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What is Working Capital? Definition, Importance & More.

What is Working Capital? Definition, Importance & More.

Hello Readers. One of the most important factors to check while analyzing a company before making an investment decision is its working capital.

In simple words, working capital can be defined as the funds available to a firm to finance its regular operations like day to day business activities. Nonetheless, the noteworthiness of working capital is way more than what most people think. 

In today’s article, we will be focusing on the importance of working capital management and how it could be studied to get a deeper insight into the companies we are researching for potential investments. 

Here are the topics that we’ll cover in this post.

  1. What is working capital?
  2. Why is working capital important?
  3. What factors affect the working capital of a company?
  4. When Negative net working capital is actually positive.
  5. Conclusions

Overall, it’s going to a very educational post. Therefore, please read this article till the very end. Let’s get started.

1. What is working capital?

To define the term in the simplest words, working capital is essentially the funds that have been allocated for day to day operations of the firm for the current financial year. These funds need not entirely be held in cash but could also include any asset or liability from which a cash transaction could be expected. This could include account tradables, cash in hand, account payables and short-term borrowing and loans.

The most commonly used formula for working capital is given by the following,

Net Working Capital = Current Assets – Current Liabilities

When an investor wants to look only at the operating level of a company he may prefer to use the following formula for working capital.

Operating Working Capital = Cash + Inventory + Accounts Receivables – Accounts Payables

Please note that the operating working capital excludes the short-term interest and loan payments a company may have to incur in a financial year.

2. Why is working capital important?

Conventionally, the working capital is used as a measure of a company’s liquidity. Since it is calculated on the basis of accounts receivable/payable, cash, borrowing and payments, the working capital of a company could tell us a ton about the management’s approach and commitment to inventory management, debt management, revenue collection, and payments to suppliers.

A positive working capital would imply that a company has got a good control over its transactions and is able to collect and make payments with a large degree of freedom.

A negative working capital, on the other hand, would normally imply the opposite.

3. What factors affect the working capital of a company?

Although working capital is studied to get an understanding of the management and the general thumb rule that positive working capital is always better than negative working capital works most of the times in investing. We, at Trade Brains, believe that investors could get access to more opportunities if they were to take a more holistic approach to study working capital.

Since a company is always involved in a particular business, it is, therefore, logical to assume that all the short/long term factors affecting the industry will determine how managers conduct their operations and hence the working capital. In some industries, managers can offset the risk in operations by choosing a favorable business model. Depending on the kind of model they choose to operate could also determine the working capital of the company.

On a broad level, the list of factors that can affect the working capital of a company are as below (note that this is not exhaustive but may be used as a guide)

  • Nature and type of business
  • Type of Industry
  • Factors of production and their availability
  • Competition
  • Price levels and inflation
  • Production Cycle Time
  • Credit Policy and agreements with suppliers and customers
  • Growth and Expansion strategies
  • Working capital cycle

A more quantitative approach to analyzing working capital would be through a basic ratio analysis. Below are the most useful metrics used by fundamental investors.

4. When Negative net working capital is not so negative!

Imagine a newspaper printing and distribution company with around 2,000 customers in a city. When a customer signs up for a subscription for 1 year, he/she may have to pay the amount up front for the period for which the service is provided. Assume that the subscription cost for one year is ₹1,000, this implies that the company will receive ₹20,00,000 in advance payment. This amount is recorded under accounts payables portion of the balance sheet. Assume that the company holds another ₹8,00,000 in cash and an inventory worth ₹2,00,000.  The net working capital of the company can then be computed to be -₹10,00,000.

In the above example, it can be noticed that even though the working capital happens to be negative the business model of the company allows the company to receive its cash well in advance. This cash could then be ploughed back into the business as investments into new equipment or into marketing to expand its client base.

In general, companies that have high inventory turns and perform a lot of business on a cash basis, such as grocery stores or discount retailers, require very little working capital. These types of businesses raise money every time they open their doors. Because of their advantages, these company can also enter into contracts with vendors and suppliers to lend their products for free for a specified period of time. These partnerships allow the retailers/discounters to keep their cash in hand and employ them elsewhere which trying to sell the products they got through credit. If they are unable to sell them they could just return it back to the vendors before the end of their negotiated period without any cost.

The following sectors are normally observed to operate with a negative working capital.

  • Retail: Due to supplier agreements and high inventory turnover
  • FMCG: Able to leverage their wide brand appeal and customer demand to get retailers to book their products in advance
  • Automobiles: Companies employ “just in time” manufacturing policies to keep efficiency high and inventory at low levels. Also, they normally charge a decent sum as an advance from customers as booking charges.
  • Media: Services are provided only after an upfront subscription fee

5. Conclusions

Although analyzing the working capital and its various components form an essential part of investment research. An investor should always keep in mind to view the company as a business and try to understand the root causes within the business model or the industry which drive the numbers.

Sticking to an individual’s circle of competence may help greatly in this regard which investing in stock markets. Happy Investing!

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3 Uncommon Alternative Investment Options in 2020

It is no secret that diversifying is the key to success for investing and as humans we love our options! Many investors assume diversifying means investing in different types of securities like bonds, stocks, and options. However, the top investors take the term in their most exclusive form and invest in truly diversified assets. This brings us to alternative investments.

What are alternative investments?

Outside stocks and bonds, there is a world of investments that we can choose from. Alternative investments are those investments that vary from the traditional forms of investing in terms of liquidity, how they are regulated and the way they are managed. Having a mixed basket of investments is very beneficial for an investor especially during a downturn. People who have experienced a recession or inflation will tell you that investing in only one type of asset will result in great losses.

A few examples of alternative investments include venture capital, real estate investments and even gold efts. These assets are usually more illiquid than traditional investments and have little to no correlation with stocks and bonds. However, alternative investments are less regulated than traditional stocks which are under the control of organizations such as FINRA, SEC in the U.S or SEBI in India. On the flip side, although they are not controlled investments, the performance of alternative investments is difficult to measure. This is because, unlike stocks, there is limited information available on alternative investments, making them difficult to assess.

Types of alternative investments

Alternative investments is a mindset approach to investing rather than a specific investment. There are various alternative investments out there and investors can choose the ones that best suit their management style. A few investments include:

1. Private equity

Investing in the stock market is great but not all companies are listed on the exchange. There are more private companies than public companies and the companies often take on an investor to help fund their growth. Private equity is the broad term to describe the spectrum of investors in the private market. The funds raised by the private equity firms will be invested in private companies, many of which include promising startups. The capital raised is used for organic and inorganic growth of the company. The amount invested is then returned back to the investors during an exit event such as the private firm issuing an IPO to go public or an acquisition or merger.

To assess the performance of this alternative investment, many investors use the internal rate of return (IRR) however this does not take into consideration the interim or negative cash flows. In recent years, this formula evolved to the Modified IRR which is a more holistic approach to analyze the performance of a private equity investment.

2. Collectibles

paintings

Collectibles is the broad term used to describe items such as cars, antiques, paintings and various vintage items. In other words, they are items that have a low intrinsic value. Many people place a high value on these items, but unlike stock and bonds that can generate profits and income, the value of the collectibles is based on the speculations of buyers and sellers. An investment into collectibles can help diversify your portfolio but you need to have a good understanding of the items you are collecting to reduce risks.

One of the best ways to invest in collectibles is to have a personal interest in what you are collecting. This will help you develop an interest in the market and gain expertise on the items you are investing in. Items collected this way will give the collector personal satisfaction of the items they own whether or not they receive the expected return.

It is important for investors to remember that collectible items have a long holding period. While stocks and shares can be sold at a whim, depending on market conditions, collectibles, on the other hand, need to be ‘held’ by the owner for an extended period of time. This is because collectibles tend to gain value over time and selling them too quickly can only result in high transaction costs.

While collectibles can help diversify your portfolio, an investor requires extensive knowledge in the market to make the right decisions. But collectible investing is great because not only is it an alternative investment but it is also a hobby for many!

3. Hedge funds

A hedge fund isn’t a single investment but rather a pooled investment that is managed by an investment advisor. A hedge fund raises money from investors and uses the money to buy up entire businesses, either through a takeover or by investing in the business to improve operations. There are also hedge funds that specialize in real estate or other assets such as patents and trademarks.

Investing in hedge funds can help an investor diversify their portfolios because hedge fund managers used a variety of strategies when investing. This includes arbitrage, distressed assets, and macro-trends. They also take a Leveraged approach to investment which is using borrowed money for investment.

Hedge Funds vary from private equity investments because they invest in public companies, thereby providing more liquidity and making it easier for investors to take out their money if required. A report by the World Economic Forum states that in the U.S investments in hedge funds represent 40% of total alternative investments.

Also read: What is a Hedge Fund? And How do they operate?

Closing Thoughts

Diversification is the mantra when it comes to earning high returns on your investments. While the stock market allows investors to assess the performance of their stocks and provides liquidity, it is not always the safest investment as the markets are constantly volatile. This has led to an increase in the popularity of alternative investments in the last couple of years.

Historically, however, alternative investments are more popular among high net-worth individuals as they require a large initial investment and cannot be converted to cash quickly. Nevertheless, alternative investments have numerous advantages such as portfolio diversity and active management of funds.

Alternative investments are now an option for all classes of investors and not just the wealthy ones. But these investments requires a lot of research and study and investing in them without a thorough assessment can be incredibly risky.

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Open-Ended Vs Closed-Ended Funds: Which One to Prefer?

A few days ago, I was having a discussion on Mutual Funds with a friend of mine. During the conversation, he asked me to state the key parameters which one needs to consider for investing in a Mutual Fund scheme. Another time, a person in my connection lists on LinkedIn texted me and asked when he should invest in an Equity Mutual Fund. He further wanted to know whether he should invest a lump sum or opt for investing through SIPs. Again yesterday, an old friend of mine called me up in the evening and asked in which fund he should be investing given his risk-return profile.

Well, being a Mutual Fund enthusiast and having an experience in Mutual Fund investing of over two years, I frequently come across many such queries on Mutual Funds from my acquaintances. But, there is one thing which has really surprised me is that till date, no one has ever asked me anything regarding Open-ended and Close-ended Mutual Funds.

I think this is something one needs to know if he/she is a fresher in Mutual Fund Investing. Therefore today, I have decided to talk about Open-ended vs Close-ended funds.

Open-ended vs closed-ended funds

On the basis of the structure, a Mutual Fund can be either termed as an Open-ended Mutual Fund or a Close-ended Mutual Fund. Let us first discuss Open-ended funds.

— Open-ended Funds

Open-ended funds can issue any number of units from the market. These work in a similar manner like some collective investment scheme where you can purchase units directly from the Mutual Fund Company instead of an existing unitholder.

Unlike a Close-ended fund, the units in an Open-ended scheme can be purchased or sold even after the NFO (New Fund Offering) period ends. These funds offer units to you on an everyday basis. Further, you can also redeem your units to the Mutual Fund Company any day.

The units of an Open-ended fund are issued at a price which is termed as the Net Asset Value (NAV). The NAV of a scheme is nothing but the market valuation of the assets minus liabilities of the scheme. If the scheme performs well, its NAV goes up and vice versa. So, having a constant look at the NAV of a fund helps an investor to evaluate its performance.

— Closed-Ended Funds

In a Close-ended fund, a fixed number of units are issued at the NAV to the investors in its New Fund Offering (NFO). After that, no fresh units are offered to investors. Therefore, you cannot invest in the units of a Closed-ended fund after its NFO period ends. Furthermore, you cannot redeem your units to the Mutual Fund Company after the NFO period lapses.

In order to provide liquidity to the existing investors, the existing units of a Close-ended scheme are listed on a recognized stock exchange subsequent to the NFO. Any further transactions with respect to those units are taken place in the stock market.

The transactions of the units of a Close-ended fund in the stock exchange are taken place at a price determined by the interaction between demand and supply in the market. Therefore, in a stock exchange, you would get a unit of a close-ended scheme at a price which could be at a premium over or a discount below its NAV.

Difference between open-ended vs closed-ended funds

So far we have understood the basics of Open-ended and Close-ended funds. Let us have a look at the major differences between them.

1. Open Ended schemes are more liquid in nature. You can redeem your units of an Open-ended fund anytime. Closed Ended schemes come with a fixed lock-in period. If you want to redeem your portfolio to the Mutual Fund Company at the NAV, you have to do it within a specified period of time. Otherwise, you have to dispose of it through the stock exchange at the market determined price.

2. Unlike a Close-ended scheme, an Open-ended fund is not traded on any recognized stock exchange: The price of a unit in an Open-ended scheme is majorly influenced by the prices of its underlying securities. On the other hand, the price of a unit in a Closed-ended scheme is more impacted by the market forces as compared to its benchmarks. So, it is easier to evaluate the performance of an Open-ended scheme as compared to a Close-ended fund.

3. Closed-ended funds offer trade opportunity at real-time market prices: As the units in a Closed-ended fund are traded on a stock exchange like shares, this gives you an opportunity trade on them based on real-time market prices. You can apply share trading strategies like limit orders, margin trading, etc.

4. Less-pressure for Closed-ended fund Managers: The Fund Managers in an Open-ended scheme is having no option but to strictly follow the objective of the scheme. Further, they have to face the redemption pressure of the unitholders off and on. The AUM (Assets under Management) for the Fund Managers to handle in a Close-ended scheme stays majorly fixed from the beginning. Therefore, they can manage the same at their own discretion and are not required to face any external pressure or adhere to stringent compliances.

5. The track records of a Closed-ended fund are not available, unlike an Open-ended fund: It is not possible for you to see the performance of a Close-ended fund over different economic cycles. But, in case of an Open-ended fund, you can always take an informed investment decision.

6. In a Close-ended fund, you have to invest a lump sum in a scheme during the time of their NFO issue: It is of no doubt in saying that it is a risky approach in making investments. Whereas, an Open-ended fund allows you to set up a Systematic Investment Plan (SIP) in a scheme of your choice.

Also read:

Closing thoughts

 In an Open-ended fund, many investors look to redeem their portfolio to book quick profits when the NAV goes up by 5 to 10% in the short run. This hurts the long-term investors significantly who stay invested with an aim to achieve higher returns in the long run. In this regard, a Closed-ended fund seems to be a better option. This is because its lock-in period prevents early redemption by the investors and if they redeem in the stock market, the AUM of the scheme still remains unaffected.

Again, if you have a little or no knowledge of the market and looking to earn a return of 15 to 20% annually, an Open-ended fund is ideal for you. In these funds, the NAVs are updated daily and they offer a higher scope of liquidating as compared to the Close-ended ones.

Moreover, Close-ended funds don’t offer any SIP mode for investing. You can only invest in a lump sum mode either in the NFO or in the secondary market. So, you can choose to invest in a Close-ended fund if you want to trade in a Mutual Fund scheme like any share in the stock market. But, if you are a regular income earner who likes to invest on a regular basis, an Open-ended Mutual Fund is always better for you.

It is not so easy to conclude whether opting for an Open-ended fund is better than investing in a Closed-ended scheme. The performance of any Mutual Fund scheme, whether it is Open-ended or Closed-ended, depends on the fund category it belongs and the effectiveness with which the Fund Managers handle its assets. In addition to that, what matters more is the purpose for which you want to invest in a Mutual Fund.

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Howard Marks’ Investing Strategies & Lessons

Howard Marks, born during the 1940s, is a renowned investor and writer in the United States of America. In 2017, he was ranked the #374 richest person in the United States, with a net worth of $1.91 billion by Forbes.

During the early part of his career, Howard Marks worked with Citibank in senior positions. In the year 1985, he joined TCW where he created high yield, convertible securities, and distressed debt groups and led them all by himself.

After working in TCW for a decade, Howard resigned and eventually founded Oaktree Capital Management in Los Angeles with five partners. Interestingly, the partners of Howard in Oaktree are all ex-employees of TCW like him. The Asset Management Firm of Marks started growing in size and operations at a rapid pace with the passage of time. Oaktree focused on distressed debt, high-yield bonds, and private equity. Mr. Howard is currently the Co-chairman of the organization.

He is also a very popular personality among finance enthusiasts in the US and the world. His detailed discussion on investment strategies and insights into the US economy is known as “Oaktree memos”. It contributed highly towards his popularity among the investing community across the world. He has also authored several books on investing which are quite famous around the globe like Mastering The Market Cycle: Getting the odds on your side The Most Important Thing: Uncommon Sense for The Thoughtful Investor.

Investing strategies of Howard Marks

Let us have a look at some pointers which would help you understand the investing philosophy of this famous billionaire investor. 

1. Be a contrarian investor: Howard Marks stated that your behavior as an investor towards the financial market should be different from the other retail investors. When people buy some stock, you have to sell the same and vice versa. You need to observe what others are doing and try to comprehend where they are going wrong.

As per Marks, the market is driven by greed and fear of investors. You should not follow the herd. What others are doing, not necessarily it has to be correct. You can’t afford to get carried away by the actions of the herd. Controlling your emotions is extremely important to achieve success in financial investing.

2. You might face punishing times in your investing career: You can’t expect any industry to perform well every time. It is also not possible for an asset class to provide high returns on all occasions. It might happen that the investing approach of yours fails to generate your target returns on every occasion.

Your portfolio might stay reddened for a substantial period of time. It is pretty okay to incur losses while investing. Losing your corpus in the financial market is a part and parcel of investing.

3. Patience is highly needed to succeed in the financial market: If an asset is underpriced, it doesn’t mean its price is going up tomorrow. Similarly, an overpriced asset doesn’t indicate it will start going bearish soon.

You might come across a plethora of opportunities in the stock market to book quick profits at low risk. But, it is always recommended to stay firm with your investing strategies. Have faith in your investing philosophy to yield returns for you in the long run.

4. Don’t look for “exact bottoms” in the market: Marks said that he looks to buy a stock at a cheap price. He enters into the market when the price is low, not necessarily it has to be the price. It is not always possible that you get to buy all quantities of a share at its rock bottom price.

After an initial investment, when the same stock gets cheaper, Marks again buys more of it. It is not necessary to buy all your shares at the market low to make huge money.

5. Refrain from buying quality stocks at any price: It is not true that you will earn huge profits by investing in high-quality securities. You should look to buy a stock which is trading at a price lower than its intrinsic value.

Investing in stocks at a low purchase price not only generates the scope for future gain, but it also puts a limit on the downside risk. The more is the discount from the fair value (intrinsic value), the greater is the “margin of safety” a stock could provide you with.

6. Psychology is more important than market predictions: You don’t have a crystal ball to predict the future. You can’t forecast how the market will perform tomorrow. You can only mentally prepare yourself from probable situations in the market. For making money in the stock market you require having a deep insight into companies, asset classes, and sectors.

You can’t let your emotions get better of your investment strategies. What matters most is your psychology. You have to be either aggressive or defensive in your approach. It doesn’t matter whether you are investing in stocks or bonds.

It hardly matters whether you pour your money in domestic or international markets. Your returns remain unaffected irrespective of the fact whether you invest in a developed economy or an emerging market. 

Famous quotes by Howard Marks

You can find a plethora of quotes from Marks on the internet. Here are a few quotes which I found worth sharing from his book, The Most Important Thing Illuminated: Uncommon Sense for the Thoughtful Investor’.  

— “The process of intelligently building a portfolio consists of buying the best investments, making room for them by selling lesser ones, and staying clear of the worst.”

— “There are old investors, and there are bold investors, but there are no old bold investors.”

— “There’s a big difference between probability and outcome. Probable things fail to happen—and improbable things happen—all the time. That’s one of the most important things you can know about investment risk.”

Here are two more of my favorite quotes of Howard from his book, ‘Mastering the Market Cycle: Getting the Odds on Your Side’.

— “There are three ingredients for success—aggressiveness, timing, and skill—and if you have enough aggressiveness at the right time, you don’t need that much skill.”

— “What do value investors do? They strive to take advantage of discrepancies between “price” and “value.” In order to do that successfully, they have to (a) quantify an asset’s intrinsic value and how it’s likely to change over time and (b) assess how the current market price compares with the asset’s intrinsic value, past prices for the asset, the prices of other assets, and “theoretically fair” prices for assets in general.”

Also read:

Closing thoughts

Investing requires a person to have patience, dedication, and studying the market thoroughly. In case you want to earn quick profits in the short term, it is possible through trading but not by investing. But, if you are looking to grow your wealth and willing to stay invested for a long time, investing can make it a reality.

Howard Mark has not made huge money in one day. It took him years of experience to reach where he is now. To grow as a fundamental analyst, it is very important to learn from the eminent personalities who have achieved grand success as investors. The investing approach of Marks is immensely informative for any fresher willing to pursue a career in the financial market.

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The Butterfly Effect: This Theory Can Change Your Life

It has been said that something as small as the flutter of a butterfly’s wing can cause a typhoon halfway around the world.

One of the greatest surprises in the scientific world is the chaos theory or butterfly effect which are events in our lives that are both non-linear and unpredictable. While science traditionally deals with outcomes that can be predicted and calculated to a certain extent like chemical reactions or the force of gravity, there are often many instances that are nearly impossible to predict like natural disasters, stock prices or the weather.

The first step to overcoming this unpredictability is to understand the chaotic nature of the world we live in. Identifying the elements that cause changes in stock price or the weather can help us steer our thinking in a certain direction. Finally, we need to remember that our eco, social and economic systems are all interconnected and taking negative actions on any of these systems can result in detrimental consequences.

The Butterfly Effect

The butterfly effect describes the phenomenon that a small event can have very large consequences.

This chain reaction is perfectly described in the movie ‘Pay it forward’ where a small boy, Trevor, creates a plan of kindness for a school project.  A recipient of a kind favor carries forward this favor to three other people. As the movie goes on we see this circle of people who do favors become bigger and bigger and ultimately affects the lives of many people in the community. One random act kindness started by a small boy resulted in a very large impact, changing everyone’s lives for the better.

While the movie represents a glass half full situation, the butterfly effect can be negative as well. For example, as much as meteorologists try to predict natural disasters, there have been tsunamis and typhoons that are inexplicable.

It is important to remember that the butterfly effect is not a small event that can have a large impact which can eventually be driven to the desired end but it is in fact a small event in a complex universe that can either have a very large impact or no impact at all. It is virtually impossible for us to identify or predict which one will occur.

The invention of the butterfly effect

In popular culture, the butterfly effect is used to describe the explain the inexplicable. How one small event can have a magnanimous effect on a completely unrelated event. This theory was first discovered by an MIT meteorology professor, Edward Lorenz who came across the phenomenon while conducting some weather-related research.

In 1963, Lorenz was conducting research on weather patterns and entered numbers into a program that was based on 12 variables such as wind, speed, and temperature. These values would be depicted on a graph that would rise and fall depending on the weather pattern. Lorenz ran a stimulation similar to the one he ran previously and the results he saw surprised him.

The variables were drastically different from what he saw previously when he ran the same stimuli. This would forever change the way his program produced weather patterns. He said “the numbers I had typed into the computer were not exactly the original ones. They were rounded versions I had first given to the printer. The initial errors caused by rounding out the values were the cause: they constantly grew until they controlled the solution. Nowadays, we would call this chaos.”

This unexpected change in the value of the variables based on the same stimuli led Lorenz to the powerful insight that the smallest of changes could have large unpredictable effects. He later termed this the butterfly effect saying that a butterfly could flap its wings in one part of the world and it could cause a typhoon in a completely different place. This led him to the conclusion that even with knowledge of primary conditions, the future was virtually impossible to predict.

Lorenz presented his findings in a paper titled ‘Deterministic Nonperiodic Flow’ which is considered one of the greatest achievements of twentieth-century physics. He said that there are small variables that can have profound impacts on the same body or system in the future. The strength of the impact is however unpredictable. Weather is a variable that is often hard to predict.

How the butterfly effect has impacted reality?

There are many references in real life (also represented in popular culture) where a small event has resulted in a large consequence- the butterfly effect. Here are a few ways the butterfly effect has shaped modern history.

The bombing of Hiroshima and Nagasaki

The nuclear bombs dropped on Hiroshima and Nagasaki is remembered as one of the most significant events in the war that changed the course of history and won Korea their independence. A little research into the war will tell you that the U.S intended to bomb the Japanese city of Kuroko.

However, on the fateful day, bad weather conditions prevented the U.S from doing this. The fighter planes flew over the city three times and eventually gave up due to the lack of visibility. The military personnel then made the split second decision to bomb Nagasaki instead. This bombing, as has been documented in history, had a magnanimous effect on the war and changed the course of history. If the weather conditions in Kuroko had been better, it might have resulted in a completely different outcome.

The Chernobyl accident

In Soviet Ukraine, 1986, a catastrophic accident occurred at a Chernobyl nuclear plant. The disaster was a result of design flaws in the reactor and the arrangement of the nuclear core that was not in accordance with the manual. This nuclear accident is said to have released more radiation that the bombings of Hiroshima and Nagasaki. Numerous people were evacuated and it also resulted in deaths and birth defects.

However, the accident could have been much worse, after the initial release of radiation three workers volunteered to go turn off the underground valve which is said to have eventually killed them. This was a brave and heroic act because had they not turned off the valve when they did, more than half of Europe would have been destroyed and inhabitable (the butterfly effect). The Chernobyl accident has had numerous long-term effects and many believe it is the cause of global warming. Countries today are slow to adopt nuclear power as an energy source.

Closing Thoughts

While the human race thrives on control and predictability, the butterfly effect shows us that we, in fact, cannot predict the future. The complex universe around us is chaotic and vulnerable to even the smallest of changes. As humans, we can only identify catalysts that react to these conditions. However, if we try to control or predict outcomes, more often than not, it will result in failure.

Finally, always remember what the butterfly effect actually teaches us- “Everything that you do matters”. 

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What is National Pension Scheme (NPS)? Advantages, Tax Benefits & More

NPS or National Pension Scheme is a pension plan which was initiated by the Indian Government in January 2004. It was primarily introduced for those Government employees those who joined employments in 2004 and onwards.

Subsequently, the Government of India wanted to develop the habit of savings among the salaried Indians, specifically for retirement. Therefore, from the month of May in 2009, NPS was made available for all employed Indians. PFRDA (Pension Fund Regulatory and Development Authority) is the regulator of NPS in India.

How can you start NPS?

If you are a salaried Indian resident, aged between 18 to 60 years, you are eligible to invest in NPS. You can open your NPS account with any entity called the Point of Presence (POP). POPs mostly include banks and other financial institutions. The authorized branches of a POP are called Point of Presence Service Providers (POP-SPs). POP-SP acts as the collector of its POP.

In order to enroll in an NPS account, at first you have to make an application in a prescribed form. Next, you have to furnish the documents required for complying KYC norms. Once your application is processed, the Central Record-keeping Agency (CRA) will send you your PRAN. After that, you have to pay the minimum account opening fee along with the management fee to activate your NPS account.

Various types of Accounts in NPS

There are two types of accounts in NPS, which are Tier I account and Tier II account.

Tier I account is mandatory for all subscribers of NPS. If you are a Government employee, you are required to contribute 10% of your Basic Salary plus D.A. in NPS. The Government of India also contributes an equal amount in the same account. A minimum of Rs 500 per month is required to be contributed in your NPS account, i.e. Rs 6000 in a year.

In case you are a private employee, you get the option of choosing between NPS and EPF. If you choose NPS, you have to contribute an amount equal to 10% of the sum of your Basic Salary and DA. Your employer will also contribute an equal amount in your account. You can find your employer’s contributions towards your NPS account in Form 16.

Tier II account of NPS is a savings account and you can withdraw money from it anytime. Neither your employer contributes any amount in this account nor do you get any tax exemption on such contribution made. You have to pay Rs 1,000 to open this account. In your subsequent contributions, you have to pay a minimum of Rs 250 on each occasion. Further, every year end, your balance in this account should be at least Rs 2,000 to keep your account operation.

How does NPS work?

An NPS invests in Equities, Corporate Debts, and Government Securities. You can choose any from the Active, Auto or Default plan. In Active plan, maximum 50% of your investments can be allocated to Equities.

In the Auto plan, until you reach 35 years of age, maximum investments that can be made in Equities and Corporate Debts would be 50 and 30%, respectively. After that, in the next 20 years, the investments in Equities and Corporate Debts go down every year by 2 and 1%, respectively.

In the Default plan, maximum 55% in Government Securities, 40% in Corporate Debts, 15% in Equities, and 5% in Money markets can be invested out of the contributions made. If you are a Government employee, please note that you can only opt for the Default option.

The financial assets of your NPS account are managed by an established Fund Management Company. You can choose your fund manager from any of the following:

  1. ICICI Prudential Pension Fund.
  2. LIC Pension Fund.
  3. Kotak Mahindra Pension Fund.
  4. Reliance Capital Pension Fund.
  5. SBI Pension Fund.
  6. UTI Retirement Solutions Pension Fund.
  7. HDFC Pension Management Company.
  8. DSP BlackRock Pension Fund.

How your NPS account provides you with pensions?

When you subscribe to an NPS scheme, you are provided with a Permanent Retirement Account Number (PRAN). While you work, NPS accumulates your savings in your Permanent Retirement Account (PRA).

When you retire, your savings in the PRA will be used for providing you with pensions throughout your retired life. When you retire from your job after reaching a certain age, NPS allows you in withdrawing up to 40% of the corpus in your PRA. The balance corpus continues generating pension amounts for you annually.

You should also keep this in mind that you can only withdraw from your NPS account after three years from your subscription date have been completed. You can withdraw funds only to the maximum of 25% of the amount contributed by you. Furthermore, you are allowed to withdraw to the maximum of three times during your subscription tenure.

Also read:

Benefits of investing in NPS

When it comes to investment management, NPS provides you with a certain amount of flexibility. Your savings in NPS is operated and managed by a private investment entity. If you are dissatisfied with your chosen fund manager, you can shift to another Fund Management Company.

Apart from that, NPS is a safe investment as it is regulated by PFRDA, a statutory body of the Indian Government. NPS has been in India for around 15 years and it has consistently yielded between 8 to 10% returns every year.

One of the greatest perks of investing in NPS is that it provides huge tax benefits to its subscribers. Whatever you contribute to your NPS account is eligible for tax benefit up to Rs 1.5 lakh u/s 80C of Income Tax Act, 1961 for every Financial Year.

Further, a tax benefit of extra Rs 50k out of your employer’s contributions is allowed u/s 80CCD1B for every Financial Year. NPS has an EET status like PPF. This means the investments, returns, and redemptions are all eligible for tax benefits. You can read more on taxation of NPS in this blog.

Closing Thoughts

You must have heard that one should not put all the eggs in a single basket. Diversification is the key to success in the financial market. Diversifying your corpus is difficult if you directly invest in the market. This is because you would require a huge amount of money to create a well-diversified portfolio.

Investing in Mutual Funds can sort this problem to a huge extent. But, it is not going to be of much help to you if you lack the knowledge of picking the right Mutual Fund scheme for your financial needs.

NPS overcomes this shortcoming of Mutual Fund. Here, you don’t need to analyze a plethora of schemes by yourself. You just require picking your desired fund manager who would handle all your investments as per your chosen NPS plan. The beauty of investing in NPS is that you don’t need to possess any practical knowledge of the stock market.

How to Develop a Stock Investor Mindset cover

How to Develop a Stock Investor Mindset?

If you want to make a significant amount of money from the stock market, it is crucial to develop a healthy stock investor mindset. However, the problem is that most people never learn this skill set as neither it is taught in schools nor colleges. Even the best degrees in finance or MBA do not honestly explain how to invest in stocks and make money from it smartly.

Only a minority population is fortunate enough is born in the family of the investors or whose close ones have been investing efficiently in stocks or mutual funds. For the rest, they always have to start from the ground zero level, without any proper guidance or mentorship.

Therefore, when it comes to developing a successful stock investor mindset, it is the responsibility of the individual to learn this skill-set themselves. If you are one of those who has never invested in the stock market and struggling to build an investor mindset, this post can be useful to you.

In this article, we are going to discuss how a beginner can develop a successful stock investor mindset.

Stock market gives us all an amazing opportunity…

There are thousands of companies publicly listed in stock exchanges. And hence, the stock market allows everyday investors like us to buy the shares of those company and get a piece of ownership.

From big Indian companies like Tata, Reliance, Wipro, ITC, etc. to Global giants like Apple, Google, Facebook, Samsung, etc. You can invest in any public company that you like through a stock exchange. All these companies are professionally managed and give employment to hundreds of people. And by investing in these companies through the market, you can become a part-owner and shareholder.

The first step of building a successful stock investor mindset is by appreciating the fact that we are given a fantastic opportunity as an investor. And if you are not investing in stocks, you are missing an excellent opportunity to become one of the owners of the best of best companies and also be a part of the growing economy.

The majority of the investing population never appreciate this fact, and hence they end up just trading stocks entire day and never owning the stock of an amazing company that they believe in.

How to develop a stock investor mindset?

My first advice for you to develop a stock investor mindset would be to read books.

However, this is a bit of obvious advice, right? And you are not reading this post for getting an obvious answer. Therefore, I won’t write an article of 1,000 words on the best investing books to read today. Anyways, if you are interested in reading a few good investing books, you can check out this list of 10 must-read books for stock investors.

My second advice would start watching investing videos on Youtube. This is again a piece of obvious advice. However, a great benefit of watching videos on Youtube (which people forget) is that they’re FREE. And therefore, I thought to mention this point in this post.

A few great Youtube Channels to follow to learn stock investing in Indian are FinnovationZ, Pranjal Kamra, Nitin Bhatia, Varun Malhotra, Sunil Minglani and of course Trade Brains’ Youtube Channel.

Now that we have discussed the apparent answers, let’s move forward to a few fun and easy tips to help you build an investor mindset.

Here are a few essential tips to help you build a stock investor mindset:

1. Keep investing apps on your phone:

Now and then during your day, you get some time off your work. Maybe during lunch, coffee break or while traveling to and fro from your work through metro or cab. You can use this time to develop your investor mindset.

Keep a few good investing and news app in your phone to remain updated with the investing world. A few useful apps that I recommend to stay updated with the market for beginners will be Moneycontrol or Economic times market. A quick tip- do not fill your phone will dozens of stock market app as it will burn you out to check them all. Instead, have one or two good apps which you can get comfortable with.

Also read: 7 Best Stock Market Apps that Makes Stock Research 10x Easier.

2. Join online forums/Whatsapp/Telegram Group

Joining active online forums will keep you in the loop regarding what’s happening in the market and what other’s are saying. Needless to mention that you should never invest based on a post in these forums/groups without researching. However, there are a lot of genuine contributors to these forums who are willing to share their knowledge and findings with the group members.

Find a few good forums/groups that suits you and join them. A few active online forums for the Indian stock market is ValuePkr, TradingQ&A, Rakesh Jhunjhunwala forum, Traderji & Trade Brains’ forum.

3. Enroll in courses

A lot of people envy online courses and want to learn to invest for free. But if you can spend lakhs of rupees in college tuition fee, thousands of rupees in buying books, then why not also spend some money for enrolling in investing courses that can help you get financial literacy.

How is spending money for enrolling in courses different from spending money on buying books? Both give you the knowledge, right? One of the vital step to enhance your stock investor mindset is by enrolling in a few right courses to learn the investing skills.

4. Mastermind

Although joining forums/WhatsApp groups etc. will help you in masterminding. However, it is equally important to surround yourself with people interested in similar activities as of you. This will encourage and help you keep motivated towards your goal. Find a few people with whom you can hang out and discuss your investment queries.

5. Attend local investing workshops/Conferences

If you are living in a big city, the chances are that you can easily find a few good investing workshops/conferences happening in your locality. Just by doing a simple google search, you can find a list of such events. On the other hand, if you live in a tier-2 or 3 cities, then you might have to plan a visit to your nearest big city to attend such conferences.

Attending investing workshops and conferences is another fantastic way to learn new skills, keep yourself surrounded by like-minded people and ask your most troubling questions with the experts. And if you can regularly attend a few investing workshops/conferences in a year, it will help you build a winning investor mindset.

Closing Thoughts:

No matter how common a skill might look like cooking, driving or swimming, it takes time and practice to become an expert in that skill. Just think about how many swimming lessons you took before diving in the 8-ft deep water.

Similarly, you cannot develop an excellent investor mindset in a day or week. You need to put time and efforts. Moreover, consistency is key here. Always remember, he who wants the most wins. If you’re going to become a successful investor, be consistent and keep learning.

That’s all for this post. I hope it is useful for you. Cheers!

Renting vs buying a home- Which one is better 3

Renting vs buying a home- Which one is better?

Renting vs buying a home has always been a big topic of discussion. Whenever we look for any long-term accommodation, we analyze deeply whether to buy a house property or take it on rent.

Some people say that staying in a rented home is better as we don’t have to spend a huge amount of money upfront. Moreover, when we opt for buying a residence, we mostly prefer raising a home loan which can again be a big commitment. On the other hand, those who advocate acquiring a residential property, state that it feels completely different to live in one’s own house and the house is their biggest asset.

We shall take an example to analyze the question of renting vs buying a home.

Renting vs buying a home

Let us consider two guys, Rohit and Sumit, who have got jobs as freshers in the IT sector in Kolkata. The former has decided to stay in rented accommodation while the latter has chosen to buy a flat on loan.

Let us see how the financial picture of Rohit looks like.

Renting a home

Renting vs buying a home- Which one is better 2

Rohit has decided to stay in a 3-BHK apartment on rent. Let us assume Rohit’s rent to be Rs 20k per month with an average annual appreciation of 5% per annum. This is to be noted that if you take accommodation on rent, your landlord may increase your rent with time so as to adjust inflation.

Coming back to our example, the expected rent of the apartment after 20 years can be assumed to be Rs 40k per month. The monthly rent after 20 further years (a total of 40 years from now) is expected to become Rs 80k per month. If we calculate, we will find that after 40 years, Rohit would have paid Rs 2.9 crores towards the rental of his home.

Pros and cons of staying in rented accommodation:

As Rohit has opted to stay in a rented apartment, he needs to consider a few key things. First, he can’t treat his house as his own home as the legal owner is his landlord. Next, Rohit is always exposed to the risk of losing his shelter as his landlord may ask him to leave anytime (by giving a notice period as per the rent agreement).

Generally, the landlords in the majority of the states in India impose restrictions on the number of years a tenant can stay in his house. This happens as the landlords are not adequately protected by the applicable Indian laws. There are certain restrictions that Rohit will have to face with regard to the renovation of his apartment and keeping pets. Moreover, he has no scope of enjoying complete privacy in rented accommodation.

There are a few advantages too that Rohit can enjoy while staying in his rented residence. He is not required to pay any house taxes. Next, Salaried individuals, who live in rented houses, can claim the House Rent Allowance (HRA) to lower their taxes – partially or wholly. Apart from paying a refundable security deposit and sometimes the maintenance charge, he is not required to pay any further lumpsum amount upfront.

If Rohit changes his job to another location or he is transferred to another location in his existing job, it won’t bother him financially. His contract with the existing landlord will be canceled and he will enter into a fresh contract with a new landlord.

Also read: HRA – House Rent Allowance – Exemption Rules & Tax Deductions

So, far we have discussed only regarding Rohit. Let us now analyze the situation of Sumit.

Buying a home

Renting vs buying a home- Which one is better 1

It was stated earlier that Sumit has decided to buy a similar accommodation like Rohit by borrowing from a Bank. Let us assume the amount of his home loan is Rs 40 lakhs which he has to repay in 2 decades time. The applicable interest rate is 8.3% p.a and Sumit requires paying EMIs of Rs 34,200 for 20 years loan duration. So, if we calculate, the total amount that Sumit has to pay after 20 years, it will amount to Rs 82 lakhs.

After the loan is repaid, Sumit is not required to pay anything at all to the Banker. So, for staying in rented accommodation for 4 decades, Rohit has to pay Rs 2.08 crores more than Sumit. Although Sumit is required to pay Municipal Tax every year, it is a nominal amount and can be ignored in our analysis.

Sumit would get dual income tax benefits every year as long as he is repaying the loan on house property. On one side, his gross total income will get reduced by the Interest on Loans paid by him u/s 24(b) of the Income Tax Act, 1961. On the other side, he would get deduction u/s 80C of the said for the principal amount of loan paid by him. The maximum deduction allowed u/s 24(b) and 80C are Rs 2 lakhs and Rs 1.5 lakhs, respectively.

So, from the above discussion, Sumit’s decision of purchasing a house property seems to be financially more viable than that of Rohit’s choice of rental accommodation.

Pros and cons of staying in buying a home:

Let us discuss some major benefits that Sumit can enjoy by opting for buying an apartment.

It is needless to say that having one’s own house is a sign of pride, sense of achievement and source of privacy. If Sumit is transferred to a new location or takes up a job in another location, he can sublet his property to someone. Even if he doesn’t stay in his house, it doesn’t mean that he has to incur a loss if he has bought the apartment on loan.

Many people say that rentals are always cheaper than EMIs. But, the fact is that, as time passes, the rentals tend to get higher and higher while the amount of existing EMIs doesn’t.

As an owner of the house property, Sumit can obtain any personal loan keeping his apartment on collateral. Today, real estate is a growing industry where the price of properties is going up every single day. Therefore, as Sumit has chosen to buy a house property, he will be investing in a physical asset having huge potential to generate large returns in the days to come.

There are a few shortcomings of buying a house too. Although Sumit will get the house in his own name, he can only enjoy the ownership in a true sense after he has repaid the loan in full. Generally, a Bank charges a down payment while granting the home loan. This upfront payment could be as high as one-fifth of the price of the apartment bought. So, in the short term, Sumit has to incur a heavy payout to buy a house property on loan.

Also read: Are REITS in India a worthy investment option?

Closing Thoughts

The decision of buying vs renting a home is not going to be the same for every individual. Whether you want to buy a house property or take it on rental, it totally depends on your financial situation. If buying accommodation suits my financial situation, it may not suit yours.

Moreover, both the options are having their own perks and shortcomings. In this article, we have evaluated both the options where buying accommodation sounds financially fitter than staying in a rented home.

Minimalist lifestyle Is it worth being a minimalist cover

Minimalist lifestyle: Is it worth being a minimalist?

Being a minimalist is all about living with less and in recent years it’s become somewhat of a trend with shows such as Tidying up with Marie Condo and the Minimalism documentary (both on Netflix) taking the internet by storm. They say that minimalist lifestyle can change your life for the better and living with less equals more time to focus on the important things in life such as growing your personal relationships. But who is a minimalist and is it really worth being one?

Minimalist lifestyle: Is this for you?

While the word minimalism, these days, is synonymous with the clutter-free way people live their lives, it was traditionally a word used to describe art and design (such as the decorating your home with a minimalist concept). However, this word has become so much more today as we use it to define a certain lifestyle- less is more.

The idea behind this concept is that in today’s digital age we are often overwhelmed with materialistic things such as our iPhones and laptops. We forget to spend time with our loved ones and enjoy the simple things in life like cooking or creating art. Minimalism serves as an answer to these problems.

Minimalism is intentional living and involves getting rid of anything that takes up unnecessary space in your life like unwanted clothing, household items, bills, and fees. While living a clutter-free life sounds like a good idea, it may not be for everyone. Here are a few pros and cons to help you decide if the minimalist life is for you.

The PROS

Minimalism lets you focus on what matters the most and take out what you don’t need. Here are a few reasons why you should consider this lifestyle.

It helps you find the things you really need

Let’s be honest, you could honestly survive without a lot of things currently sitting in your house. The first step to being a minimalist is picking an area or room in your house and clean it out. You will find a bunch of things you no longer use or didn’t even know you owned.

Take this opportunity to either donate or sell these things. Not only does this leave you with the things that are important to you but you can also make a quick buck on the side. The rule of thumb is to take an item and see if you’ve used it in the last 90 days if the answer is no, will you use it in the next the 90 days? If the answer is still no, you no longer need it.

Having fewer things makes it easier to budget

When you know exactly what you have, it is easier to budget and make decisions. One of the main reasons many people find it hard to forecast expenses and prepare financially for the future is because they have too many unnecessary expenses to think about. This includes bills to apps like Hulu or Netflix or unwanted subscriptions. While these may not seem like too much money at first they can add up over time.

A few ways to overcome these unnecessary minor expenses is by having just one card to pay all your bills. You can even get a card with a good rewards program to rack up those points. This way you have all your major expenses on one statement which makes it easier to budget for the upcoming year.

Another option is to have a single checking account and a single emergency fund. This way you can maintain the minimal balance for the account and have a better idea of your daily expenses. An emergency fund is particularly useful during a period of a cash crunch. Getting your finances in order is a crucial element in living a stress-free and clutter-free life.

Also read: How Much Should You Save  - 50/20/30 Rule!

You create room for the important things in life

Having too many things can create a sense of claustrophobia which often leads down a road of anxiety and unhappiness. So when we clear out unwanted items, it leaves more room for what truly brings happiness to our lives. Physical things tend to tie us down like an anchor and living a minimalist life can take that weight off your shoulders- freedom from greed and debt.

Happiness is subjective and can mean different things to each one of us. For some, it could mean spending time with your family, your puppy or even doing something you are passionate about. Many people find that living a minimalist life will get them closer to this goal.

The CONS

While living a minimalist life looks interesting, it is often easier said than done. Minimalism isn’t a personal project and tends to affect those around you as well. Here are a few cons of living a minimalist life.

The minimalist lifestyle is difficult to adopt

Living clutter-free sounds like paradise but many people find it incredibly challenging to trade in their material possessions for a more minimalist life. In today’s digital age, with new trends popping up on the internet every day, there is a lot of peer pressure to keep up with the latest styles. Living without material possessions (shoes, clothes and electronics) can seem unthinkable for many.

The process of de-cluttering your life is stressful and overwhelming and going through all your things can bring up a lot of memories (some good, some not so good). Moreover, minimalism has a different meaning for everyone so it can be hard to decide how much minimalism is right for you.

(Video Credits: Matt D’Avella)

Minimalism is not a one-stop solution to all your problems

Greed and debt are two evils that people want liberation from and many people see leading a minimalist lifestyle as the answer to all their problems. But this is not the case because if you wake up one day and decide to go cold-turkey and lead a completely minimalist life, you are more than likely to relapse and go right back to your old habits.

It is important to see minimalism as a gradual process rather than a quick fix to all your problems.

Also read: 7 Fun And Easy Tips to Save More Money

So, should you become a minimalist?

Well, that’s a question only you can answer. Leading a clutter-free life is a great feeling but it is not for everybody. Some people often find happiness amongst their chaos.

Choosing to live a minimal life depends on your mindset and what you hope to get out of it. If you do decide to become a minimalist, remember to take it one day at a time.

10 Reasons Why You Should Start a SIP cover

10 Reasons Why You Should Start a SIP

Last Friday, I met my old college friend- Priyanshu. While discussing various stuff, he told me that he has decided not to invest in ‘Fixed Deposits’ anymore. Well, there is no doubt in saying that he has made a good decision. We all know that FD is no longer a strong investment option for creating our desired wealth for the future.

During our conversation, Priyanshu suddenly got eager to know more about investing in Mutual Funds. I told him that Mutual Funds have of late become the talk of the town. I explained to him the benefits of investing in the same. Anyways, he also asked me whether he should invest in Recurring Deposits instead of Mutual Funds. As we went further in our discussion, I realized that he used to think one can invest in Mutual Funds only in a lump sum mode like FDs. But, the fact is that you can even invest in a Mutual Fund through SIPs.

Later, I told him that as he is doing a day job and earning a regular income, he should start investing in the Mutual Funds via SIP mode. Investing through SIPs works in a similar manner like Recurring Deposits (RDs). One key difference between the two is that you get units while investing in Mutual Funds. Another major difference is that through SIP investing you can earn relatively higher returns than RDs. Further, the rate of returns in SIP Mutual Funds is not fixed as in the case of RDs.

In the SIP or Systematic Investment Plan, a fixed sum of money is automatically invested in your chosen Mutual Fund on a specified date of each month. When you set up SIPs, your Bank Account is debited and your desired sum gets invested in your chosen Mutual Fund scheme.

Why You Should Start a SIP?

If you are a beginner in Mutual Fund investing, you might have this doubt why you should opt for investing through the SIP mode. Here are the ten best reasons why you should start a SIP.

1. Automate your investments: You can set up SIPs to activate investments in the Mutual Fund from your Bank Account on a particular date. This results in developing a habit of investing in the Stock Market and helps you create a large corpus in the long run.

2. Developing an investment habit towards your goal: SIP investing builds a regular investing habit for an individual. So, if you have any financial goal, your well planned SIPs can make it more feasible to achieve.

3. Variety of investment plans: SIPs help you invest in Mutual Funds with your desired amount for a chosen term. Moreover, you have a variety of schemes to choose from according to your financial needs like Equity based mutual funds, debt mutual funds, balanced funds, etc.

4. Flexibility in investments: Using a Step-up SIP, you can gradually increase your SIP amount with the increase in your earnings. In Mutual Fund investing, you can choose to stick to your regular SIP amount. But, if you wish, you can also choose to increase or decrease (up to the minimum investment amount) your SIP amount with the help of a Flexi-SIP.

5. Affordable investments: When you invest in the Mutual Funds through SIPs, you can create a huge capital over a long period of time. SIP investing doesn’t require you to invest a large sum of money in every installment. So, your household expenses are not at all hampered due to SIP investing. You can start investing in SIP with an amount as low as Rs 500 per month.

6. Rupee cost averaging: Investing in the Mutual Funds through SIPs fetch you more units when the market moves down and fewer units when it goes up. Therefore, this averages out the overall costs of your investments over time.

7. You do not need to time the market: You don’t need to know whether the Stock Market has hit rock bottom or it has reached its peak. You can invest in the Mutual Funds any time through SIP as its rupee cost averaging feature nullifies the market volatility.

8. Long-term investment: Mutual Funds are typically meant for creating wealth in the long run. Investing through SIP let you invest in the market with small amounts over a long period of time. The higher is the investment horizon, the greater is the scope to earn larger returns.

9. Power of compounding: The returns on your SIP investments are also reinvested in the market. Therefore, you not only earn returns on what you invest but also on your reinvested returns. The longer you stay invested in the market, the greater is your scope of enjoying the power of compounding.

10. Diversification: You get the opportunity to enjoy the benefit of diversification while investing in SIPs. You can easily allocate your investment across diverse asset classes and industries. Diversifying your investment results in reducing your security-specific risks and increases your chances of earning larger returns.

Quick Note: Long term capital gains on an Equity Mutual Fund are tax-free if such gains don’t exceed Rs 1 lakh in a Financial Year. This goes to show that Equity Fund investing via SIPs is a wonderful way to accumulate a huge investment in the long run. Further, Investing in ELSS up to Rs 1.5 lakh in a Financial Year is allowed as a deduction against Gross Total Income for the same period. Setting up SIPs in an ELSS can help you gain tax benefits with ease.

Also read:

Conclusion

Mutual Funds have become extremely popular in recent years among the middle-class Indians because of AMFI’s “Mutual Funds Sahi Hai” campaign. SIP investing is a great way to invest in Mutual Funds for building huge wealth in the future.

People who don’t invest in Mutual Funds are either lacking in knowledge or simply scared to invest in the same. However, the Mutual Fund industry in India is highly regulated by SEBI, which reduces the chances of occurring malpractices to nil.

In this article, we have tried to highlight the major advantages of investing in Mutual Funds via SIP route. Again, you can start investing with as low as Rs 500 per month in a SIP. Mutual Funds can help you fulfill all your financial needs if you invest in it in a systematic manner.

7 Incredible Side Hustle Ideas to Make an Extra Income

7 Incredible Side Hustle Ideas to Make an Extra Income

Thanks to the world wide web, earning a few extra bucks with a side-hustle is now easier than ever. But although there many different ways one can make money, you need to pick the side hustle ideas that matches your skills and needs.

Fortunately, there are many unique ways you can earn an income without an investment or a highly-specialized skill-set. While not all side-hustles may be the best fit for you, you need to pick the one that derives the most value- because at the end of the day, your job satisfaction is what mattes the most.

What are side hustles important?

Side hustles provide an outlet for you to pursue your passions outside your 9-5 job while giving you the opportunity to make an extra income. It is all about personal growth, discipline and can help you develop an entrepreneurial streak.

When choosing your side hustle, you may want to consider what you would want to supplement your current job with. This could be anything from blogging to selling your artwork online. Whatever your side hustle may be, it’s all about following your passions and seeing them through. Additionally, you can make some extra bucks and treat yourself.

Side hustle ideas

The idea of a side hustle can seem alluring but you are not sure what kind of job you want to do. Thanks to the developments in technology we have the world at our fingertips and a myriad of side hustles to choose from. A few of them include:

1. Sell your crafts online

If you have an artistic streak, you can use your talent to start a side hustle and earn some extra cash. They are many websites out there such as Etsy where you can list your crafts and other home-made items for others to buy.

Apps such as Instagram and Facebook are also great places to showcase your work. Many artists post pictures of their work on their Instagram or Facebook pages along with a link to their websites where customers can purchase the products. The rise in businesses born this way has led to a decrease in the number of brick and mortar stores worldwide.

2. Sell your stuff on e-bay or Amazon

A sure-fire way to make money online and have a lucrative side-business is to sell your items on websites such as e-bay, Amazon, or Olx. These items could include anything from household goods to furniture, books and even stamps. This is a great way to make use of things that you don’t really use or need. If you find that you have a knack for selling stuff online, you can do this professionally and earn a commission on every sale.

3. Drive for Uber or Ola

One of the best and most versatile ways to make money is to drive for Uber or Ola. Companies such as these have transformed the way we view transport in today’s sharing economy.

What makes these ride-share companies so great is that you get to decide when you want to work with just the click of a button. In metropolis cities such as Bangalore or Chennai, this is an easy and convenient way to make a side-income.

4. Start a blog

Starting a blog is not a quick money maker but it is a great way to create a platform for something you are passionate about while developing your skills.

What’s more? you can do it anywhere and from any part of the world. A blog is something you can create in your spare time and consistently working on it and posting great content can result in a high income eventually. You can even monetize your platform through sponsored posts, affiliate links or a shopping link to buy your products. Many people have created very lucrative businesses through their blogs.

5. Get a part-time job

If you want to trade in your time for money, you can get a part-time job. They are many options you can choose from to match your interests and skill-sets. A few ideas include babysitting, an administrative assistant or a barista.

If you are big on Instagram or Facebook, you can even take on a social media gig. The only downside to part-time jobs is that they often don’t pay as well as online businesses but they are still a great way to earn money while doing something you love.

6. Teaching

If you have the ability to teach other people skills, this opens up numerous side hustle possibilities. For example, if you are skilled in a particular academic field such as math or science, you could tutor students or even teach an online class. If your interests lie in other areas such as fitness or calligraphy, you can use your skills to teach a class in your free time. The great thing about teaching as a side hustle is that you get to do what you love while sharing your passion with others.

7. Freelance writing and editing

For those who possess the skill of putting words on paper, they are many side hustles that allow you to share your stories with others. Freelance writing and editing allows for flexibility and is quite enjoyable. You could write articles for magazines or journals on various genres (travel, fashion) and even edit student essays or websites online. You can develop your skills while expressing your creativity.

Also read: 11 Best Passive Ways to Make Money While You Sleep

Closing Thoughts

Tony Robbins famously said that’ if you do what you’ve always done, you’ll get what you’ve always gotten’ and this holds true for a lot of things in life.

Even if you love what you do for a full-time job, it is important to have an outlet where you can develop your passions and express free -thinking- this is where side-hustles play an important role in our lives.

While side-hustles can help you earn a supplemental income, they are important for many other reasons as it taches you to step out of your comfort zone and develop life-skills. While getting another job may be hard there are many ways you can earn an additional income as listed above.

So get a side-hustle and develop those skills!

Over Diversification cover

Why Over-Diversification can be Dangerous for your Stock Portfolio?

“Wide diversification is only required when investors do not understand what they are doing.” — Warren Buffett on Diversification

If you read any investing book or listen to a popular investment advisor, the first tip that most of them will give you is to diversify your portfolio. “Do not put all your eggs in one basket!!

At first glance, this tip sounds logical. After all, risks involved while investing in just one stock is way higher compared to if you diversify your investments in ten stocks. However, the problem occurs when people over diversify their portfolio.

Over-diversification is a common mistake among the investing population. In this post, we are going to discuss what exactly is over-diversification and how over-diversification can be dangerous for your stock portfolio. Let’s get started.

What is diversification?

A diversified portfolio is investing in different stocks from dissimilar industries/sectors in order to reduce overall investment risk and to avoid any damage to the portfolio by the poor performance of a single stock.

Ideally, a retail investor should hold stocks between 3 to 20 from different industries and sectors. However, personally, I believe 8–12 stocks are sufficient for a diversified portfolio. It’s crucial that your portfolio is sufficiently balanced as ‘over’ and ‘under’ diversification are both dangerous for the investors:

  • Under diversified portfolio has more risk as the poor performance of a single stock can have an adverse effect on the entire portfolio.
  • On the other hand, over-diversified portfolio gives low returns and even the good performance of a few stocks will lead to a minimum positive impact on the portfolio.

Ironically, Peter Lynch described it as ‘diworsification’ highlighting inefficient diversification, in his best-selling book ‘One up on the Wall Street’.

Why do people over diversify?

Over diversifying simply means owning an excessive number of stocks in your portfolio. If you are a retail investor and holding 30–40 stocks or more, you are over-diversifying your portfolio. Now, the next question is why do people over diversify their portfolio.

The most common answer can be that a lot of investors do not even know that they are over-diversifying. They just keep buying stocks following the famous traditional tip written in popular books i.e. diversify to reduce risk. They believe that having more stocks is good for their portfolio.

A similar thing happened to me during my rookie days. At one time, I had 27 stocks in my portfolio. Out of them, I had invested almost equally in among 18 stocks and the rest 9 were trailing stocks which contributed only a minor portion of my portfolio.

Although the returns from many of my holding stocks were high, however, the overall return on my portfolio was not that big during that period. Anyways, after a few months, when I analyzed my portfolio to understand why this was happening, I found the answer. I over-diversified my portfolio. In the upcoming months, I slowly reduced the number of my holding stocks from 27 to 14, keeping only the best ones which I was confident about.

Quick Note: An amazing book that helped me to understand that the concept of over-diversification is flawed was reading ‘The Dhandho Investor’ by Mohnish Pabrai.

The principle that I liked the most in this book was ‘Few bets, big bets, and infrequent bets’. Here, Mohnish Pabrai suggests that you do not need to make frequent bets. Every once in a while, you’ll encounter overwhelming odds in your favor. In such times, act decisively and place a large bet. If you haven’t read ‘The Dhandho Investor’ yet, I would highly recommend you to read this book.

Security

Another big reason why people over-diversify their portfolio is to have ‘security’. Buying a large number of stocks helps in spreading investment risks over many instruments.

If you diversify your portfolio with multiple stocks, you’re less likely to experience major drops. This is because the possibility of all the stocks underperforming at a particular time is quite less. When some of your stocks are having tough times, others may be out-performing. Hence, efficient diversification helps is maintaining consistent overall portfolio performance.

For defensive investors, security may be a reason for over-diversifying. It definitely reduces the risk, but it also decreases the expected returns. High returns on your best stocks will be always balanced out with the majority of average/losing stocks.

Why over-diversification can hurt your stock portfolio?

By now, you might have vaguely understood the concept of over-diversification, let’s discuss why over-diversification can hurt your stock portfolio.

  • Low expected Returns

Over diversifying or adding too many stocks to your portfolio reduces the risk, but it also reduces the expected returns. Let’s understand it better with the help of two extreme situations.

When you own 2 stocks, your portfolio is associated with high risk and high expected gains. On the other hand, when you own 100 stocks, your portfolio risk is low, but your expected gain is also lower.

Over-diversification is a point where the loss of expected return is higher than the benefit of reduced risks. For a well-diversified portfolio, you need to find the sweet spot where you neither own too many stocks nor too few.

  • Tracking them all is difficult

In order to efficiently monitor your invested stocks, you need to evaluate their quarterly reports, annual reports, corporate announcements, latest news related to the companies, etc. If you are holding 30 stocks in your portfolio, monitoring them all can be really difficult, especially for the retail investors who have a full-time day job.

On the other hand, if you are holding just 10 stocks in your portfolio, monitoring them doesn’t take too much time or efforts. However, when the number of holding stocks increases, the chances of missing important news/announcement related to your invested stocks gets higher.

  • Duplication or inefficient diversification

Diversification means owning different companies from different industries or sectors. For example, one stock from automobile sector, two stock from technology industry, one stock from pharmaceutical, two from banking, two from energy sector, etc.

However, if you’ve bought 5 banking stocks out of 10 stocks in your portfolio, you haven’t diversified your portfolio effectively. Over-diversification often leads to owning similar companies in your portfolio.

Closing Thoughts

The majority of the investing population are given flawed tip to immensely diversify their stock portfolio. However, following this strategy is quite dangerous for retail investors. Your portfolio should be sufficiently diversified, not ‘over’ or ‘under’ diversified.

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

what are bonds cover

What are Bonds? And How to Invest in them in India?

A bond is a financial product which represents some debt. It is a debt security issued by an authorized issuer which can be a company, financial institution, or Government. The issuers offer returns on bonds to the lenders in the form of fixed payment of interest for the money borrowed from them.

A bond is having a fixed maturity period of its own. It is an obligation of the authorized issuer in paying interest and/or repaying the principal at a future date upon maturity. However, such payouts are dependent on the terms and conditions associated with the bonds issued by the said issuer.

Are bonds and stocks the same?

It was stated earlier that bonds are as good as debts. So, if you are a bondholder, it means that you are a lender of funds to the issuer entity. On the other hand, if you own a stock, it indicates that you have a share in the ownership of such issuer organization.

Bonds are having predefined maturity periods while stocks don’t. Anyways, if you invest in stocks, you can sell them off any day. But, if you are a holder of bonds, you have to wait for its maturity period to end to get back your investments. 

What are the different types of bonds available for investing?

  1. Zero-coupon bonds: These bonds are available for investing at a discount on the face values. After the expiry of their maturity period, they are redeemed at par.
  2. G-Sec bonds: These bonds are considered as one of the safest bonds as they are issued by the Government of India.
  3. Corporate bonds: These bonds are issued by corporate The companies borrow funds from the people and pay them regular interests.
  4. Inflation-linked bonds: The principal amounts and interest payments of these bonds are indexed to inflation.
  5. Convertible bonds: A bondholder is having the option of converting these bonds into equities as per predetermined terms.
  6. Sovereign gold bonds: These bonds are issued by the Indian Government and offer the safest way of investing in digital Gold.

Why would you invest in bonds?

Here are a few best reasons why one should invest in bonds:

  1. Bonds are less riskier than equities. Therefore, investing in bonds will ensure that your corpus is protected.
  2. It is highly likely that the returns on equities are higher than bonds. But, this is also to be considered that investment in equities carries a higher risk than bonds. The payment of interests on bonds is ideally assured while equities don’t make any such promise of paying regular dividends.
  3. If you don’t want to pay tax at all then you can invest in tax-free investment bonds. So, if you fall in the higher tax bracket, not only you keep on growing your wealth but also enjoy full tax advantage on the returns on such bonds.

TOP TAX SAVING BONDS IN INDIA-min

(Source & Image credits: Karvy)

How to Invest in Bonds in India? 

If you want to invest in Bonds in India, either you would be investing in corporate bonds or Government bonds. Let’s first talk about investing in corporate bonds.

You can buy Corporate bonds from the primary markets when the issuing company issues new bonds. In order to invest in them, you are required to file an application form and submit the same to any branch of the issuer along with prescribed documents and application fee. In case you are having Demat Account, your bonds will be credited to the same. However, if you don’t have one, then you would receive them in their physical format. You can also buy corporate bonds from the secondary markets subject to their availability.

Government bonds are not traded like shares on the stock exchange or secondary market. They are sold through their official distributors. These bonds are also made available by the designated branches of post offices and banks. For investing in these bonds, you can submit your application form, necessary documents, and required fees in any of the said places. Once your application is processed, you would receive bonds in your name.

Instead of buying bonds directly from the companies and Government, you can also invest in them through the bond brokers in India. Investing in bonds through brokers is more convenient. You can invest in bonds through their online platforms like websites and mobile applications. Brokers like ICICI direct, HDFC Securities etc offer their clients to invest in bonds along with equities. Here, to comply with KYC requirements, you are not required to pay any visit to their physical offices. They are the investment service providers and act as middlemen between you and the issuer organizations.

icici direct bonds

The bond brokers are the market makers of bonds in India. Over 90% of the bonds which are traded in India are privately placed instruments. Therefore, they are not advertised at all. The bond brokers are playing an important role in creating a deep and wide bond market in our country.

Also read:

Conclusion

In India, the majority of the people are interested in investing their money in their Bank Fixed Deposit Accounts. The next preferred investment options are the tax saving instruments like NSC and PPF. Financial literacy is not at all strong in our country. Therefore, most people are unaware of the fact that diverse investment options are available. A good number of Indians simply feel afraid to invest because of the lack of proper financial education.

The bond market in India is not as deep as what exists in western countries. Therefore, the number of individual investors in the Indian bond market is pretty low. Due to AMFI, Mutual Funds have started gaining substantial popularity in the last few years in India. So, the retail investors have started investing in bonds not directly but through debt mutual funds.

The investors in the Indian bond market majorly consist of Banks and Financial Institutions. Advertising is not permitted in India with regard to investing in bonds. If any authority takes the initiative to encourage bond investing, then India can witness a more liquid bond market someday.

How to eat an elephant? One bite at a time cover

How to eat an elephant? One bite at a time!

Desmond Tutu once wisely said, “there is only one way to eat an elephant: a bite at a time.”

In other words, what he meant to say was that even an enormous goal can be achieved if you take a little step at a time. Bit by bit, bite by bite, you’ll make possible what at first seemed impossible. Most people fail to achieve a massive goal because they try to eat the whole elephant at once.

Your financial goals are similar to eating an elephant. And in order to reach those goals, you need to take one step at a time!

Goal Setting:

The biggest factor for turning your dreams into reality is goal setting. No matter how big the goal, if you can set it, put a timer and start working on it, you can achieve the goal eventually.

Personally, I’ve two goals for the next five years. First, to turn my venture ‘Trade Brains’ into a massive online education platform which can provide financial literacy to thousands of investing population. And my second goal is to write a book. My long-term financial goal is to achieve FIRE- Financial freedom and retire early as soon as possible.

For those who know me, you might have watched me working on this blog ‘Trade Brains’ for over two and a half years now. I always knew that the path is not easy. But bit by bit, I’ve been adding investing lessons which can be useful for the beginners as well as matured investors. Similarly, for my long term goal of financial independence and early retirement, I have been working hard and investing consistently.

My investment strategy is simple. I do not try to get huge returns for a year or two by investing aggressively. I prefer consistent decent returns because I know that the power of compounding is in my favor. Time is the biggest friend for those who start investing early.

Now, why I’m telling you all this?

Similar to my goals, you might also have a gigantic dream of eating an elephant. Maybe you aim to build a huge retirement corpus or to buy your dream house on a beach across western ghats in India or to become a successful investor. And if you want to achieve these goals, you also need to take one step at a time.

If you want to learn how to invest intelligently and become victorious in investing, take your first step. Buy your first investing book and read it. Then read the second book and continue the process. You certainly won’t become an expert investor in a year or two. But with time, practice, and efforts, you will get better than 99% of the investing population.

In a similar way, if you want to build a huge corpus, let’s say for your retirement, you definitely cannot build this huge corpus by a few profitable investments. You need to be consistent in your investment strategy.

I receive a lot of emails from people asking for recommendations of hot stocks that can give them huge returns in the next six months or a year. But setting small goals and investing for six months won’t help in achieving a massive goal. Maybe you’ll win and get good returns on that stock. But this one-time return won’t make you any richer. You’ll probably remain at a similar financial situation compared to where you were last year. For achieving your financial goals, you need a reliable strategy that can give you consistent returns year after year, not just one-time big return by fluke.

It doesn’t matter how big your first few bites are, you cannot eat an elephant with a few big bites. Similarly, no matter how big the returns are, you cannot build your dream corpus in a year or two. Consistent returns are the steps to achieve your goals.

A few other tips to help you eat that elephant

Now that you have understood how to eat an elephant, here are a few other tips that can help you further:

— Set SMART Goals: Setting a smart goal is the first step towards achieving your massive goal. Often, SMART goal is described as (S)pecific, (M)easurable, (A)uthentic, (R)elevant and (T)ime bound

— Start breaking into small pieces: Even the biggest of the objects can be broken down into small atoms. Once you have set your goal, start breaking it down into small pieces. For example, if you are building a retirement corpus, find out how much you’ll need to invest yearly, monthly or even weekly to reach your goal in the desired time frame.

— Stick to the plan: “A goal properly set is halfway reached.” However, the next half is to stick with the goal– which is the toughest. If you are planning to build a corpus of Rs 10 crores in the next 30 years by investing in mutual funds, stick to your investment strategy. Do not stop your SIPs in between because of small-term market corrections.

— Celebrate small wins: Periodically measure how close you are to your goal and each time you reach a milestone, celebrate it. Achieving a massive goal will take time, and enjoying the small wins will keep you motivated to take your next bite.

— Mastermind: Probably the most important but often ignored tip. Keep close to people who encourage you and from whom you can learn. Surround yourself with people having similar goals as that of yours.

Closing Thoughts

The biggest mistake that people commit while chasing a massive goal is taking huge bites initially and try to eat the whole elephant at once. This eventually leads them to burn out too soon. Nonetheless, any big, enormous goal can be achieved by breaking it into small pieces and taking small steps.

Before we end this post, here is the final tip. Enjoy the journey. It’s gonna take time to achieve a huge goal. And enjoying is really crucial if you want to keep going.

That’s all. Take care and talk soon!

ETF EXCHANGE TRADED FUNDS

What is ETF (Exchange Traded Fund)? And How to Invest in them?

Exchange Traded Fund or ETF is getting a lot of attention among the investing population lately because of the ease and flexibility it offers to the investors. It is a basket of securities like mutual funds but can be bought and sold through a brokerage firm on a stock exchange.

In this post, we are going to discuss what exactly is an Exchange Traded Fund and how to invest in them. But before we start discussing ETFs, let’s brush up the basics of mutual funds as they are somewhere related.

Mutual Funds

Mutual Fund is a financial product where a Mutual Fund company pools funds from its investors and in return, allot them units. The amount collected is invested in a portfolio of securities which are traded in the markets. Mutual Fund schemes are low-cost investment options which help you to plan your personal finance effectively. You can start investing in mutual funds with an amount as low as Rs 500 per month via SIPs. Through Mutual Funds, you can invest your savings across diverse asset classes, industries, and economies.

In Mutual Fund investing, you can either choose to be an ‘Active’ investor or opt for ‘Passive’ investing style. The Mutual Fund schemes where the underlying assets are frequently churned to outperform their benchmarks are known as active funds. Passively managed funds are those which replicate the portfolios of their benchmark indices.

ETFs are the best representatives of passively managed funds. Let’s have a discussion on ETF basics.

Exchange Traded Funds

An ETF or Exchange Traded Fund is a variety of Mutual Fund which tracks any particular index, be it an index of stock, commodity or any other security. ETF invests in a portfolio of assets of a specific nature. For example, you can invest in a Gold ETF or Bond ETF or Currency ETF.

ETFs trade in the stock exchanges and therefore can be bought and sold during market hours like any instruments listed in a stock exchange. The price at which an ETF is usually traded is close to its Net Asset Value (NAV). In order to invest in an ETF, you need to have your own Share Trading Account and Demat account.

You can earn income from your ETF investments in two ways. Firstly, you can earn in the form of dividends. The second one is that you can trade your ETF units like shares and generate income in the form of capital gains.

Some people have this doubt in their minds whether ETF is the same as Index Funds or not. Well, what is the reality then? Let’s dig deep into it.

ETF vs Index Funds

An Index Fund is also a variety of Mutual Fund like ETF. The portfolio of an Index Fund is built in such a manner that its components look similar to that of a specific stock market index. An index fund aims in replicating the performance of a particular benchmark index.

On the other hand, an ETF is a special form of Mutual Fund consisting of similar securities, falling under any specific market index. An ETF is the only type of Mutual Fund which is traded like shares in a stock exchange. Its composition is similar to any index like Sensex or Nifty.

So, both ETF and Index Fund look quite similar except the fact that the ETF is traded in the stock market.

Is this the only difference between the said two investment options? The answer is a big no. Let’s have a look at some more key differences between the two:

  1. You can invest in an Index Fund only during a specified time in a day. But, you would be happy to know that you can trade in the ETFs throughout the day.
  2. The price of any ETF keeps fluctuating throughout the trading hours. On the other hand, the price of an Index Fund is fixed only at the end of the trading day.
  3. The basis for the pricing of an ETF is the demand and supply of the same in the market. Whereas, the pricing of an Index Fund depends on its NAV.
  4. To invest in an ETF, you will have to incur expenses in the form of brokerage. But, for investing in an Index Fund, there is no such transaction charge applicable.
  5. The expense ratio of an ETF is comparatively lower than that of an Index Fund.
  6. If you want to invest in an ETF in the Indian market, the minimum investment required is Rs.10,000. Whereas, you can invest in an Index Fund by paying a minimum lump sum of Rs.5,000. Moreover, you can choose to invest in the Index Funds with a minimum amount of Rs.500, if you choose the SIP (Systematic Investment Plan) route. Please note that investing in an ETF via SIP is not applicable.

Why you should invest in an ETF?

The next question that can come to your mind is why you should invest in an ETF? I can state a couple of reasons in favor of this.

Investing in an ETF is certainly convenient. Buying and selling an ETF unit can be done by having a look at the market price available on the trading platform. The exchanges where the ETFs are listed are well regulated by the concerned authorities. This has resulted in increasing transparency in the trading of ETFs.

Furthermore, you can choose to invest in ETFs as the expense ratio is much lower than any other Mutual Fund. Again, if you are unable to figure out which stocks to invest in, you can invest in a sector-specific ETF instead with a small corpus. 

performance of ETF in India

(Updated till 2nd May 2019 | Source: Moneycontrol)

How to invest in ETF in India?

In order to invest in an ETF you need to ensure the following two things:

  1. You are mandatorily required to open a Share Trading Account with any Stock Broker/ Sub-broker.
  2. You must also possess a Demat Account in your name for the purpose of holding the ETF units which you are going to buy.

Now, to apply for the above two things, you have to submit the following documents for complying with the KYC (Know Your Customer) norms:

  1. A copy of your Passport, Driving License, or PAN Card as your identity proof.
  2. A copy of your Passport or any Utility bill as a proof of your address.
  3. A copy of your Bank Account statement for the last 6 months.

After you have got access to your online trading platform, you can carry out any ETF transaction. You can invest in ETFs via any of the following two modes:

  1. You can place your order in the market through the online trading terminal provided to you. Trading in ETFs is no different than carrying out transactions with respect to stocks listed in the stock market.
  2. The second option is that you can place your order by calling your Broker over the phone and let them know about your trade requirements. 

Also read:

Closing thoughts

If you are willing to take part directly in the stock market but unable to figure out which security to pick, you can start investing with ETFs. In case you are an existing investor in the market and looking to try something different, you can look to include ETFs in your portfolio.

In India, people are still predominantly interested in investing in traditional saving schemes like PPF, FD, and NSC. Stock Market investing is yet to get popular among the Indians at a significant level. Not even ten percent of the income earners in our nation are having their Stock Trading Accounts. Therefore, there is no doubt in saying that the number of participants in ETFs in our economy is still pretty less.

AMFI has been working hard in the last few years to popularize the concept of Mutual Fund investing in our country. So, as the Indian Mutual Fund industry grows, it is expected that more and more investors will show an inclination towards ETFs.

PROS & CONS OF dividend investing cover

Dividend Investing: Pros and Cons That You Should Know

Dividend Investing: Pros and Cons That You Should Know: One of the most popular ways to generate income from stocks is dividend investing. Here, the investors enjoy the benefits of dividend income along with capital appreciation. Anyways, if you are new to dividend investing, let me give you a brief introduction.

Dividends are basically a portion of income that a company distributes to its shareholders. Dividend investing means investing in those stocks which give high consistent dividends to their investors.

For example, in the last financial year (Mar 2018), HPCL gave a dividend of Rs 17 per share to its shareholders (Dividend yield=3.8%). Therefore, if you were holding 100 shares of HPCL company in your portfolio 2018, you would have received Rs 1700, credited directly into your bank account without selling even a stock.

A lot of equity investors invests in stocks just for the dividends. Dividend investing is a good way to earn secondary income along with enjoying the capital appreciation for your invested stocks. When invested correctly, investors can earn amazing income through dividends. (Also read: How to make money from dividends- the right way?)

In this post, we are going to discuss the pros and cons of dividend investing that you should know before making your investment in dividend stocks.

Pros of Investing in Dividend Stocks

Let’s start with the pros. Here are a few best advantages of investing in dividend stocks:

1. Passive Income

This is probably the biggest advantage of investing in dividend stocks. You can treat dividends as a passive income- which means getting paid without doing any work. For the people looking for a few alternate secondary sources of income, dividend investing is the answer.

Anyways, for making passive income through dividend investing, initially, you need to put big efforts to find good dividend stocks. However, once the work is done, you can enjoy the passive income for multiple years.

2. Double Profits

If your invested stock goes up by 30% in the next 3 years, and you received a dividend yield of 3% per year from the same stock, the combined profits are way higher than just the capital appreciation. Here you can earn double profits compared to investing in companies that don’t give any dividends.

3. Defense against bad markets

Everyone makes money in a rising market. However, the scenario is different when the market turns sour.

In the bear market or corrections, the share price of a lot of your favorite stocks may fall. And hence you might not be able to make a good return from capital appreciation of stocks. However, if you have picked the right dividend stocks in your portfolio, you can enjoy a decent dividend income even when your portfolio is down.

Further, dividend stocks are generally big matured companies and hence are less influenced by a bear or speculative market. Investing in these companies can provide a good hedge to your investment from a bad market. In addition, dividend investing also helps in capital preservation. Even if the stock price of your invested company doesn’t go up, if you are getting regular high dividends, you will be able to preserve your capital.

4. Steady Income

Profits from stocks are only on ‘paper’ unless you sell them. This money is not in your bank account. The profits/loss are unrealized until the final settlement i.e. selling the stock. However, dividend stocks add steady income in your pockets without worrying about selling any stock.

5. Dividend Reinvestment

You can use the dividends that you receive from stocks to buy more stocks and reap the benefits of dividend reinvestment. Else, you can use that money to invest in any alternative investment options like bonds, gold, etc if you want to diversify your portfolio. Once you get the money back in your account, you have immense options to re-invest them back in whichever investment option that suits you.

6. Long-term investment

One of the best strategies to make money from stocks is the same old philosophy of ‘buy and hold’. However, while investing for the long term, there may be a number of situations where the investors may be in the need of a few extra bucks. Here, selling stocks may be the only option available to them if they want to make money from their invested stocks.

Nevertheless, as dividend stocks offer a steady income stream, investors may prefer to hold the stocks longer and enjoy the benefits of long-term investing.

stock market meme 31

Cons of investing in dividend stocks:

No investment strategy is perfect and the same goes with dividend investing. Here are a few biggest disadvantages of investing in dividend stocks:

1. Low-growth companies

Most growth companies do not give dividends to their shareholders as they reinvest their profits in expanding their businesses like opening new plants, entering new cities, buying new machinery, acquiring small companies, etc.

On the other hand, big matured companies do not have so many opportunities and hence they offer a large profit to their shareholders. While investing in dividend stocks, the investors may be investing in low growth companies that may not always offer high returns.

2. High dividend payout risks

High dividend payout means that the company is distributing a major portion of their profits to their shareholders. For example, if a company made a profit of Rs 100 crores in a financial year and shares Rs 85 Crores as dividends, this means that the dividend payout ratio is 85%.

At first glance, it may sound favorable for the shareholders. After all, they are getting a major portion of the profit as dividends. However, in the long run, it may not be advantageous for investors.

Think of it from the other angle. When the company is not retaining enough profit for itself, it doesn’t have any big money left for reinvesting in its growth. And if the company is not reinvesting enough, it may face problem to grow, compete with the rival companies or even to retain the same net profit in upcoming years. Moreover, if the company doesn’t grow or increase its profits, it can’t add more value or increase dividends for the shareholders in the future.

3. Double Taxation

Companies pay Dividend distribution tax (DDT) of 15% to provide dividends to their shareholders. However, once dividends are credited to the shareholders, the investors again have to pay a tax on the capital gain. Although, small investors do not have to pay any tax on dividends. However, if the dividend received is more than Rs 10 lakhs, the investor has to pay a tax of 10% on the capital gain by dividends.

Also read: Do I Need to Pay Tax on Dividend Income?

4. Dividend cut

This is the worst case scenario. Dividends are not obligations and a company may decide to cut the dividends anytime in the future. Moreover, when the company cuts the dividends, even the share price falls significantly as the public sees it as a negative sign. And that’s why the dividend investors may face double side trouble.

Further, many times, the board of directors can also change the dividend policy of a company. This can again have an adverse effect on the dividend investors if the decision is made against the existing dividend policy.

stock market meme 23

Quick Note: New to investing? Check out this awesome investing course for beginners: HOW TO PICK WINNING STOCKS? Enroll today and start your journey in the exciting world of the stock market.

When you should exit a dividend stock?

Now, that you have understood the pros and cons of dividend investing, the next big question is when should you exit a dividend stock. If you’ve invested in dividend stocks, look for the following signs periodically to avoid any dividend pitfall in your invested company. Here are the three signals that you should exit a dividend stock:

— Dividends start declining: A fall in dividend for a year compared to the previous one can be ignored by the investors as businesses can always have a few losses in some years. However, if the dividends start continuously declining year-after-year, it may be a sign for the investors to exit.

— High dividend payout: A payout ratio greater than 70% for the continuous years may be a warning sign that the company is not retaining enough profit for its growth.

— An adverse change in dividend payout policy: If the company changes its dividend policy against the favor of the investors, then again it may be a sign to exit that stock.

Closing Thoughts

Traditionally, dividend investing approach was used by the retirees or the people entering their retirement age. As these people do not have any primary source of income (regular paycheck) after retirement, receiving small dividends per year in their account can be a good secondary source of income.

However, these days even the young and middle-aged investors are looking forward to dividend investing. Why? Because it is always a joy to see dividends get credited to your account periodically. Moreover, they do act as a secondary income source.

That’s all for this post. I hope it was helpful to you. Happy Investing.

What are STP and SWP in Mutual Funds_ A Beginner's Guide cover

What are STP and SWP in Mutual Funds? A Beginner’s Guide!

Systematic transfer plan (STP) and Systematic withdrawal plan (SWP)

In India, the Mutual Fund industry has started growing off late due to the immense efforts by Association of Mutual Funds in India (AMFI). Previously people used to be more interested in parking their money in Fixed Deposits and Recurring Deposits. Today, many Indians are looking to invest in Mutual Funds for gaining higher returns, ensuring larger security, and enjoying more liquidity.

Unfortunately, the percentage of Indian population investing in the Mutual Funds would not even cross the one-fifth of the total number of income earning Indians. At present, as high as 80% of the Indian income earners are either unaware of Mutual Funds or they have a plethora of misconceptions regarding the same.

One of the myths that many Indians have is that SIP is a feature of the Mutual Fund. The fact is that SIP is a mode of investing in Mutual Funds. You can invest in Mutual Funds either via lump sum mode or through SIPs. Let us have a basic understanding of SIP.

1. Systematic Investment Plan (SIP)

SIP means Systematic Investment Plan. You can invest a fixed sum of money at specified intervals of time, over a time period in a systematic manner. You can choose to make SIP investments yearly, half-yearly, monthly, weekly, or even daily.

SIPs are similar to Recurring Deposits. You are required to invest your money on a predetermined date and the Mutual Fund Company will provide you units based on that day’s NAV.

If you are looking to invest in the Mutual Funds via SIPs, you do not need to time the market. The major benefit that SIPs provide you is ‘rupee cost averaging.’ Therefore, your investments are not subjected to the risk of market fluctuations as SIP investing averages out the cost of your investments.

Now, there are two crucial concepts associated with SIP. The first one is the Systematic Withdrawal Plan or SWP.

2. Systematic withdrawal plan (SWP)

SWPs allow you in withdrawing a specific amount of money at regular intervals of time. SWP plans are more suited for retired people who are looking for a regular income to meet their expenses, preferably on a monthly basis.

After investing a lump sum amount in a Mutual Fund, the fixed amount and frequency of withdrawal are to be set by you. Not only SWPs help in providing you with periodic income but also protects you from the ups and downs of the stock market.

SWPs work in the manner opposite to SIPs. In case of SIPs, your money is invested in the Mutual Funds from your Bank Account. While, in case of SWPs, your Mutual Funds units are redeemed and gets deposited in your Bank Account.

Let us consider an example to understand how SWPs work in reality. Suppose Mr. Akash is having 10,000 units of a Mutual Fund on 1st January. He wishes to withdraw Rs 5,000 per month through SWP for the next three months. Therefore he sets up an SWP to give effect to it.

The units from your Mutual Fund holdings will be redeemed automatically to provide you with a regular income of Rs 5000 per month. The table shared below explains the process.

Date Opening Units NAV Units redeemed Closing units
1st Jan 10000 20 250 (5000/20) 9750
1st Feb 9750 16 312.50 (5000/16) 9437.50
1st March 9437.50 15 333.33 (5000/15) 9104.17

Now let us discuss the second key concept i.e. Systematic Transfer Plan (STP) 

3. Systematic Transfer Plan (STP)

STPs allows you to transfer your money from an Equity Mutual Fund scheme to a Debt scheme. The opposite can also take place. STP acts as protection against market volatility. STP is an automated way of transferring your money from one Mutual Fund scheme to another.

Whenever you feel that the investment made by you in an Equity Fund is being exposed to a higher risk, you can transfer your units to a Debt scheme periodically. Therefore, you can set up STPs which transfers your funds from your Equity scheme to a Debt Fund. When the market settles itself, you can again transfer the money from that Debt Fund to an Equity scheme.

Let us now understand how STPs work. You need to select a Mutual Fund from which your funds should be transferred to another scheme. You can set up STPs in a manner where a transfer can take place. It could be yearly, quarterly, monthly, weekly, or even daily.

STP means redeeming units of a scheme and investing the proceeds in the units of another scheme. Generally, STPs are allowed to an investor by a Mutual Fund company only within the schemes of the same company.

Through setting up STPs, you can keep earning your returns on a consistent basis. Moreover, your investments are also protected against adverse market circumstances. STPs also help you enjoy the benefit of ‘rupee cost averaging’ similar to SIPs.

STPs help you in rebalancing your portfolio. You can keep your funds moving from debts to equity when the Stock Market witnesses a bullish trend. Similarly, you can move your Equity investments away from the market and invest in Debt schemes when the market corrects itself.

Also read:

Systematic transfer plan (STP) and Systematic withdrawal plan (SWP)-min

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Taxation rules

Investing via SIPs is not going to fetch you any tax benefit unless you invest in an ELSS scheme. Under section 80C of the Income Tax Act, 1961, you can enjoy a tax deduction on your investments up to Rs 1.5 lakh. This tax benefit is available if you invest in any prescribed securities including ELSS.

SWPs result in the redemption of units of a Mutual Fund. Let us assume that you have invested in a Debt scheme and set up an STP to transfer money to an Equity Fund. Assuming 3 years have not been completed, any capital gain you make due to the redemption of units in Debt Fund will be taxable as per your tax slab. If you withdraw your investments after 3 years, capital gains are taxable @10% and 20%, with indexation and without indexation, respectively.

STPs also result in the transfer of units and therefore the capital gains are subjected to Income Tax. Suppose, you shift your investments from an Equity Fund to Debt scheme within 1 year, the capital gain tax is chargeable @15%. If 1 year exceeds, the tax is attracted @10%, provided capital gains in a Financial Year exceeds Rs 1 lakh.

Also read: Mutual Fund Taxation – How Mutual Fund Returns Are Taxed in India?

Closing Thoughts

If you lack both time and knowledge for Stock Market investing, you can invest your money in the Stock Market via Mutual Funds. For investing in Mutual Funds, you require making use of SIPs, STPs, and SWPs in any phase of your investment journey.

When you earn regular income in our life, investing in Mutual Funds via SIPs seems ideal. As per changing market circumstances, you can set up STPs to maximize your returns by minimizing your corpus loss. SWPs usually come in the picture when you stop earning income actively and looking for a passive source of regular income for the rest of your life.

Mutual Fund is a great investment option for growing your long term wealth. The systematic arrangement of your investments and withdrawals in the form of SIPs, STPs and SWPs help you live a financially disciplined life.