wish to transfer the bond before the maturity
  • You can easily trade these bonds on stock exchanges
  • Sovereign Gold Bonds are accepted as collaterals for loans by banks

So, as compared to physical gold, sovereign gold bonds carry many benefits to investors. But, it is better to go through a comparative study of Sovereign Gold Bond and physical gold. In turn, you can arrive at an informed decision that the former is better than the latter:

Comparing Sovereign Gold Bond and Physical Gold:

Criteria  Sovereign Gold Bond Physical Gold
Meaning These are government securities with dependable 999-purity Gold ornaments can be made only when copper is mixed. So, you cannot ensure the utmost purity of physical gold
Rate The issue rate is decided by the government The rate keeps changing every day
Lock-in period 5 years lock-in period There is no lock-in period. You can buy and sell anytime.
Investment You can buy gold bonds in units. One unit is equivalent to one gram of gold. You have a restriction on the utmost grams you can buy. An individual cannot buy more than 4 kgs of gold per year. If you are particular about buying physical gold, you can buy coins and biscuits available in 10 grams denominations. So, you will have to spend more to buy even a single coin or biscuit.
Taxation Capital gain on redemption is zero in Sovereign Gold Bond. Even, long-term capital gains come with indexation benefits. Nevertheless, the capital gains on premature redemption are taxable at the same percentage as physical gold The capital gains from your investment in physical gold held for less than three years are taxable based on your tax slab. For an investment held for more than three years, you will be taxed at 20% with indexation benefits.
Liquidity It is not liquid as you can trade your Sovereign Gold Bond in stock exchanges only after 5 years of the lock-in period. You can buy physical gold from any jeweler or even from banks these days. You can even exchange through the same jeweler or a different jeweler at any time without any lock-in period.
Demat Account Not compulsory. Nevertheless, you have the option to hold your Sovereign Gold Bond units in a Demat account. Not required

Conclusion:

In short, if you are looking for liquidity, buying physical gold will be a good idea. Nevertheless, if you are fine with the lock-in period and look for the best returns, Sovereign Gold Bonds can the right choice!

Best Tax Saving ELSS Mutual funds To Invest in 2022?

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Best Tax Saving ELSS Mutual funds To Invest in 2022?

What are ELSS Mutual funds and how can ELSS Mutual funds help you grow your wealth? Let us find out here:

“Do not save what is left after spending but spend what is left after saving.” 

Thanks to the mentality to save instilled right from a young age in India! When talking about the opportunity to save, we have different options. One such option is Tax-Saving Mutual Funds. These are shortly referred to as ELSS. 

What Are Tax-Saving Mutual Funds?

These are diversified equity funds. The money you invest in these funds is invested in stocks. These investments are made in particular proportion based on your investment goals. Tax-saving mutual funds are similar to any other types of mutual funds. But, the difference is that your investment in these funds will bring you tax benefits. In particular, you can get exemptions under section 80C. 

What Makes ELSS Mutual Funds Special?

In Tax-Saving Mutual Funds, your fund manager will choose stocks after carrying out in-depth market research. He will carry out this research to deliver the utmost risk-adjusted portfolio returns to you. As compared to other investment options, the ELSS stands unique. One of the key factors that make it unique is the short lock-in period of three years. 

Why Should You Consider ELSS or Tax Saving SIP?

 

Choosing these funds for your investment is a good idea. The reason is that they can make you eligible for a tax deduction of up to Rs.1.5 lakh. You can claim this deduction under 80C section of the IT Act. In turn, you can bring down your tax liability. The reason is that the amount you invest in these funds is deducted from your taxable income.

Here are some key features that make ELSS special:

  • ELSS Mutual funds invest a major portion of your funds in equity. To gain a better understanding about equity, you can visit our Mutual fund article.
  • ELSS Mutual funds have a compulsory lock-in period of three years. This is the shortest period among the other tax-saving instruments in the market.
  • Apart from tax-saving benefits, they can bring you capital appreciation from your investment.
  • Do you wish to get regular income from your ELSS Investment? You have the option to choose dividend pay-outs. Otherwise, you can also choose capital appreciation to get funds in a lump sum for your future.
  • You are relieved of exit or entry load when you choose ELSS as your tax-saving option
  • In the long run, you can expect 10-12 per cent returns. You can get this when you choose good ELSS funds for your investment. These returns are the highest in the tax-saving category of instruments. Nevertheless, ELSS carries some risk as well due to equity investments. 

Tax Benefits You Can Expect from an ELSS Investment:

You can claim a deduction under section 80C of the Income Tax Act for the principal money you invest in an ELSS scheme. You can claim a deduction of up to Rs.1.5 lakhs as per this section of the IT Act in India.

save tax build wealth ELSS

As mentioned earlier, ELSS Schemes have a compulsory lock-in period of three years. So, when you redeem, you will get long-term capital gains from these schemes. The good thing here is that these gains are not taxable. However, this exception is applicable only until Rs. 1 Lakh per financial year. Any gains more than this value will be taxed at 10% without indexation.

Benefits of ELSS over other Investment Schemes:

Are you wondering whether to choose ELSS or other investment schemes? Then, understanding the benefits of this investment option as against others will help you decide:

  • ELSS has the shortest lock-in period compared to PPF, NSC and SCSS
  • Potentially higher returns as the returns are market-linked. But, in other schemes like bank FD, you can expect only a fixed return.
  • You can expect better post-tax returns from ELSS Schemes. Many investors were able to get long-term capital gains of Rs. 1 lakh per year from these schemes.
  • ELSS schemes can help you with wealth-generation. Do you know how? The corpus funds that you generate from these schemes can help meet your financial goals.

Comparison of ELSS with Other Tax-Saving Schemes:

You can gain a better idea of the benefits of ELSS over other schemes from the table below:
Investment Instrument Tax Free Gains Returns Lock-in period (in  years) Risk/Safety
Employee Provident Fund Yes 8.50% Until 60 years Low Risk
National Pension System Partially Variable Until 60 years Moderate Risk
Life insurance premiums Yes Variable At least 5 years Moderate Risk
Equity Linked Savings Scheme (ELSS) No Market-Linked 3 years High Risk
Bank FD No 6.20% 5 Years Low Risk
PPF (Public Provident Fund) Yes 7.1% 15 Years Highest Safety
NSC (National Savings Scheme) No 6.8% 5 Years Highest Safety
SCSS (Senior Citizens Savings Scheme) No 7.4% 5 Years Low Risk

Source: SBI Mutual Fund

Investment Mode:

When you choose to invest in Tax-Saving Mutual Funds, you have two choices. You can choose SIP or lump sum mode.

As stated in our SIP Vs. lump sum mode article, SIP investment could be the better choice in most instance. Nevertheless, you can choose lump sum mode when the market is in bearish trend. Also, you can do this when you are ready to invest for a longer. Also, choose lump sum mode only when you are ready to take higher risks.

Who Should Invest In ELSS Schemes?

Now, you know that ELSS schemes are beneficial in many ways. However, the returns are market-linked. It means that based on the market, the returns can either increase or decrease from the money you invest. So, it is a high-risk investment. It is the most suitable investment option for aggressive investors, who are particular about wealth creation in the long run. 

As these schemes carry a lock-in period, you should be ready to stay invested for three years. Also, you should make your financial plans accordingly. To save taxes, investors in higher tax brackets can benefit from these schemes for sure. Also, without the benefit of indexation, gains of more than Rs.1 Lakh are taxed at 10%. So, if you have long-term financial goals, you can choose this scheme. Using this investment, you can plan for your child’s education and even your retirement.

What is NAV (Net Asset Value) in Mutual Fund?

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What is NAV (Net Asset Value) in Mutual Fund?

As we discussed in our mutual fund article, the units allocated into an account are based on the NAV of that mutual funds. Today we’ll see what NAV is, how it is calculated and how it affects the money invested.

  1. NAV = Net Asset Value?

    In very simple terms, NAV is nothing but the price you pay to buy the unit of mutual funds. So, if the Net Asset Value of a mutual fund is 22.85, that simply means you would need to pay Rs 22.85 to purchase one unit of that mutual fund. Most of the time, the unit cost of mutual funds begin with Rs. 10 and increase as the assets under the funds grow. Going by this rule, the more popular a mutual fund is, the higher is its Net Asset Value. But of course, it is not an indicator of whether or not a fund is good or bad, or rather cheap or expensive. There’s a whole list of things that you should look for when you are purchasing a mutual fund or SIP.

     

  2. How Net Asset Value calculated?

    The calculation of NAV is pretty simple and straightforward. It has a very basic formula, that is NAV = (Total asset – total liabilities)/ total outstanding shares It is calculated based on the day’s closing prices for each individual asset. So at the end of every day the NAV is updated, after the stock market closes at 3:30 pm. The market reopens the day after with the closing prices of the previous day. The fund houses accordingly deduct all the expenses to get the net valuation of the assets for the day, using the formula mentioned above.

  3. How is NAV relevant to investors? Is low NAV good or high NAV good or bad?

    A lot of investors think net asset value is similar to a stock price. This causes them to believe that a fund with a lower net asset value is cheaper and hence, a better investment. In truth, it is not an indicator of mutual fund performance. A lower value alone does not make a fund a better investment or vice versa. Hence, it should not be the only determining factor to choose a mutual fund. So, Net Asset Value doesn’t really reflect a lot when it comes to fund selection and just one of the parameters that you (term audience as investor),. There’s a whole bunch of things that you should consider before selecting a fund for investment.

What is SIP | Why Should Invest in SIP?

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What is SIP | Why Should Invest in SIP?

This is a continuation, or rather an extension of our previous article, what are mutual funds? If you are well aware about what mutual funds  are, how do they work, what are pros and cons of investing in mutual fund, Then you can go right ahead with this article, otherwise we would recommend reading the post about mutual funds, first clearing concept about mutual funds and then moving on here.

  1. What is SIP (Systematic Investment Plan)?

    SIP stands for Systematic Investment Plan. What it actually is nothing but a fancy word for EMI in savings. That’s right, have you heard the phrase, “boond boond se ghada bharta hai”. That’s exactly what it means. Just like when you don’t have enough water to fill the entire vase, but every single drop is an addition to make it full. But the subtle thing here is discipline, a continuous process of saving rather than just one shot of saving.

  2. Why Consider Systematic Investment Plan?

    SIP enforces you to make a habit of saving, and that’s a really good thing. We all have expenses, and we all get greedy sometimes. Oh! A sale is coming on Amazon, let’s buy that new smartphone, we’ll save next month. What? A new restaurant is opening, but short of funds, oh well! We can save money next month, so let’s try the restaurant first. What about that new Avengers movie that just launched? Or a trip to Kerala? So, for one reason or another, if we don’t make a habit, and more important, we don’t enforce that habit, then we skip the saving and our well will never get full.

    With SIP, you can set up an automatic system, that once every month (or every week, or based on any frequency that you select), that particular amount will be auto debited from your account and invested into the mutual funds of your choice, and basis the nav, a certain number of units will be  allocated to your account. So, once you set up the SIP, you don’t have to remember about saving, and it is automatically done on your behalf, forcing you into a habit of saving. Of course, you always have the option to manually pause or stop the SIP in case of some emergency, but you should not get into the habit of doing that as that would defeat the whole purpose of systematic saving.

  3. Systematic Investment Plan (SIP) vs One Time Investment

    You always have the option to invest/save all your money at once but that may not be as efficient as the other option. They both have their own use, and you can’t replace one with another. One time investment is the best option when you have a bunch of money and you want to invest all that in savings. But that does not mean you should not start a SIP, because as we just explained, SIP enforces a habit of saving. As units allocated to your demat account are based on the nav, averaging out over a period of time is more. Let’s understand with an example.

  • Principal -> Rs 10,000
  • Current Price -> Rs 500
  • Scenario one -> one time investment -> units allocated at once -> 20
  • Scenario two -> invest Rs 1000 per month
    • Month 1 ->
      • Price -> 500
      • Untis allocated -> 2
    • Month 2 ->
      • Price -> 550
      • Units allocated -> 1.82
    • Month 3 ->
      • Price -> 487
      • Units allocated -> 2.05
    • Month 4 ->
      • Price -> 440
      • Units allocated -> 2.27
    • Month 5  ->
      • Price -> 387 ->
      • Units allocated -> 2.58
    • Month 6 ->
      • Price -> 423
      • Untis allocated -> 2.36
    • Month 7 ->
      • Price -> 498
      • Units allocated -> 2.00
    • Month 8 ->
      • Price -> 530
      • Units allocated -> 1.88
    • Month 9 ->
      • Price -> 512
      • Units allocated -> 1.95
    • Month 10  ->
      • Price -> 490
      • Units allocated -> 2.04
  • Total units allocated => 2+1.82+2.05+2.27+2.58+2.36+2+1.88+1.96+2.04 = 20.96

As you can see, with one time investment, we get the units based on the price at that point, but when we spread out the money over a period of time in SIP, then we might get more units (of course, we could also get less units, if the price only goes up in the subsequent times, but as we suggested in our article about mutual funds, the SIP and mutual funds are a long term investment, and in the long term the price goes up and corrects in a pattern.

In conclusion, SIP is one of the best ways to start saving for the long term. Check out our article on how to start a SIP in zerodha.

What is Mutual Funds, All About Mutual Funds in Simple Words?

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What is Mutual Funds, All About Mutual Funds in Simple Words?

  1. What are mutual funds?

    Simply put, mutual funds are nothing but a savings tool, just like a lot others, FD, RD, LIC etc, that help you grow your investment much better than savings in a bank.

    In a more defined manner, as stocks are traded in the stock market. Mutual funds are a collection of certain stocks, so instead of picking stocks yourself, there’s a dedicated team of people who do the hard work for you, and create a portfolio of certain stocks, so you can then invest a certain capital and based on the NAV a certain number of units are allocated to your account, to understand better about nav and how units are allocated, do check out our article about nav.

    These were just simple definitions, let’s look at some of the more official definitions.

    Investopedia: “A mutual fund is a type of financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets.”

    Wikipedia    : “A mutual fund is an open-end professionally managed investment fund that pools money from many investors to purchase securities.”

    Not so intuitive, right? So, for now, let’s just stick to our definition of the mutual fund, and in the upcoming section we’ll get a much clearer picture of what they are and how they differ from other saving options.

  2. Why to invest in mutual funds?

    Now this is an important question and it will also help us understand what mutual fund are more clearly. What should you invest in mutual funds? As we have already seen there are multiple reasons not to keep your money sittle idle in your bank account. Mutual funds are one of the ways to diversify your portfolio, allowing you to get much better returns than you would ever have in your savings account.

    So, that’s it! To get more returns, and two diversify your portfolio.

    The first reason is pretty simple, everyone wants more return on their investment, so no need to explain that. But the second point about diversification, that is covered in more detail in our article, diversifying your portfolio. But even if you focus on the first point, without worrying too much about the second point for now, read on to what are the pros and cons of investing in mutual fund.

  3. Advantages and Disadvantages of Mutual Funds in India?

    Just like every coin has two sides, so there are pros and cons of mutual funds. We have covered the benefits already in the second point. But there are also certain things we need to be careful of when investing money in mutual funds. The biggest downside is that since most of the mutual funds are market based, if due to any reason, the market is falling down, and the mutual fund that you’ve purchased has some allocation in the shares which are decreasing, then it may impact the nav and you may result in loss. Then? What’s the solution? Well the solution is that mutual funds are more of a long term investment, so in the long run, (about 5 to 10+ years) mutual funds will give you more and better results in almost all of the cases. Again, we are not saying in all the cases, because anything that is related to the market can’t ever be 100% certain. But the probability of that worse case scenario is very minimal, and is extremely unlikely to happen. How unlikely? Click here to find out the times when markets had the most fall in history. But as is evident from today’s market, eventually the markets will rise up in the long term.

  4. Types of Mutual Funds:

    Mutual funds can be categorized based on many things, the lock in period, the type of area where money is invested.

    Based on structure:

    Open Ended -> No lock in period
    Closed Ended -> Units are locked for some time
    Interval funds -> A cross between open-ended and closed-ended funds

    Based on asset class:

    Equity funds -> Major investment is done in equity
    Debt funds -> Major investment is done in the debt sector, such as government bonds.
    Hybrid funds -> This is a hybrid approach where some of the investment is made in equity and some is invested in the debt market.

    Based on investment goals:

    Growth Funds -> Funds that invest primarily in high-performing stocks with the aim of capital appreciation are considered growth funds
    ELSS (Tax saving) -> Funds that invest primarily in high-performing stocks with the aim of capital appreciation are considered growth funds
    Liquidity-based funds -> Funds that are targeted towards maintaining liquidity so that there is no lock in period and units can be sold whenever cash is needed.

     

  5. How To Invest In Mutual Funds In India?

    There are various options to invest in mutual funds in India, from banks to brokerage houses. These days most of the banks have the option to directly invest in mutual funds. You can also open an account in zerodha, and start a SIP, or in any of the top brokers. Zerodha actually has a completely separate app for managing mutual funds, and that is coin, so is with many other brokers as well.They all may differ slightly in UI design, but the basic set of operations is the same. You open the app, search and select the mutual fund in which you want to invest, and place an order, that’s it! To check out a graphical tutorial of purchasing mutual funds or placing a SIP in zerodha and upstocks, check out our article here. 

  6. Best Mutual Funds To Invest In 2022 India.

    Best mutual funds in India, as per value research online:
    – SBI BLUE CHIP Fund (one of the best in growth, long term)
    – Axis Liquid Fund (one of the best in liquid funds)
    – Axis Long Term Equity (one of the best in ELSS/tax-saving)
    – Axis Gilt Fund (one of the best in debt fund)

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