All about Equity

All about Equity

What is equity fund?

Equity or shares are instruments companies issue to raise funds for their growth. Investors buy these kinds of equity investment such as shares because they expect the value of these shares to increase as the company grows with the help of their funds.
Equity shares give you ownership rights in the company. In other words, if you buy a company’s shares, you become one of its owners. However, your ownership interest is extremely small because you own a very small percentage of shares. Nonetheless, your shares give you the right to vote in all important matters of the company. They also entitle you to a share in the company’s profits.

How to buy shares?

There are two markets where you can buy shares – primary and secondary. The Primary market comprises all transactions in which the company directly (i.e. through an agent) offers its shares to general investors. The first time a company does so is called its initial public offer (IPO). All subsequent offers are called follow-on public offers (FPOs). You can bid for IPO and FPO shares through your demat account.
A company’s shares get listed on a stock exchange soon after its IPO. From here on, you can buy and sell them on the stock market. All buy and sell transactions on the stock market are called secondary market transactions. Exchanges act as an intermediary between the buyer and the seller for these transactions.

Equity mutual funds

Active stock trading is a skilled full-time job. If you don’t have the time to master it, invest in top equity mutual funds and let the experts do it for you. There are many good fund houses that have plans for every investment objective. They are managed by highly trained investment professionals with years of stock picking experience.

Types of equity returns

Shares generate returns in two ways – price returns and dividends.

Price return is the profit you make when your stock’s price increases. Share prices increase when a company performs well. So, when buying shares, you are essentially betting on the company’s performance.

As discussed earlier, shares give you ownership rights in the business and entitle you to a share in its profits. Companies retain most of their profits and spend them on future growth. But they also distribute a part of them to shareholders. This is known as dividend. Dividends are typically announced on a per share bases. So, if you have 100 shares of a company that has announced a dividend of Rs.5 per share, your total dividend will be Rs.500.

It is not compulsory for companies to pay a dividend. They can pay a different amount each year or not pay anything at all.

Analysing equity returns

Price appreciation and dividend returns vary from company to company. For a better analysis, you should look at their sum, i.e. total return. Young companies generally don’t pay high dividends because they need to invest in growth. However, they generate great price returns because of their strong growth potential. Mature companies generate moderate price returns because they have limited investment opportunities. However, they can pay higher dividends because they are cash rich.

Equity risk

Equity investments are highly susceptible to market developments. Also, they don’t guarantee a fixed return like bonds. This makes them high-risk investments.
A proportion of this risk is stock-specific or unsystematic. For example, internal labor issues will only affect the shares of the company that is facing them. You can easily mitigate this risk by investing in other companies. Other risks affect most companies and are hard to mitigate. For example, if a country is at war, stocks of most companies in it will be affected. You cannot mitigate this risk by investing in other stocks. Such risks are called systematic or non-diversifiable risks.
Don’t let systematic risks bother you because you cannot do much about them. Try to reduce your unsystematic risk as far as possible by building a portfolio that has shares of several companies from different sectors.


In Conclusion

Now that you have a firm grip on the basics of investment in equities, you are all set to start trading. Remember, stock trading is risky, but risk and return go hand in hand. So, pick your stocks wisely and leverage the expertise of professional investors by including equity mutual funds in your portfolio.

Disclaimer: Investments in the securities market are subject to market risks. Read all the related documents carefully before investing.


Factors Affecting Investment Decisions

Investment choices vary from investor to investor depending on their goals, risk tolerance and individual personality. But, there are certain common factors that affect everyone’s investment decisions. Whether you make investment decisions on your own or rely on professional help, knowing the factors that affect your investment decision is essential to maximize your portfolio return.Factors affecting investment decisions are:▪ Net worthYour family’s wealth or net worth plays a major role in investment decision-making. For example, two friends with similar salaries can have completely different family background and thus completely different investment patterns. Someone from a wealthy family would easily be able to take exposure in equity without having the fear of losing a part of the portfolio while another person with limited means might be more conservative in nature. Tip: So, your family’s net worth needs to be considered while taking investment decisions. ▪ Risk appetite If you are one of those who lose their sleep if the investment portfolio goes below your invested amount even for a day, then equity is not your forte. Your willingness to take risk affects your investment choices. For example, if you are comfortable with daily volatility of the market, you can consider to build an aggressive portfolio. Tip: You can slowly start equity investments with MIPs, balanced funds, etc. before plunging into equity-oriented options like equity mutual funds, stocks and unit-linked insurance plans (ULIPs). ▪ Time horizon A longer time horizon allows you the opportunity to invest in relatively riskier options like stock. That’s because the volatility of stocks usually flatten over time. However, if you have a shorter time span, investments with stability and guaranteed return are the probable choices for you. Tip: The earlier you start, the better it is since the power of compounding helps in building your investment portfolio. ▪ Investment need Once the financial goals are known, the primary reason for investment is evident. That helps in making investment decisions easily. This is because the amount of money needed for the specific goal and timelines would be specified, making it easier to plan. Tip: Your needs have to be separated from wants. Once the investment need is known and penned, it becomes easier to plan and stick to it as well. ▪ Return expectations Depending on your return expectation, you can choose the right investment avenue to meet your desired goal. Each investment has its associated risk and expected return and being an investor, you would know that there is a trade-off between risk and return, i.e. higher the expected return, higher would be the associated risk. Tip: However, opting for high-risk investments might not be most desirable in your investment journey as the converse is not always true. So, investment is a game of choosing your risk and then achieving the return on investment and not the other way round! ▪ Investor knowledge and experienceAn experienced investor usually takes faster and smoother investment decisions without too much time. Thus, an Investor’s experience plays a role in decision making. It’s also good to seek help of expert advisers to smart decisions. Tip: It takes time for investors to gain investment experience which cannot be expedited under any circumstance. So, start slow, enjoy the investment experience before taking any drastic step!ConclusionThere are lot more factors that goes into making investment decisions and it depends on your personal profile, family history, number of dependants, loans, etc. Considering the various factors while making investment decisions can help you build a solid investment portfolio that best suits your needs and temperament.   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 are Alternative Investments

Equity, bonds, and mutual funds are the best-known investment instruments. But there are several other instruments that you can invest in. They are collectively known as alternative investments. In this section, we will discuss what are alternative investments and how to invest in some of the common alternative investments, namely exchange traded funds (ETFs), derivatives, commodities and private equity.Exchange traded funds (ETFs)An ETF is a special kind of mutual fund that trades like a stock and tracks the movement of an index, such as the Nifty or Sensex. ETFs only invest in stocks that make up the index they are tracking. For example, an ETF tracking the Nifty will only invest in the stocks that make up this index. You can buy and sell ETF units on the market, just like stocks. Since the ETF invests only in Nifty stocks, the price of its units will move according to the Nifty.By knowing what are alternative investments and investing in ETFs, you can buy into the growth of an index as a whole, without individually investing in its stocks. Invest in ETFs if you have a hard time picking individual stocks or if you want to cut your trading costs. Some ETFs also track overseas indices, which gives you exposure to say US or European stocks. Like equity indices, there are also ETFs that invest in debt and gold. You can invest in gold ETFs if you want to invest in gold without buying physical gold.DerivativesOne of the types of alternative investments are derivatives. These are contracts whose price depends upon (i.e. is derived from) the price of other assets, such as stocks, bonds, commodities, and currencies. You can buy and sell them on a derivatives exchange. They were traditionally used to mitigate (i.e. hedge) the risk of a sharp movement in the price of the underlying asset. But they are also popular as profit-making instruments.There are major types of derivatives:1. Futures – This is an agreement to buy or sell an underlying asset at a pre-decided price on a future date. Assume that you just bought a stock for Rs.100. You would make a profit if you sold it at a higher price later. But you would incur a loss if its price fell. You can mitigate this risk by buying a futures contract at say Rs.110. This would obligate you to sell the stock at Rs.110, irrespective of how its price changes. But it will ensure that you make a profit of Rs.10.2. Options – These are similar to futures contracts, except that they give you an option instead of an obligation to buy or sell at a pre-decided price. The option to buy is called a Call option and the option to sell is called a Put option. In the previous example, had you bought a Put option, you could have decided whether to sell your shares or not on the future date. If their price rose above Rs.110, you could have opted out of the contract and sold your shares in the open market at a higher price. CommoditiesAny basic good that is used as raw material or input in the production of other goods or services is a commodity. Commodities can categorised into:1. Metals – They are further categorized into base metals (like copper, tin, and zinc) and precious metals (like gold, silver, and platinum).2. Energy – Crude oil, natural gas etc.3. Agricultural commodities – corn, sugar, cotton, wheat etc.4. Meat and Livestock – live cattle, lean hog, feeder cattle etc. Commodity trades usually happen through the futures market. Commodity futures are contracts where the underlying asset is a commodity. They are mostly used for hedging by entities that deal in these commodities. For example, a cotton farmer may protect himself from a fall in the price of cotton by buying a cotton futures contract. However, you too can trade in commodity futures to profit from commodity price movements.Private Equity (PE)These are funds that invest in unlisted companies with strong growth potential. They have a high minimum investment threshold, which makes them viable only for high net worth individuals (HNIs). The manager of a PE fund is called general partner (GP). He also invests in the fund along with the other investors, who are called limited partners (LPs). In addition to investing the fund’s corpus and handling its administrative duties, the GP is responsible for defining how profits will be distributed among the LPs.The aim of a PE fund is to build a portfolio of companies, just as you would build a portfolio of stocks. However, instead of buying a few shares, PE funds buy major stakes in these companies. At times, they also acquire whole companies. The idea is to bring together companies that can strategically benefit from each other by sharing their capabilities. Some of these funds are sector-specific. They only invest in one sector, such as IT or financial technology.To sum upThe above-mentioned are some of the alternative investments in India. Including secure alternative investments and assets in your investment strategy is a good way to diversify. The price dynamics of commodities are very different from equity, bonds, and mutual funds. They are a high risk-high return asset class. Adding a small proportion of these can boost your portfolio returns, even if you are a low-risk investor.     Disclaimer: Investments in the securities market are subject to market risks. Read all the related documents carefully before investing.

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  • 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.

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  • SIP vs. RD - Systematic Investment Plan (SIP) Vs Recurring Deposit (RD)

    Financial planning plays an important role in today’s time. For your money to grow into wealth, it is required that you invest it in good avenues. Many individuals set aside a fixed amount every month for investment purpose. The two most popular investment avenues for investing a fixed sum of money every month are Systematic Investment Program (SIP) in Mutual Funds and Recurring Deposits (RD). In this article, you will learn about the difference between RD and SIP. Let us begin by learning the meaning of the two terms. What is SIP? Systematic Investment Plan or SIP is an investment scheme where you can invest a fixed sum of money on a monthly or quarterly basis. It is a disciplined approach of investing your money because you set aside a fixed amount of money for investment purposes. You can start SIP by selecting a mutual fund scheme. The best part of SIP is that you can start it with an amount as low as Rs. 500. Let us now learn the meaning of recurring deposit. What is Recurring Deposit? Recurring Deposit or RD is a term deposit scheme offered by the banks. In this scheme, you have to select the duration of time and amount of monthly deposit. Upon the start of the plan, you have to deposit a fixed amount of money every month during the tenure of the scheme. In general, the duration of the scheme is minimum 6 months and on completion, 3 months of addition can be made up to maximum tenure of 10 years. Recurring deposit schemes are easy on the pocket because in this scheme you get the option to select the amount and tenure for which you want to continue the scheme. Let us now learn about the SIP vs. RD. Scheme of Investment SIP is about investing in mutual fund plans where you have the option to select between debt or equity funds on the basis of your risk-taking capability. Whereas, RD is a deposit scheme that can give you a fixed rate of returns. If you are looking for more flexibility than you can opt for a flexible recurring deposit scheme.  Frequency of Investment SIP can be started with a small amount. It is your choice to invest in SIP on a weekly, monthly and quarterly basis. In the case of recurring deposits, you can invest a fixed amount on a monthly basis. Choice of Investment SIP gives you the option to invest as per your risk appetite. Based on your risk-taking capability you can invest in different mutual fund schemes like equity, debt, hybrid, etc. On the other hand, a recurring deposit has no investment options. To earn a fixed return, you have to invest a fixed amount of money on a monthly basis. Tenure You can opt for SIP investment for any tenure or duration of time. The minimum period of investment is 6 months. Whereas, in the case of recurring deposits, they have a fixed maturity date. The minimum period of investment is for 6 months and the maximum period up to which you can do a recurring deposit is 10 years. Return The rate of return in SIP is not fixed because their performance is linked to the market. In general, over the past 10 years, the equity mutual funds have given return of 12% to 14% per annum and debt mutual funds have given a return of 8% to 9% per annum. On the other hand, when you start investing in RD, the rate of return is already known to you. Liquidity SIP is highly liquid in nature i.e. they can be withdrawn whenever you want. However, you must remember that you would be charged an exit load on redeeming within 1 year of investment. Just like SIP, RD is also liquid in nature. RD attracts pre-withdrawal charges in case you make a withdrawal before the end of the tenure. Risk Investing in mutual funds is risky because the performance of the fund is dependent on market performance. Poor market performance can even lead to capital erosion. 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Now the next important question that would arise in your mind is, SIP or RD which is better? Well, the answer to it is very subjective and will vary from person to person. Both the investment schemes are very different from each other and have their own benefits. Depending upon your risk appetite and tenure of the investment, you can select the right scheme for you. You can also refer to the difference between the two schemes and understand which investment option is ideal for you. The beginners or inexperienced investors often find it difficult to take the investment decisions on their own. To assist them in financial planning, IndiaNivesh Ltd. is always at their assistance. We understand your financial goals and risk appetite before suggesting you any investment plan or scheme. We provide our clients with innovative and customised financial solutions. Our aim is to exceed the expectation of client in all our endeavours. You can even open a demat account with us and trade or invest in the stock market on the basis of our regular research reports.Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.

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  • 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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