Mutual Funds are to financial markets what star kids are to Bollywood – the talk of the town. Campaigns like “Mutual Funds Sahi Hain” have helped to spread awareness about the benefits of mutual funds to the masses. One of the most commonly used MF terms is SIP or Systematic Investment Plans. However, not much is known or talked about its better half – Systematic Withdrawal Plans or SWP. SWPs are considered as the opposite of SIP. Read on to know more about SWPs and how it can be beneficial for you.
SWP – Meaning in Mutual Fund parlance
Systematic Withdrawal Plan is a facility which allows investors to take out a pre-decided amount from their existing Mutual Fund investments at pre-determined time durations. The frequency of withdrawal can be chosen by the investors basis their requirements. It can be monthly, quarterly, bi-annually or annually. Basis the amount withdrawn in SWP, the equivalent units (as per the NAV on the day of withdrawal) are redeemed.
Key features of SWP in Mutual Funds:
- It generates a regular stream of cash inflows
- Offers flexibility to investors in terms of withdrawal amount and frequency
- Can be started at the time of starting investment in a Mutual Fund scheme or can be activated at a later date in an existing scheme.
- Many investors prefer the SWP route to dividends. This is because dividends attract DDT (Dividend Distribution Tax) while long-term capital gains (till Rs. 1 Lakh) under SWP are exempt from tax.
- There is an option in SWP to customize the withdrawals:
- Fixed Withdrawal Option - You can decide to take out a specific amount on a periodic basis.
- Appreciation Withdrawal Option- If you want to preserve your capital, you can decide to withdraw only the amount of capital gains.
- Setting up a Systematic Withdrawal Plan is a simple process. All you need to do is fill up the SWP Form (with the details like the amount to be withdrawn, periodicity etc.) and submit to the fund house or your distributor.
Benefits of Systematic Withdrawal Plan Mutual Funds:
1. A fixed source of income
Systematic Withdrawal Plans become a fixed source of income for investors. For working individuals, it helps to supplement salary or business income. It can also be used as a steady source of income post-retirement.
Just like Systematic Investment Plans, SWPs also help to instil a sense of disciplined investing. In SIP you need to invest a fixed sum of money on a regular basis. SWPs automatically redeem pre-determined units of mutual funds, irrespective of market levels. One can plan their monthly expenses as per the SWP amount, which will help them to remain within the budget. Secondly, the fixed withdrawal limit protects you from impulse sell or buy decisions in case of market fluctuations.
3. Rupee Cost Averaging
Rupee Cost Averaging enables investors to eliminate the need to time their market related decisions. Mutual Fund’s Net Asset Value(NAV) keeps on changing from time to time. Through SWP, investors get the average NAV of the MF over a long duration of time. Hence, it protects them from market fluctuations and ensures that investors do not become dependent on any particular NAV.
4. Tax efficiencies
From a tax perspective, each withdrawal under SWP is treated the same as equity or debt mutual funds. As the tax is applied only on the amount redeemed, SWP becomes a more tax-efficient alternative as compared to Fixed Deposits or lump sum withdrawals. They are preferred to Dividend Plans too for the same reason. Dividend payouts attract DDT (Dividend Distribution Tax) which is deducted by the AMC before the payout. SWP allows optimising the tax on capital gains by holding the investments for a longer tenure and splitting the income over multiple time periods.
How to use SWPs effectively?
All investors can benefit from SWP in Mutual Funds. Here are some examples in which you can include them effectively in your financial planning-
- Retirement Planning
SWP is a great strategy to fund financial needs post-retirement. This facility is especially handy for retirees who do not have a pension or other such regular source of income.
- Supplement salary income
Salaried individuals can use SWP as a second source of income. It can help them fund specific financial goals such as children’s education, purchase of consumer goods, paying off loans, etc.
The biggest challenge faced by freelancers or self-employed professionals is lack of a steady or fixed income. There may be months where they would be minting money but there could be some dry spells as well. In such cases SWPs help to bring stability to one’s financial life.
- Nearing your financial goals
Many investors use SWP in an extremely smart manner, especially when the markets are doing well. They invest in an equity mutual fund as they have the potential to generate higher returns. Once they reach their desired corpus, they can opt for an SWP. Through this facility, they move the funds from the equity investments to a relatively safer/ non-volatile option such as Bank Deposits, etc.
Final WordsSystematic Withdrawal Plans help to cultivate a sense of financial discipline. It can be effectively used as a means to fund your monthly expenses or finance your (or your parent’s) retired life. Not only does it offer regular income but also ensures a controlled and budgeted approach to spending. However, you should try to withdraw only the interest part and keep the capital amount intact. In case you are unable to decide how much is too much, it is best to seek the help of an expert like IndiaNivesh. The team at IndiaNivesh can help you choose the right Mutual Fund scheme and the correct SWP amount basis your financial needs and investment tenure. They also offer a wide range of financial solutions related to broking and distribution, institutional equities, strategic investments, investment banking and wealth management. You can read all about them on https://www.indianivesh.in.
Disclaimer: "Investment in securities market and Mutual Funds are subject to market risks, read all the related documents carefully before investing."
SME IPO – Meaning, Procedure & Benefits of SME IPO Listings
All over the world, the SME sector is playing an important role in the social and economic development of a country. Growth of the SME sector is crucial for the growth of our country to curb the problems of poverty, income inequalities, unemployment, and regional imbalances. In India the SME sector contributes a high proportion in the national income and is witnessing rapid growth and more and more efforts are being taken in the development and promotion of this segment. Various government initiatives such as Skill India, Make in India, Start-up India, Pradhan Mantri MUDRA Yojana, Public Procurement Policy to encourage growth and innovation in the SME sector has led to favourable growth in the agricultural, manufacturing and service industry. Even though the SME sector contributes significantly to the GDP of our country, numerous challenges that impede the growth of the SME sector which include- Inadequate funds and timely access to credit is one of the biggest hurdles in the growth of SMEs. Lack of resources and infrastructure Lack of skilled manpower Inability to market their products/services Technological and digital barriers All these challenges create a serious problem for the growth and development of the SME sector in India to its full potential. All the above challenges are more or less due to a lack of capital and access to raise money from the public like the bigger companies. To overcome this challenge, SME platforms BSE-SME and NSE Emerge were launched by the BSE and NSE respectively, to allow small and medium enterprises to fulfil their dreams of growth and expansion by raising capital from the public. Meaning of SME IPO: BSE SME exchange platform is a trading platform dedicated especially for the trading of shares of small and medium enterprises. In order to get listed on the exchange, the companies have to come out with their IPO. The eligibility criteria and norms of the SME IPOs are different from that of the main board of BSE and NSE. The listing requirements for BSE SME IPO It must be a public limited company. Proprietorships, Partnership Firms, Private Limited Companies need to change to convert to a public limited company. The company’s net worth in the latest audited financial results should be at least 3 crores. The company’s net tangible assets in the latest audited financial results should be at least Rs 3 crores. The companies post paid-up capital should be at least Rs 3 crores and not more than Rs 25 crores. If the paid-up capital is more than Rs 25 crores then it has to be listed on the main board. Distributable profits for at least two years out of the immediately preceding three years. The company must have its own website with financial statements of 3 years. It must enter into an agreement with both depositories and mandatorily facilitate DEMAT trading of securities. There should be no winding-up petition by the applicant company which has been admitted by the court. The issue should be a 100% underwritten issue and 15% of the issue must be underwritten by the Merchant Banker in his own account. A minimum of 50 allottees is needed by the company at the time of listing through IPO. The minimum lot size for trading and application is Rs. 1,00,000. The company has not been referred to BIFR( Board for Industrial and Financial Reconstruction). The listing criteria for EMERGE- NSE SME IPO The applicant must be registered as a company under the Companies Act 1956 or Companies Act 2013. The companies post paid-up capital should not be more than Rs 25 crores. Distributable profits for at least two years out of the immediately preceding three years. It must have certified copies of the annual report for 3 years. A business plan of 5 years along with balance sheets and profit and loss statements. The promoters must have relevant experience of 3 years in the same field. It must enter into an agreement with both depositories and mandatorily facilitate DEMAT trading of securities. There should be no winding-up petition by the applicant company which has been admitted by the court. An auditors certificate stating there is no default in payment of interest by the promoter or by the promoter’s holding companies. If there is any litigation case filed against the applicant, promoter or promoter held companies then it must be disclosed along with the nature and status of the litigation. If there are any criminal cases filed against the director or directors then the nature and status of such investigations which can have a direct impact on the business must be disclosed. A minimum of 50 allottees is needed by the company at the time of listing through IPO. Procedure for listing on the SME IPO exchange Appointment of a Merchant Banker for advisory and consultation. The Merchant Banker is then required to conduct due diligence and documentation check of the company. It must check all financial documents, details of promoters, requisite government approvals, material contracts, etc. The documentation should also include share issuances, IPO structure and other financial documents. On completion of due diligence and documentation by the Merchant Banker, a draft prospectus and DHRP have to be submitted by the company in accordance with the SEBI guidelines. The BSE will verify the documents and on finding those satisfactory will process it. A site visit is also conducted by officials at the company’s site. The promoters will be called for an interview with the Listing Committee on satisfactory completion of documentation and site visit and issue an in-principal approval. The Merchant Banker can then file the prospectus with the ROC along with the opening and closing date of the issue. On approval from ROC, the company will intimate the exchange with the required documents and opening date of the issue. As per the schedule, the IPO will be opened and closed to the public for allotment. The company will then submit the documents to the exchange for allotment. Once the allotment is over, the notice of listing and trading of the shares will be issued How can the companies benefit from SME IPO listing? The SME Capital Markets have helped many companies scale up their business. The SME IPO listings have increased manifold since the introduction in 2012 and at present the BSE SME platform has over 300 companies listed on it and the NSE Emerge has over 180 companies listed on it. With relaxed listing norms and minimal cost for listing when compared to the main board, the SME platforms are ideal for companies who wish to raise capital to meet their growth requirements. Support from exchange boards, increase in the number of SME stocks on exchange and good results is encouraging more and more investors to invest in the SME segment.Disclaimer: "Investment in securities market and Mutual Funds are subject to market risks, read all the related documents carefully before investing."
Know What is Pre-Market Trading & How it Works in Share Market
Most of us are aware that trading takes place on the stock exchange between 9.15am and 3.30pm. But what if we told you that it is only partially correct. Some trading (though low in volume) also takes place during the extended trading hour periods. Read on to know about more about this additional trading window and its significance. What is Pre-Market Trading Pre-market Trading is a global phenomenon and refers to trading that takes place before the usual trading hours. The usual trading hours for Indian stock markets is 9:15 am to 3:30 pm. Pre-open market stock trading is a special trading window of 15 minutes prior to the start of the working hours for the stock markets. Hence, the time frame between 9:00 am and 9:15 am is considered as the pre-open market session. This feature was first introduced by NSE and BSE in October 2010. The objective behind a pre-market trading It was observed that there was tremendous volatility in the first couple of minutes of trading hours. The core objective behind having a pre-market trading session is to stabilise the market especially when heavy volatility is expected due to some overnight major events or corporate announcements. These could be election results, reforms or new economic policies, declaration of mergers and acquisitions, delisting of shares, open offers, change (especially downgrading) in credit ratings, debt-restructuring, market rumours etc. The additional 15 minutes allows the stock markets to arrive at the right premarket stock price and not get carried away by external events or announcements. In India, premarket future or options trading is not permitted. Pre-market Trading Session – Breakdown of the 15 minutes The premarket trading period can be further bifurcated into three slots:Order Entry or CollectionThe Order Entry session starts at 9:00 am and lasts for eight minutes. The following activities are undertaken during this timeframe Placing of orders for purchase or selling of stocks Changes or modification in orders Cancellation of orders After 9:08am (i.e. completion of order entry session), orders are not accepted by the stock markets Order MatchThe Order Matching session starts at 9:08am and continues for the next four minutes. The following activities are undertaken during this timeframe Confirmation of orders placed during the Order Entry session Order Matching Calculation of stock opening price for the regular session that starts at 9:15am During the Order Match session, one cannot buy, modify, cancel or sell their orders. Limit orders (i.e. order quantity and price is specified) are given priority over the market orders (order quantity and price are not specified) during the execution time. Buffer TimeThe last three minutes of the premarket trading session (i.e. 9:12 am to 9:15 am) is considered as buffer time. This period is used to ensure a seamless transition to regular trading hours. Any abnormalities from the previous two slots are addressed during this time. Calculation of Opening price during the pre-market stock trading session The opening price of the stock during this session is determined during the second phase i.e. Order Match session. It is done with the help of a specific methodology. This calculation method is referred to as the call auction methodology or the equilibrium price. The stock price which corresponds to the maximum quantity of tradable shares is known as the equilibrium price. It is a factor of demand and supply. The orders placed during the first eight minutes are matched at the equilibrium price and then traded accordingly. Some scenarios: If the highest tradable quantity corresponds to two different stock prices, then the stock price with the lower unmatched orders is taken as the equilibrium price. For example: Stock Price Order (Buy) Order (Sell) Demand Supply Max Tradable Quantity Size Unmatched Orders (Demand minus supply) 105 1275 1160 25000 20000 20000 5000 99 2000 8000 20000 30000 20000 -10000 Though the maximum tradable quantity is same in both the cases, the equilibrium price will be considered as 105 as it has a minimum unmatched order size If the values of the highest tradable quantity and unmatched orders are same or equidistant, but they correspond to two different stock price, then the above methodology cannot be applied. In this case, the equilibrium price is taken as the stock price which is closer in value to the closing price of the previous day. For example, Stock Price Order (Buy) Order (Sell) Demand Supply Max Tradable Quantity Size Unmatched Orders (Demand minus supply) 105 1275 1160 25000 20000 20000 5000 99 2000 8000 20000 25000 20000 -5000 Assuming the closing price on the previous day was Rs. 110, then the equilibrium price in the above example will be Rs. 105. What about orders that remain unmatched or are not traded in the pre-open session? Orders that are not traded or remain unmatched are carried forward to the general trading session. The opening price of these orders is determined in the following manner: Limit Orders i.e. orders wherein the price and quantity are already specified are carried forward at the same mentioned price Market Orders i.e. orders wherein the price and quantity are not specified are carried forward at: If the opening price was ascertained during the pre-open trading session but order not traded, then at the determined price If the opening price was not discovered, then they are carried forward at the previous day’s closing price Stock Markets tend to be overwhelming for many investors. The concept of premarket trading can further compound the complexity level. However, as an investor, you should always remember that help is just around the corner. Professional experts like IndiaNivesh can help to simplify and demystify the entire process. The team at IndiaNivesh keeps a close eye on this Pre-market session to comprehend the mood and strength of the stock market. They track the pre-market stock prices and take the best decisions for your portfolio basis the market sentiments. Moreover, since they offer a wide range of services (broking, mutual funds, institutional equities, private equity, strategic investments, corporate advisory, etc.) they have a holistic view of the market and the economy. Their expert opinion can help you to amp up your investment game. You can read more about their offerings, vision and accomplishments on their website https://www.indianivesh.in/Disclaimer: "Investment in securities market and Mutual Funds are subject to market risks, read all the related documents carefully before investing."
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