What is CAGR & How to Calculate it?

Posted by Rushabh H. Mehta | Published on 06 Mar 2020
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What is CAGR & How to Calculate it?

There are different types of investment avenues in the market and each of these avenues promises you a compounded rate of growth if you remain invested. Compounding of return means earning a return on the return earlier generated. So, if you invest INR 100 and earn a return of 10% in the first year, the amount would become INR 110. Thereafter, in the second year, you would earn 10% on INR 110 giving you a return of INR 11. This compounding helps grow and multiply your wealth considerably over a period of time.

In the case of market-linked investments, the rate of return is not guaranteed. It varies over the investment period. To know the average rate of return on your investments, the concept of CAGR is used. Let’s understand what CAGR is and how it helps you find the growth of your market-linked investments.

What is CAGR?

CAGR’s full-form is Compound Annual Growth Rate. The Compound Annual Growth Rate, in simple terms, is the average rate of return of an investment over a one year period. CAGR takes into account two important factors - the time period of the investment and the fluctuations in the return. Since the returns vary depending on the market fluctuation, finding the return over a specific time period becomes difficult. CAGR gives you the average growth rate offered by the investment over the said time period. CAGR shows the approximate growth rate considering that there is no market fluctuation and that the returns earned are reinvested into the investment.

How to calculate CAGR?

It is very easy to calculate CAGR. There is a CAGR formula which you can use to find the Compound Annual Growth Rate of your investment. The CAGR formula needs three important details which are as follows –

  • Value of the investment made initially (VI)
  • Term of investment (T)
  • Value of the investment at the end of the term (VE)

Using these three inputs, the CAGR formula becomes – CAGR = (VE / VI) ^ (1/T) – 1

Let’s understand with an example –

Mr. A invested INR 10,000 in a market-linked investment avenue. After 3 years, the value of his investments stands at INR 13,500. The CAGR for Mr.A’s investment could be calculated as below –

VI – INR 10,000

T = 3 years

VE = INR 13,500

CAGR = (13500/10000) ^ (1/3) – 1

= 10.52%

How CAGR helps understand the mutual fund growth rate?

Mutual funds are market-linked investment avenues which do not offer a guaranteed rate of return. Since the returns are subject to market fluctuations, CAGR becomes an accurate tool to measure the performance of the fund over a specified period. Investors can check the annual CAGR of mutual fund schemes and use the rate to find out which scheme offers better returns than others. The fact sheet offered by the mutual fund house contains returns generated by the fund over different time frames. These returns can prove to be confusing and so CAGR is an easier alternative to understand the performance of the fund. CAGR acts as a ready reckoner for investors to assess returns from a mutual fund scheme and also highlights the compounding of returns on mutual fund investments.

Important points to know about CAGR

  • The investment risk inherent in the scheme is not highlighted by CAGR. CAGR is merely a yardstick to measure the growth rate
  • CAGR proves to be a good measure of growth for a short-term period, i.e. up to 6 or 7 years. If you are considering long-term investments, the growth trends over a short-term period would be averaged out. In such cases, CAGR would give an average rate even if the fund performed excessively well in a two or three year period and then the returns fell in later years.
  • CAGR changes every year since the investment period changes
  • CAGR for two investment funds can match one another even if the funds are different. This might happen if one fund performed well initially and the other one performed well in the last few years. As a result, the performance is averaged out and the CAGR

Other modes of calculating returns from investments

Besides CAGR, there are other ways to calculate the returns generated by market-linked investments. These ways are as follows –

  • Returns since launch

Under this model, the return earned by the fund ever since it was launched and till the present date is calculated.

  • Trailing returns

Under the trailing returns approach, you measure the performance of your fund daily, weekly, bi-weekly, monthly or annually.

  • Annualised returns

Annualised returns are calculated as the geometric average of the return yielded by the fund over a given period of time.

CAGR v/s Absolute returns

Absolute returns measure the total return yielded by an investment. The time period is not considered. CAGR, on the other hand, measures the return over a specific time period. For instance, in the previous example, INR 10,000 grew to INR 13,500 over a 3-year period. The absolute return would be 35% since it measures the total return earned on the investment. However, when CAGR is considered, the time period of investments is also taken into consideration thereby considering the time value of money. As such, CAGR comes to 10.52% which is a more realistic figure. While absolute returns show the returns generated, the time period is missing. You cannot figure out how many years it took the investment to generate this return. But CAGR shows you the annual return making it easier to make a judgement on the performance of the fund.

The next time you invest in mutual funds, stocks or other market-linked investment avenues, consider their CAGR to choose the fund or investment which has better returns over its peers. So, visit IndiaNivesh and find out a mutual fund scheme of your choice and then compare the scheme’s CAGR with its peers to choose the best performing fund.

 

Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing. 

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What is Difference between REIT and INVIT?

Posted by Rushabh H. Mehta | Published on 02 Mar 2020

Introduction to REITs and InvITs REITs Similar to mutual funds, Real Estate Investment Trusts (REITs) facilitate investments into the real estate sector. Here, you can buy and sell units rather than properties, to profit from your investments. If you are looking to invest in the property market without having to buy properties, consider REITs. This structure is governed by SEBI, Real Estate Investment Trusts (REITs) Regulations, 2014, that offers a framework on registration and regulation of REITs in India. As defined, REITs are used to invest in real estate, such as land and permanently attached improvements to it. However, it does not apply to mortgages or assets falling under the scope of 'infrastructure'. InvITs Similar to REITs, InvITs are structures where investors invest money identical to that of a mutual fund. This option was introduced to open up investments in the infrastructure sector. Regarded as a modified version of REITs, InvITs are built to suit specific circumstances in the country.   Understanding REIT vs INVIT For a while now, the real estate sector in India has been pushing to introduce REITs and InvITs. While these were permitted, investors were hesitant mainly due to the uncertainty of the tax treatment of pass. But with the recent clarification by the government on the status of pass-through payments in REIT and InvIT, these structures have become more transparent. Today, the government has also permitted banks and mutual funds to invest in these instruments, subject to specific predefined elements. To understand the difference between REITs and InvITs, let's look into the specifics of each structure.   Similarities between REITs and InvITs    REITs - As a kind of real estate mutual fund, a REIT collects money from investors or unitholders and invests them in real estate projects. The REIT further invest such funds into completed and under construction real estate projects. The returns generated on these real estate schemes are distributed to the investors through dividends. Typically, most REITs are regarded as medium-term development projects. InvITs - As a slight variation of REIT, InvITs only invest in infrastructure plans with extended tenures. Therefore, a significant road project, highway plan or even a substantial irrigation scheme can attract InvITs for investments. Similarly, the returns generated by infrastructure projects are distributed to InvITs investors through dividends.   Types of REITs Equity REITs: These structures generate money when owners lend spaces such as large residential townships, office spaces, shopping malls and the like to tenants on lease. The generated income is then divided among investors through dividends. Mortgage REITs: Under this structure, there is no concept of an owner. This arrangement means the finances taken against debt to develop real estate projects. Typically, mortgage REITs generate income through EMIs that are further distributed among investors through dividends.   Deciphering REITs structures Under the Indian Trusts Act, 1882, REITs are set up as trusts registered with the SEBI. This structure involves three parties. They include: Trustees – These are individuals who oversee activities within the REITs. They are registered debenture trustees that are not associated with the sponsor. Sponsor - These individuals hold approximately 25% in REITs for the first three years. After the three years, sponsors hold 15% in the REITs. The primary responsibility of the sponsor is to set up the REITs structure and appointed trustees. Manager - A company, LLP or a corporate body that supervises and looks after the day-to-day functioning of the REIT. To qualify as a manager, a manager must have at least five years' experience in addition to other requirements, as specified.   Advantages of investing in REITs Secured income through long leases High liquidity Stringent regulations by the SEBI Specialised management Transparency Guaranteed dividend Diversification To understand how you can benefit from investing in REITs, here are some ways. Income is typically generated from REITs in the form of rent; this revenue is regarded as a guaranteed income. You can purchase REITs just like you do shares in the stock market, but, without the hassle of purchasing actual property or the complications of dealing with real estate legalities. On average, REITs yield approximately 10% per annum for its unitholders, that can be decent returns compared to other investments.   A closer look into InvITs Better known as infrastructure investment trusts, InvITs are relatively similar to REITs. InvITs obtain money from investors to be used as an investment in infrastructure projects to ensure cash flow. Typically, InvITs invest directly or through an SPV into infrastructure projects. However, InvITs can only be done through SPV's in the case of public-private partnership. Just like REITs, InvITs are governed by the SEBI through the SEBI (Infrastructure Investment Trusts) Regulations, 2014 that registers and regulates InvITs. The minimum investment amount in InvITs is Rs. 10 lakh that can be bought in an IPO for ten years or more.   Types of InvITs  A public offer of InvITs units is mainly invested in completed infrastructure projects. An InvIT investment in under-construction projects typically goes for a private placement of its units.   Deciphering InvITs structures InvITs are mainly set up as trusts that are registered and regulated by the SEBI. Typically, four parties are involved in an InvIT. These include: Trustee - An individual, who is a SEBI registered debenture trustee. Sponsor - A sponsor can be a corporate body, an individual promoter, a company or an LLP with a net worth of ₹100 crores that has set up the InvIT. Sponsors have to hold InvITs for a minimum of three years unless specified otherwise in the regulatory requirements. Investment manager - A corporate body, company or an LLP that manages all the functionalities and business activities surrounding InvITs is regarded as an investment manager. Project manager - An individual responsible for executing the project, and in the case of public-private partnership, could be an entity assigned to being responsible surrounding the implementation of the project.   Advantages of InvITs  Regarded as providing a suitable structure to finance infrastructure projects in the country InvITs are considered ideal. This is because, if large infrastructure projects under development in India are delayed due to several reasons such as death, finance expenses, frozen equity of private investors and the like, InvITs can come to the rescue. They can: Offer long-term refinancing of current infrastructure projects. Assist in retrieving the developer's capital to be used to reinvest into new infrastructure projects. Help banks from risky loan exposure by taking out the current high cost of debt with long-term, low-cost funds. Assist investors in building diversified investments within the infrastructure industry. Attract foreign funds in the infrastructure sector. Help bring about enhanced standards of governance in the infrastructure arena.   Conclusion Many foreign investors are showing a keen eye in the infrastructure and real estate sector of India. In this regard, REITs and InvITs can be perceived as excellent opportunities for taking advantage of India's developing growth in the industry. These structures also offer a significant prospect for institutional investors to diversify their investments. Given the robust governance REIT protocols set up by SEBI in addition to RERA laws, real estate can work out to be attractive investments for the future.   Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing. 

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Dematerialisation of Shares – Meaning, Process & Benefits

Posted by Rushabh H. Mehta | Published on 06 Mar 2020

The online platform has revolutionised the way we live. Whether it is transacting, connecting with a loved one, getting updated about the happenings in the world, everything can be done online. When it comes to investments, the online platform provides ease and convenience. Investment in shares and share trading is a prevalent activity undertaken by many investors. They invest their money in the stock of a company with a view to earn profits when the stock value rises. When shares are purchased, share certificates are issued in physical form containing the details of the investor and the investor. However, these physical share certificates are inconvenient, and so the concept of dematerialisation has been introduced. Do you know what it is? What is dematerialisation? Dematerialisation of shares means converting physical shares and securities into an electronic format. The dematerialised shares and securities are, then, held in a demat account which acts as a storage for such shares. Dematerialised securities can then be freely traded on the stock exchange from the demat account. How does dematerialisation work? For the dematerialisation of securities, you need to open a demat account with a depository participant. A depository is tasked with holding shares and securities in a dematerialised format. As such, the depository appoints agents, called, Depository Participants, who act on behalf of the depository and provide services to investors. There are two licensed depositories in India which are NSDL (National Securities Depository Limited) and CDSL (Central Depository Services (India) Limited). Need for dematerialisation of shares Dematerialisation of securities was needed because it became difficult for depository participants to manage the increasing volume of paperwork in the form of share certificates. Not only were there chances of errors and mishaps on the part of the depository participant, but physical certificates were also becoming difficult to be updated. Converting such certificates into electronic format frees up space and makes it easy for depository participants to track and update their investor's stockholding. Benefits of dematerialisation for investors As an investor, you can get the following benefits from dematerialisation – You don’t have to handle the physical safekeeping of share certificates. Since your investments are converted in electronic format, you can easily store them without the risk of theft, loss or damage You can access your online demat account and manage your investments from anywhere and at anytime The charges associated with the demat account are low. Depository participants change holding charges which are minimal and you don't have to pay any stamp duty on dematerialised securities Since no paperwork is required to be done, the transaction time is considerably reduced Given these benefits, dematerialisation proves advantageous. Nowadays, the practice of holding physical securities has become almost obsolete and buying through a demat account has become the prevailing norm for investors. How to convert physical shares to demat? To convert physical shares to demat, the following steps should be followed – You should open a demat account with a depository participant. A depository participant can be a bank, financial institution or a stockbroker who is registered as a depository participant with the two licensed depositories of India You would then have to avail a Dematerialisation Request Form (DRF) from the depository participant and fill the form Submit the form along with your share certificates. The share certificates should be defaced by writing ‘Surrendered for Dematerialisation’ written across them. The depository participant would, then, forward the dematerialisation request to the company whose share certificates have been surrendered for dematerialisation. The request should also be sent to Registrar and Transfer (R & T) agents along with the company The company and the R & T agents would approve the request for dematerialisation if everything is found in order. The share certificates would also be destroyed. This approval would then be forwarded to the depository participant The depository would confirm the dematerialisation of shares and inform the depository participant of the same Once the approval and confirmation is complete, the shares would be electronically listed in the demat account of the investor Buying securities in a dematerialised form If you are looking to buy stock in a dematerialized form, here the simple steps that you can take for the same – Choose your broker for buying the securities and pay the broker the Fair Market Value of the securities that you want to buy The payment would be forwarded by the broker to the clearing corporation. This would be done on the pay-in day The clearing corporation would, then, credit the securities to the broker’s clearing account on the pay-out day The broker would then inform the depository participant to debit its clearing account and transfer the shares to the credit of your demat account The depository would also send a confirmation to your depository participant for the dematerialisation of shares in your account. The dematerialised shares would then be reflected in your demat account You would have to give ‘Receipt Instructions’ to your depository participant for availing the credit of shares in your demat account. This is needed if you hadn’t already placed a Standing Instruction for your depository participant when you opened your demat account. Similarly, for sale of dematerialised shares, the process is opposite. Trading in stocks in a dematerialised format is simple, quick and convenient. It has also become the practice of the current market. So, if you want to buy or sell securities, open a demat account and start trading in dematerialised securities. Should you have any doubts, get in touch with the team at IndiaNivesh who will look into your requirement and lead you towards a quick resolution.    Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing. 

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    Posted by Rushabh H. Mehta | Published on 06 Mar 2020

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Benefits of ULIP A ULIP is popular because of the following benefits it provides – It allows you to avail insurance coverage as well as investment returns in a single product The premiums paid and the benefits received under ULIPs are completely tax-free in nature helping you save tax The flexible benefits of ULIPs allow you to manage your investments as per your investment strategy The different types of ULIPs help you fulfil the various financial goals that you might have Switching and partial withdrawals do not attract any tax making ULIPs tax efficient Since the returns are market-linked, you get inflation-adjusted returns from ULIP ULIPs are attractive insurance policies that give you coverage as well as returns. Now that you understand ULIP meaning, its types and advantages, use our IndiaNivesh platform to invest in a plan as per your insurance and investment needs and enjoy all the benefits that the plan has to offer.   Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.

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  • Capital Market – Meaning, Types & Functions of Capital Market
    Posted by Mehul Kothari | Published on 20 Nov 2019

    We all know how various companies and industries raise funds for their short term requirement through the money market. However, when they need funds for long term, capital market is their source. The capital market is just like the money market but with a difference that funds raised in the capital market can be used only for long term. In this article, you will learn about the concept of capital market in detail. Let us first understand what is the capital market? Understanding Capital Market Capital market in simple words means the market for long term investments. These investments have a lock-in period of more than one year. Here, the buyers and sellers transact in capital market instruments like bonds, debt instruments, debentures, shares, derivative market instruments like swaps, ETFs, futures, options, etc. Let us now understand the types of capital market. Types of Capital Market The capital market is of two types i.e. Primary Market and Secondary Market. 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Ways of Raising Funds Offer through Prospectus In the primary market, the prospectus is used to raise funds. The company invites the investors and the general public through an advertisement known as the prospectus to subscribe to the shares of the company. The shares or debentures are allotted to the public on the basis of subscription. If the company receives a high subscription then allotment is done to them on pro-rata basis. The company hires merchant bankers, brokers or underwriters to sell the shares to the public.  Private Placement Some companies try to avoid the IPO route to raise funds as it is very costly. Instead, they give investment opportunity to few individuals via private placement. Here the companies can offer their shares for sale to select individuals, financial institutions, insurance companies and banks. This way they can raise funds quickly and economically. 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The capital markets may be sometimes termed risky because they do not give fixed returns annually. But when looked from a long term perspective, their performance has always been good and rewarding for the investors. If you want to learn more about the capital market or put your savings in the capital market, you can contact IndiaNivesh Ltd.Disclaimer: "Investment in securities market and Mutual Funds are subject to market risks, read all the related documents carefully before investing."

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  • Tax Free Bonds – Meaning, Features & Best Tax Saving Bonds for Investment
    Posted by Mehul Kothari | Published on 18 Oct 2019

    Investors always look for opportunities to invest in avenues that can give them good returns in the long run. Along with high returns on investments, they also look for tax saving options. The tax saving investment options that are popular in terms of high return and zero taxation are tax free bonds and tax saving bonds. If you are looking to make tax saving investments, this article will help you in learning about tax free bonds in India and its related information in detail. Let us first understand what tax free bonds in India are. What are Tax Free Bonds? Tax free bonds are issued by the government enterprise. They are like financial products and includes municipal bonds. They are a low-risk investment option and offer a fixed rate of interest. What makes tax free bonds even more attractive is the fact that it makes you eligible to claim tax exemption under section 10 of the Income Tax Act of India, 1961. 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In the last few years, the regular investors in tax free bonds include regional banks, cooperative banks, trusts and corporate companies. Let us now learn about the features of tax free bonds. Features of Tax Free Bonds Exempt From Tax The main feature of tax free bonds is that they are exempt from tax. The interest earned on these bonds is free from income tax. However, it is advisable that you must declare your interest as income from tax free bonds and not to claim the tax deduction on the investment amount. Moreover, no tax deducted at source (TDS) is applicable on tax free bonds. These bonds are beneficial for individuals who earn higher income and fall under higher tax bracket.  Low Risk Since tax free bond schemes are run by the government, the chances of default on interest payment is almost nil. This safeguards your capital and also provides you fixed annual income in the form of interest. Liquidity Tax free bonds are long term tax saving investment option and they have extended lock-in period. This suggests that you cannot liquidate tax free bonds quickly. Therefore, you must be aware of the fact that these tax free bonds cannot act as your emergency fund. Lock-In Period While investing in tax free bonds you must ensure that you will not be needing the money in the short term. This is because tax free bonds have lock-in period of 10 to 20 years. This means, you cannot withdraw your investment before the maturity period. Issuance And Transaction The tax free bonds can be purchased through a demat account or in physical form. They are traded on the stock exchange. Here you must remember that only the interest earned on these bonds is tax free and capital gains made by selling the bonds in the stock market is taxable in nature. Returns The returns on tax free bonds are dependent on your purchase price because these bonds are traded in lower volumes and have limited buyers or sellers. Interest Income The investors in the tax free bonds receive the interest on an annual basis. The rate of interest on these bonds ranges from 5.50% to 6.50%. The rate of interest can fluctuate because they are related to the current rate of government securities. The rate of interest on these bonds is very attractive considering the fact that they are exempt from tax. Let us now have a look at few of the popular and upcoming tax free bonds of 2019. Popular and Upcoming Tax Free Bonds of 2019 Some of the popular and upcoming tax free bonds of 2019 are HUDCO N2 Bonds, REC N7 series, HUDCO N3 Bonds, National Highways Authority Of India, REC N6 Bonds, Indian Railways N7 Series, Indian Renewable Energy Development Agency, Power Finance Corporation, etc. Often people use the term tax free bonds for tax saving bonds and vice versa. 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It is simple and hassle-free to make an investments in these highly rewarding bonds. However, you can make investment only when the period of subscription is open. Just like investing, redeeming tax free bonds is also a very simple task. You can redeem the bonds after the completion of the tenure. Investing in the tax free bonds and tax saving bonds are highly rewarding as they involve almost no risk. If you are new to the financial market or you are looking to invest in tax free bonds or tax saving bonds, you can take the assistance from IndiaNivesh Ltd. We are the leading broking firm and financial advisors in the market. With our assistance, you can achieve your financial goals and objectives in a desired manner.  Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.

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