Debt: the word itself conjures up the image of a moneylender standing on the doorstep waiting for his money. However, debt is not always bad. You may have heard of people ‘being in debt’ but what about ‘investing in debt’? When you make a debt investment, you loan the money to a corporate or the government. In return, you receive returns in the form of interest. If you are interested in tax-efficient steady returns and safety of principal, then debt funds are ideal for you.
Here are five different types of funds that you can include in your portfolio:
Bonds are debt securities issued by government entities and corporate houses. These entities raise money for financial purposes, which include funding investments and enhanced cash flow. When you purchase bonds as investment, you receive a regular income through interest payments. At the end of the maturity period, you receive the original investment made. There are different types of bonds such as government bonds, corporate bonds, high-yield bonds, international bonds and so on.
2) Public provident fund
The Public Provident Fund, or the PPF, has been a popular debt-oriented investment for for the past many decades. This scheme is backed by the government of India and offers a high degree of protection on the principal as well as interest. As an investor, you are guaranteed a fixed return each year. The current rate of interest on PPF is fixed at 7.6% per annum .
PPF is a 15-year scheme. At the time of maturity, you have the option to extend the plan indefinitely in blocks of five years. The investments you make under PPF are eligible for a tax deduction of Rs 1.5 lakh under Section 80C of the Income Tax Act. In addition, the interest you earn is not taxable.
3) National Saving Certificate
National Saving Certificate (NSC) is a savings bond offered by the Indian government. It is one of the safest investment avenues in the country. It is available at all post offices and investors can invest for up to 10 years in this scheme. Currently, the interest rate on NSC investments is 7.8% per annum*. It is popularly used as a tax-saving instrument by government employees, salaried individuals and businessmen.
Further benefits include:
a) Tax deductions are applicable under Section 80C of the IT Act.
b) No upper limit on how much you can invest
c) You can get loans from banks by offering certificates as collateral
4) Gilt funds
Gilt funds are mutual funds that allow you to invest in government bonds and securities. These funds carry zero default risk and they are considered to be very safe. These funds invest in debt that is of low risk and high quality. And while the returns can be moderate, the invested capital is safeguarded against risk. That’s why these funds are suitable for beginners or those who are risk averse.
5) Debt mutual funds
Debt mutual funds are different from gilt funds as they invest in a mix of securities such as corporate bonds, money market instruments, treasury bills and government securities. Compared to gilt funds, the risk is higher but they offer high returns too. If you are interested in earning a steady income during uncertain interest rate movements, you can invest in fixed maturity plans (FMPs). These are close ended debt funds with a fixed maturity date.
Most people think of equities when it comes to investments. However, investments in debt can be a great way to balance your portfolio and to earn steady returns.
Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
How to buy stocks
The two biggest stock exchanges in India are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Together, there are more than 6,000 companies listed on their platforms. With literally thousands of options in front of you, it can be tough to pick the right stocks for your portfolio. In other words, where do you even begin? Here are some tips that can help you make the right investment decisions. 1) Familiar with a particular sector? Start thereIt is always good to know how a company or a sector functions before you invest. For example, if you are in the healthcare industry, you might already have useful knowledge about how pharmaceutical companies function. You can utilise this knowledge for your investment gains. Beyond that, you can start investing in companies with business models that are easy to understand. Even the great investment guru Warren Buffett says that he does not invest in companies and industries that he does not understand. 2) Check the financial healthGo through the financial records of the company to find out its financial health. Take a look at the company’s track record regarding revenues and profits. There are three important financial statements you should read and understand before investing in a company. They are: These three statements paint a financial portrait of the company. By reading these statements, you can get an idea if a company is profitable or not. And while the profitability of the company is important, it is also necessary to see what the debt situation is. It may not be a good sign if a company has large amounts of debt when compared to its competitors. 3) What is the stake of promoters?Promoters are individuals or organisations who are generally the biggest shareholders in a company. In many cases, these promoters have key executive roles in the company. That’s why keeping tabs on their investment holdings can offer clues regarding the future prospects of a company. So when promoters increase their shares, it is taken as a good sign for the company. 4) Looking for a regular income: dividends are your answerMost people invest in the stock market for two reasons: steady income at the present or high returns in the future. If you are interested in a regular income, then it is best to invest in stocks that offer dividends. Blue chip companies that have reached the maturity stage of the growth cycle tend to offer good dividends to its investors. By investing in such companies, you can earn steady returns to finance your current needs. 5) Long-term investmentsThe stock market is an ideal investment avenue if you want to invest for the long term. Warren Buffett once said: “If you aren’t willing to own a stock for ten years, don’t even think of owning it for ten minutes.” Look out for stocks that have high growth potential in the next five to 10 years. For example, if a company reinvests its profits back into the business, it is an indication that the company has good growth potential. This way, the company positions itself for long-term growth and success in the market. By investing in such stocks for the long term, it is possible to create a big corpus for your future goals such as buying a house or retirement planning. ConclusionBuying stocks is a science as well as an art. With more experience in the stock market, you can become a better investor. But to reach that state, you need to put in time and effort to learn and understand the different aspects of the stock market. Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
How to Invest in Derivatives
Futures, options and derivatives: Watch any movie about the financial markets and you are bound to hear these words. Traders in good looking suits rush around the trading floor spouting these terms at the top of their voices. It all sounds rather important and complicated. But what are these words exactly? And how do you invest in derivatives? Let’s find out.What are derivatives?Derivatives are financial contracts between investors. They derive their value from another asset such as stocks, bonds or other commodities. That’s why they are known as ‘derivatives’. Based on the change in price of the underlying asset, the price of the derivative is determined.How to trade in derivatives?Future contracts and options are two of the most common types of derivatives. Here is how you can invest or trade in these avenues.Futures contractsAs the name suggests, a futures contract is a contract between two investors to conduct the sale of an asset for a specific price and a pre-determined point of time in the future.Here is how a futures contract takes place. Imagine there are two investors: Santosh and Meera.Santosh has 100 shares of company X. The value of each share at the moment is Rs 50.Santosh wants to sell the shares after six months. However, he fears that the market could take a downturn by then. He wants to ensure that he gets a good return on the sale of his stocks.He tells his broker to find a buyer for his shares.Meera is an investor who wishes to buy the shares of company X. She is confident that the market is poised for a boom in six months. She decides to enter a futures contract with Santosh.As per the contract, she is willing to buy 100 shares of company X at Rs 80 per share after six months.In reality, two things could happen: the market could go up as Meera expects or go down as Santosh expects.Scenario #1 Imagine the market goes up. The stock price of company X rises to Rs 120 per share.This means that Meera earns a profit of Rs 50/share. As for Santosh, it doesn’t really matter whether the market goes up or down because he has already booked his profits at Rs 30 per share.Scenario #2Imagine the market goes down. Let’s assume the prices of company X falls to Rs 20 per share.This means Meera makes a loss of Rs 30 per share.Stop lossIn order to avoid such losses, Meera could instruct her broker to create a stop loss. For example, if she creates a stop loss at Rs 40, the broker immediately sells her shares when the stock hits the specified price.In this way, Meera can ensure that her losses are minimized.OptionsAn option is like a futures contract. Here too, two investors enter into an agreement to trade a security at a particular price on a pre-determined date in the future. But in the case of options, the buyer or seller is not obligated to go through with the transaction. He has the ‘option’ to conduct the transaction. This allows the investor to gain a leveraged position on the stock while at the same time he can avoid the risk of a total purchase. Options are commonly used by traders to hedge their positions in the market.ConclusionDerivatives offer investors the opportunity to hedge their bets in the market and maximize their returns. If you have the appetite for some risk and if you possess an understanding of the Indian markets, investing through derivatives can be largely beneficial. And the next time you hear someone talking about derivatives on the TV, you know exactly what they are talking about. Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
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