Rupee Depreciation: Is it a cause of concern?

Rupee depreciation and its impact on the economy, market and people have been in a lot of debate lately.

Last year, the exchange rate of Indian rupee to US Dollar made an all-time of Rs 74.34 on October 9, 2018. Although the currency has recovered a little since making its high and currently hovering at Rs 70.52 (as of January 9, 2019), however, people are still wondering how rupee depreciation can impact their lives.

In this post, we will understand what exactly is rupee depreciation and also analyze the impact of rupee depreciation on different industries, imports, exports, and the stock markets.

How the Rupee value is determined?

In simple words, the rupee value is determined by the forces of supply and demand in the currency market.

If the demand for Indian currency is high, Indian rupee will appreciate. This is called rupee appreciation. For example, if $1 = Rs 70 previously and later it moves to 1$ = Rs 67, then the rupee is said to be appreciating. This also means that our currency is gaining strength against the dollar.

On the other hand, if the demand is low, the currency value will depreciate. For example, if $1 =Rs 70 previously and later it moves to $1 = Rs 73, then it means that the rupee is depreciating. Here, our currency is losing strength against the dollar.

Quick Note: Although it’s easier to say that the price of a currency is determined by the forces of supply and demand, what actually drives an increase in demand or supply is a little complex and depends on multiple factors.

Some of the key determinants are inflation in the country, growth rate, interest rates, imports and exports, General macroeconomic conditions of the country, Economic Policies of a government (Fiscal Policy, Budget, Investment policy, and Foreign Trade Policies), political stability, banking capital, commodity prices etc.

Floating vs Fixed Vs Managed Rate System:

Another important concept to understand while studying the currency of a country is its rate system. It can be either fixed, floating or managed float regime.

The floating rate system is a situation in which the value of the currency is freely determined by the market through supply and demand forces and it generally fluctuates constantly.

On the other hand, if the government or RBI exercise controls and fix the exchange rate of a currency (and disallow any fluctuations according to demand and supply forces in the market), such a system is called the Fixed Rate system. It is also called the Bretton Woods system or Pegged Currency System.

However, since this mechanism does not depict the real currency strength (or weakness), most of the countries including India changed to Managed Floating Rate System where currency value is determined by competitive market forces, with intervention by the Central Govt by purchasing rupee in exchange for the foreign currency to increase money supply in the economy which leads to home currency depreciation. Vice versa, it buys foreign currency in exchange for the rupee to reduce the money supply in the economy leading to home currency appreciation.

History of Indian Rupee: A comparison of Indian Rupee Value vs US dollar 

Since October 2008, the exchange rate of INR per USD has depreciated from Rs 48.88 to Rs 70.52 – as of 9th January 2019. Here is a historical data of the exchange rate of Indian rupee per US Dollar.

Year Exchange rate
(INR per USD)
1947 3.30
1949 4.76
1966 7.50
1975 8.39
1980 7.86
1985 12.38
1990 17.01
1995 32.427
2000 43.50
2005 (Jan) 43.47
2007 (Jan) 39.42
2008 (October) 48.88
2010 (22 January) 46.21
2012 (22 June) 57.15
2014 (12 Sep) 60.95
2016(20 Jan) 68.01
2017 (28 Mar) 65.04
2018 (9 May) 64.80
2018 (Oct) 74.00

Source: Wikipedia

Exchange rate inr per dollar

(Source: Tradingeconomics.com)

What TRIGGERS the increase in demand of currency?

Rupee’s appreciation or depreciation against the dollar depends on the dynamics of demand and supply for the currencies. Besides global factors, the following factors also are instrumental in creating the demand:

  • Interest Rate: The interest rate of a country influences the demand for the currency. India with an interest rate of 6-7% would attract greater capital inflow as investors get a higher return than their earnings in the US. (with Interest rates of 2-3%). This results in rupee appreciation.
  • Inflation Rate: A country with lower inflation would have increased demand for its products by foreign buyers. Higher demand for goods & services would translate into higher demand for that currency resulting in currency appreciation.
  • Export-Import: A country exporting more than importing from other countries, would result in higher demand for that currency, causing currency appreciation.

Current Scenario of Currency in India

The Rupee is currently sharply depreciating against the dollar having breached the Rs 70 per dollar mark by the end of 2018. As per a report dated 8 Jan 2019 by Livemint –Analysts say fundamentals will aid the rupee this year.

  “Attractive real yields (net of inflation), growth momentum and robust FX reserves of $394 billion and dollar stabilization are likely to be positive for the rupee, while lower global growth and trade will eventually impact the US economy and asset markets, causing the US Federal Reserve to slow the pace of rate hikes”, -Standard Chartered Bank. (Source: Livemint)

The dollar is expected to stabilize as interest rate differentials between the US and the rest of the world peak.

how the rupee fared last year-min

(Source: Bloomberg)

What are the different impacts?

Industry impact:

Rupee Appreciation means imports turn cheaper and exports become expensive. So, it means good news for companies who are dependent on imported inputs like Petro Products and Engineering Goods as their outflows would decline.

Rupee depreciation means exports earn more. Indian IT sector is dependent on US export revenues.  The contracts with US clients are usually quoted in dollars term. Hence their inflows would increase.

rupee appreciation and depreciation impact-min

Source: Moneyworks4me.com

Stock Market impact:

Foreign investors (FIIs) stand to benefit from a rupee appreciation. Subsequently increased FII inflows could fuel a bull run in the stock market.

To explain with an example: Suppose an FII Invests Rs. 1lakh in the Indian stock market and at an exchange rate of $1 = Rs. 50. So, the amount invested is (1,00,000/50) $2000. Suppose, after 1 year, hypothetical, even if the value of the investment doesn’t appreciate or depreciate, the foreign investor will be in a position to book a profit if the exchange rate has appreciated to $1 = Rs. 40

If the investor sells his investment at the prevailing currency conversion rate, he would get (1,00,000/40)  $ 2500. So, he would book profits of $ 500 due to the rupee appreciation.

Also read: How Does The Stock Market Affect The Economy?

Fuel Shock:

In the case of a Rupee depreciation, the biggest blow to the Indian economy would be the higher outflows due to fuel becoming expensive. India imports most of its fuel requirements from the OPEC countries. This increased fuel costs would result in food inflation as transportation costs become higher. In a developing country like India, this would have disastrous consequences on the vast population.

Summary

In this post, we studied the broad framework of how the exchange rate is decided by the currency market and the factors that influence the Rupee appreciation or depreciation. We also discussed the outlook as per analyst expectations and the impact of the exchange rate fluctuation on the real economy and the stock market.

Although the impact of rupee appreciation or depreciation on individuals and industry depends on which side of the fence they are. However, broadly speaking, rupee appreciation against US dollar is an indicator of a strong, robust Indian economy.

ULIP vs mutual funds cover

ULIP vs Mutual Fund -Which one should you opt for?

ULIP or Unit Linked Insurance Plan is a financial instrument which is a fusion of insurance and investment. Therefore, if you are a ULIP holder, you are going to enjoy the benefits of both insurance and investment at the same time.

Being a ULIP holder, you are required to pay a regular premium for the insurance part. A part of such premium paid by you would get invested in financial instruments (combination of debt and equity) as per your choice of weightage. It is solely your discretion what your investment is going to be consisted of. Your choice is should match with your risk appetite, liquidity requirement, and financial goal.

On the other hand, a Mutual Fund is purely an investment product. The AMC or Asset Management Company pools the money from the investors (also called unit holders) for investing in financial instruments like shares, derivatives, and bonds. Such investments are professionally managed by the AMC through its experienced and knowledgeable fund managers. (Read more about Mutual Funds here.)

After the re-introduction of long-term capital gain (LTCG) tax on equity and equity oriented Mutual Funds in the Union Budget of 2018, people in India have started to discuss whether ULIPs have become more rewarding than Mutual Funds. In fact, many experts have stated that ULIPs have become more profitable than equity oriented Mutual Funds after LTCG tax has come into effect. ULIPs are not subjected to any capital gains tax.

However, it has to be stated here that taxation is not the only parameter that you should consider for selecting an investment product. There are many other key factors which you should keep in mind before selecting any investment product.

ULIP vs Mutual Fund

Here are some parameters that you should consider before selecting one investment product between Mutual Fund and ULIP.

What is your purpose of investing?

Before getting started, you should clearly define your purpose for investing. Having no clarity in purpose or creating vague goals in mind would never help you meet your financial needs in the future.

Suppose, you have set a goal to accumulate Rs. 2 crores in 30 years, you should go for investing. If your objective is to have your life insured, you should think of going for a term insurance plan.

ULIP is not a financial product which can provide you with an adequate insurance cover. If you already have got an insurance policy in your name, then you can consider investing in ULIP additionallyULIP has an insurance element in it which Mutual Fund lacks.

In short, a ULIP plan is a combo of insurance and investment product at the same time. The premium that you pay on your ULIP plan, a part of the same is meant for providing you with an insurance cover. The rest of your payment is invested in a combo of debt and equity which is as per your discretion.

Further, it is a fact that a mutual fund does not offer any insurance component. But if you’ve planned properly, it is may not be a huge issue. You can start a mutual fund SIP and simultaneously take a term insurance plan alongside. It is going to help you artificially create a ULIP for yourself.

Who is more transparent between Mutual Fund and ULIP?

The disclosures of the underlying portfolio of a ULIP are not as transparent as that of a Mutual Fund because it is not mandatory for the ULIPs to disclose their NAVs on an everyday basis. In addition to that, the exact break-up of load on a ULIP plan is not available, unlike a Mutual Fund scheme.

Apart from the loading, expense ratio which in regard to a Mutual Fund plan is also mandatorily required to be stated clearly in the mutual fund fact sheet.

The Mutual Fund industry in India definitely comes in the list of the most regulated and transparent industries across the globe. From returns to underlying portfolios to sector allocation of investments, one can clearly find all the information in the online platform of an AMC and various other websites.

Furthermore, many analysts track Mutual Funds and publish their analysis time to time. It is not that ULIPs don’t disclose the information on analysis. But, they are not tracked by the analysts in a detailed manner like Mutual Funds.

Which is more tax efficient? ULIP or Mutual Fund?

tax ulip vs mutual fund

If you invest in a ULIP plan, the premium that you will pay is eligible for tax deduction u/s 80C of the Income Tax Act, 1961 up to Rs.1.50 lakhs.

However, you won’t be getting this benefit if you invest lump sum or SIP in any equity or debt fund. Only if you invest (whether lump sum or SIP) in an ELSS Mutual Fund (an equity fund), then you can avail the income tax benefit under the said section.

Again, the capital gain from redeeming your investment in ULIP is fully tax-free in your hands, irrespective of whether the investment is in the nature of equity or debt.

However, this is to be noted that you are required to pay 15.6% effective tax on short-term capital gains in case of Mutual Fund redemption. And also, 10.6% tax has been introduced on long-term capital gains with effect from April 1, 2018, from equity mutual funds, in case the aggregate gains cross Rs.1 lakh.

Taxation rate on short-term gains from the redemption of debt funds is per one’s income tax slab, while the long-term capital gains are subject to tax @20% (excluding Cess) after indexation. From the angle of taxability, ULIP definitely seems to be a better choice, provided it yields higher after-tax returns than Mutual Fund.

Note: If you want to learn more about taxation of ULIPs, you can read this article. For studying more on taxation of Mutual Funds, you check out this post.

ULIP vs Mutual fund Comparison on the basis of costs.

costs ulip vs mutual funds

If you decide to invest in a ULIP through online mode, you would save incurring significant expenses which are not only limited to administrative expenses and fund allocation charges. On the other hand, the expense ratios of Mutual Fund schemes are a little high, especially for the active funds. Furthermore, you can reduce the expense ratios if you invest in the direct plans.

Both these financial products have their own pros and cons. But, it can still be said that if you compare Direct Mutual Funds with ULIP, the former seems more cost effective.

Mutual Funds are more liquid than ULIP.

One of the most important parameters to look into any investment product is its liquidity.

An investment option should be preferred if you are able to liquidate your investments when you are in need of doing so. Mutual Funds are highly liquid in nature. You can redeem your units at any time and would get the proceeds straight into your bank account at most by 3days.

But, you can’t withdraw your investments from ULIPs unless the minimum lock-in period of 5 years gets over.

For mutual funds, it is only the tax saving ELSS funds where your investments get locked-in for 3 years. Rest other funds can be bought/sold/increased/decreased at any time. But, in case of ULIPs, the lock-in periods is an additional two years compared to even tax saving ELSS’s locking period.

Even after the lock-in period of ULIP ends, if you redeem your investments, it will around a week for your money to get credited in your bank account.

In terms of profitability, who is the winner?

In the case of ULIPS, a significant portion of your premium is actually spent towards costs, in the initial five years. The same gradually gets lower over time. So, even in an excellent bullish market, it will take you around half a decade to break even. Hence, if you look to earn returns which would beat the market in the long run, you require staying invested in ULIPs for at least one to decades.

However, the financial situation is not so complicated in the case of Mutual Funds. Many active mutual funds continuously beat the market and give superior returns to their shareholders since their origin. Furthermore, if you are investing in equity funds via the SIP route, you also be gaining the advantages of rupee cost averaging.

Note: To know more about profitability, check out this blog by Economic Times.

Flexibility – Do you know Mutual Funds offer more flexibility than ULIPs?

Investing in Mutual funds is of more flexibility than ULIPs. You can make a move from one scheme to another within the same fund house or another one. But, ULIPs allow you only to switch your investments from equity to debt or debt to equity but only within the same insurance house.

So, if the fund manager of your ULIP plan is underperforming or resigns from the company, it is going to be a matter of concern for you. You simply cannot move in such an adverse situation to a new insurance company without redeeming your existing investments before the end of its maturity period. A similar situation does not arise in the case of a Mutual Fund.

Summary

In this post, we have tried to highlight the features of Mutual Fund and ULIP. We have tried to draw a line by line comparison between these two investment products to help you understand how they both work in real.

Now, let us quickly summarize what we have discussed in this article.

  • ULIP neither gives an adequate life cover nor offers a great investment opportunity.
  • A Mutual Fund plus a Term Insurance Plan can comfortably compensate a ULIP.
  • Mutual Funds are more transparent than ULIPs and also provide more comprehensive disclosures.
  • ULIP is more tax efficient than Mutual Fund, given the former’s after-tax returns are higher.
  • Both Mutual Funds and ULIPS investing are associated with several charges.
  • Mutual Funds are more liquid, profitable and flexible than ULIPs.

From the above summary, it is clearly understood that the Mutual Fund seems to be a better financial product as compared to ULIP.

Generally speaking, the concept of combining insurance and mutual funds into one specific product is against the essence of financial planning. Financial planning means you will buy term policies for covering life risk followed by SIPs on equity funds to grow long-term wealth. ULIPs combine insurance and investment into one financial product thereby making ULIPs prone to mis-selling. This is because it is highly probable that many investors would fail to understand where insurance actually begins and where investing ends.

Anyways, ULIPs have always been more tax friendly as compared to Mutual Funds. On top of that, the introduction of income tax @ 10% on LTCG tax from equity investments, by the Union Budget 2018 has given ULIP more boosts. But, as discussed, you don’t choose an investment product on the basis of one parameter, do you? Mutual Funds do outweigh ULIPs on several grounds like profitability, transparency, flexibility, and liquidity.

ulip vs mutual funds summary

Anyways, if you are sloping towards ULIPs, let us first discuss when you should consider opting for ULIPs.

  • Do you want to have a life insurance cover which comes with an investment opportunity? Are you comfortable with moderate returns? If both of your answers are a yes, then ULIP is suitable for you.
  • Further, can opt for ULIPs if your risk appetite is low or on the medium side.
  • Apart from that, if you are looking for a tax saving financial instrument where liquidity is not of much importance to you, then also ULIP would not be an appropriate choice.

Now, let us discuss when you should give a thought to start Mutual Fund Investing.

  • In case you have a risk appetite of a medium or higher side, then Mutual Fund is going to suit you.
  • In case you are seeking a pure investment product with high returns, then Mutual Fund is the answer.
  • And finally, if you are okay with paying a little additional tax on capital gains, but you want your investment to be liquid (Except ELSS), then you can go for Mutual Funds.

That’s all. We hope this article of ours will add to your knowledge and enable you to take a more rational decision with respect to your investments in the future. Happy investing!

How do oil prices affect the stock market cover 2

How do oil prices affect the stock market?

Crude oil is considered to be one of the most important commodities in the global economy. It is versatile in its uses and helps industrialize economies. A variety of things from plastics to rubber and machinery uses crude oil or its byproduct, making it a crucial element in the raw materials for many businesses in the economy.

Hence it is no surprise that the stock market is often influenced by the price of oil. It can affect an individual investor or have a domino effect on the stock market. Here are some of the ways oil prices affect the stock market:

How do oil prices affect the stock market?

– Profitability of oil companies

The oil business has two main components to it, the upstream and downstream business.

The upstream business is involved in the drilling of oil wells and the manufacture of crude oil in industries. Examples of such businesses include Oil India and Shell.  When these companies are profitable it usually results in high stock market prices because the crude oil manufactured by these companies is the raw material for many businesses.

If upstream companies find it hard to drill for oil and face an increase in research and development costs, it could have an adverse effect on the value of the oil company’s stock.

The second type of oil business is the downstream business. These are corporations involved in the distribution and retail function of crude oil. They are in control of your local gas stations such as Indian Oil and Bharat Petroleum. These companies find low crude oil prices beneficial as they can now purchase crude oil at a low price from upstream companies.

– Consumer Demand

Almost everything that a person consumes is tied to oil such as electricity or fuel for their cars.

An increase in the price of oil can raise the daily living costs for people, reducing the amount of money they have available to spend on other goods and services such as electronics or clothing. The revenue of these companies decreases as consumer demand for their goods and services falls. The negative effect on the earning of firms lowers the value of their stock.

Alternatively, a decrease in oil prices has the opposite effect. When consumers spend less on fuel, it gives them more money for other goods and services. The increase in demand raises earnings and has a positive impact on the stock market.

How do oil prices affect the stock market cover

– Profitability of other industries

Since all businesses use a byproduct of oil, an increase or decrease in the price of oil can indirectly affect them as well.

If the price of oil increases, a delivery services company will face higher fuel costs. These costs will be translated to consumers as high prices for their services. The low earnings of the company will result in low stock prices for the industry.

Likewise, if oil prices decrease, the companies can charge lower prices to consumers and have high profitability and higher share prices. In reality, however, companies rarely lower the prices of goods and services if the price of raw materials has decreased.

– Impact on Inflation

The price of oil can directly or indirectly increase or decrease costs of goods and services in the economy and can result in inflation. In the United States, the price of oil is not considered a factor when the inflationary rate is calculated but its price can cause a ripple effect in the economy through industries that use crude oil as a raw material.

If oil prices rise, it can increase the cost of living for individuals, putting a pressure on wage rates to make up for this. The high labor costs increase the costs of goods and services and increase the rate of inflation in the economy as each dollar can now buy fewer goods and services. When inflation rises the stock prices of the industry decline.

Also read:

– Effect on Imports

For countries such as India that import almost 80 percent of its crude oil, a decrease in the price of oil is beneficial because it decreases imports expenditure and stabilizes the exchange rate of the currency.

However, a reduction in oil prices isn’t always great for the stock market. There is a positive relationship between the Foreign Direct Investment and the price of oil. When the price of oil goes up, oil-rich countries invest in emerging oil markets like India. However, when prices go down, they withdraw their investments.

Hence with a fall in oil prices, few foreign investors will invest their money in the Indian stock markets resulting in a negative impact on stock prices.

Conclusion

The versatility of the crude oil has made it an influential factor in the increase and decrease of stock prices. The price of oil not only affects the stock of oil companies but also the stocks of industries that use it a byproduct of it.

While the exact amount of influence it has on stock prices cannot be calculated, the price of this commodity can increase or decrease the total costs of production of many goods and services. This can affect the amount of goods people consume to exchange rate and the level of foreign direct investment which collectively affect the stock prices in an economy.

Needless to say, the price of crude oil has the ability to affect the level of investment in the economy and influence stock prices.

How to find the last 10 year financial statements of Indian companies cover-min

How to find the last 10 year financial statements of Indian Companies?

Reading the financial statements of a company is a key part of fundamental analysis which no investor should ignore.

Here, the investors need to read at least 5-10 years financial reports of the company in order to understand its performance, growth rate, trends, consistency etc. For example- a high profit for just one or two years is not sufficient to approach at any conclusion. However, if you can find that the bottom line of the income statement is consistently growing at a good pace for the last 5-10 years, this may be a healthy sign for the company.

In short, it’s imperative for the investors to read (and understand) the financial statements of a company before investing.

However, for the beginners, finding the last 10-year financial statements of Indian companies may look a tedious job. Besides, because of so many paid/subscription-based plans available for detailed financial statements of companies, it might be a little challenging for the newbies to decide whether to go for a paid plan or surf the internet to download the reports for free.

Paid plans are generally beneficial as they provide comprehensive reports and tools. However, they are often more useful to the professions, rather the retail investors. For the common investors, it’s better to use the free websites/resources to find the last 10 year financial statements of Indian companies.

In this post, we are going to discuss the free websites and resources to find and download the financial statements of Indian companies. Let’s get started!

How to find the last 10 year financial statements of Indian companies?

1. Company’s official website

The company’s website is the first and foremost source to find its financial statements. You can download the quarterly and annual reports of any company by visiting its official website and navigating to the ‘Investors’ or ‘Investor’s relations’ page.

tcs website

However, to arrange the last 10-year reports, here you might have to download the annual reports one-by-one manually. Nonetheless, this is the best source for the investors to download the financial statements of publically listed Indian companies.

2. Financial websites.

There are a number of free financial websites in India which provide the customized five to ten years financial statements of Indian companies, all at one place. Two of simplest financial websites that beginners should know are:

Screener is a simple, clean, yet powerful website. Here, you can also download the financial statements of a listed Indian company in the excel sheet.

For downloading the financial statements, simple go the screener website and search for your interested company in the search bar. Next, go to the company page where you can find ‘Export to Excel’ option.

screener asian paints

Quick Note: You need to create a login account on Screener in order to download the excel report.

Money control is probably one of the most popular financial websites in India for researching stocks and other financial instruments.

To download the financial statements of the Indian company, go to the company page on the money control website. Next, select the ‘financials’ option in the left tab and click on the financial statement (profit and loss statement, balance sheet or cash flow statement) that you would like to download.

moneycontrol

A few other websites that you can visit to find the financial statements of Indian companies are Yahoo Finance, Equity Master, Marketsmojo, Marketsmojo etc.

Also read: 7 Must-Know Websites for Indian Stock Market Investors.

3. Stock exchange websites

bseindia-min

Finally, you can always visit the stock exchanges (NSE/BSE) website to download the financial statements of an Indian company. The exchanges are continuously working to improve their website and its UI is far better compared to what it used to be a few years ago.

To download the financial statements, search for the company name in the top search bar and open the company page. You can find the annual results and reports in the financial section on the company page. 

Also read:

Closing Thoughts:

Although there are so many options for the investors to find the last 10 year financial statements of Indian companies, however, the easiest and best one is the company’s official website.

A notable problem with the financial websites is that they have to adjust the financial data a little to customize with their layout and hence the data shown on their website may not be exactly accurate. Moreover, there have also been cases where the financial data reflected on these financial websites doesn’t match with that of financial statements declared by the company (this may be because of human or computer error while gathering the data). Therefore, its always advisable to download the annual reports of the companies from their official website while researching the company as it is a more reliable source.

Nonetheless, an easier approach that investors can follow is to use these financial websites for a quick study and later download the annual reports from the company’s website/NSE/BSE while performing the detailed study.

That’s all for this post. I hope it is useful to you. Happy Investing!!

6 things you should NOT do when the stock market is volatile cover

6 things you should NOT do when the stock market is Volatile!

Investing in the stock market is known to provide some of the highest long-term returns and can earn investors a profit in manifolds over the years.

People invest in stocks to reach their financial goals and earn a profit on their savings. It is a way to make money work for you rather than you working for the money.

What is stock market volatility?

Investing in stocks is a risky business. While investors can earn a high return on shares, we cannot overlook the volatility that comes with it.

Volatility can be described as the continuous change in the prices of stocks over a short period of time. Here, the price of stocks can rise on a certain day and can fall the very next day. For example, you may have seen situations where Sensex may have fallen over 400 points in a day and recovered on the very next. This can be considered as volatility.

High volatility also increases the VIX ratio (Volatility Index) also known as the Fear Index. It measures the amount of fear in the market as a result of the volatility.

The fear caused by a volatile market makes investors react in many different ways. Some start to panic as their investments get riskier and try to sell & exit the market. On the other hand, there are contrarian investors, who prefer investing only in situations when others are selling. Anyways, as shares start to lose value, investors often make hasty decisions that can result in terrible outcomes.

6 things you should NOT do when the stock market is volatile!

Here are six things investors should not do when the stock market is volatile:

1. Don’t Panic!

The number one reaction investors have when there is volatility in the market is to panic and make speculations. It is important not to be influenced by fear and do something irrational. Investors can consider buying a stock at a lower price but should not panic-sell. Instead, they should use this period of volatility to evaluate the stocks in their portfolio.

There are often many reasons why a person invests in a particular stock in the first place. If the fundamental values of why you invested in the stock are clear, then you should remain invested. However, if you are not sure of a particular investment, meet with your financial planner to decide a course of action to exit the market.

Remember, volatility in the market is only short-term, don’t panic-sell if your long-term objectives of investing in the market haven’t changed.

panic selling

2. Don’t buy JUST BECAUSE prices are low!

When there is volatility in the stock market it is not advisable to invest in the market just because prices are low. This is because there is no guarantee that a stock with a low price today will increase in value in the future. In fact, the price may go even lower and you could end up in a value trap. (Also read- What are value traps?)

You need to analyze the stock’s fundamentals and track record. Look into factors like revenue growth, profit margin, price to earnings, debt-to-equity ratio etc as well as its future potential. If the stock shows a history of riskiness and volatility it would be best not to invest in them. Don’t be a bottom fisher!

3. Don’t believe everything you see on the news!

A sudden ‘breaking news’ segment on the stock market can cause people to make investment decisions that can prove to be disastrous in the future. News reports are not always authentic and often mislead or misguide the investor which can affect the sustainability of a stock.

News reports about the volatility of stock markets are usually short-lived and stock prices will bounce back like a ping-pong ball before you know it. This short-term volatility is often due to a current event in the economy. Once the event has passed, your stock price should be back to normal. As a serious investor, be aware of ‘breaking news’ but don’t follow it blindly.

news

4. Don’t make decisions based on international markets!

During certain periods, there can be a correlation between local and international stock markets. For example, a change in the leadership of a country could affect numerous economies around the world. But statistically speaking, such a correlation does not exist most of the time.

Volatility in the stock market is a reflection of individual events in an economy or movements in the economic cycle. The stock prices are a result of the anatomy of the local economy. For example, the Dow Jones in the US is completely independent of the stock prices in NSE’s NIFTY. Hence, investors should not be influenced by volatility in international markets, there may be various factors that could affect these stock prices.

5. Don’t rush to invest in volatile sectors!

An important rule for investors is to study trends in the market before investing. If there are particular stocks that drive bear markets- avoid these.

A stock that has a financial risk and a low standard of corporate regulations often lead to long-term problems and has a low chance of recovering. These stocks will have short bursts of upward movements but will have a long-term downward trend.

Do a market analysis of the sector you are investing in, if the industry shows a history of high volatility- you should remain of cautious before you invest too much money into it.

6. Don’t put all your eggs in one basket- Diversify your portfolio!

diversification do not put all your eggs in one basket

One of the biggest mistakes an investor can make is not investing in a variety of stocks. If a certain industry shows potential for high returns, it is not a wise decision to invest all your money here. This is because if a certain economic event has a negative impact on the industry- it could result in a huge financial loss for the investor.

It is better to spread your risk and invest in different stocks that are stable, have a strong market presence and good growth potential. Here, even if you face volatility in one of your assets, you have a diverse portfolio of stocks to cover your losses.

An investor looking to reduce their risks and control losses should diversify their portfolio and not invest in too many volatile stocks. Greed can often take over fear and this can prove to be disastrous. Investors need to perform a thorough analysis of the stock market before picking stocks to invest in. If they do not have the bandwidth to do this, they can consult a financial advisor.

Also read:

Follow the tips listed above to help you get through a period of high stock market volatility. While it is important to safeguard your portfolio from the effects of a volatile market, remember the biggest risk is not taking any risk at all.

How to invest in Direct Mutual Funds cover

How to invest in Direct Mutual Funds?

You must have heard of the slogan “Mutual Funds Sahi Hai”.

AMFI or Association of Mutual Funds in India has started the campaign in early 2017 as an initiative for making you aware towards Mutual Funds. The purpose of this campaign is communicating to you that Mutual Fund investing is the right choice that you can make.

Investing in Mutual Funds is one of the most appropriate ways that you can opt for generating long-term wealth for yourself. Investing in mutual funds is convenient even at a low cost. Apart from that, it is well-regulated, has transparency, and it offers the benefit of diversification to the investors like you. (If you are fresher in the field of Mutual Fund investing, here are some of the important jargons for you should know).

Direct vs Regular Plans

With effect from the very beginning of the year 2013, the SEBI had made it compulsory for all Mutual Fund houses of having two versions of each scheme i.e. Direct plan & Regular (or Indirect plan).

In a Direct plan, you can invest directly in a scheme of a Mutual Fund AMC at a low cost. The direct plans are cheaper than the regular plans because you will be saving costs in terms paying commission to intermediaries.

Looking at both the plans, the difference in returns seems to be as low as 0.25% which can go up to 1%. In the long-term, these differences result in significant amounts. So, this clearly evident that you should always go for investing in the Direct plans of Mutual Funds. (Have a look at what AMFI says about Direct Plan here)

direct funds

(Image Credits: Livemint)

Also read: How direct plan mutual funds can help you create greater wealth in the long term? -ET Market

How to invest in Direct Mutual Funds?

Now that you have the basic understanding of direct plants, let us have a look at the different ways through which you can invest in the Direct plans of Mutual Funds in India.

Mutual Fund Websites and Apps

These days you will find almost all AMCs operating in India having their online presence. So by creating an online account with an AMC you can easily purchase and redeem your units, switch from one fund to another, set up SIP and SWP with ease. Here, you would be directly transacting with the AMCs through their websites. No third party is there to poke his/her nose in between.

Anyways, a minor problem in this method of Mutual Fund investing is that you need to remember your sign up details for every AMC whose units you have got in your portfolio.

Apart from that the process of investing and redemption varies across the apps and websites of different AMCs. So, it is highly probable that you would find the entire process cumbersome, thereby showing less interest in creating a diversified portfolio and ending up sticking to a single Fund house. Even if you have managed to invest across several AMCs through their online portals, it might be a little difficult for you to analyze your entire portfolio at one place.

Also read: Top AMC (Asset Management Companies) in India: The Biggest to Small Ones

Registrar And Transfer Agents (RTAs)

direct funds sources

(Image Credits: Paisabazaar)

Registrar and Transfer Agents (RTAs) handle transactions of the Mutual Fund entities on behalf of them.

In India, the majority of the Mutual Funds are served by the two RTAs named Computer Age Management Services (CAMS) and Karvy. These two offer Mutual Fund investment services across diverse AMCs through their websites and apps. Here, you just need to remember one or two login details for the same. You can also invest in the Mutual Funds through these RTAs by personally visiting their offices.

In case you also want to invest in those AMCs not covered by the said two RTAs, then you have to check out the other RTAs as well.

Also read: RTAs are the backbone of the mutual fund industry -Live mint

Demat Account

You can perform Mutual Fund investing from almost all demat accounts. However, here you will have the option of investing only in the regular plans.

Few brokers like Zerodha facilitates Mutual Fund investing through Direct plans. Zerodha offers investing in Direct Mutual Fund plans through its “Coin” platform.

Earlier the service charge was Rs 50 per month plus GST if your total investment had crossed Rs 25k and now it is completely free. Through the Coin platform, you can invest in almost all Indian Mutual Fund AMCs. You can view and analyze your portfolio in one place. What you need to do is remember just a single login id.

Note: Although you can invest in the Mutual Funds for free in Zerodha you have to pay the annual maintenance charges associated with your demat account. Furthermore, you are not going to get any free or paid investment advisory services through Zerodha.

MF Utilities (MFU)

MF Utilities (MFU) is an online portal connecting investors, Mutual Fund distributors, Mutual Fund houses, collection banks, payment aggregators, and RTAs.

Having an account with the MFU allows you to invest across 27 AMCs in India. After you have signed up with MFU, it provides you with a Common Account Number (CAN) which you can use across all the twenty-seven participating AMCs.

By logging into the MFU portal, you can easily invest in any of such 27 mutual fund AMCs. You can conveniently carry out multiple transactions across various mutual funds on a single platform.

Furthermore, at a time you need to pay only once to invest across more than one scheme. Well, MFU if is of no use to you if you want to invest in any Fund house falling outside of these 27 AMCs. In addition to that, the user interface of the MFU is not at all great and there is still a substantial scope of improvement. You can read more about MFU here.

Robo-Advisory Apps & Websites

robo advisors

(Image Credits: Investorjunkie)

India has witnessed a lot of websites and apps in the last 2 to 3 years who offer to invest in Direct plans of mutual funds. Some of the platforms are linked with MFU while the rests have direct integration with the Mutual Fund AMC. One of the most popular robo advisor in united states in Betterment which was founded in 2008. Few of the popular robo advisor in India are Arthayantra5nenceInveztaScripbox etc.

Most of such websites and apps are user-friendly in nature and are fee-based robo-advisory services. It means that the investment recommendations come from the algorithms created by the experts. If you would like to get expert advisory services having a human element in it, then it would cost you more.

You would come across some robo-advisory platforms which offer free investment services but let you invest only in the regular funds. Others may allow you to invest in direct funds against some fees or they might charge money from you against rendering investment advice.

Also read: A Quick Guide to Robo Advisors in India.

How to get started?

So far we have discussed the ways of Direct plans Mutual Fund Investing. But, how would you choose the right platform for yourself? Let us throw some light on the same.

First, if you are looking to invest in the schemes of a very few AMCs, you can invest through the online portals of such AMCs.

In case you would like to select from a heavy portfolio, then you should consider investing through an RTA.

Third, do you think you need any professional help for your mutual fund investing? If yes, then you can opt for online platforms where an expert provides you with customized investment recommendations. It might seem to be a cumbersome process for you to choose one such platform for yourself.

Finally, if you are looking for a robo-advisory platform having a better user interface, then you can associate with any of such against a monthly or flat fee for your mutual fund investing. In the long-term, as your mutual fund portfolio will grow, the flat fee structure will seem more cost-effective. On the other hand, in case of the monthly fee system, a percentage of your invested corpus will be charged on your account on a monthly basis. Robo-advisory platforms are new concepts altogether and you may go ahead with it to experience Mutual Fund investing in a newer way.

That’s all for this post. I hope it was useful to you. If you have any additional questions regarding investing in direct plans of mutual funds, please comment below. Happy Investing!

Measurement Scales Balance Swinging Swing Equality

Is Stock Market Investing a Zero-Sum Game?

One of the most debated questions regarding stock market is that- Is stock market investing a zero-sum game? If someone makes money in the stock market, does it means that someone else must be losing money?

In this post, we are going to demystify this question and try to answer whether stock investing is a zero-sum game or not.

What is a Zero-Sum Game?

A Zero-sum game is a situation where one person’s profit is equivalent to the another’s a loss so that the net change in wealth is Zero.

A few popular examples of zero-sum game is Poker and gambling. In poker, the amount won by one player is equal to the combined losses of the other participants. Please note that there can be two or multiple participants in such games.

Moreover, Zero-sum games are contrary to win-win situations.

poker

Is stock market investing a Zero-sum game?

When it comes to the stock market, the majority assumes that the market is a zero-sum game. After all, the money made by someone should come from a source and most believe that it costs from the other losing participant.

However, this is not true. Investing in stock can be mutually beneficial.

In the share market, trades are based on future expectations and because of the different risk tolerances of the participants.

Just because someone is selling their stock, doesn’t mean he is losing. He might have made substantial profits and willing to book profits. And similarly, if one sells, there’s no reason to think that the next investor can’t profit too. Here, both the parties can be winners.

Overall, a zero-sum game isn’t the right description of investing. As the company expands and becomes more valuable, the stock market can increase the wealth of both the participants & economy over time.

win win situation stocks Is Stock Market Investing a Zero-Sum Game?

Dividends…

An important factor which is invariably ignored while studying the stock market as a zero-sum game is the dividends. As corporations generate profits from the sales, they share a portion of this profits with their shareholders as the dividends.

(There are even cases where the investors get back more money than the original invested amount just as dividends over time.)

If the market was a closed system with just buyers and sellers, somewhere it could be possibly considered as a zero-sum game. However, it is not a closed system as money is consistently pumped into it as dividends by the companies.

Quick Note: The exception to these scenarios are the companies that do not pay dividends.

Also read:

Closing Thoughts

Investing is not a zero-sum game and both the parties can be winners.

Here, the profit for the participants doesn’t come from the stake of losses by other participants, but from the value created by the company. If one sells a stock, there’s no reason to think that the next investor can’t profit too. As long as the business is performing well, the stock will keep on increasing value without anyone losing the money.

Overall, there doesn’t need to be one winner and other losers. Stock market provides an opportunity for a win-win situation for all.

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How Does The Stock Market Affect The Economy?

A stock is a type of security that represents an individual’s ownership in a company and a stock market is a place where an investor can buy and sell ownership of such assets.

Trading stock on a public exchange is essential for economic growth as it allows companies to raise capital through public funding, pay off debts or expand the business.

Why do we have a stock market?

The stock market exists for two main reasons, the first is to provide a company with the opportunity to raise capital that can be used to expand and grow the business.

If a company issues one million shares that can sell at $4 a share, this allows them to raise $4 million for the business. Companies find it favorable to raise capital this way so they can avoid incurring debt and paying steep interest charges.

The stock market also provides investors with the opportunity to earn a share in the company’s profit.

One way to do this is to buy stocks and earn regular dividends on its value- that is the investor earns a certain amount of money for each stock they own.

Another way is to sell the stock to buyers for a profit when the price of the stock increases. If an investor buys a share for $20 and the price eventually increases to $25, the investor can sell the stock and realize a profit of 25%.

Also read: Why do Stock Markets Exist? And Why is it So Important?

How the Stock Market affects the Economy?

The increase and decrease in stock prices can influence numerous factors in the economy such as consumer and business confidence which can, in turn, have a positive or negative impact on the economy as a whole. Alternatively, different economic conditions can affect the stock market as well.

Here are a few ways the stock market can affect the economy of a country:

Movements in the Stock Market

The movements in the individual prices of stocks give the stock market a volatile character. As stock prices move up or down, their volatility can have a positive or negative impact on consumers and businesses.

In the event of a bull market or a rise in the prices of stocks, the overall confidence in the economy increases. People’s spending also increases as they become more optimistic about the market. More investors also enter the market and this feeds into greater economic development in the nation.

When the prices of stock fall for a continuously longer period, also known as a bear market, it has a negative effect on the economy. People are pessimistic about the economic conditions and news reports on falling stock prices can often create a sense of panic. Fewer investors enter the market and people tend to invest in lower-risk assets which further depresses the state of the economy.

Also read: What is Bull and Bear market? Stock Market Basics

bull and bear market

(Image credits: 5paisa.com)

Consumption and the Wealth effect

When stock prices rise and there is a bull market, people are more confident in the market conditions, and their investment increases. They tend to spend more on expensive items such as houses and cars. This is also known as the wealth effect which is how a change in a person’s income affects their spending habits and eventually leads to growth in the economy.

In the case of a bear market or a fall in stock prices, there is a negative wealth effect. It creates an environment of uncertainty among consumers and a fall in the value of their investment portfolios decreases spending on goods and services. This affects economic growth as consumer spending is a major component of Gross Domestic Product.

A common situation of the wealth effect was during the US housing market crash of 2008, which had a large negative impact on consumers wealth.

what's the economy

(Image credits: Investopedia)

Impact on Business Investment

Apart from consumer spending, business investment is also a key indicator of economic growth.

When stock prices are high, businesses are likely to make more capital investments due to high market values. Many companies issue an IPO during this time as market optimism is high and it is a good time to raise capital through the sale of shares. There is also more mergers and acquisitions during a bull market and firms can use the value of their stock to buy out other companies. This increased investment feeds into greater economic growth.

When the stock market is bearish, it has the opposite effect on investment. Confidence in the economy decreases and businesses are no longer eager to invest in the economy. The decrease in share price makes it harder for companies to raise funding in the stock market.

Other factors

The stock market also affects the bond market and pension funds. A large part of pension funds are invested in the stock market and a decrease in the price of shares will lower the value of the fund and affect future pension payments. This can lower economic growth as people who depend on pension income will tend to save more and this lowers spending and eventually the GDP.

While a fall in share prices has a negative impact on economic growth and GDP of a nation, it has a positive effect on the bond market. When there is a depression in the stock market, people look for other assets to invest their money in such as bonds or gold. They often provide a better return on investment than shares in the stock market.

Remember, it is always important to diversify your investment portfolio and spread your risk. Don’t throw all your eggs into one basket.

The stock market and the economy are not the same

Contrary to popular belief, the stock market and the economy are two different things. The GDP of an economy and the stock market gains are incompatible and, in fact, there is little comparison between the two. The major reason for this discrepancy is the difference in the size of the two markets. The economy depends on millions of factors that can have both a positive and negative impact, while the stock market is only affected by one factor, the supply and demand of stocks.

Also read:

For investors in the stock market, it is better to err on the side of caution and focus on the fundamentals of each stock rather than on the economy as a whole. As the saying goes ‘an economist is a trained professional paid to guess wrong about the economy’.

Growth vs Dividend Mutual Funds

Growth vs Dividend Mutual Funds: Which one is better?

The Equity Mutual Fund comes in various forms. You can either invest your savings in a Small-Cap Fund or a Mid-Cap Fund. In addition to this, you have Large-Cap, Balanced Fund or Multi-Cap Fund to go for. You can opt also for an ELSS Fund if you are planning your personal Income Tax for the next Assessment Year.

Whatever be the category of an Equity Fund you choose to park your money in, this will either be in the nature of Growth Plan or Dividend Plan. In this post, we are going to discuss growth vs dividend mutual funds and which one is better for investors.

From the literal interpretation, it is not very unlikely that you might feel more inclined towards investing in the dividend plan at this point in time. Let us discuss why.

You might think that dividends from equity funds can be used for generating regular income. However, the fact is that regular dividend payouts are only possible if the fund generates profit regularly.

Moreover, for an equity fund to be a sustainable profit generating fund, the stock market is also required to be going upwards. If the market shows correction for a substantial period of time, it won’t take much time for the flow of regular dividend to get stopped.

Again, you might be an investor who thinks choosing dividend plan for booking regular profit without redeeming your units held. This might seem to be good as a strategy on the paper but, for its execution, proper planning is required.

Further, it could also be possible that you have just read the names of these two plans for the first time and completely unaware of the idea behind Growth and Dividend plan. You might not know what they actually mean and end up selecting something randomly just for the sake of investing in an Equity Fund.

Growth vs Dividend Mutual Funds

Now, let us understand how Growth Plan and Dividend Plan work in real life.

In the Growth option, the profits in the form of capital appreciation and dividend, made by your scheme are re-invested into the same fund. This will lead to the rise in the Net Assets value (NAV) of the scheme with time.

When the underlying portfolio of the fund makes profits, the NAV of its units rises. Similarly, you’re your fund runs at a notional loss, supposedly due to the market correction, the NAV of the same fund goes down.

In the case of Dividend Plan, the profits made by your fund are not reinvested back into the fund by the Fund Manager of the Asset Management Company (AMC). You get a share in the said profits in the form of dividends from time to time.

The amount of dividend you get and the frequency of getting the same are not predetermined. Dividends are only declared by the AMC when the scheme realizes profits in real.

In the Dividend option, the dividend is paid to you from the NAV of the units you hold, so paying dividend reduces your overall NAV.

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Source: JagoInvestor

Have a look at this write-up to know more about Dividend and Growth option.

Now you have come to know how Growth Plan and Dividend Plan work. So, which option would like to opt for? Our recommendation would be to go for the Growth option.

Why Growth Plans?

Let us discuss why you should choose Growth option over Dividend Plan while investing your savings in Equity oriented Mutual Fund.

In the Finance Act 2018 (Budget 2018), it is said that the Income Tax on Long-term Capital Gain @10.4% (including Health & Education Cess of 4%) will be charged on Equity and Equity oriented Mutual Funds. Now, Income Tax is only going to be applicable if Long-term Capital Gain crosses the threshold limit of Rs 1 lakh in the Financial Year 2018-19.

The said Budget has also introduced Dividend Distribution Tax (DDT) on Equity and Equity oriented Mutual Funds at an effective rate of 12.942%. Let us understand the break-up of the said rate of 12.942%.

Suppose you as an investor has got Rs 1000 as a dividend on your Equity Fund. Now, DDT is chargeable on the basis of “Grossing Up” concept. So, to pay Rs 1000 as a dividend by the AMC, the actual dividend comes to be Rs 1111.11{1000/ (1-10%)}. The rate of DDT is 10% so DDT comes to Rs 111.11.

The surcharge is calculated @12% on DDT which is calculated as Rs 13.33. Health & Education Cess @4% is to be charged on the computed Cess and Surcharge which gives the result of Rs 4.98.

So DDT comes to Rs 129.42 (Rs 111.11 + Rs 13.33 + Rs 4.98).

Although the DDT is chargeable in the hands of the Mutual Fund Company, due to the imposition of the former, you are getting Rs 129.42 less as a dividend. So, indirectly you are paying a hidden tax @12.42% on your dividend income. Whereas, in the case of long-term capital gain, you are only charged 10.4% by the Indian Government which is relatively lower.

Note: To know more about taxation on Mutual Funds for the Financial Year 2018-19, do check out this blog.

The above explanation substantiates that your Equity Mutual Fund investment with Growth Option, subject to Long-Term Capital Gain tax would be relatively more tax efficient than your investment in a Dividend Plan Equity Fund, where DDT is made applicable.

Furthermore, in accordance with the latest Budget, LTCG in an Equity Fund is only subject to Income Tax if the same exceeds Rs 1 Lakh in a Financial Year.

For example, if your Long-term Capital Gain in a growth plan investment is Rs 75000 for the Financial Year 2018-19, you don’t need to pay a tax on it. But, if the same becomes Rs 150000, then LTCG tax is chargeable on Rs 50000, i.e. the amount in excess of Rs 1lakh.

On the other hand, if you have invested in a dividend plan, the entire dividend you have received is subject to DDT. No exemption limit is applicable to an equity dividend option similar to a growth plan equity scheme. (If you want to know more about the Union Budget 2018-2019 please check out this file.) 

The equity funds with growth plan are more appropriate for long-term wealth generation than dividend based equity funds. The amount of dividend you would receive in the latter option is not going to be a significant one.

You are most likely to spend that money in your day to day expenses and it is hardly going to be reinvested by you in the market.

But, if you have invested in a performing equity fund with growth option, the latter refrains from paying you any return in cash. So, the returns get reinvested in the same fund and get compounded year on year. This leads to the generation of substantial wealth in the long term. 

If you like to know how to choose a Mutual Fund scheme for yourself, please check out this blog.

dividend growth mutual funds tax

(Source: Times of India)

What if you have already invested?

If you have invested in a dividend plan and the duration has crossed a year, you are recommended to switch to the growth option within the Financial Year 2018-19. Here, switching means redeeming units of one fund and investing the proceeds in another scheme.

If the holding period of your investment is less than 1 year, the gains are to be treated as Short-term Capital Gains. In that case, you would be taxed @15.6% (including Cess). But, if your portfolio is bleeding (due to recent bearish market), you can even switch irrespective of the completion of 1 year of your investment. As discussed earlier, the Long-term Capital Gains, if any, would be taxed @10.4% (including Cess).

You can even choose to let it complete a year and gradually switch to growth plan so as to ensure that the Long-term Capital Gains do not go over the Rs 1 lakh mark.

Closing Thoughts: Growth vs Dividend Mutual Funds

In this post, we discussed that Budget 2018 has proposed Long-term Capital Gains Tax and Dividend Distribution Tax on Equity schemes.

We have also seen how growth option scores over a dividend plan as the former is more tax efficient and sound more suitable in generating long-term wealth. Therefore, from the entire discussion, it is very clear that the Growth plan is the obvious winner.

That’s all for this post. Happy Investing!