Investment Banking - Overview, Types and All You Need to Know

Investment Banking - Overview, Types and All You Need to Know

Most people get awed when someone mentions that they are investment bankers. You think of a high-profile corporate professional, decked up in a smart suit making a crisp presentation to the top management. But do we really know what does an investment banker do or what is investment banking? Read on to know more.

What is investment banking

Investment banking is the arm of a bank or any other financial institution that offers financial consultancy and advisory services to entities, government or individuals. They render a wide range of services to their customers which includes:

• Capital Issue Management
Indian investment banks offer public issue management through two routes:
o Fixed Price Method
o Book Building Method
They also offer assistance to firms during IPO (Initial Public Offer), FPO (Follow on public offer), Rights issue, Preferential Issue and debt placement.

• Advisory services during mergers and acquisitions
Investment banks play a crucial role during mergers and acquisitions. They help the entities to make the right deals by checking feasibility, minimizing risk and maximizing ROI. They either represent the seller (target representation) or the buyer (acquirer representation). Some key activities in M&As include:
o Establishing a fair and just value for the involved parties
o Sourcing deals
o Financing

• Debt Syndication
Investment banks also help companies to look for new finance opportunities and sources. This includes project finance, working capital loan, term loans, commercial borrowing, etc.

• Buybacks
Another common activity performed by investment banks is to advise their clients when and how much to buy-back their shares.

• Legal compliance
Investment bankers help their clients in ensuring that they adhere to all the statutory requirements and compliances as laid down by SEBI.

• Corporate Advisory
These services are usually offered to large-scale organizations or corporate bodies. Investment banking includes doing business appraisals, developing business plans, strategic advisory, valuation, corporate restructuring, etc. These services are often tailor-made as per the needs of the clients.

Investment Banking in India

Investment banking in India is not a new concept. The roots of modern day investment banking can be traced back in India to the 19th century. This was the period when European banks created trading banks in the country. Investment banking in India used to be referred to as merchant banking. For many years, foreign (non-Indian) banks continued to dominate the merchant banking scene.

However, in the year 1970 State Bank of India decided to venture into this domain. It created the Bureau of Merchant Banking and many national banks registered in this initiative. The first national financial institution that offered merchant banking services was ICICI Securities. Within a decade, the number of merchant banks grew beyond 30. The rapid growth in the financial industry especially commercial banks further fueled this growth in the later years.
Since its inception, there have been numerous developments in the structure, role and services provided by investment banking.

Association of Investment Bankers of India (AIBI)
AIBI is a SEBI recognised body and acts as the nodal body of Indian investment banks. Its objective is to set in place standard practices, professional benchmarks and guidelines for rendering efficient services in the field of investment banking.

Initially formed as Association of Merchant Bankers of India (AMBI), it has recently undergone a transformation phase to come in sync with the current market scenario. It was during this brand transformation that the name of the body (along with the logo) was updated to Association of Investment Bankers of India (AIBI) as investment banking’s scope is much broader than the erstwhile merchant banking. Currently, there are 59 investment banks (SEBI registered) who are members of AIBI.

Some of their key activities include:

• Code of Conduct
AIBI comes out with the Code of Conduct that needs to be followed by all members. This ensures quality, uniformity and standardisation in the investment banking services. Additionally, a Due Diligence Manual is also shared with all the participating members.

• Watchdog
AIBI acts as the watchdog for the Investment Banking industry in India. It ensures that all members follow ethical practices and adhere to all the legal / statutory guidelines.

• Thought Leadership and central repository
AIBI acts as the nodal point for assimilation and distribution of information related to the investment banking ecosystem.

• Representation at PMAC
It represents the investment banking industry at the PMAC (Primary Markets Advisory Committee) formed by SEBI.

• Events, seminars and annual summits
AIBI frequently organises events and workshops on matters related to the investment banking domain.

Types of investment banking
There are different types of investing banking service providers. Such as:

• Full-Service Firms
Full-service investment banks offer the whole suite of services. For instance, underwriting, Mergers and Acquisitions, merchant banking, distribution, brokerage, asset management, structured investments and research.

• Boutique Firms
These are specialist investment banks which offer niche or specific investment banking services. These are relatively newer entrants in the market and have evolved as a result of market demand by smaller entities and start-ups.

• Commercial Banks
Some commercial banks have also extended their scope beyond pure banking and offer some investment banking services.

• Brokerage Firms
These firms only offer trading services to their clients. They are often used by underwriting investment banks while placing issues.

Choosing an investment bank
Choosing the right investment bank plays a crucial role in achieving the desired results. Here are some factors that you should take into consideration.

• Capabilities and credentials
Professionals in their team and their skills, market experience and credibility. This also includes support teams such as research, information technology, etc.

• Experience
Experience with relevant services and your sector / sub-sector needs to be checked.

• Size/Volume of transactions
Details of comparable transactions (basis your requirement) completed in the last five years will help with this information.

• Accessibility and transparency
Level of transparency displayed by the investment bank in their transactions along with their day-to-day accessibility needs to be assessed. Many times, local support or presence is preferred.

• Valuation Methodology
Alignment with your business’s needs and the valuation methodology of the financial partner is important.

IndiaNivesh is a well-known name in the Indian financial solutions industry. It offers a wide range of services including investment banking. Their ability to offer customised solutions and connect businesses enables them to act as a professional navigator for the long-run growth of their clients. They specialise in:

• raising capital (from domestic and global sources)
• facilitating entry of foreign enterprises in India
• globalisation of domestic entities
• corporate finance activities and
• support during mergers and acquisitions.

For a runner, the perfect running shoes can make all the difference. Similarly, the correct investment banking partner can help you get the much needed competitive edge. With a suite of unique products and market expertise, IndiaNivesh can be that partner for you.

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


Gold Exchange Traded Funds (Gold ETFs) - Overview & how to invest in it

Gold Exchange Traded Funds (or Gold ETFs) combine the two passions of many investors – stock trading and gold investments. They provide a channel through which you can be a part of the bullion (gold) market. The investor’s funds are invested in gold stocks but there is no physical delivery of the yellow metal. They are often referred to as open-ended Mutual Funds that invest the corpus in gold bullion. Key highlights of Gold ETFs: Gold ETFs in India started in the year 2007. Slowly but steadily they have started gaining momentum. Some of the key benefits offered by Gold Exchange Traded Funds are:1. Transparency: Transparent pricing is one of the USPs of Gold ETF. Like stock prices, information about gold prices are easily available to the general public. You can easily determine the value of their portfolio by checking the gold prices for that time or day.2. Ease of trade: Just like shares, Gold ETFs can be easily traded on the stock exchange. You need to buy a minimum of one gram of gold which is equivalent to one unit of Gold ETF. Investors can invest in Gold ETFs from any location in India. Moreover, the difference in price (due to GST) will not be applicable.3. Cost efficiencies: Unlike many investment avenues, there are no entry or exit loads with Gold ETFs. The only cost involved would be the brokerage fees. 4. Risk: Unlike physical gold, there are no storage hassles or theft fears with Gold ETFs. Additionally, gold prices are not prone to frequent fluctuations. This makes Gold ETFs a relatively safer choice. 5. Tax efficiencies: Gold ETFs do not attract any wealth tax or securities exchange tax. Also, if they are held for a period of more than one year, the gains are treated as long-term capital gains. For anyone interested in holding gold, these ETFs provide a tax-efficient alternative. 6. Diversification: Gold ETF investments can help to bring diversity in the investment portfolio. During volatile market conditions, they can help to stabilise or improve the overall returns for you.7. Collateral: Gold ETFs are accepted as security collaterals for loans or capital borrowings by many financial institutions. Why is investing in Gold ETFs better than traditional forms of gold? You do not need to worry about impurities or adulteration in the metal As ETFs are held in electronic form, there are no storage related issues or costs Easy trading on the stock exchanges and hence high liquidity Real-time tracking of investments No mark-ups costs such as making charges, wear and tear involved The price of Gold ETFs remains the same throughout the country. However, the gold prices can vary from one location to another.  How does Gold Exchange Traded Fund work? The investment is converted into unit of gold basis the cost applicable at the allotment time. For instance, the cost of gold (per gram) on a particular day is Rs. 3000. Ms. X wants to invest Rs. 60,000 in Gold ETFs. Her investment amount will get translated into 20 gold units. At the back-end, physical gold acts as security for these ETFs. For example, if you invest in Gold ETFs, the entity at the back-end purchases gold. They act as the custodian for the investment and also guarantee for the purity of the metal. The stock exchanges assign the responsibility of buying and selling gold to authorised members or participants which in turn can be used to issue ETFs. These are usually large companies. As a result, these authorised members ensure that there is parity between the gold cost and ETFs. How to invest in Gold ETFs? Gold ETF investments are a simple affair.1. Choose a broker or fund manager: Many financial institutions (including banks) offer Gold ETF products. Similar to the online share trading, you would need to reach out to a fund manager or a firm which will trade on behalf of you.2. Demat and Trading Account: In order to invest in Gold ETFs, you need to have a demat account and an online trading. You can apply for these accounts online with the broker or such service provider by providing details like PAN, Identity Proof, residential proof, photograph and a cancelled cheque (for bank account linkage).3. Online Order: Once the accounts are in place, you can select the desired Gold ETF and place the order through the broker’s online portal. You can also opt for Mutual Funds which have an underlying Gold ETF.4. Confirmation: The placed orders are then routed to the stock exchange. The purchase orders are matched with the corresponding sell orders and accordingly executed. A confirmation email or message is sent to you. Who all should invest in Gold ETFs? Gold is a relatively safe and stable investment. Its prices do not fluctuate as much as equities. Hence, Gold ETFs can be a good choice for you, if you do not want to take too much risk. Additionally, since these ETFs are tradeable easily on the stock exchange, they are useful if you are looking for an investment opportunity with high liquidity. Hence, it is a good option for you to diversify your portfolio. So, if you meet the requisite objective of investment, Gold ETF is a good option for you as well. Things to keep in mind while investing in Gold Exchange Traded Funds Here are some tips that you could use while investing in Gold ETFs Gold is generally considered as a stable asset. However, you should not forget that the Net Asset Value (NAV) of Gold ETFs can also fluctuate basis market volatility As an investor, you need to bear brokerage fees or commission charges for Gold Exchange Traded Funds. Hence, you should check these costs while deciding on the broker or fund manager However, you should not make the decision on the basis of price alone. Consider the broker/ fund house’s past track record, services provided, type of clients handled etc. before choosing the service provider Do not over-invest in Gold ETFs. It is usually suggested to restrict investment in these ETFs to 10% of the entire portfolio. Final Words A smart investor knows that all that glitters is not gold. A good fund manager or firm helps choose the best Gold ETF products in India. IndiaNivesh, a well-known financial services company can help in this regard. With their rich experience in the Indian market and in-depth understanding of the financial ecosystem, they have helped numerous customers to grow their wealth and fulfill their financial goals.Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.

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Online Trading – How does online trading work?

India ranks second in the global list of number of internet users. After all, “Online” is the new place to be. Whether it is ordering groceries, buying furniture, paying your insurance premium or making travel plans, it can be done online these days. In fact, it is increasingly becoming the preferred mode of doing transactions. No wonder, by 2018 Indians had started consuming 1GB data daily as compared to 4GB per month earlier (Source: Nielsen India). And this is just the statistics for smartphones! So, it comes as no surprise that online trading in India has also picked up momentum in the recent times. If you are seriously considering investing in the stock markets, then it is essential to find out about online trading.What is Online Trading?Online trading is the act of making buying and selling transactions for shares and other financial products through a digital or online platform. Anyone with an internet connection, trading account, bank account and sufficient funds can go for online trading. The biggest advantage of this mode of trading is the convenience factor. You can buy or sell stocks and securities from the comfort of your home or even while on the go. Additionally, cumbersome paperwork is possible at the click of a button. Online Trading in IndiaOnline trading in India started in the year 2002. It has brought a paradigm shift in the trading environment. Automation of the trading process has significantly brought down the turnaround time and paperwork involved. It has streamlined the process and made it more flexible, simple and customer friendly. Thanks to this wave of automation, the capital markets have witnessed a 1488% growth in the last decade. Mobile trading has also seen a solid jump in the recent years. Currently 10.15% of the average daily turnover on NSE is through this route. This is a growth of more than 800% in the last five years.How does online trading work?Majority of the stock market trading takes place on India’s two exchanges – National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). Before you can understand how online trading works, it is important to understand the various involved components. In order to start online trading, one needs to do the following:1. Demat and Trading Account Anyone who wants to do online stock trading in India needs to have a trading account and demat account. What is a demat account?A demat account is an account which holds the shares or securities in an electronic format. A trading account facilitates the transactions (buying and selling) in the stock markets. All the buy or sell orders are placed through this account. The demat account is similar to a bank account in which all the debit and credit transactions are made. Many service providers offer a 2-in-1 account which combines the benefit of an online trading and demat account. Some banks also offer a 3-in-1 account. This adds demat and trading facility to your savings bank account. We will elaborate more on the steps to open a demat/ trading account in the later part of the article. So, online trading account can be used for or margin trading, delivery based trading and derivative trading. It can also be used for investing in IPOs and mutual fund. However, demat account is not mandatory for making investments in Mutual Funds. 2. Depositories There are two depositories that are registered with the SEBI- National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL). They act as the custodian for dematerialised securities. They have the accountability of safe-keeping the securities/portfolio. Depositories provide their services through Depository Participants (DPs). Banks, trading members and financial institutions registered with SEBI can act as DPs. 3. Learn the stock market terminology Before you begin to tango, you need to know the steps. Similarly, in order to do any online trading, one needs to be familiar with common terminologies and basics. The stock market works on the basic principle of demand and supply. One should keep a tab on financial affairs, market news, etc. How to open a demat or trading account?1) Reach out to a broker / Depository Participant:The first step is to find a registered stock broker. Broadly speaking, there are two kinds of brokers: a) Full Service Brokers: These brokers offer a wide range of services in addition to stock trading. Such as financial research, market updates, tax planning and retirement planning. b) Discount Brokers: These brokers provide only trading facility. Due to their no-frills services, their charges are much lower as compared to full-service brokers.While selecting a broker one should consider the following:i) Account Opening Charges:This is the amount charged for the opening of the demat or trading account. ii) Account Maintenance Charges:This refers to the annual fees for maintaining the demat or trading account. iii) Brokerage:Brokers levy certain fees for processing the orders (buy /sell) placed by the investors. The commission charged varies from one broker to another. They also depend on the type of transaction such as intraday transactions, transactions involving delivery, futures and options, etc. Some also offer discounts basis the number or value of trade conducted. iv) Technical expertise and service record:You should not blindly select the cheapest alternative. The quality and nature of service should be the most important criteria. If a particular stock broker has an exemplary service record, the higher brokerage charges may become justifiable. 2) Complete account opening formalities:The broker provides the trading account application form. The same needs to be filled up and submitted with the necessary KYC documents. These include:i) PAN Cardii) Identity Proofiii) Address Proofiv) Cancelled cheque (for the account that will be linked to the trading account)v) Bank statement for the last six months (only applicable for derivative segment trading)vi) PhotographsDocuments such as Aadhar, Driver’s License, Passport, etc. are considered valid for this purpose.In addition to the application forms, you also need to sign a Power of Attorney (PoA) in favor of the intermediary/broker. This is required for the transfer of securities (margin purposes), settlement of trades and funds from the client's account and for recovery of the amount payable to the broker/DP.After successful verification of all the details provided, the trading account details are shared with you for future reference.There are many online stock trading websites. However, choosing the right one can make the entire process more streamlined, easier and lucrative for investors. IndiaNivesh is a well-known financial services partner in this domain. IndiaNivesh continuously keeps on changing and adapting as per the market sentiments and evolving customer needs. State-of-the art technological tools combined with an experienced team have been delivering customised financial solutions since the last 11 years. A range of services related to broking, institutional equities, portfolio management, investment banking, private wealth and corporate advisory are offered.Final WordsIf you keep all these points in mind, online stock trading can be a non-intimidating, easy and profitable income generator. And above all, you must remember that you must think long to get the best out of the stock markets. Patience is a virtue! 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

    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

    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

    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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