Mutual funds are the most popular investment avenue among investors. It can be justified from the fact that the mutual fund industry has added a whopping 3 trillion to their asset base in 2018 and the uptrend may continue in the coming years.
There are many types of mutual funds available in the market and one of them is Index Funds. They offer an easy, diversified and low-cost way to invest in the stock market. In this article, you will learn about the Index Funds in detail.
Let us begin the article by learning what is an index fund?
What is an Index Fund?
Investors always seek to take advantage of diversifying their portfolio across different asset classes. To do so, index funds are the most popular because they imitate the portfolio of an index like the Sensex or the Nifty. This fund is constructed in such a way that it matches the performance of the financial market index. An investor who has bought an index fund would experience the price moment exactly in sync of the quoted value of the Sensex or Nifty, depending on the fund. Therefore, these funds ensure the performance exactly as the index that is being tracked. One of the main benefits of these funds is its low expense ratio.
Let us now learn how does an index fund work?
How Does an Index Fund Works?
Like mentioned earlier, Index funds basically track the performance of the index such as Nifty. When you purchase this fund, your portfolio will have 50 stocks in the same proportion that comprise in the Nifty. Therefore, an index represents a group of securities of a market segment. In India, the most popular Indices are NSE Nifty and BSE Sensex. The index funds are not actively managed funds because they replicate an index. In actively managed funds, the fund managers keep on looking for opportunities by researching and selecting new stocks. But in index funds, the managers just maintain the composition of an underlying benchmark.
In the case of actively managed funds, the aim is to beat its benchmark while in the case of index funds, the managers try to match the performance of the portfolio with that of the index. Even though the fund managers try their best to match the performance of index fund returns with their portfolio but still there can be some small difference. The index fund managers try to bring down the tracking errors so as to match the index fund returns with the portfolio returns.
Now coming to the most important question that who must invest in the low cost index funds. In this section, we will discuss the same.
Who Can Invest in Low Cost Index Funds?
If you want a predictable set of returns and do not want to take much risk, these low cost index funds are ideal for you. These funds will give you same set of returns as a particular index would. Also, if you want to keep yourself associated with equity funds but not with those funds that are actively managed and bear some risk, these funds are good for you to invest.
Therefore, the first thing to consider while investing in the low cost index funds is determining your financial goals and the amount of risk you are willing to take. In the long run, the performance of the index funds is very good.
Let us now learn how you can invest in the index funds?
How to Invest in Index Funds
Investing in Index Funds is very easy with IndiaNivesh Ltd. Just follow the below mentioned steps to invest in the index funds;
- Visit the website - https://www.indianivesh.in/ and sign in.
- Fill the amount and period of your investment.
- Complete the hassle-free KYC process.
- You can now invest in your preferred index fund amongst the many options available.
Before you invest in index funds, there are a few things that you must consider. Let us see what they are.
Things to Consider Before Investing in Index Funds
- Risk Appetite
It is always advisable to mix and diversify your investments. Index funds are perfect for those who want to take fewer risks. You can reap higher benefits in these funds when the market is in bull mode. When the market enters the bearish mode, you may consider entering actively managed funds.
Index funds aim to replicate the performance of the underlying benchmark. If you are looking for decent returns in the long run, you can invest in the index funds. It is advisable to invest in those index funds that have minimum tracking error.
- Cost Of Investment
The main benefit of investing in index funds is the lower expense ratio. The expense ratio of index funds is 0.5% or less while the expense ratio of actively managed funds is 1% to 2.5%. The funds with lower expense ratios always generate higher returns.
- Financial Objectives
If you are looking to invest for your retirement or want to create long term wealth then index funds are ideal for you. These funds can generate good returns in the long run which would be of great assistance in your life after retirement.
- Period of Investment
Index funds are known to give better returns over a long term of period. You must have the patience to stick to these funds and avoid taking any decision on the basis of short term fluctuations.
On redemption of the index funds, the capital gains are taxable. Your holding period determines the rate of taxation. If the holding period is less than a year, the short term capital gains are taxable at 15%. And if the holding period is more than one year, the long term capital gains over Rs. 1 lakh is taxable at 10% with no benefit of indexation.
The above mentioned are the things that you must consider before investing in the best index funds available in the market. If you looking to invest in best index funds and need any assistance you can contact IndiaNivesh Ltd.
Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
Share Buyback – Meaning & Upcoming Buyback of Shares
“XYZ company announces a buyback of its shares”. You must have seen or read this headline multiple times in the last couple of years. Especially by companies from the IT or technology industry. According to reports, in the financial year 2018, buyback offers worth Rs. 50,000 crores were made in the Indian markets. Have you wondered what is share buyback and what are the technicalities involved with it? Or if you should give up your shares during buyback offers? Then read on and get all your queries resolved. What is share buyback? Buyback of Shares – Meaning: A share buyback is a process through which a listed company uses its money and repurchases its own shares from the market. It is the opposite of an IPO (Initial Public Offer). Stock repurchase is also seen as a way for the company to re-invest in itself. Once the stock buyback is complete, they are absorbed and cease to exist. There are two ways in which stock buyback can take place: Tender Offer: In this buyback channel, the company offers to buy back a certain number of stock at a quoted price. The buyback is done directly from the shareholders. Open Market: The open market buyback takes place through the secondary market (stock exchange). The resolution (special or board) needs to specify the maximum price for the buyback. 2. Buyback of Shares – Regulations: SEBI has laid down the following guidelines for buyback of shares: It cannot be more than 25% of the total paid-up capital value and free reserves held by the company. It needs to be approved by the shareholders through a special resolution. If the buyback value does not exceed 10% of the total paid-up capital value and free reserves held by the company, it necessitates only a board resolution. Why do companies offer stock buyback schemes?1. Surplus cash but lack of investible projects This is one of the primary reasons behind stock repurchase by companies. Idle cash reserves come with a cost. Matured businesses do not need to invest exorbitantly in research, development or other such aspects. Also, holding on to unused equity funding results in ownership dilution without any good reason. Hence, companies prefer to buy-back their own shares.2. Tax-efficiencies Buybacks usually happen at a premium as compared to the market price. Companies prefer this route to reward shareholders rather than paying our dividends due to the tax implications. Dividends attract 15% DDT (Dividend Distribution Tax) for the companies as well as 10% tax in the hands of shareholders if the dividend income exceeds Rs. 10 Lakhs. Hence, earnings through buyback become more tax efficient for both the parties, even after considering the taxes applicable.3. Enhanced valuations Buybacks are associated with enhanced share valuations as a result of an improved PE multiple. Stock repurchase leads to a reduction in the number of outstanding shares and hence, capital base. This, in turn, improves the value of EPS (Earning per Share) as the same amount of dividend is now divided between lesser shareholders. The ROE (Return on Equity) also goes up as the cash assets on the Balance Sheets come down.4. Signal to the market Stock buybacks are also used to send indicators to the market. It signals that the company has great confidence in itself. Hence it is ready to repurchase its own shares (mostly at a premium) as it feels that the company is undervalued currently in the market. For instance, when the company management is highly optimistic about the future prospects but the stock price still reflects bearish sentiments based on past performance only. In some cases, promoters can also use the buyback channel to tighten their hold on the company. This is especially true when the shareholding is highly diluted or is in the hands of individuals or investors who do not have the best interest of the company in mind. How to evaluate stock buyback offers? Now you know what is share buyback and the reasons why companies offer them. But the fundamental question remains – what should be your stance in case of buyback offers? Should you hold your stock or give them up? These pointers can help you take the final decision:1. Offer Price and buyback quantum Buybacks are lucrative only when they are offered at a significant premium amount. The offer price must be substantially above the current market price to make it worthwhile for the investor. Also, the quantum of the share repurchase amount should be substantial. 2. Look at the tax implications Till recently, shareholders had to pay capital gains tax on their buyback earnings. However, with the introduction of buyback tax for listed companies, investors are now exempted from the same. Companies will now have to pay 20% buyback tax. This move has been done as the Government observed that more companies were distributing their profits through the buyback channel rather than dividend as the latter attracted DDT (Dividend Distribution Tax). Note: The buyback tax is not applicable to companies who had announced their buyback schemes prior to 5th July 2019.3. Promoter Participation Promoters cannot participate in the buyback process if it is being done through the open market. However, they are allowed in case of tender offer. In case of participation by the promoter, there is usually a positive movement for the stock price in the long-term. Final Words Buyback can be rewarding for both parties (company as well as investors). As an investor, it is important for you to understand the implications of each buyback offer and decide wisely. You should keep an eye out for the upcoming buyback of shares in 2019 and corporate news around the same. In case you feel that you are not able to decide on your own, you can always reach out to an expert like IndiaNivesh. Indiaivesh has been providing excellent financial solutions to investors since the last 11 years. It offers a wide range of products – broking, distribution, equities, strategic investments, investment banking as well as wealth management. With its “client-first” approach, skilled and experienced team members and state-of-the-art research and technological capabilities, you can be rest assured that your financial interests are in safe hands. Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
Steps to Build a Complete Financial Portfolio
Looking to become a successful investor? If yes, then you need to make efforts to maintain a good portfolio. As an investor, you need to understand your financial goals, your future requirements and risk-taking ability in order to determine your asset allocation. Building a good portfolio with the right mix of different asset classes will help you in generating wealth and living a peaceful life after retirement. This article will assist you in building a complete financial portfolio. Let us learn about the steps for building a financial portfolio. Steps For Building Financial Portfolio Make A List Before you begin making a financial investment portfolio, you must prepare a list of everything you own. The list must include all your assets like stocks, immovable property, cash and bank balance, bonds, etc. Also, prepare a list of liabilities. This balance sheet is going to play a critical role in shaping your financial portfolio. This list will act as a benchmark for your financial portfolio management. Know Your Appropriate Asset Allocation After knowing all your assets and liabilities, determine your financial goals and shape your financial portfolio. You must consider your age during financial portfolio management because only then you would know what would be your upcoming needs and how much capital you can invest. Another factor that you must consider before determining your asset allocation is the amount of risk you can take. If you are clear with your future financial requirements you would be able to easily figure out your risk tolerance. It is a well-known fact that higher returns can be made only by taking higher risks. In such a scenario, the general rule is that if you are young, you can take bit of a risk. But if you are nearing your retirement, it is recommended to build a safe and secure financial portfolio. To put it another way, there are two types of investors; conservative and aggressive investors. Conservative investors are those who would make a less risky portfolio by investing a major portion of capital in fixed income securities and small portion towards equities. Aggressive investors are just opposite of conservative investors. They are willing to take more risk in anticipation of good returns by investing a significant portion of capital in equities and remaining in fixed income securities. Build the Portfolio After determining the right asset allocation, build the financial portfolio. Here you can break different asset classes into subclasses. Like, if you are investing in equities, you can divide your investment in the equities into various sectors like pharma, banking, etc. The duration of the investment in bonds can be divided into short term and long term. Thus there are many ways through which you can select the asset and securities. While investing in each asset class consider the below-mentioned points:1. Stock Picking: If you are investing in stocks, determine the level of risk you are willing to take. In addition, know the sector well before investing. Understand the market cap of a company, the future of a particular sector, the opportunities and risks in the future. You must make sure to regularly monitor the investment in equities by following the stock price, company and industry news.2. Bond Picking: Before investing in bonds, consider the time period, maturity, credit rating, bond type and interest rate. Invest only after understanding the above factors in detail.3. Mutual Funds: Mutual funds allow you to hold stocks and bonds that are managed by professional fund managers. Before investing in mutual funds, find the track record of the fund managers and fee charged by them. Low-cost index funds are another good option to invest for risk-averse investors as they replicate the performance of an index.4. Exchange-Traded Funds: Exchange-Traded Funds are a good alternative to mutual funds. They are just like mutual funds and represent a group of stocks. However, they are not actively managed like mutual funds. Because of passive management, these funds are less costly than the mutual funds and also offer good diversification. Keep Assessing Portfolio Weightage After preparing a financial investment portfolio, its value would keep on changing due to price fluctuations. Therefore, it becomes important to continuously rebalance the portfolio as per the price movement. Also, the market situation keeps on changing so you also need to alter the balance of your portfolio accordingly. While rebalancing the portfolio, analyse your future needs and risk appetite. Like, if you are ready to take more risk you can increase your stake in equities. Therefore, rebalancing is all about determining which asset class in your financial portfolio is overweight and underweight. Strategy to Rebalance After determining which securities to reduce or increase from your financial portfolio, you can again follow the process given above under “Build Your Portfolio” heading. By using the same investment approach, you can pick the securities you want to invest. If you feel that some securities in your portfolio which are overweight can fall, you can consider selling them and purchasing another set of securities. In the whole process, you must not forget the tax implication of your decisions. The above mentioned steps shall help you in building a complete financial portfolio. During the whole process, you must always remember that diversification is the key to building a safe and secure portfolio. If you are a beginner or need any assistance in building a financial portfolio, you can contact IndiaNivesh Ltd. We are one of the most trusted and value-enhancing financial services group in India.Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
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