Share Market - How to invest in share market

Mehul Kothari द्वारा पोस्ट | 23 Sep 2019 को प्रकाशित |
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Share Market - How to invest in share market

Have you been thinking about buying shares but do not know how to invest money in the share market? Then you have come to the right place. In this article, we will tell you all that you need to know regarding the DOs and DONTs and how to invest in the share market.

Why is an investment in the share market a smart decision?

Many market experts feel that investing in the share market is the only towards building real long-term wealth. Read on to know the top reasons why you should venture into the share market and the benefits associated with it:

• Ownership (at least a certain percentage)

With shares, you gets the twin benefits of dividend and ownership.

• No need for negotiation

In the case of shares, you see clearly what you need to pay. There are no hidden charges or scope for negotiation. This makes the buying process quicker and more transparent. Brokerage or such associated costs are also minimal. Hence, you can be assured that a big chunk of the investment does not go towards associated costs or operational expenses.

• Potential for a higher return

Share markets have the potential to generate a much higher return than conventional investment avenues such as Bank deposits, Fixed Deposits, etc. You just needs to choose the right stock to invest in and be willing to absorb some degree of risk. Investments in the share market bear extremely sweet fruits for you in the long-run.

How to invest in the share market?

Before we answer your question on how to invest money in the share market, you need to know the pre-requisites and procedures involved.

• Identity Proof (PAN Card or Aadhar Card)

To be eligible for investment in the share market, you need to have a PAN Card or an Aadhar Card. These are mandatory documents for the Know Your Customer (KYC) process of SEBI. Also as per the new rules for opening a Demat account, one needs to furnish a canceled cheque along with your bank statement (for the last six months).
It is also important to make sure that the information mentioned in these documents is correct and up-to-date. So, You must check the details such as name spellings, contact details, etc. to ensure there are no issues later.

• Contact a broker

Trading on the share market is not open to all individuals. Only some people are authorised (by the central regulator –SEBI) to perform trading (buying and selling) of securities. These intermediaries are referred to as brokers. They can be individuals, firms or agencies registered with SEBI.

Hence, any interested investor needs to reach out to a broker to invest money in the share markets. They also assist the investors in completing the formalities involved in making investments in the share market.

Brokers levy a service charge or brokerage for rendering their services to the investors.

• Demat and Trading Account

A Demat account is an account that will hold the shares in a non-physical electronic format. The Demat account number needs to be quoted for all stock market transactions to allow electronic settlements. It is mandatory to have a Demat account to trade on the share market. Shares can no longer be held in physical format. Similar to a bank passbook, any transactions (buying or selling) will be debited or credited in the Demat account.

A trading account is used to place the trade (invest or sell) orders in the share market. Its purpose is different than a Demat account. A Demat account acts as the bank in which shares purchased are deposited and shares sold are taken out. It is a storage house. Trading Account, on the other hand, facilitates the trading process and acts as the link between the Demat account and the bank account.

• Unique Identification Number (UIN)

A UIN is required if the value of a single transaction reaches or exceeds Rs. One Lakh. For transactions below that limit, UIN is not needed.

• Depository Participants (DPs)

There are two depositories in India – CDSL (Central Depository Services Limited) and NSDL (National Securities Depository Limited). They act as a link between the listed companies and their shareholders. Depositories issue the shares through authorised agents known as Depository Participants (DPs). DPs can be banks, individual brokers or financial institutions. They are accountable for the final transfer of the securities.

Once you have all the above things in order, you are ready to know how to invest in the share market online. All you need to do is:

1. Scan the market and identify the shares or securities that you would like to invest in. One must ensure that the investment decisions are in line with the goal, investment strategy, risk profile, and investment horizon.

2. Inform the stockbroker about the details of the investment to be made. These include the name of the organisation to invest in, the number of securities to be purchased and the entry price. For instance, you want to purchase 1000 shares of a company that is currently trading at Rs. 750. However, you want to get in at an entry price not more than Rs. 600. You can instruct your broker to invest as soon as the price comes down to that level.

3. In case if any of the buy or sell orders reach their expiry date, the broker informs the investor regarding the same.

4. Once the transaction is complete, it reflects in the Demat account.

5. Dividends on shares held are directly credited to the linked bank account.

Share Market Investment Tips
Here are some share market investment tips to make your experience smooth and fruitful:
• Do not get swayed with promises of guaranteed return. In the share market, there are no minimum or definite returns.
• Check the credentials and track record of the intermediaries that you partner with. One should only deal with intermediaries who have the necessary authorizations and are registered with statutory bodies such as SEBI or stock exchange.
• In the case of securities, "one size fits all" does not hold true. Hence, ensure that the investment decisions are in sync with your risk profile.
• Not everything that shines is gold. Be cautious of securities that exhibit a sudden increase in trading activity or price. Also, before investing in low-priced stocks one must conduct a due-diligence of the concerned company. It is important to make sure that the price fall is justified by internal or external factors.
• Maintain copies of all investment-related documentation (application forms, contract notes, communication to companies, brokers, etc.)
• Do not invest in the share market based on market rumors. Similarly, do not panic sell in case the market goes down. Impulsive decisions are not fruitful for most investors.
• Always check the instructions given to the broker and their understanding of the same.

Now you know everything about how to invest money in the share market. However, make sure you invest adequate time and effort in choosing your broking partner. The right firm or individual can help you make the right decisions in the share market. One name that you can depend on, for these services in IndiaNivesh. Their rich experience and technical expertise enable investors to maximize the potential of their investments. They also conduct extensive research on markets and various players.
So, what are you waiting for? The share market has something for everyone.



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

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Wealth Management – What is Wealth Management & Services in India

Posted by Mehul Kothari | Published on 19 Sep 2019

Financial and physical health have a lot in common. Both are continuous journeys and not a one-time activity. For instance, it is not enough to reach one’s desired weight but rather maintain it at the same level. Similarly, when it comes to our financial wealth it is not only about earning money. Rather one needs to focus on continuously growing it. Both these journeys become easier and more fruitful when a coach is there is to guide you each step of the way. A physical trainer is to your physical health what a wealth management advisor is to your financial health. What is wealth management?Wealth management is a kind of specialised and customised investment advisory service. It is also referred to as a combination of financial and investment counseling. These services are offered to individuals with high net worth i.e. HNIs. The financial expert who offers these services is known as a wealth manager. Wealth management services in India include services related to accounting, taxation, investment, retirement planning, estate as well as legal planning.Who is considered an HNI in India?An individual who has an investible bank balance of at least Rs. 200 Lakhs (2 crores) is categorised as High Net Worth Individuals. People with an investible surplus of Rs. 25 lakhs (but below 2 crores) are tagged as Emerging HNIs. This is only an indicative figure and can vary from one service provider to another.Wealth Management services in IndiaWealth Management is one of the fastest-growing industries in our country. Numerous factors have contributed to the rapid growth of wealth management products in India. A positive long-term economic potential of the nation, growing income levels, increased consumer awareness and the current low penetration have collectively fueled this growth. A quick look at these factors• Expansion in wealth creationAn Asian Bank report mentioned that India with its 119 billionaires stands just behind the USA and China. This figure is likely to triple in less than a decade. Some of the factors that will lead towards this exponential growth are a spurt in entrepreneurship, a robust educational system, a strong outlook for the IT and ITES sector, increased investment in state-of-the-art asset classes, etc. • Increased awarenessWith the advent of technology, information about new age practices and concepts (such as wealth management products in India) is easily available and accessible. People are more open to seeking help from professional experts to manage and grow their corpus. One key factor behind this increased awareness is also the fact that the high net worth individuals are comparatively younger. • Increase in firms offering wealth management products in IndiaThere is a surge in the number of wealth management service providers in the country. In addition to individual brokers and domestic firms, many global entrants have also forayed into this arena. Though the percentage of HNIs in our country is small when compared to the figures for developed countries, strong growth forecasts coupled with a growing middle class and young population indicate the potential for high asset accumulation soon. India is pegged to become the third-largest global economy by 2030 (according to a Cognizant report). As a result, personal wealth management in India is going to become the need of the hour.As per a recent report published by Capgemini, the wealth management industry is likely to witness a double-digit growth (ranging between 10% and 15%) per year in the coming five years. Key aspects of Wealth Management services in India• Risk AnalysisThe wealth manager analyses the risk-taking capacity of the client by taking into account a host of factors. These include current as well as future financial obligations, investment goals, the stability of income, client personality, etc. Correct risk analysis plays a critical role in formulating a customised investment plan for the client which will meet his/her financial goals.• Asset AllocationAfter the risk analysis, the wealth manager strives to strike the perfect balance between risk and return for the client. The available assets of the client are distributed across the suitable asset categories in sync with their risk quotient and return aspiration. The key asset classes include stocks, debt, real estate, mutual funds, gold, etc.• Investment HorizonA good wealth manager helps in achieving the client’s short-term as well as long-term investment objectives. They offer advisory services that enable the clients to maintain enough liquidity and flexibility to meet their investment goals in the short-term. Additionally, they also work towards securing the financial future of the client and maximise the return on their investments.• Customised Investment ProductsMany wealth managers work closely with the country’s leading banks. As a result, they have access to the entire spectrum of investment products. Sometimes they might even be in a position to offer tailor-made and bespoke investment products as per the client’s requirements. • Continuous market researchWealth management is not a one-time activity that ends with suggesting the right investment avenues or products. Rather it is just the start. Wealth managers continuously scan the market, assess the performance of various products, review the client’s portfolio and try to predict future trends. They apply a host of quantitative and qualitative techniques for this purpose. Additionally, they keep on interacting with the client periodically to analyse if there are any changes in their risk profile, financial obligations, investment goals, etc. Role of a wealth managerWealth Management is principally a simple concept – protect and grow the wealth of the client. However, its execution is a highly complex task. And hence it is done by financial experts known as Wealth Managers. A wealth manager is an expert who makes use of the entire gamut of financial disciplines such as investment / financial advice, accounting and tax-related services, estate planning as well as retirement planning to grow the client’s corpus.Wealth Management Products in IndiaThe product offerings vary from one service provider to another. Though the key products include:• Alternative Asset• Equities• Bonds, debentures, fixed maturity plans• Insurance• Mutual Funds• Loans• PMS (Portfolio management services)• Real Estate Services• Digital Investments• FundraisingWealth Management service providersBroadly speaking, there are three kinds of service providers in the realm of wealth management.• Banks• Brokerage Firms• Boutique Advisory Firms• Individual brokers or sub-brokersSelecting the right advisor is critical. One needs to choose a wealth management service provider who is not only trustworthy and credible but also can offer investment or financial advice as per the client's needs. The alignment of interest is extremely important. One of the most trusted names offering wealth management products in India is IndiaNivesh. It specialises in offering customised solutions for their wealth management clients across income levels. Their client-first approach coupled with their rich experience and technological competence enables them to preserve and grow the client’s net worth. Their "Wealth Cafe" offers an exhaustive database of research ideas and reports for the client's information. More importantly, their presence across a wide range of financial solutions such as broking, institutional equities, strategic investments, insurance, and investment banking helps them gain a holistic view of the markets. This translates into profitable and sustainable investment advisory for clients looking for personal wealth management services in India.Final Words:We hope that this article has addressed a lot of questions. Such as what is wealth management, why you need it along with an overview of the offerings. And now that you know who can help you with managing and growing your corpus, make sure you make the best use of their expertise.   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 NCD (Non Convertible Debentures)? – Meaning & Features| IndiaNivesh

Posted by Mehul Kothari | Published on 23 Sep 2019

What is NCD (Non Convertible Debentures) Investors are continually looking for new investment avenues, especially in a market where conventional investment instruments and sometimes falter in a volatile market. One such attractive proposition that can help you manage liquidity and risks while offering significant profits are nonconvertible debentures (NCDs).What is NCD?Nonconvertible debentures meaning, NCDs are financial vehicles issued by reputed companies for a specified period of time with a guarantee of a fixed interest to investors. Unlike standard debentures, nonconvertible debentures cannot be transformed into equities or company shares. The company that issues the NCD decides on the interest rates. On maturity, investors receive the principal amount and the interest together. Nonconvertible debentures can be held by individual investors, banking institutions, primary dealers, unincorporated establishments, registered corporate bodies and other bodies incorporated in India. Companies issuing upcoming non convertible debentures in the market, do so to raise funds from the public. These NCDs can be secured or unsecured. Secured nonconvertible debentures are supported by the issuing company's assets to accomplish the debt responsibility. Hence, if the company fails to pay its investors, they can claim the payment by liquidating the company's assets. On the other hand, unsecured NCDs are ones that are not supported by the company's assets. Thus they hold far higher risk than secured NCDs.Features of nonconvertible debentures:Interest rates Typically, the interest rate of NCDs overs between 10 to 12%. Fixed deposits on the other hands could offer a maximum of 8% returns. Hence, compared to most investment options, NCDs can be lucrative due to its high-interest rates. However, how credit rating agencies grade a company’s NCD can be inversely proportional to the interest, it provides. For instance, a highly rated NCD could provide low-interest rates. But compared to corporate fixed deposits, bank fixed deposits and government bonds that give a maximum of 8% returns; nonconvertible debentures offer returns up to 11%, which makes it an attractive investment instrument.Pay out options If you are looking to invest in nonconvertible debentures, you can benefit from a variety of interest pay out options such as on a monthly basis, quarterly, six-monthly or annual basis. Typically, NCDs could mature from 90 days to 20 years. Hence, you have the opportunity and flexibility of choosing short and long-term tenures depending on your investment objectives.Liquidity Non convertible debentures are listed on stock exchanges and offer secure withdrawal options. Redeeming your investment from NCDs can be easier than bank fixed deposits, and hence, can be considered as providing better liquidity than FDs.IssuanceA company that offers nonconvertible debentures through open issues can be purchased within a specified timeframe. Similarly, NCDs can also be purchased from the stock market. To understand what is ncd in stock market, you may want to look into the open stock market and exchanges for easily tradable NCD options.Stringent credit ratingNCDs are only authorised to be issued by companies that have good credit ratings. Credit rating agencies rate NCDs and revise ratings regularly.Things to consider before investing in non convertible debenturesIt is critical to understand how NCDs can be vulnerable to risks. These risks could be related to how a company's business is handled and how it utilises its funds. An NCD’s credit rating could take a hit if the company's turnover is impacted negatively. To address the impact, companies then borrow additional funds from banks and lending institutions. This is why it is critical to consider a few points before investing in nonconvertible debentures. These include:Issuer's credit ratingOpt for a company that has a credit rating of AA and above. The score is a crucial indicator of the company's potential to raise funds from external and internal operations. The rating is also evidence of the company’s sustainability. Credit rating is a valid parameter that can expose the financial position of the company.Debt levelsIt is essential that you conduct background checks on the asset quality of the organisation if you are considering to invest in its nonconvertible debentures. If a company is allocating more than 50% of its entire assets in unsecured loans, it can be a sign to stay away from such companies.Understanding CARCapital Adequacy Ratio or CAR looks into the company's capital and calculates if it has adequate funding to outlive potential losses. It can be an excellent idea to look into the company you plan on investing to see if it has at least 15% CAR. Alternately, you must also ensure that the company has historically maintained the CAR over a period of time.Looking to NPAsA company issuing NCDs must set aside at least 50% of their assets towards Non-Performing Assets or NPAs. This can be an optimistic indicator of the company's asset quality. In the event that the company's quality declines due to bad debts, you may want to take it as a warning.Gauging ICRA company's ability to settle the interest on any of its debts at any given time can be witnessed in its Interest Coverage Ratio or ICR. The ICR of a company reveals how it can handle potential non-payments.Tax bracketIf you belong in the 10% and 20% tax plan, you may find nonconvertible debentures as a lucrative investment option. This is because, if your tax bracket is low you stand to earn more from NCDs.ConclusionThere is a marked difference between fixed deposits and non convertible debentures. It can be an excellent idea to look into specific factors before selecting an NCD as an investment option. Consider the company's financial health and how it employs its funds if you notice a diversion from its core business; it can be a sign to stay away from the said company. Going through the credit rating of companies can also give you a fair idea of how your investment is secured. For instance, you may want to steer clear from companies that have low ratings but temptingly attractive, high returns. Such propositions could be risky in the long run, especially if the overall financial health of the company is not stable.   Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.

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  • Cost Inflation Index - Meaning, Calculation & Benefits
    Posted by Rushabh H. Mehta | Published on 06 Mar 2020

    Inflation is an economic term and referred to the continuous rise in the price of goods and services, thereby reducing the purchasing power of the money. The pinch of inflation is felt by all sections of the economy, be it, the consumers, investors, and the government.  And, even though it increases the cost of living, inflation is a necessary evil and desirable for the growth and development of the economy. For the reason of inflation, it is only fair to pay more for your goods like comb and brush over the years due to an increase in the price. For the same reason, it is unfair to pay capital gains tax on your assets without taking into account the impact of inflation on the value of the asset. Cost Inflation Index(CII) is the index to calculate the increase in the price of assets year-on-year due to the impact of inflation. What is the Cost Inflation Index? Cost Inflation Index or CII is an essential tool for determining the increase in the price of an asset on account of inflation and is useful at the time of calculating the long-term capital gains on the sale of capital assets. It is fixed by the central government and released in its gazetted offices by the Ministry of Finance every year. Capital gains are the profits arising from the sale of assets like real estate, financial investment, jewellery, etc. The cost price of the asset is adjusted taking into account the Cost Inflation Index of the year of purchase and the year in which the asset is sold, and the entire process is known as Indexation. Cost Inflation Index Calculation The cost inflation index calculation is done by the government to match the inflation rate for the year and calculated using the Consumer Price Index (CPI). Cost Inflation Index India for the financial year 2019-20 has been set at 289. Change of the base year for the Cost Inflation Index The cost inflation index base year was changed in the Union Budget 2017 from 1881 to 2001. The base year was changed by the government to enable accurate and faster calculations of the properties purchased before April 1, 1981, as taxpayers started to face problems with valuations of older properties. The base year has an index value of 100, and the index of the following years is compared to the index value in the base year to determine the increase in inflation. With the change in the base year, the capital gains and tax burden has reduced significantly for the taxpayers as it now reflects the inflated price of the asset realistically. The current Cost Inflation Index Chart for each year is as under- How is the Cost Inflation Index (CII) used in calculating capital gains To calculate the capital gains on your assets the purchase price of the asset is indexed by the cost Inflation Index using the formula below- Indexed cost of the asset at the time of acquisition = (CII for the year of sale/ CII for the year of purchase or base year (whichever is later))*actual cost of acquisition If suppose you purchased a flat in December 2010 for Rs 42 lacs and sold in Jan 2019 for Rs 85 lacs. Your capital gain from the sale of the flat is Rs 43 lacs. The CII in the year in which the flat was purchased is 148, and the CII in the year the flat was sold in is 280. The purchase price of the flat after taking into account the Cost Inflation Index is = (280/148)*Rs42 lacs= Rs 79. 46 lacs  This is the indexed cost of acquisition. Your long-term capital gain after taking indexation into account is Rs 85,00,000- Rs 79,45,946 = Rs.5,54,054. Long-term capital gains on the sale of property are taxed at 20% with indexation benefit. So, your tax liability, in this case, would be- 20% of Rs 5, 54, 054= Rs 1,10,810 Without indexation benefit, the capital gains are taxed at 10%. In this case, the capital gains would be- Sale price of the flat - purchase price of the flat = Rs 85,00,000 – Rs42,00,000 = Rs.43,00,000.  The capital gains tax without indexation benefit will be 10% X Rs 43,00,000 = Rs.4,30,000. Thus, indexation helps reduce the long-term capital gains and reduce the overall tax burden for the taxpayer considerably. Indexation benefit can be used for investments in mutual funds, real estate, gold, FMPs, etc. but is not applied for fixed income instruments like FDs, recurring deposits, NSC, etc. Few important tips to remember about the Cost Inflation Index- If you receive an asset as a part of the will, then in such the CCI for the year in which it was transferred will be considered and not the CCI of the purchase of the asset Indexation benefit for the cost of improvement of the asset is the same as the cost of improvement of the asset. Cost of improvement incurred before 1981 to be ignored. CONCLUSION Cost Inflation Index is an important parameter to be considered at the time of selling long-term assets as it is beneficial for the investors. Reach out to our experts at IndiaNivesh for any queries about capital gains arising from the sale of assets for correct guidance.   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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  • High Dividend Mutual Funds
    Posted by Rushabh H. Mehta | Published on 02 Mar 2020

    Dividend mutual funds are a type of mutual fund that pays a regular dividend to the unitholders of the mutual fund scheme, thereby creating a regular source of income for them. The investment strategy of the fund manager is to invest in a basket of companies that have a steady flow of income and promise to pay periodic payment to the investors. Some investors prefer a regular source of passive income from their investments. Mutual fund schemes that offer a high dividend are a popular choice for such investors. The frequency of payment of dividends is decided by the fund manager and is usually fixed. Dividends can be paid daily, monthly, quarterly, six-monthly, or yearly, and the frequency of payment is mentioned beforehand. However, there is no guarantee on the rate and amount of the dividend to the investors and the payment of dividend is subject to the performance of the fund. There are 2 types of dividend mutual funds based upon the asset class that they invest in. 1. Dividend Yielding Mutual Fund (Equity) • Mutual fund schemes which invest more than 65% of their corpus in equity shares of companies • Like any other equity scheme, they have the potential for higher returns, but also carry a higher risk • Investors should invest in these schemes with an investment horizon of medium to long term 2. Dividend Yielding Mutual Fund (Debt) • Mutual fund schemes which invest more than 65% of their corpus in debt instruments of government and corporations like treasury bonds, commercial papers, etc. • These funds carry low risk and provide average returns to investors • Interest received from the various instruments is paid as a dividend to the investors• Investors should invest in these schemes with an investment horizon of short to medium term Tax treatment for dividend mutual funds Till now, dividend income received by the investor used to be recorded under the income head of “Income from other sources” and such income was tax-free in the hands of the investor. However, as per the Union Budget 2020, the DDT is now abolished for companies and mutual funds. From April’20 onwards, any dividend received above Rs 5000 will be taxed in the hands of the investor. It will be taxed as per the individual tax slabs for both equity and debt schemes. Only debt investors who fall in the lower slabs of 10% and 20% will pay lesser taxes on dividends. For all the others, the taxation would be higher going forward. Why should investors invest in high dividend mutual funds? Dividend mutual funds offer unique advantages to the investors, especially when the macroeconomic condition of the country is weak; these investments provide the reliability of income to investors. The benefits of dividend mutual funds which should be kept in mind while investing in such funds• Fund managers of dividend mutual funds invest in companies which can pay steady dividends and even if there is a slowdown in the economy, as companies do not want to send any negative signals, they avoid curtailing payment of dividends, thus making them less volatile than other funds.• Overall returns from these funds are less affected as compared to other funds as the dividends provide a hedge against market volatility.• In a low-interest rate regime, investors looking for a higher consistent income can opt for dividend mutual funds. Disadvantages of a dividend mutual fund scheme • Returns generated by dividend mutual fund schemes are lower as compared to growth schemes in case of rising markets• These funds are not suited for aggressive investors looking for higher returns from their investment• Moreover, with the abolition of Dividend Distribution Tax (DDT), investors in the higher tax-bracket will have to pay higher taxes on the dividend income. Role of dividend mutual funds in a portfolio Invest in dividend mutual funds with an investment horizon of 7 to 10 years for optimal returns. Investment in such funds should be a part of your strategic asset allocation and to lower the volatility of the overall portfolio. Aggressive investors can allocate less than 10% of their portfolio in such funds. Conservative investors, on the other hand, can allocate a higher percentage to these funds. Essential things to keep in mind while investing in dividend mutual funds • Conservative investors looking to invest in dividend funds should invest in large-cap funds, preferably of blue-chip companies that pay a higher dividend. Investing in companies with a higher proportion in mid & small-cap companies will increase the risk of the investment, thereby defeating the purpose of investment• Invest in a fund which has been in existence for some time and witnessed a few market cycles• Avoid investing in a fund with a small corpus to minimize risk as few wrong investment calls can significantly hamper returns• The expense ratio plays a vital role in determining the overall returns from a scheme. Choose funds with a lower expense ratio   CONCLUSION Investing in high dividend mutual funds is a good option if you are looking for a regular income through dividends. Consult our experts at IndiaNivesh to help you guide through the allocation of funds in these schemes as per your investment horizon and risk profile.   Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing. 

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