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What led to the massive drop of $8k in Bitcoin Price -Money Bites 26 Feb

Money Bites

Short bites to keep you informed of matters that impact your wallet and wealth

Hey there,

Hope all’s well at your end!

As life gets back to normal, and we are getting out more often, how are you dealing with the fuel price hike? Do you have any smart hacks? Do let us know.

On the other end, India faced the second-highest number of cyber-attacks across Asia Pacific with finance and insurance sectors being the most hit. We hope you are taking adequate safety measures while doing online transactions

Top Bite this Week

What led to the massive $8k drop in Bitcoin prices?

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Tax saving

Best tax saving options for 2020-21

India has two types of tax structure – direct taxes and indirect taxes. While indirect taxes are collected through various products and services, direct taxes are charged on the taxable income of the eligible taxpayers. Taxes are essential for the progress of any state but tax-payers have the option of investing in tax-saving schemes to reduce their tax outgo. These tax savings provide a dual benefit i.e. tax-saving and building an investment portfolio.

As we approach the fag end of this Financial year (2020-21), we bring to you 10 tax savings schemes that you could consider if you haven’t done your investments yet. 

Best tax saving options for FY 2020-21

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How to avoid losses in stock market?

Avoid losses in stock market
Home » Archives for February 2021

How to avoid losses in the stock market?

Stock market investing is synonymous with attractive and quick gains and capital appreciation. However, the returns offered by the stock market come with risks attached. You cannot get good returns without undertaking the volatility risks associated with stock price movements.

Stock prices are subject to fluctuations, and these are a part and parcel of the stock market. While the price might increase attractively in a bullish market, the same may plummet the next day. So, while you are earning returns one moment, you might incur losses in the next moment as the value of your stockholding falls. So, what should you do? Should you not invest in the stock market altogether?

Though the stock market is a risky avenue, there are ways in which you can avoid losses. You don’t have to abstain from stock trading or stock investing. You just need to be a little wise when it comes to investing in the stock market. Here are some tips which, when followed, would allow you to avoid making considerable losses in the stock market.

Tips to avoid losses in the stock market

  • Learn about the market – Knowledge is power 

One of the many reasons why many investors suffer losses in the stock market is because they start their investments with limited or no knowledge. The stock market is a trading marketplace, and unless you know the ins and outs of the domain, you will incur losses. A little knowledge is a dangerous thing, isn’t it?

Equip yourself with the knowledge of how the market works. Learn the pricing techniques of stocks so that you can anticipate which stock would make a profit and which might suffer a loss. Also, the stock market and the economy of the country are interlinked. If one moves up, the other will follow. Even if the stock market falls, if the economy is strong, the market would rise so that you can remain invested.

When you approach stock investing with complete knowledge, you can avoid making rookie mistakes that incur losses. Learn about the stock market and then jump on the investor bandwagon.

  • Research the stock you pick

Do you follow the herd mentality when investing? If you do, it’s time you give up the habit. Don’t pick stocks only because they are popular with other investors. Research the stock before investing in it. Find out the company’s financial position, fundamentals, projected cash flows, market capitalisation, market sentiments around the stock, and prospects.

If the company is poised to grow and has strong fundamentals, its stock would not give you losses. 

When investing, either pick already established companies to avoid a possible downturn or those you have researched into. You can take the help of your broker to do your research but always make an informed choice.

  • Have a long term perspective

While it is true that stock investing has the potential of quick returns, you should invest with a long-term perspective. There is no quick-fix formula for returns in stock investing. You can ride on the market wave and make quick bucks when the market is rising but always think long-term for stable returns. Long-term investing reduces the risk associated with stock trading. 

Moreover, even after a crash, the stock market always rebounds and gives positive growth. You just need to give it time. For example, the S & P BSE Sensex opened at 15,534.67 in 2012, and in 2021, the market opened at 47,785.28.  A growth of more than 300% within nine years only.

This is why long term investment is the keyword to avoid losses in stock investing. Even if your stock’s value falls, you can remain invested and wait for the value to bounce back and grow so that you can earn positive returns. If you have a myopic vision, losses would be impossible to avoid.

  • Past performance does not guarantee future profits

Another common mistake that many investors make is to rely on stocks’ past performance when selecting them for investment. Past performances can never give you the projected future return. 

For example, the stock of Jet Airways or Videocon had a good track record for many years before the company went bankrupt. Had you invested in these stocks based on their performance, your investments would have been useless after these companies faced bankruptcy. Historical performance does not guarantee future profits. You should assess the financial fundamentals and have a good understanding of the market the company operates in before investing in it. 

Study the company’s price-earnings ratio, which would help you understand whether the stock is undervalued or overvalued. Investing in undervalued stocks would yield profits while overvalued ones may not have great potential for profits. Moreover, a company with a strong history of profitability would be financially healthy compared to companies that have not yet generated revenues. So, stock assessment on financial aspects is essential. 

This assessment would help you understand whether the company is under stress or not, and then you can make the right choice of investment. 

  • Stop-loss can work wonders

When it comes to profits from stock investing, the sky’s the limit. On the other hand, the losses can run into the ground. One way to minimise your losses is to use the stop-loss tactic. Under this tactic, you instruct the broker to sell the stock when it reaches a particular price level, called the stop-loss level. This is significant when the stock prices are falling. By selling off at the stop-loss point, you can prevent further degradation of returns if the prices fall further. 

For example, say the stock price is at Rs.1500, and then it starts falling. You expect a further fall in the stock price, and you put a stop-loss order at Rs.1350. Now, if the stock price reaches Rs.1350, the broker would sell off the stock so that you can avoid losses in case of further devaluation. On the contrary, if the stock price starts rising, you don’t have to worry because stop-loss doesn’t limit your profits, only your losses. 

Use the stop-loss strategy when prices are falling. Estimate the minimum price at which you can sell the stock and still make a profit. Set this price as the stop-loss price so that you can avoid losses when the price falls further.

  • Leave your emotions at home when you set out to trade in stocks

How many times have you let your emotions dominate your investing strategy? 

When it comes to stock investing, practicality matters, not emotions. If you let your emotions dictate your trading activities, you would eventually face a loss. So, when you are buying and selling stock, be practical and keep a cool head. 

Remember, upturns and downturns don’t last lifelong. If the market is bullish, it will enter the bear phase after some time, and if the market is bearish, it would rise and become bullish. The stock market is a roller-coaster ride, with both profits and losses. To avoid losses, you need to be clear-headed about your investments. If the market is rallying, rein in your emotions of investing all your wealth. Go slow. 

Similarly, when the market falls or enters a downward phase, don’t get emotional and sell off your stock immediately. Be calm and take your time. When the market is rising, invest slowly and carefully. Similarly, when the market is falling, don’t liquidate your investments. Hold on to them as the market would recover. 

Emotions might let you make the wrong decisions about buying and selling stock. But when you are practical, you can carefully weigh the pros and cons of the market dynamics and then invest with caution.

  • Diversification is the name of the game

Have you ever heard the saying – ‘Don’t put all your eggs in one basket’? If you have, do you understand its meaning? When you put your eggs in different baskets, if one basket gets damaged or if one egg is bad, you still have other baskets to fall back on. The same holds for stock investing. Diversification should be the mantra for successful investing. Choosing a variety of stocks is vital in preventing losses. If one stock suffers a loss, the other might not thereby decrease the risk of losses.

 For example, say you buy two stocks A and B worth Rs.100 each. Now, if the price of A moves down to Rs.95 and the price of B rises to Rs.105, your losses are nil. Even though you have invested in stock A, the profit from stock B has nullified your loss.

Though stock trading is not as simple, diversification plays the same role. You should pick stocks of companies belonging to different sectors. This way, if one industry underperforms, your losses would be minimised due to the growth in other sectors.

The latest example of diversification one can see in the COVID pandemic. When the pandemic struck, the stock market started sliding due to lockdowns and uncertainty that affected the industry. Stocks of manufacturing companies started falling, but stocks of FMCGs and pharmaceuticals were on the rise. So, investors with investments in different sectors managed to earn profits despite the falling markets because they had exposure in the pharma and FMCG sectors, giving them the best effect of diversification.

So, aim for a diversified portfolio of stocks. Invest in different sectors for maximising profits and minimising losses. 

Also, don’t overdo diversification. Excess of everything is terrible, and the same is true for diversification. A highly diluted portfolio would fail to give you significant returns from a performing sector. There might even be higher chances of loss. So, diversify, but with reason. 

  • Hedge against losses

Hedging is also a useful tool that can help you prevent losses from stock investing. Hedging means cutting down losses from one investment by investing in another. Hedging in the stock market can be done through futures and options contracts or call or put actions. Similarly, when the market is falling, you can hedge your investments by investing in alternative avenues, like gold. Gold tends to rise when the markets are unstable. This was observed both at the time of demonetisation and the COVID pandemic when the markets were in turmoil, but gold prices rose. So, you can use gold or other investment avenues or trade in futures and options to hedge against equity investments.

  • Keep learning

Learning is a never-ending process, and when it comes to the stock market, new rules and regulations are always being updated. Therefore, you should update yourself with the latest changes in the market and the companies comprising the market. Also, master the art of stock investing for an in-depth understanding of the market and how it works. Take online courses, read books on stock trading, understand the strategies of successful investors and expand your knowledge base. Also, keep track of current affairs that can help you understand which company is poised to grow to invest in it and grow your investments. 

  • Track your investments regularly

Neglect is another reason why investors suffer losses. Stock trading is a dynamic activity. It is not a fixed deposit scheme where you invest and forget. To gain maximum returns, you need to be proactive with your investments. Be updated with market movements and rebalance with changing market sentiments. Invest when the prices are low and sell when prices rise to make maximum profits. 

Check which stocks are giving you good returns and which can be sold off to cut your losses. Track your investments regularly so that they are relevant to the changing dynamics of the market.

EndNote

Profit and loss go hand-in-hand with stock market investments. You can use the tips mentioned above and minimise your losses, but there is no guarantee of avoiding them altogether. Given the volatility of the market, losses are inevitable. Still, if you are careful with your investments, you can steer clear of them or suffer minor losses that do not deteriorate your portfolio. A wise investor is a profitable investor. Be both!


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What are direct mutual funds?

Direct Mutual Funds
Home » Archives for February 2021

What are direct mutual funds?

Before we dig deeper into the Direct Mutual Fund and its attributes, it is important to understand what a Mutual Fund is. A Mutual Fund is a form of financial vehicle that involves pooling of money collected from many investors by the fund company to invest in financial securities like stocks, bonds, money market, etc. The returns generated on the investments are shared back to the investors.

Mutual funds are professionally handled by money managers.

Features of Direct Mutual Funds

According to SEBI regulations (Securities and Exchange Board of India), a mutual fund offered by an asset management company (AMC) can consist of two variants – regular funds and direct mutual funds.  This categorisation was brought in by SEBI to prevent the misselling of plans with higher commissions.

  • Direct funds are when an investor invests in a mutual fund without involving a broker/agent/distributor. When a third party is involved in selling a mutual fund and charges commission for the same, it falls under Regular funds.
  • All direct mutual funds are denoted by the words “Direct”  or Direct Plan to indicate to the investor.
  • The direct fund scheme is directly offered by the asset management company (AMC),  the fund house, or app-based investment avenues like Finity.
  • Under this scheme, there is no involvement of the third party, agent, or distributor, and there are no commission/brokerage charges involved with each transaction, making the expense ratio low.
  • Investment into direct mutual funds can be made in online or offline mode.

Advantages of direct plans of mutual funds

There are many reasons why investors prefer to invest in direct mutual funds. 

  • No commission/distribution charges: There is no room for an intermediary with direct plans, allowing the investors to invest directly with the fund house or through apps that charge zero commission/fees. This means that no commission fee gets deducted from your investment when each transaction is made. 
  • Easier investing: With the direct plan, you can invest directly in a mutual fund scheme by simply logging into AMC’s website. You can also buy offline from the registrar of mutual funds like CAMS and Karvy or through an app-based platform.You could also buy direct funds from financial platforms like Finity, where you not only get to buy funds at the click of a button but also get research-backed recommendations, portfolio rebalancing alerts,  and investment suggestions based on your goals.
  • Higher NAV: In the absence of commission/distribution fees paid out to agents/intermediaries, direct plans have a lower expense ratio than regular plans. This results in a higher Net Asset Value (NAV) for direct plan investors. This implies you get higher value since the low-cost direct plans allow investors to earn up to 1-1.5%, which would otherwise have been claimed as a commission fee with the regular plan, allowing investors to secure higher returns on their investments. 
  • Allows you to manage your investments better: With digitalisation, it has made it easier for investors to have access to many investment documents online. If you follow the right resources, you can become a DIY investor and increase your returns.

Things to be aware of while investing in direct mutual funds

  •  Comparing and analysing investment strategies and mutual fund performances requires your time and attention than with the Regular plan. As a small investor, you might not have the necessary tools to perform such tasks. An investor needs to review and update the investments regularly; otherwise, it will adversely affect the return on investment.
  • When investing in a mutual fund scheme, the things that should be considered are the fund’s age and maturity period, the fund house’s reputation, and financial ratios. Generally, new investors lack such attributes. 

Difference between Direct plans and Regular plans of mutual funds

Parameter  Direct Plan Regular Plan
Third-Party Not present Present 
Returns Higher (no additional fees to the broker/agent) Lower
Expense Ratio Low expense ratio  High expense ratio
Net Asset Value High Low 
Market Research  Should be done on your own The advisor does it for you
Investment Advice Not available Provided by the advisor

What is an expense ratio? Why is the NAV of the direct plan higher than the regular plan?

Like any business or service which charges you for its services, the mutual fund charges investors with a fund management fee, administrative costs, registrar fee, maintenance fee, entry and exit load, 12-1b distribution fee. This bracket is called the expense ratio, which is disclosed to the investors daily.

The expense ratio states the percentage amount you pay to manage your funds about your investment. For example, if a fund earns Rs10,000, with an expense ratio of 0.5%, this means you are paying Rs. 50 to manage your portfolio. The expense ratio is charged regularly, and a higher expense ratio will eat out your returns due to compounding. Direct plan investors pay a lower expense ratio than the regular plan.

NAV is higher because it provides better returns when compared with the regular plan. There is an inverse relationship between operating expense and net asset value (NAV). AMC incurs expenses to manage your funds. The NAV is disclosed to the investor after deducting such expenses. This means when higher expenses are deducted, it reduces the NAV. Since direct plans have no commission fee and investors directly invest with AMC, this scheme reports a higher NAV after considering all the expenses.

How to switch from a regular to a direct plan? What are the costs involved in doing so?

Mutual funds give users the option to switch from regular to direct funds, and this can be done in two ways; online and offline.

Switch through an offline mode
If you plan to switch your mutual fund plan offline, you need to visit the branch of the fund house you have selected.

  • You will be required to file a ‘Switch/Redemption Form’ with the fund house. 
  • Enter all the information about your scheme; also include your portfolio number and the fund name. Sign it before submitting. 

When the fund house has made the necessary changes to your scheme, they will provide you with an updated statement. This process can also be initiated through your broker/intermediary.

Switch online

If switching schemes offline seems like a hassle to you, you can also do this online just by logging into your fund account, through AMC’s website, or any other online financial platform from which you do the transaction. Different platforms will have different options to select from.

  • Click on the page to buy and sell funds; mainly, this is the transaction page. 
  • Click on the ‘switch’ option to switch from your regular funds to direct funds and follow the steps related to the change; if your platform does not support this, you will need to select the option ‘Redeem Funds.’ 
  • The screen will display the terms and conditions for switching schemes and the details about the scheme you wish to change to.
  • Once you have made the respective changes, it may take up to four business days to take place. 

When regular funds are switched for direct funds, it is termed redemption, attracting tax on capital gains. Investors need to be sure that their scheme does not include exit load as this will reduce the redemption value, which leads to a reduction in the direct fund amount.

How to invest in direct plans of mutual funds online through Finity?

Finity is a direct mutual fund platform that supports investment in  4000+ mutual funds from over 50+ AMC’s. In addition to investing, you can also get research-based smart recommendations for investments, portfolio rebalancing, advanced research reports, and carry out Insta switch from your regular plans all in a click. 

Investing in direct mutual funds through the Finity App is super easy with the following steps

  1. Download the Finity app on your smartphone and select the mutual fund investment type and the sub-category from the list available on the home screen.
  2. The app will then show various time-horizons for investment. Select as per your personal strategy and click on the ‘invest’ button next to the scheme you are interested in.
  3. Choose between ‘Monthly SIP’ or ‘Lump-sum options.
  4. Enter an amount, select the date for monthly investment and make payment.
  5. Enter basic details and bank details on the next screen (if you haven’t given all these details earlier) to complete the process.

You could also redeem your funds with just a single click at any time. Finity is registered with SEBI, making it completely safe and secure to perform transactions online and protect its investors’ privacy using the most robust encryption to secure investors’ data.

With the rise in financial awareness and easy access to markets, many individuals have been encouraged to make their own financial decisions. 

Conclusion

The advancement of technology and growth for online investment has empowered investors to buy, sell and/or obtain mutual funds with no human intervention. Direct mutual funds are one such investment opportunity that eliminates the extra costs associated with the regular routes.


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6 top tips to improve your Credit Score

A credit score is a three-digit number that lenders use to determine the likelihood of being repaid on time while granting a loan or a credit card. This important financial factor can affect how much and how frequently you can borrow. The higher your score, the better your chances of qualifying for loans at favourable terms. The same goes for credit cards. 

Banks and other credit issuers do not easily lend loans to individuals with a low credit score because they see a higher risk of default in such cases. If you can get a card or a loan despite having a low credit score, then chances are that your credit limit will be low or you may have to shell out higher interest rates. To prevent this, it is advisable to aim for a higher credit score. In this blog, we will explain credit scores along with smart tips to improve your credit score.

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fuel price hike

Money Bites – 19 Feb 2021

Money Bites

Short bites to keep you informed of matters that impact your wallet and wealth

Hey there,

Hope you all are doing great!

The Sensex rally that started with the Budget seems to be going strong. On the other end, gold plummeted to an eight month low. Planning for a drive to make the best of WFH? Hope you have your Fastags in place. They are now mandatory all across the country.

Top bite this week

Petrol price hits a century in some places. Do you know why?

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Insurance covers

Top 5 Insurance covers needed in every person’s kitty

Insurance is a word that is often heard when talked about investment. It can be best explained as a safety net or a blessing at the time of crises. A majority of people consider insurance just from the point of view of a tax-saving instrument and mostly buy life insurance. However, there are many types of insurance covers that are quite essential for a person to have. While life insurance can provide a safe future for the family of the deceased if he/she was the sole breadwinner, other types of covers like health insurance or vehicle insurance will help in the event of a medical emergency or an accident. 

Insurance is often considered to be unnecessary, especially by young people in their 20s. They usually think of it as a waste of money and rather prefer spending on high-risk high-return investments like stocks, futures, and options, etc. However, according to a majority of experts, 20s are the best time to get an insurance cover as the cover value can be high and the premiums for them will be quite low. Moreover, these plans do not require an agent to be the middleman between the insurer and the person insured anymore as they can easily be bought online depending on a person’s needs.

Here are the top 5 insurance covers that are essential for a person to have in today’s day and age.  (more…)

How does a stock market work?

Stock market
Home » Archives for February 2021

How does a stock market work?

Investing in stocks is one of the means to create wealth as the stock market has the potential to yield attractive returns. When investors invest in the stock of a company, they not only become a part-owner of the company but also participate in the profits earned by the company. Stock investing could give them regular returns in the form of dividends, as well as the benefit of capital appreciation when the value of their investment rises. Investing in the stock market is, therefore, quite beneficial.

That being said, one cannot ignore the market risks associated with stock trading. While investors can make profits in a rising market, they can also suffer losses when the markets fall. Stock trading is, therefore, risky. Investors need to understand how the stock market works so that they can use stock market investments to their benefit. So, let’s understand the concept of the stock market and how it works.

What is the stock market?

A stock market is a platform where stocks and other securities like bonds, currencies, commodities, and derivatives are bought or sold. The stock market gives the companies a platform to list their stocks for sale to raise capital. It also gives investors the platform to trade in listed stocks to generate returns.

What is a stock?

Stock is a type of instrument that is offered by companies as a means to raise capital. Stock, which is also called share, denotes per unit ownership in a company. If a company issues 10,000 units of stocks, and an investor invests in 1000 such units, the investor is said to have become a 10% owner of the company. Stocks give investors the right to earn dividends on their investments. Moreover, investors could make a profit, if their investment in the share rises. 

A stock market is, therefore, a marketplace where stocks of listed companies are bought and sold. 

Participants of the stock market

The stock market is composed of different participants. Each participant plays a different role in the stock market. Here’s a look at the different participants of the stock market –

  • The regulator

The role of the regulator is to frame rules and regulations that determine the working of the stock market. The regulator governs the stock market, ensures that the participants adhere to trading laws, and also regulates the market on the whole. The Securities and Exchange Board of India (SEBI) is the regulator that regulates the stock markets in India. 

  • Companies

Companies participating in the stock market offer their stocks for sale. Companies need to list themselves on the stock market to offer their stock for trade.

  • Stock exchange

The stock exchange is where the stocks are listed. These listed stocks, bonds, and derivatives are then traded by investors. In India, there are two primary stock exchanges – the National Stock Exchange (NSE) & the Bombay Stock Exchange.  Nifty is the benchmark market index of 50 most traded companies on NSE and  Sensex is the benchmark index of 30 most traded companies on BSE.

  • Intermediaries or stockbrokers

Intermediaries or stockbrokers are middlemen, either individuals or firms, through which trading in stock and other instruments can be done. As per SEBI norms, investors can buy and sell shares only through authorized stock brokers. Brokers or intermediaries charge a fee or brokerage on the transactions done through them.

  • Investors and traders

Investors are those who invest in the securities on the stock market, and traders are those who buy and sell stocks and other securities on the stock market. Investors and traders can be domestic retail investors, institutional investors, Asset Management Companies, foreign institutional investors, Non-Resident Indians, and OCIs. 

  • Depository and Depository Participants

Trading in stock requires investors to have a Demat account. This Demat account is offered by Depositories. National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL) are two depositories in India. Depositories, however, do not offer Demat account facilities directly to investors. Investors have to open the Demat account through a Depository Participant (DP) that acts as an agent of the depository. 

  •  Clearing Corporation 

Clearing corporations settle stock trading between traders. When a stock is traded between investors, one investor sells the stock while another buys it. Clearing corporations locate the buyer and seller of a particular stock and settle the trade between them. They debit the buyer’s account and credit the amount to the seller’s account. In India, there are different clearing corporations, like India International Clearing Corporation (IFSC) Limited, Indian Clearing Corporation Limited, etc.

Types of stock markets

There are two main types of stock markets. They are as follows –

  • Primary market

The primary market is the main market, where companies list their stocks for sale for the first time. This listing is done through an Initial Public Offering (IPO). IPO is, therefore, the first public offering of stock by a company. IPOs allow companies to list their stock on the market to raise funds. This listing is fresh, and it is open for a specified time.

Investors can bid for the stocks and then buy the stock at the issue price as specified by the company issuing the stock. After the end of the subscription period, the shares are allotted to bidders who bid at the highest prices. Companies that issue their stock through IPOs have to pay a fee to the stock exchange for listing their stock. Moreover, they are required to disclose their financial statements and give details of their future projects and growth.

  • Secondary market

Once the stock is offered to the public through an IPO in the primary market, it can be traded in the secondary market. The secondary market is the place where listed stock and other securities are bought and sold by traders continuously. Trading happens between investors and traders. The company whose stock is being traded is not involved in such trading.

How does the stock market work?

The working of the stock market can be defined through chronological steps. Here is a look into the steps that show how the stock market works-

  • Step 1 – Stock listing through IPO

Firstly, companies offer their fresh stock to the public for sale through an Initial Public Offering (IPO). This IPO is done per the rules and regulations laid down by the regulator and after being approved.

  • Step 2 – IPO subscription

Investors subscribe to the IPOs through their brokers.

  • Step 3 – Allocation of stock

After the IPO closes, the stock is sold to successful bidders at an issue price fixed by the company.

  • Step 4- Stock listing on the secondary market and trading

After the IPO, the stock gets listed on the secondary market. Such stocks can then be bought and sold among investors looking to make profits or cut losses.

How can you trade in the stock market?

If you are looking to trade on the stock market, you need the following –

  • A Demat account
  • A trading account
  • A bank account
  • A broker

You will have to open a Demat & Trading account with any  SEBI authorised brokers. Thereafter, you can pick a stock to buy. You will have to communicate your desire to buy a particular stock to the broker. The broker places your purchase request on the stock exchange and the exchange searches for a seller. Once a seller is found, the price for the transaction is fixed. The exchange also authenticates the identities of the buyer and the seller to ensure that no fraudulent trade takes place and that the parties don’t default on their intentions to buy and sell.

Once the price is fixed, the trade is settled between the buyer and the seller. The seller’s Demat account is debited by the number of shares sold, and the buyer’s Demat account is credited with such shares. Moreover, the seller’s bank account is credited with the transaction amount, and the buyer’s bank account is debited. Settlement of the shares bought and sold is done within T+2 days, i.e., within 2 days from the transaction date.

Buyers also pay brokerage on the cost of the shares, while for sellers, the sale price is reduced by the brokerage cost.

Pricing of shares in the stock market

The price of a stock is the perceived worth of the company in the eyes of the investors in absolute terms. The price shows the amount buyers are willing to pay to buy one unit of the stock at current market dynamics. When an IPO is launched, the company fixes the issue price of the stock that it offers for sale. However, once the stock is listed in the secondary markets, its price can move up and down. The pricing of shares depends on the law of supply and demand. 

Here’s how the law applies to share pricing –

For every trade, a buyer and a seller are needed. Thus, there is a need for demand and supply. If there are more buyers than sellers, the demand for the stock increases. It makes the stock attractive to the buyers. This pushes the price of the stock upwards. However, if there are more sellers than buyers, the supply increases, which reduces the perceived value of the stock. As such, the prices are pushed down. 

There is also a concept of the bid-offer spread. This is the difference between the bid price and the ask price. The bid price is the maximum amount that a buyer is willing to pay for the stock, while the offer price is the lowest price at which the seller is selling the stock. If the buyer accepts the ask price, or if the seller accepts the bid price, the stock is traded. 

If buyers are more than sellers, the bid prices will increase, and sellers would also increase their ask price. This, therefore, increases the price of the stock. On the other hand, when sellers are more than buyers, buyers would reduce their bid price, and sellers might also reduce their ask price. This would, therefore, reduce the price of the stock.

High-quality stocks of established companies have low bid-offer spread and are liquid.

Bull and bear market

The terms ‘bull’ and ‘bear’ are used to describe the sentiments of the stock market. When the economy is strong, and prices of securities listed on the market rise consistently for some time, it is called a bull market. During this time, the value of stocks increase, and investors earn attractive returns. Investors can also book their profits by selling their stockholding if their goal of investing is achieved. 

On the contrary, if the stock prices start declining consistently over a sustained time, it can be called a bear market, the market sentiments are low and stock prices decline. This could be a good time to pick up some stocks which have good fundamentals. 

Difference between stock market correction and stock market crash

Other common terms associated with the stock market are ‘correction’ and ‘crash’. These terms are different from one another. A stock market correction is said to happen if the prices in the stock market decline by 10% or less. A stock market crash, on the other hand, occurs when the stock prices fall by 10% or more in one single day. 

Stock market investing tips

Investors looking to invest in the stock market should keep the following tips in mind –

  • Understand the working of the stock market to understand how your investment would work.
  • Choose a suitable broker to trade in the stock market.
  • Pick the right stocks for your portfolio and aim to diversify your stockholding. Consult your broker/investment advisor for expert advice on the right stocks to pick.
  • The stock market is volatile. Do not panic if the value of your stock falls. Assess the profitability of the company. If the company fundamentals are strong, the value of your stock will increase when market sentiments become positive.
  • Have a long-term horizon. The stock market has been proven to offer good returns to investors who had the patience and a long-term investment perspective.

The stock market is a roller-coaster ride that is prone to its ups and downs. Understand how the market works, and then invest. Start small and then you can increase your investments gradually as you learn the ropes of stock market investing. 


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Index funds

Your essential guide to investment in Index Funds

Index funds
Home » Archives for February 2021

Your essential guide to investment in Index funds

Index funds are a subcategory of mutual funds that invest a collected corpus of funds in the index. For instance, an index fund that is benchmarked to NSE Nifty will buy stocks in the index and these will be in the same proportion as the index itself. The idea is to replicate returns generated by the Index that it aims to follow. Index fund investment is also known as a passive investment since investors do not have to pick stocks actively. 

Despite the simplicity of Index funds as investment avenues, most Indian investors are not aware of it. The few who are aware of this category of investment prefer actively managed funds because they are risk-averse and assume that Index funds may carry higher risk.

If you are new to Index funds and would like to explore this investment type, we have put together a guide for the same. Read on to find out how you can start with Index fund investments. 

What are Index Funds?

Definition of Index Funds

In simple terms, an Index fund is a kind of mutual fund which builds its portfolio using the same composition as that of a market index like Sensex or NSE Nifty. The fund invests in stocks that are part of the benchmark index selected and replicate the composition as well.

Let’s consider an example to better understand this concept. If HDFC Bank and Reliance Industries Limited make up 5% and 2% respectively of Nifty 50, then the index fund, which uses Nifty 50 as a benchmark, will allocate the same percentages of the portfolio to the said stocks. 

How do index funds work?

One unique characteristic of an Index fund is that it is not actively managed by a fund manager. Since the portfolio mirrors an index’s composition at all times, there is no necessity for a fund manager to intervene with stock selection. This results in the Index fund’s NAV moving in the same direction as the index which it follows. 

Why do people invest in index funds?

Most Index fund investors get attracted to the diversification that it offers in an investment portfolio. Since Index funds replicate the composition of indices, there is also the attractive return factor that draws people towards them. 

While the Indian market still sees a very limited amount of investment in Index funds, these are slowly but surely gaining popularity as more and more investors get educated about this investment avenue.

How to Invest in Index Funds?

Investing in Index funds is similar to the process of mutual fund investment. This can be done either directly or through an agent/distributor. To avoid the hassle of physically visiting the mutual fund office, it is best to choose an online distributor for investment. Here is how you can go about it:

  1. Choose an Index fund for your investment (details on how to choose an ideal index fund’ can be found in the next segment)
  2. Select an online distributor through which you can make the investment. This will offer convenience as you will not require a Demat account or physical visit to the fund’s office.
  3. Go through the list of fund options available and make the investment after following KYC procedure listed out by the online distributor.

How to choose an ideal index fund

While choosing an ideal index fund, investors must consider two key factors:

  1. Lower expense ratio – An ideal index fund is one that aims to generate returns that are very close to the benchmark index’s returns. If there is a higher expense ratio associated with an index fund, the returns could be far lower than the benchmark, and it is nearly impossible to generate higher returns than the benchmark. Hence, the lower the expense ratio, the higher the chances that it will generate similar returns as the benchmark index.
  2. Lower tracking error – Variance between Index fund returns and the percentage gain/loss of the Index it follows is called tracking error. For instance, if an Index fund has gained returns of 4% and the Index has gained 4.5% then the 0.5% difference is known as tracking error. Since the primary aim of any index fund is to keep returns closer to the index, investors must look for a fund that has lesser tracking error. This means, the fund manager is constantly tracking the index and leaves very little scope of error, which would otherwise result in lower returns than the index.

How to invest in Index Funds through Finity?

It is now easy to invest in Index funds with a few clicks using the Finity app on your mobile phone. Follow the below-mentioned steps to expand your portfolio with an ideal Index fund option through Finity:

  1. Install and launch the ‘Finity’ app using your smartphone
  2. Click on the ‘Equity’ option within Top Mutual Funds
  3. Scroll down to find ‘Index funds’ as an available option and click on it
  4. The screen will now show various time horizons for investment. Depending on your requirement, you can select any of the time horizons to start.
  5. The app will show you funds as per the time horizon selected, and there are ratings against each fund to make the selection easier. Click on the ‘Invest’ option in the fund of your choice.
  6. Choose between ‘Monthly SIP’ or ‘One-Time Lump Sum’
  7. Enter the amount you wish to invest and ‘Proceed’ 
  8. Enter your PAN number to enable the app to check your ‘investment readiness’
  9. The app will then ask you to fill in basic details along with KYC information
  10. The last step is to enter bank account details and make a payment towards your investment

Top index funds to invest 

India-Specific Index Funds

HDFC Index Nifty 50 – Launched back in 2012, this equity mutual fund scheme has a minimum SIP investment requirement of Rs. 500. Historical 1-year returns of the fund are 24.56%.

Fund Name Benchmark Index Minimum SIP Amt Fund Manager 5-Year Annualised Returns
HDFC Index Nifty 50 Nifty 50 Rs. 500 Krishan Kumar Daga

Arun Agarwal

17.81%

 

UTI Nifty Index Fund – This scheme was started in 2013 and historical 1-year returns are  25.04%. 

Fund Name Benchmark Index Minimum SIP Amt Fund Manager 5-Year Annualised Returns
UTI Nifty Index Fund Nifty 50 Rs. 500 Kaushik Basu

Sharwan Goyal

Kamal Gada

17.88%

 

ICICI Prudential Nifty Next 50 Index Fund – This scheme is an open-ended index scheme that aims to invest in securities that are part of Nifty Next 50 Index. has 1-year historical returns of 19%. 

Fund Name Benchmark Index Minimum SIP Amt Fund Manager 5-Year Annualised Returns
ICICI Prudential Nifty Next 50 Index Fund Nifty Next 50 Rs. 100 Kayzad Eghlim 15.88%

 

Motilal Oswal Nifty Next 50 Index Fund – This is an open-ended scheme that replicates/tracks Nifty Next 50 Index. The scheme was started in 2019 and historical 1-year returns of this scheme are estimated to be around 19%.

Fund Name Benchmark Index Minimum SIP Amt Fund Manager 5-Year Annualised Returns
Motilal Oswal Nifty Next 50 Index Fund Nifty Next 50 Rs. 500 Swapnil Mayekar 19.54%

 

HDFC Index Sensex – With historical 1-year returns of about 25%, this fund is also one of the top-performing index funds in India. It was launched in 2012. The fund is preferred for its low expense ratio 0.1%.  

Fund Name Benchmark Index Minimum SIP Amt Fund Manager 5-Year Annualised Returns
HDFC Index Sensex Nifty Next 50 Rs. 500 Krishan Daga

Arun Agarwal

18.63%

 

International focussed Index funds

Motilal Oswal S&P 500 Index Fund – This open-ended index fund has a historical 6-month return of approx 13%. The 6-month time horizon is mainly since it is a relatively new scheme. The suggested investment time horizon for this scheme is 5 years and above. This fund is benchmarked and invests in the S&P 500 index on New York Stock Exchange.

Fund Name Benchmark Index Minimum SIP Amt Fund Manager
Motilal Oswal S&P 500 Index Fund S&P 500 Index Rs. 500 Abhiroop Mukherjee

Herin Visaria

 

Motilal Oswal Nasdaq 100 Fund Of Fund – This is an open ended scheme with historical 1-year returns of nearly 47%. It is one of the preferred investment schemes in the index funds category. Started back in 2018, the scheme follows the NASDAQ 100 Index as a benchmark index.

Fund Name Benchmark Index Minimum SIP Amt Fund Manager
Motilal Oswal Nasdaq 100 Fund Of Fund NASDAQ 100 Index Rs. 500 Ashish Agrawal

Abhiroop Mukherjee

 

Edelweiss MSCI India Domestic & World Healthcare 45 Index Fund – This index fund scheme was launched in Nov 2020 and has generated annualised returns of about 11% since inception. Following the MSCI India Domestic and World Healthcare 45 Index, it primarily invests in stocks of 45 healthcare sector companies that are listed in India and the USA.

Fund Name Benchmark Index Minimum SIP Amt Fund Manager
Edelweiss MSCI India Domestic & World Healthcare 45 Index Fund MSCI India Domestic and World Healthcare 45 Index Rs. 500 Hardik Varma

Amit Vora

Advantages of Investing in Index Funds

Index funds offer many advantages, especially to new and risk-averse investors. Some of the major advantages are as listed below:

  • Lower Expense Ratio: One of the main advantages of Index funds is a lower expense ratio, which is primarily because the funds are not actively managed. The expense ratio comprises the cost related to fund operations and management fees. Investors can benefit from an expense ratio of 0.5% in Index funds against a 1-2.5% ratio in actively managed funds. For instance, one of the top-rated Index funds in India ‘ICICI Prudential Nifty Next 50 Index Fund’ has an expense ratio of 0.39%, far lower than most actively managed mutual funds.
  • Disciplined Approach: Index funds adopt a very disciplined approach towards the selection of stocks and their proportions, as compared to fund managers randomly timing the market.
  • Cost savings: Investors also save on brokerage costs, since the investment is based on the chosen index.
  • Tax efficiency: Index funds can be tax-efficient apart from having comparatively lower expense ratios. The tax save mainly comes that there is no need to switch between funds depending on performance.
  • Ideal for the risk-averse: It is an ideal investment choice for investors who are risk-averse but still want a certain level of equity exposure along with portfolio diversification benefits.

Things to be Careful About

Every investment form comes with some set of disadvantages. Here are some of the major drawbacks of Index funds that are important for investors to consider before making an investment:

  • Miss out on investing in Small & Mid caps: Index funds are focused on large-cap stocks and therefore have a lesser advantage as compared to actively managed funds which can have small and medium cap focus. Index funds may prove less beneficial for aggressive investors who are looking at a 7-10-year horizon. 
  • Possible investment in non-performing stocks: Index funds sometimes lay heavy dependency on high-performing stocks. The composition of an Index fund keeps changing as per the Index itself. Thus, a stock will carry heavy weightage in the fund if it weighs heavy in the Index. This will be true even if the stock is overvalued. This percentage composition cannot be modified since the fund is not actively managed. For instance, if Nifty 50 has a 5% contribution of Reliance Industries Limited stocks, the Index fund following Nifty 50 will mirror this contribution irrespective of the expected stock performance of RIL.

End Note

Index funds can be used to begin an investment journey, as it is a form of passive investment. Some investors also use it for portfolio diversification and better returns by following a benchmark index. It is up to an investor to make the most of this investment opportunity and generate strong returns through the benchmark index’s performance during upward trends.


Frequently Asked Questions

Are Index Funds good for short-term investments?
Index fund investments must be made for at least 5 years to see good returns. In the short-run, these could fluctuate as per changes in the indexes that they follow. 

Can I invest in Index funds if I am a beginner?
Many investors who are beginners prefer to invest in index funds since they offer exposure to a wide variety of stocks. There is also the benefit of diversification and comparatively lower risk involved.

How do I invest in Index funds?
You can invest in Index funds by using the Finity app. It is easy to download and user-friendly. Through the app, you can pick an Index fund of your choice by comparing the available metrics. After completing the basic KYC process, you can start investing in an Index fund of your choice.

What is the minimum investment amount in an Index Fund?
The minimum amount to be invested in an Index fund differs as per the conditions laid by the fund. In most domestic funds, however, the minimum SIP investment is around Rs. 500.


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ETFs

Exchange Traded Funds(ETFs)- What are they and how do they work?

Exchange Traded Funds
Home » Archives for February 2021

Exchange Traded Funds(ETF)- What are they and how do they work?

Exchange Traded Funds, more popularly known as ETFs, are a type of investment funds. These funds have the characteristics of shares and mutual funds. These funds are not individual investments like stocks but a bunch of securities compiled together to form a fund but can be traded in the open market like shares or stocks. This is where they differ from mutual funds as mutual funds cannot be traded throughout the day on a real-time basis but after the completion of trading hours based on their value at the end of the day.

ETFs can be bought or sold in units, thus limiting the exposure of the investor at the same time, allowing them to take the benefit of intraday trading.

Given below are some details related to the ETFs.

How to invest in ETFs?

As mentioned above, ETFs are an easier and better option for potential investors who wish to dabble in the stock market yet want to limit their exposure. ETFs are a pool or collection of diverse assets or securities that are used to form a single fund. Like index funds, ETFs also track the underlying index and enable the investor to trade on a real-time basis. 

ETFs usually have the same portfolio, i.e. securities in similar weights as the index it tracks and tries to replicate the performance of the underlying index like Sensex or NIFTY 50. Hence, ETF value moves up or down based on the values of underlying securities.

ETFs are traded like any normal share or security on the exchange. The value of the ETF is based on the price fluctuations of a single or multiple securities that are part of the fund.

These funds can be either actively managed funds or passively managed funds. However, in Indian markets, ETFs are passively managed funds. Actively managed funds are managed by dedicated portfolio managers or fund managers who track the markets closely to reduce the tracking errors and maximize the performance of the ETF. Passively managed ETFs simply follow the underlying index and do not require a team of dedicated fund managers to maximize the returns. 

Potential investors can invest in the ETFs through registered brokers like any other shares or securities. Alternatively, investors can invest in the ETFs on their own by opening a Demat account and managing it on their own by trading in the selected ETF. This will eliminate the charges that would otherwise have to be paid to the brokers but will require the investor to be informed about ETFs and its working.

Advantages of ETF

  • Reduced expense ratio

Trading in ETFs is a less expensive affair as compared to trading in mutual funds or even index funds. Most ETFs are passively managed funds, and hence the expense ratio is quite low. Also unlike mutual funds, ETFs do not have any additional charges like entry or exit load. This significantly reduces the expenses to invest in an ETF ultimately benefiting the investors.

  • Reduced risk

ETFs have a diversified portfolio of securities that are combined to form a single fund. The performance of the fund is reflected by the performance of the individual assets of the fund. Hence, if one asset underperforms, and the other performs better, the net result for the fund will be offset and it reduces the overall risk. Also, as ETFs are usually passively managed funds, the risk involved in investing in ETFs is quite lower than compared to investing directly in stocks, mutual funds, etc. and the tracking errors are also significantly less. 

  • Access to different markets

Trading in ETFs provides an opportunity for the investors to invest in different markets that were earlier not accessible to retail investors. Investors can trade in different markets like forex, gold, commodity market, debt or equity market, emerging markets, etc. The investors can decide the underlying market they want to trade in and trade in relevant ETFs.

  • Tax benefit

ETFs are taxed based on the underlying securities and the investors can get indexation benefits on Long term capital gains just like debt funds/securities.

  • Better transparency and liquidity

ETFs can be traded like shares throughout the day on a real-time basis. This ensures the high liquidity of the fund. Most ETFs provide complete transparency of their underlying assets and their daily portfolio as compared to other funds like hedge funds or mutual funds that provide reports on their holdings quarterly. This provides better investor awareness to make timely decisions as compared to other investment options like mutual funds 

Things to keep in mind while investing in ETFs 

  • The volatility of the markets

The performance of ETFs is dependent on the performance of the underlying assets or the index that it tracks. The value of these funds like shares is also subject to price fluctuations and the risk of volatile markets.

  • Diversified investment

ETFs being a cluster of securities provide diversity in the fund. However, they do not provide higher gains with multiple assets performing in opposite directions. For Example, if one asset or security in the fund is positively performing but another asset or security of the fund with a relatively higher weight is underperforming or negatively performing, the overall result of the ETF will not be high.

  • Cost of brokerage and the need for a demat account

The cost involved in trading ETFs is the commission fees charged by the fund managers, which is part of the expense ratio. These charges are nominal, as they are passively managed funds and have to be borne by the investor. When the investor invests in the ETFs on their own, it requires them to open a Demat account and trading account and pay brokerage for such services to the brokers. However, investors will require to have a thorough understanding and analysis of the markets in such cases.

  • Less exposure for small and medium companies

ETFs normally invest in companies having higher market value and those companies that consistently give better performance and higher results. This often leads to small or medium companies with high potential being ignored.

How to select the right ETF to invest in?

Selecting the right ETF in accordance with your risk appetite and investment goals is very important to reap benefits. 

  • Identify the index for investment

The foremost step to invest in an ETF is selecting the index for investment. This requires an in-depth analysis by the investor or the help of brokers having expert knowledge of the same. For example, if an investor has in-depth analyzed a particular asset or industry performance, he/she can invest in such asset or industry or can invest in the index to minimize exposure.

  • Look for funds with reduced tracking errors

ETFs track the underlying index for their performance and try to match it closely. However, there may be certain deviations which are known as tracking errors. This is part of an investment in ETFs. Investors have to select funds that have low tracking warriors and higher efficiency or performance.

  • Choose funds with higher liquidity 

Investors have to select ETFs that have higher liquidity and trade volume, which ensures higher profitability or return on investment. While tracking liquidity, the investor has to ensure the liquidity of the shares being tracked and the fund. Monitoring liquidity assures the investor to exit the fund whenever they want, especially at the time of market declines. An efficient ETF has market markers that track the buying and selling to ensure sufficient liquidity of the fund at all times.

  • Go in for a lower expense ratio

Apart from reduced tracking errors, the funds having a low expense ratio is another important factor while selecting an ETF. A fund with a lower expense ratio along with reduced tracking errors will ensure a higher return on investment to the investors.

Difference Between ETF and Mutual Funds

ETFs are like mutual funds, but there are many differences between the two types of funds. 

ETFs Mutual Funds
Availability of Real-Time Trading during market hours ETFs can be traded during market hours Mutual Funds cannot be traded. You buy or sell the fund unit at NAV declared at the end of the day to the AMC.
The benefit of Limit Orders Investors can trade ETFs based on a limit order facility where a transaction is executed when the price level selected by the investor is reached Mutual Funds do not have the benefit of limit orders and hence cannot be traded on a preselected price
Availability of Intraday trading  Investors can track the direction of markets and trade accordingly during the day The intraday trading facility is not possible with mutual funds.
Returns being at par with the market or index Since ETFs match the underlying fund, returns are more or less at par with the market or index Mutual Funds are carefully created funds based on thorough analysis and not necessarily in the same composition as the index, hence returns may not always match the market
Exit Load Investors can exit from the ETF at any point hence, there is no exit load in the case of ETFs Exit loads are fees charged by the Mutual Funds when an investor exits from the fund partially or fully within a specified period from the date of the initial investment.

Popular ETFs in India

There are many ETFs available in the market for investors to choose from. These are some of the popular ETFs.

 Index ETFs   Gold ETFs  Sector ETFs  Bond ETFs
HDFC Sensex ETF HDFC Gold Exchange Traded Fund Kotak NV 20 ETF LIC G-Sec LTE Fund
UTI Sensex Exchange Traded Fund SBI ETF Gold Nippon ETF Infra BeES SBI ETF 10Y Gilt
Motilal Oswal NASDAQ 100 ETF  Invesco India Gold ETF ICICI Prudential NV20 ETF Nippon ETF Long Term Gilt

 

Investing in ETFs has gained immense popularity in recent years and has increased in volume. This is majorly on account of increased investor awareness among many other factors. ETFs are among the safest investment options for Indian markets where most investors are risk-averse and hence, can gain higher returns on a lower expense ratio.


Frequently Asked Questions

Are ETFs traded in the open market?
Yes. ETFs like individual stocks or shares can be traded actively in the open market during market hours.

What are the types of ETFs?
The types of ETFs available in the market are listed below,
Index ETFs
Currency ETFs
Gold ETFs
Bond ETFs
Sector ETFs
Leveraged ETFs

Is ETF  a favorable investment option for beginners?
Yes. investment in ETF is quite favorable for a beginner as it has many benefits like a lower expense ratio, higher liquidity, reduced risk, low investment to start investments, etc.

Does an ETF pay a dividend?
Yes. If the ETF holds a stock that bears a dividend, the same is provided by the ETF as well.

Can an ETF value become nil?
ETF is a portfolio of multiple securities. Hence, the only way the value of an ETF will become nil is if the value of each of the underlying security becomes zero.


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