Stock Market Investment - Do’s and Don’ts of Stock Market Investing for Beginners

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• Private Equity Fund – What is Private Equity & How does it work?

  Posted by Mehul Kothari | Published on 08 Jul 2019

  What is Private Equity?When it comes to investing, most of the investors opt for the traditional route. They invest in bonds or stocks or purchase mutual funds. While for some others, private equity is an appealing investment option. But what is private equity fund and what is the private equity fund structure? How can one invest in it?In this article, we explain private equity fund meaning in depth to give you a better understanding of the concept. What is Private Equity Fund?Private equity is a general term which describes different kinds of funds pooling money from several investors to acquire stakes in companies. Such a private equity fund may amass millions or even billions of dollars to directly invest in companies. These companies are not publically listed on the exchange or traded. So, a private equity fund either directly invests in private companies or engages in buyouts of public companies, resulting in the delisting of public equity. Private Equity Fund StructureA private equity fund comprises of Limited Partners (LP) who own 99 per cent of the shares in a fund. They have limited liability. The remaining 1 per cent is owned by General Partners (GP) who have full liability. They are responsible for executing and operating investment. Understanding What is Private EquityPrivate equity involves investing in unlisted companies at different stages of their development. This is done with the objective of creating an added value to these companies. After some years, such companies can be sold with a significant capital gain. Simply put, private equity funds are created with the intention of raising money from several investors to deploy it progressively by acquiring companies and helping them grow more profitable.Since private equity investment directly invests into a company, it requires a large capital outlay to gain a significant level of influence over the company’s operations. This is why not every investor can afford to invest in private equity. The minimum amount of capital required varies depending on the fund and the firm. Some funds have a $2,50,000 minimum investment requirement, while others can run into millions of dollars. Therefore, most of the private equity firm industry comprises of large institutional investors such as pension funds. Or, they may be funded by a group of accredited investors. How Does Private Equity Work?Private equity firms raise money from accredited investors and institutional investors to invest in companies through the following investment strategies:• Distressed FundingThis is also known as vulture financing. In this type of private equity funding, the money is invested in troubled companies with underperforming business assets or units. The funding is aimed at making necessary changes to the operations or management for a turnaround of the company. This could mean selling their assets for a profit ranging from patents to real estate and physical machinery. Mostly, companies that have filed for bankruptcy fall in this category and require this type of funding. • Leveraged BuyoutsThis type of private equity funding is the most popular investment strategy. Here, the private equity firm buys out a company completely with the objective of improving its financial and business health. Later, the company can be sold at a profit to an interested buyer or made public by conducting an Initial Public Offer. The firm uses debt as leverage to buy out the company so it does not have to spend the purchase price at once. The money from various investors can be used to improve the company’s earnings and create a higher return. • Funds of FundsAs the name suggests, this type of funding invests in other funds, typically hedge funds and mutual funds. The aim of the FOF strategy is to achieve broad diversification and minimal risk. For an investor who cannot afford the minimum capital requirements in such funds, FOF serves as a backdoor entry. • Venture CapitalVenture capital investments focus more on investing in newer companies or startups that are on the verge of developing a new technology or industry. This type of funding can be done at different stages of a company. For example, seed financing funds a company to scale an idea from its prototype stage to the development of a product or a service. Similarly, an early stage financing can assist the entrepreneur in helping his company grow. Or, Series A financing which can enable an entrepreneur to actively compete in a market or create one. Advantages of Private EquityPrivate equity offers multiple benefits to startups, businesses and companies. It provides them access to liquidity instead of having to rely on traditional forms of financial mechanisms such as listing on public markets for funding. Another huge advantage of private equity funding is that companies can operate away from the glares of public markets. They are not required to submit quarterly reports to the outside world and can undertake a long-term approach in bettering their fortunes. Certain forms of private equity financing such as venture capital funding can be ideal for early stage companies who do not wish to take high business loans. What are Some Myths Regarding Private Equity Firms?Here are some myths surrounding private equity firms which are not true.• Private Equity Firms Strip A Company’s AssetsMany analysts believe that private equity firms are able to turnaround a company by stripping it of its best assets. In reality, private equity firms have been known to create added value to a company by expanding their geographical footprint. Or, acquiring and integrating smaller competitors, and repositioning an out-of-date concept into a trendy product. • Private Equity Firms Cut CostsPrivate equity firms do cut costs, but only the unnecessary ones with a view to reinstating the money into other functions. For example, research, marketing, sales, and more. This can help support the company expansion with a lesser capital outlay.• Investor’s Money Is Blocked For 10 YearsGrowing companies can take time. Thus, investments made into private equity funds are generally seen as long-term or illiquid. However, it is not rare that a company can be sold off after a 4 or 6 year holding period. Private funds usually have a 10-year maturity, but it is possible that all the money gets invested in the first 5 to 7 years of the fund's life. Private Equity Fund v/s Other Kinds of EquityPrivate equity is not traded on public exchanges whereas equity through stocks is publically traded. In addition, private equity firms only invest in failing companies that need a turnaround or strong performing companies that can further improve margins and efficiency. For other kinds of equity, investors can invest in all types of companies. Private equity firms are attractive investment vehicles for institutions and wealthy individuals. Private equity operations at IndiaNivesh Ltd. are aimed at creating value for our investor clients seeking growth opportunities in unlisted businesses at an early stage. You may get in touch with our team of highly-knowledgeable fund managers to know more about investing.   Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.

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• Risk vs Return: The tradeoff

  Posted by Mehul Kothari | Published on 13 Mar 2019

  The risk return tradeoff is a principle of investment, which means that higher the risk in the portfolio, higher is the potential return possibility. However, high returns from a risk return trade off is not always guaranteed.To clarify the risk and return trade off and understand what is risk return trade off with an example, any investment with high risk may have a chance of high return, say, equity stocks. So, if the risk in an investment is high, then the possibility of return is also high, around 20-25% annually and may not be limited to just 6-8%. It basically means that the investment return is volatile and may fluctuate depending on market movements. However, the average return of equity would typically be 12-15% annually.On the other hand, if the risk in any particular investment is low, for instance in a fixed bank deposit, the chances of getting 20-25% annually may never happen. The returns will be more in the 6-8% bracket. However, it also means that the return can never become lower than 6%, especially negative. This is the trade off between risk and return. Hence, you need to take greater risks if you need a higher return on your investments. The concept of risk return trade off in finance is a widely accepted fact, but the associated risks with the portfolio are often neglected. Risk-return trade off in financeAs far as investing is concerned, each and every investment has an associated risk with it. When you are looking to choose an investment, you need to look into its risk too so that the overall risk of the portfolio is managed accordingly.   There are multiple risks associated with an investment product. Some of these include:1. Inflation risk reduces the purchasing power of cash reduces over time.2. There is credit risk because credit rating of bonds/papers, etc. determine the value of the productLiquidity risk arises when selling an investment product at the right time can be a hassle. 3. There is tax risk as governments usually make taxation changes every year. 4. Concentration risk occurs when you buy too many of a particular investment product.5. There is market risk because equity market is volatile. Risk levels of asset classesTo sum up You need to find the right blend of risk and return. This is quite an important task because the return needs to be in line with your long-term financial goal. However, it is equally important that you don’t ignore the risk factor. The investment option you choose should match your risk appetite.   Disclaimer: Investments in the securities market are subject to market risks. Read all the related documents carefully before investing.

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• Real Estate Investment in India

  Posted by Mehul Kothari | Published on 13 Mar 2019

  What is real estate investment? Real estate is an alternative investment instrument, like the ones we discussed in the previous section. But it merits a separate mention because it is tangible. You can physically own a property and decide to use, rent, sell, or modify it. Other alternative investments are purely financial instruments. They pay returns in a predefined manner during their life and cannot be put to any other use.This piece will tell you all need to know about real estate investing and property investment in India.Types of real estate There are five major types of real estate investing in India:1. Residential – This is the most straightforward real estate investment in India. It includes houses and individual apartments that can be occupied by an individual or a family. It also includes apartment buildings where each unit is occupied by a separate tenant. Tenants pay you a pre-decided rent, usually each month. the duration of their stay depends on the lease agreement. These are generally made for eleven months and renewed on you and your tenant’s mutual consent.2. Commercial – This includes individual office locations, office buildings, and business parks. They usually require a significantly larger investment than residential real estate. But they also attract higher rents. Commercial properties frequently have multi-year leases, which stabilizes your cash flows and increases their predictability. The only challenge is that their rents are highly volatile. They fall more than residential real estate during downturns as businesses downsize or shut down. They increase considerably during upswings as companies hire more people. So, multi-year contracts keep you from taking in new tenants and earning more rent during upswings.3. Industrial – This includes any property that the tenant can use to produce, manufacture, assemble, store, or distribute tangible goods. Common examples are factory locations, industrial warehouses, garages, service stations, and cold storage facilities. Industrial real estate generally generates a large fee and creates opportunities to earn incremental revenue from additional services. For example, if you have rented out a car service station, you may set up a café or a convenience store on it for waiting customers. You may even offer the property on a revenue sharing basis and earn a share of the occupant’s revenues.4. Retail – This includes shopping malls and retail stores. These properties too can be let out on rent basis as wells as revenue sharing basis. In many cases, the landlord asks for a share in the tenant’s revenue, over and above a base rent.5. Mixed-use – This combines many of the above categories on a single piece of land. It is fit for investors who can invest in a large piece of land and develop its separate sections for different uses. it offers built-in diversification because your revenues are not tied to fundamentals that affect one type of real estate. This reduces risk.Income from real estate investments Most real estate investments generate income in two forms:1. Price appreciation: This refers to an increase in a property’s value when it becomes more desirable. This mostly happens because of developments in its surroundings. For example, when a new source of employment comes up in its neighbourhood or when its metro connectivity improves. Its price may also increase because of the upgrades and improvements you make to it. Price appreciation allows you to sell the property for more than you bought it, generating a profit in the process.2. Periodic cash flows: This is the rent you generate when you lease your property. To generate this, you must hold the property for some length of time after buying it.Benefits of investing in real estate 1. Convenience – real estate is not as technical as stocks, bonds, and other financial assets. Many aspects of real estate investing are intuitive.2. Tangibility – Property provides psychological comfort because it stays with you even when its price collapse. You can use it yourself or generate some bare minimum revenue by leasing it.3. Stability – Real estate does not always generate supernormal returns like stocks. But it pays stable rent that can be increased when you renew the lease.4. Insurance – Unlike financial instruments, property can be insured against damage and loss.5. Inflation hedge – Property prices and rents increase with the price level. So, inflation has a limited effect on your financial position when you invest in real estate.In conclusion Real estate is regarded as the simplest investment instrument because investing in a property is less complicated than financial assets. Knowing how to invest in real estate involves a straightforward exchange between the property owner and the tenant. However, properties are of different kinds and each kind has its unique characteristics. This makes real estate investment a skill that needs to be done with expertise in order to get the benefits of investing in real estate.     Disclaimer: Investments in the securities market are subject to market risks. Read all the related documents carefully before investing.

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