Minimalist lifestyle: Is it worth being a minimalist?

Being a minimalist is all about living with less and in recent years it’s become somewhat of a trend with shows such as Tidying up with Marie Condo and the Minimalism documentary (both on Netflix) taking the internet by storm. They say that minimalist lifestyle can change your life for the better and living with less equals more time to focus on the important things in life such as growing your personal relationships. But who is a minimalist and is it really worth being one?

Minimalist lifestyle: Is this for you?

While the word minimalism, these days, is synonymous with the clutter-free way people live their lives, it was traditionally a word used to describe art and design (such as the decorating your home with a minimalist concept). However, this word has become so much more today as we use it to define a certain lifestyle- less is more.

The idea behind this concept is that in today’s digital age we are often overwhelmed with materialistic things such as our iPhones and laptops. We forget to spend time with our loved ones and enjoy the simple things in life like cooking or creating art. Minimalism serves as an answer to these problems.

Minimalism is intentional living and involves getting rid of anything that takes up unnecessary space in your life like unwanted clothing, household items, bills, and fees. While living a clutter-free life sounds like a good idea, it may not be for everyone. Here are a few pros and cons to help you decide if the minimalist life is for you.

The PROS

Minimalism lets you focus on what matters the most and take out what you don’t need. Here are a few reasons why you should consider this lifestyle.

It helps you find the things you really need

Let’s be honest, you could honestly survive without a lot of things currently sitting in your house. The first step to being a minimalist is picking an area or room in your house and clean it out. You will find a bunch of things you no longer use or didn’t even know you owned.

Take this opportunity to either donate or sell these things. Not only does this leave you with the things that are important to you but you can also make a quick buck on the side. The rule of thumb is to take an item and see if you’ve used it in the last 90 days if the answer is no, will you use it in the next the 90 days? If the answer is still no, you no longer need it.

Having fewer things makes it easier to budget

When you know exactly what you have, it is easier to budget and make decisions. One of the main reasons many people find it hard to forecast expenses and prepare financially for the future is because they have too many unnecessary expenses to think about. This includes bills to apps like Hulu or Netflix or unwanted subscriptions. While these may not seem like too much money at first they can add up over time.

A few ways to overcome these unnecessary minor expenses is by having just one card to pay all your bills. You can even get a card with a good rewards program to rack up those points. This way you have all your major expenses on one statement which makes it easier to budget for the upcoming year.

Another option is to have a single checking account and a single emergency fund. This way you can maintain the minimal balance for the account and have a better idea of your daily expenses. An emergency fund is particularly useful during a period of a cash crunch. Getting your finances in order is a crucial element in living a stress-free and clutter-free life.

Also read: How Much Should You Save  - 50/20/30 Rule!

You create room for the important things in life

Having too many things can create a sense of claustrophobia which often leads down a road of anxiety and unhappiness. So when we clear out unwanted items, it leaves more room for what truly brings happiness to our lives. Physical things tend to tie us down like an anchor and living a minimalist life can take that weight off your shoulders- freedom from greed and debt.

Happiness is subjective and can mean different things to each one of us. For some, it could mean spending time with your family, your puppy or even doing something you are passionate about. Many people find that living a minimalist life will get them closer to this goal.

The CONS

While living a minimalist life looks interesting, it is often easier said than done. Minimalism isn’t a personal project and tends to affect those around you as well. Here are a few cons of living a minimalist life.

The minimalist lifestyle is difficult to adopt

Living clutter-free sounds like paradise but many people find it incredibly challenging to trade in their material possessions for a more minimalist life. In today’s digital age, with new trends popping up on the internet every day, there is a lot of peer pressure to keep up with the latest styles. Living without material possessions (shoes, clothes and electronics) can seem unthinkable for many.

The process of de-cluttering your life is stressful and overwhelming and going through all your things can bring up a lot of memories (some good, some not so good). Moreover, minimalism has a different meaning for everyone so it can be hard to decide how much minimalism is right for you.

(Video Credits: Matt D’Avella)

Minimalism is not a one-stop solution to all your problems

Greed and debt are two evils that people want liberation from and many people see leading a minimalist lifestyle as the answer to all their problems. But this is not the case because if you wake up one day and decide to go cold-turkey and lead a completely minimalist life, you are more than likely to relapse and go right back to your old habits.

It is important to see minimalism as a gradual process rather than a quick fix to all your problems.

Also read: 7 Fun And Easy Tips to Save More Money

So, should you become a minimalist?

Well, that’s a question only you can answer. Leading a clutter-free life is a great feeling but it is not for everybody. Some people often find happiness amongst their chaos.

Choosing to live a minimal life depends on your mindset and what you hope to get out of it. If you do decide to become a minimalist, remember to take it one day at a time.

10 Reasons Why You Should Start a SIP

Last Friday, I met my old college friend- Priyanshu. While discussing various stuff, he told me that he has decided not to invest in ‘Fixed Deposits’ anymore. Well, there is no doubt in saying that he has made a good decision. We all know that FD is no longer a strong investment option for creating our desired wealth for the future.

During our conversation, Priyanshu suddenly got eager to know more about investing in Mutual Funds. I told him that Mutual Funds have of late become the talk of the town. I explained to him the benefits of investing in the same. Anyways, he also asked me whether he should invest in Recurring Deposits instead of Mutual Funds. As we went further in our discussion, I realized that he used to think one can invest in Mutual Funds only in a lump sum mode like FDs. But, the fact is that you can even invest in a Mutual Fund through SIPs.

Later, I told him that as he is doing a day job and earning a regular income, he should start investing in the Mutual Funds via SIP mode. Investing through SIPs works in a similar manner like Recurring Deposits (RDs). One key difference between the two is that you get units while investing in Mutual Funds. Another major difference is that through SIP investing you can earn relatively higher returns than RDs. Further, the rate of returns in SIP Mutual Funds is not fixed as in the case of RDs.

In the SIP or Systematic Investment Plan, a fixed sum of money is automatically invested in your chosen Mutual Fund on a specified date of each month. When you set up SIPs, your Bank Account is debited and your desired sum gets invested in your chosen Mutual Fund scheme.

Why You Should Start a SIP?

If you are a beginner in Mutual Fund investing, you might have this doubt why you should opt for investing through the SIP mode. Here are the ten best reasons why you should start a SIP.

1. Automate your investments: You can set up SIPs to activate investments in the Mutual Fund from your Bank Account on a particular date. This results in developing a habit of investing in the Stock Market and helps you create a large corpus in the long run.

2. Developing an investment habit towards your goal: SIP investing builds a regular investing habit for an individual. So, if you have any financial goal, your well planned SIPs can make it more feasible to achieve.

3. Variety of investment plans: SIPs help you invest in Mutual Funds with your desired amount for a chosen term. Moreover, you have a variety of schemes to choose from according to your financial needs like Equity based mutual funds, debt mutual funds, balanced funds, etc.

4. Flexibility in investments: Using a Step-up SIP, you can gradually increase your SIP amount with the increase in your earnings. In Mutual Fund investing, you can choose to stick to your regular SIP amount. But, if you wish, you can also choose to increase or decrease (up to the minimum investment amount) your SIP amount with the help of a Flexi-SIP.

5. Affordable investments: When you invest in the Mutual Funds through SIPs, you can create a huge capital over a long period of time. SIP investing doesn’t require you to invest a large sum of money in every installment. So, your household expenses are not at all hampered due to SIP investing. You can start investing in SIP with an amount as low as Rs 500 per month.

6. Rupee cost averaging: Investing in the Mutual Funds through SIPs fetch you more units when the market moves down and fewer units when it goes up. Therefore, this averages out the overall costs of your investments over time.

7. You do not need to time the market: You don’t need to know whether the Stock Market has hit rock bottom or it has reached its peak. You can invest in the Mutual Funds any time through SIP as its rupee cost averaging feature nullifies the market volatility.

8. Long-term investment: Mutual Funds are typically meant for creating wealth in the long run. Investing through SIP let you invest in the market with small amounts over a long period of time. The higher is the investment horizon, the greater is the scope to earn larger returns.

9. Power of compounding: The returns on your SIP investments are also reinvested in the market. Therefore, you not only earn returns on what you invest but also on your reinvested returns. The longer you stay invested in the market, the greater is your scope of enjoying the power of compounding.

10. Diversification: You get the opportunity to enjoy the benefit of diversification while investing in SIPs. You can easily allocate your investment across diverse asset classes and industries. Diversifying your investment results in reducing your security-specific risks and increases your chances of earning larger returns.

Quick Note: Long term capital gains on an Equity Mutual Fund are tax-free if such gains don’t exceed Rs 1 lakh in a Financial Year. This goes to show that Equity Fund investing via SIPs is a wonderful way to accumulate a huge investment in the long run. Further, Investing in ELSS up to Rs 1.5 lakh in a Financial Year is allowed as a deduction against Gross Total Income for the same period. Setting up SIPs in an ELSS can help you gain tax benefits with ease.

Also read:

Conclusion

Mutual Funds have become extremely popular in recent years among the middle-class Indians because of AMFI’s “Mutual Funds Sahi Hai” campaign. SIP investing is a great way to invest in Mutual Funds for building huge wealth in the future.

People who don’t invest in Mutual Funds are either lacking in knowledge or simply scared to invest in the same. However, the Mutual Fund industry in India is highly regulated by SEBI, which reduces the chances of occurring malpractices to nil.

In this article, we have tried to highlight the major advantages of investing in Mutual Funds via SIP route. Again, you can start investing with as low as Rs 500 per month in a SIP. Mutual Funds can help you fulfill all your financial needs if you invest in it in a systematic manner.

7 Incredible Side Hustle Ideas to Make an Extra Income

Thanks to the world wide web, earning a few extra bucks with a side-hustle is now easier than ever. But although there many different ways one can make money, you need to pick the side hustle ideas that matches your skills and needs.

Fortunately, there are many unique ways you can earn an income without an investment or a highly-specialized skill-set. While not all side-hustles may be the best fit for you, you need to pick the one that derives the most value- because at the end of the day, your job satisfaction is what mattes the most.

What are side hustles important?

Side hustles provide an outlet for you to pursue your passions outside your 9-5 job while giving you the opportunity to make an extra income. It is all about personal growth, discipline and can help you develop an entrepreneurial streak.

When choosing your side hustle, you may want to consider what you would want to supplement your current job with. This could be anything from blogging to selling your artwork online. Whatever your side hustle may be, it’s all about following your passions and seeing them through. Additionally, you can make some extra bucks and treat yourself.

Side hustle ideas

The idea of a side hustle can seem alluring but you are not sure what kind of job you want to do. Thanks to the developments in technology we have the world at our fingertips and a myriad of side hustles to choose from. A few of them include:

1. Sell your crafts online

If you have an artistic streak, you can use your talent to start a side hustle and earn some extra cash. They are many websites out there such as Etsy where you can list your crafts and other home-made items for others to buy.

Apps such as Instagram and Facebook are also great places to showcase your work. Many artists post pictures of their work on their Instagram or Facebook pages along with a link to their websites where customers can purchase the products. The rise in businesses born this way has led to a decrease in the number of brick and mortar stores worldwide.

2. Sell your stuff on e-bay or Amazon

A sure-fire way to make money online and have a lucrative side-business is to sell your items on websites such as e-bay, Amazon, or Olx. These items could include anything from household goods to furniture, books and even stamps. This is a great way to make use of things that you don’t really use or need. If you find that you have a knack for selling stuff online, you can do this professionally and earn a commission on every sale.

3. Drive for Uber or Ola

One of the best and most versatile ways to make money is to drive for Uber or Ola. Companies such as these have transformed the way we view transport in today’s sharing economy.

What makes these ride-share companies so great is that you get to decide when you want to work with just the click of a button. In metropolis cities such as Bangalore or Chennai, this is an easy and convenient way to make a side-income.

4. Start a blog

Starting a blog is not a quick money maker but it is a great way to create a platform for something you are passionate about while developing your skills.

What’s more? you can do it anywhere and from any part of the world. A blog is something you can create in your spare time and consistently working on it and posting great content can result in a high income eventually. You can even monetize your platform through sponsored posts, affiliate links or a shopping link to buy your products. Many people have created very lucrative businesses through their blogs.

5. Get a part-time job

If you want to trade in your time for money, you can get a part-time job. They are many options you can choose from to match your interests and skill-sets. A few ideas include babysitting, an administrative assistant or a barista.

If you are big on Instagram or Facebook, you can even take on a social media gig. The only downside to part-time jobs is that they often don’t pay as well as online businesses but they are still a great way to earn money while doing something you love.

6. Teaching

If you have the ability to teach other people skills, this opens up numerous side hustle possibilities. For example, if you are skilled in a particular academic field such as math or science, you could tutor students or even teach an online class. If your interests lie in other areas such as fitness or calligraphy, you can use your skills to teach a class in your free time. The great thing about teaching as a side hustle is that you get to do what you love while sharing your passion with others.

7. Freelance writing and editing

For those who possess the skill of putting words on paper, they are many side hustles that allow you to share your stories with others. Freelance writing and editing allows for flexibility and is quite enjoyable. You could write articles for magazines or journals on various genres (travel, fashion) and even edit student essays or websites online. You can develop your skills while expressing your creativity.

Also read: 11 Best Passive Ways to Make Money While You Sleep

Closing Thoughts

Tony Robbins famously said that’ if you do what you’ve always done, you’ll get what you’ve always gotten’ and this holds true for a lot of things in life.

Even if you love what you do for a full-time job, it is important to have an outlet where you can develop your passions and express free -thinking- this is where side-hustles play an important role in our lives.

While side-hustles can help you earn a supplemental income, they are important for many other reasons as it taches you to step out of your comfort zone and develop life-skills. While getting another job may be hard there are many ways you can earn an additional income as listed above.

So get a side-hustle and develop those skills!

Why Over-Diversification can be Dangerous for your Stock Portfolio?

“Wide diversification is only required when investors do not understand what they are doing.” — Warren Buffett on Diversification

If you read any investing book or listen to a popular investment advisor, the first tip that most of them will give you is to diversify your portfolio. “Do not put all your eggs in one basket!!

At first glance, this tip sounds logical. After all, risks involved while investing in just one stock is way higher compared to if you diversify your investments in ten stocks. However, the problem occurs when people over diversify their portfolio.

Over-diversification is a common mistake among the investing population. In this post, we are going to discuss what exactly is over-diversification and how over-diversification can be dangerous for your stock portfolio. Let’s get started.

What is diversification?

A diversified portfolio is investing in different stocks from dissimilar industries/sectors in order to reduce overall investment risk and to avoid any damage to the portfolio by the poor performance of a single stock.

Ideally, a retail investor should hold stocks between 3 to 20 from different industries and sectors. However, personally, I believe 8–12 stocks are sufficient for a diversified portfolio. It’s crucial that your portfolio is sufficiently balanced as ‘over’ and ‘under’ diversification are both dangerous for the investors:

  • Under diversified portfolio has more risk as the poor performance of a single stock can have an adverse effect on the entire portfolio.
  • On the other hand, over-diversified portfolio gives low returns and even the good performance of a few stocks will lead to a minimum positive impact on the portfolio.

Ironically, Peter Lynch described it as ‘diworsification’ highlighting inefficient diversification, in his best-selling book ‘One up on the Wall Street’.

Why do people over diversify?

Over diversifying simply means owning an excessive number of stocks in your portfolio. If you are a retail investor and holding 30–40 stocks or more, you are over-diversifying your portfolio. Now, the next question is why do people over diversify their portfolio.

The most common answer can be that a lot of investors do not even know that they are over-diversifying. They just keep buying stocks following the famous traditional tip written in popular books i.e. diversify to reduce risk. They believe that having more stocks is good for their portfolio.

A similar thing happened to me during my rookie days. At one time, I had 27 stocks in my portfolio. Out of them, I had invested almost equally in among 18 stocks and the rest 9 were trailing stocks which contributed only a minor portion of my portfolio.

Although the returns from many of my holding stocks were high, however, the overall return on my portfolio was not that big during that period. Anyways, after a few months, when I analyzed my portfolio to understand why this was happening, I found the answer. I over-diversified my portfolio. In the upcoming months, I slowly reduced the number of my holding stocks from 27 to 14, keeping only the best ones which I was confident about.

Quick Note: An amazing book that helped me to understand that the concept of over-diversification is flawed was reading ‘The Dhandho Investor’ by Mohnish Pabrai.

The principle that I liked the most in this book was ‘Few bets, big bets, and infrequent bets’. Here, Mohnish Pabrai suggests that you do not need to make frequent bets. Every once in a while, you’ll encounter overwhelming odds in your favor. In such times, act decisively and place a large bet. If you haven’t read ‘The Dhandho Investor’ yet, I would highly recommend you to read this book.

Security

Another big reason why people over-diversify their portfolio is to have ‘security’. Buying a large number of stocks helps in spreading investment risks over many instruments.

If you diversify your portfolio with multiple stocks, you’re less likely to experience major drops. This is because the possibility of all the stocks underperforming at a particular time is quite less. When some of your stocks are having tough times, others may be out-performing. Hence, efficient diversification helps is maintaining consistent overall portfolio performance.

For defensive investors, security may be a reason for over-diversifying. It definitely reduces the risk, but it also decreases the expected returns. High returns on your best stocks will be always balanced out with the majority of average/losing stocks.

Why over-diversification can hurt your stock portfolio?

By now, you might have vaguely understood the concept of over-diversification, let’s discuss why over-diversification can hurt your stock portfolio.

  • Low expected Returns

Over diversifying or adding too many stocks to your portfolio reduces the risk, but it also reduces the expected returns. Let’s understand it better with the help of two extreme situations.

When you own 2 stocks, your portfolio is associated with high risk and high expected gains. On the other hand, when you own 100 stocks, your portfolio risk is low, but your expected gain is also lower.

Over-diversification is a point where the loss of expected return is higher than the benefit of reduced risks. For a well-diversified portfolio, you need to find the sweet spot where you neither own too many stocks nor too few.

  • Tracking them all is difficult

In order to efficiently monitor your invested stocks, you need to evaluate their quarterly reports, annual reports, corporate announcements, latest news related to the companies, etc. If you are holding 30 stocks in your portfolio, monitoring them all can be really difficult, especially for the retail investors who have a full-time day job.

On the other hand, if you are holding just 10 stocks in your portfolio, monitoring them doesn’t take too much time or efforts. However, when the number of holding stocks increases, the chances of missing important news/announcement related to your invested stocks gets higher.

  • Duplication or inefficient diversification

Diversification means owning different companies from different industries or sectors. For example, one stock from automobile sector, two stock from technology industry, one stock from pharmaceutical, two from banking, two from energy sector, etc.

However, if you’ve bought 5 banking stocks out of 10 stocks in your portfolio, you haven’t diversified your portfolio effectively. Over-diversification often leads to owning similar companies in your portfolio.

Closing Thoughts

The majority of the investing population are given flawed tip to immensely diversify their stock portfolio. However, following this strategy is quite dangerous for retail investors. Your portfolio should be sufficiently diversified, not ‘over’ or ‘under’ diversified.

That’s all for this post. I hope it was useful for you. Happy Investing!

What are Bonds? And How to Invest in them in India?

A bond is a financial product which represents some debt. It is a debt security issued by an authorized issuer which can be a company, financial institution, or Government. The issuers offer returns on bonds to the lenders in the form of fixed payment of interest for the money borrowed from them.

A bond is having a fixed maturity period of its own. It is an obligation of the authorized issuer in paying interest and/or repaying the principal at a future date upon maturity. However, such payouts are dependent on the terms and conditions associated with the bonds issued by the said issuer.

Are bonds and stocks the same?

It was stated earlier that bonds are as good as debts. So, if you are a bondholder, it means that you are a lender of funds to the issuer entity. On the other hand, if you own a stock, it indicates that you have a share in the ownership of such issuer organization.

Bonds are having predefined maturity periods while stocks don’t. Anyways, if you invest in stocks, you can sell them off any day. But, if you are a holder of bonds, you have to wait for its maturity period to end to get back your investments. 

What are the different types of bonds available for investing?

  1. Zero-coupon bonds: These bonds are available for investing at a discount on the face values. After the expiry of their maturity period, they are redeemed at par.
  2. G-Sec bonds: These bonds are considered as one of the safest bonds as they are issued by the Government of India.
  3. Corporate bonds: These bonds are issued by corporate The companies borrow funds from the people and pay them regular interests.
  4. Inflation-linked bonds: The principal amounts and interest payments of these bonds are indexed to inflation.
  5. Convertible bonds: A bondholder is having the option of converting these bonds into equities as per predetermined terms.
  6. Sovereign gold bonds: These bonds are issued by the Indian Government and offer the safest way of investing in digital Gold.

Why would you invest in bonds?

Here are a few best reasons why one should invest in bonds:

  1. Bonds are less riskier than equities. Therefore, investing in bonds will ensure that your corpus is protected.
  2. It is highly likely that the returns on equities are higher than bonds. But, this is also to be considered that investment in equities carries a higher risk than bonds. The payment of interests on bonds is ideally assured while equities don’t make any such promise of paying regular dividends.
  3. If you don’t want to pay tax at all then you can invest in tax-free investment bonds. So, if you fall in the higher tax bracket, not only you keep on growing your wealth but also enjoy full tax advantage on the returns on such bonds.

TOP TAX SAVING BONDS IN INDIA-min

(Source & Image credits: Karvy)

How to Invest in Bonds in India? 

If you want to invest in Bonds in India, either you would be investing in corporate bonds or Government bonds. Let’s first talk about investing in corporate bonds.

You can buy Corporate bonds from the primary markets when the issuing company issues new bonds. In order to invest in them, you are required to file an application form and submit the same to any branch of the issuer along with prescribed documents and application fee. In case you are having Demat Account, your bonds will be credited to the same. However, if you don’t have one, then you would receive them in their physical format. You can also buy corporate bonds from the secondary markets subject to their availability.

Government bonds are not traded like shares on the stock exchange or secondary market. They are sold through their official distributors. These bonds are also made available by the designated branches of post offices and banks. For investing in these bonds, you can submit your application form, necessary documents, and required fees in any of the said places. Once your application is processed, you would receive bonds in your name.

Instead of buying bonds directly from the companies and Government, you can also invest in them through the bond brokers in India. Investing in bonds through brokers is more convenient. You can invest in bonds through their online platforms like websites and mobile applications. Brokers like ICICI direct, HDFC Securities etc offer their clients to invest in bonds along with equities. Here, to comply with KYC requirements, you are not required to pay any visit to their physical offices. They are the investment service providers and act as middlemen between you and the issuer organizations.

icici direct bonds

The bond brokers are the market makers of bonds in India. Over 90% of the bonds which are traded in India are privately placed instruments. Therefore, they are not advertised at all. The bond brokers are playing an important role in creating a deep and wide bond market in our country.

Also read:

Conclusion

In India, the majority of the people are interested in investing their money in their Bank Fixed Deposit Accounts. The next preferred investment options are the tax saving instruments like NSC and PPF. Financial literacy is not at all strong in our country. Therefore, most people are unaware of the fact that diverse investment options are available. A good number of Indians simply feel afraid to invest because of the lack of proper financial education.

The bond market in India is not as deep as what exists in western countries. Therefore, the number of individual investors in the Indian bond market is pretty low. Due to AMFI, Mutual Funds have started gaining substantial popularity in the last few years in India. So, the retail investors have started investing in bonds not directly but through debt mutual funds.

The investors in the Indian bond market majorly consist of Banks and Financial Institutions. Advertising is not permitted in India with regard to investing in bonds. If any authority takes the initiative to encourage bond investing, then India can witness a more liquid bond market someday.

How to eat an elephant? One bite at a time!

Desmond Tutu once wisely said, “there is only one way to eat an elephant: a bite at a time.”

In other words, what he meant to say was that even an enormous goal can be achieved if you take a little step at a time. Bit by bit, bite by bite, you’ll make possible what at first seemed impossible. Most people fail to achieve a massive goal because they try to eat the whole elephant at once.

Your financial goals are similar to eating an elephant. And in order to reach those goals, you need to take one step at a time!

Goal Setting:

The biggest factor for turning your dreams into reality is goal setting. No matter how big the goal, if you can set it, put a timer and start working on it, you can achieve the goal eventually.

Personally, I’ve two goals for the next five years. First, to turn my venture ‘Trade Brains’ into a massive online education platform which can provide financial literacy to thousands of investing population. And my second goal is to write a book. My long-term financial goal is to achieve FIRE- Financial freedom and retire early as soon as possible.

For those who know me, you might have watched me working on this blog ‘Trade Brains’ for over two and a half years now. I always knew that the path is not easy. But bit by bit, I’ve been adding investing lessons which can be useful for the beginners as well as matured investors. Similarly, for my long term goal of financial independence and early retirement, I have been working hard and investing consistently.

My investment strategy is simple. I do not try to get huge returns for a year or two by investing aggressively. I prefer consistent decent returns because I know that the power of compounding is in my favor. Time is the biggest friend for those who start investing early.

Now, why I’m telling you all this?

Similar to my goals, you might also have a gigantic dream of eating an elephant. Maybe you aim to build a huge retirement corpus or to buy your dream house on a beach across western ghats in India or to become a successful investor. And if you want to achieve these goals, you also need to take one step at a time.

If you want to learn how to invest intelligently and become victorious in investing, take your first step. Buy your first investing book and read it. Then read the second book and continue the process. You certainly won’t become an expert investor in a year or two. But with time, practice, and efforts, you will get better than 99% of the investing population.

In a similar way, if you want to build a huge corpus, let’s say for your retirement, you definitely cannot build this huge corpus by a few profitable investments. You need to be consistent in your investment strategy.

I receive a lot of emails from people asking for recommendations of hot stocks that can give them huge returns in the next six months or a year. But setting small goals and investing for six months won’t help in achieving a massive goal. Maybe you’ll win and get good returns on that stock. But this one-time return won’t make you any richer. You’ll probably remain at a similar financial situation compared to where you were last year. For achieving your financial goals, you need a reliable strategy that can give you consistent returns year after year, not just one-time big return by fluke.

It doesn’t matter how big your first few bites are, you cannot eat an elephant with a few big bites. Similarly, no matter how big the returns are, you cannot build your dream corpus in a year or two. Consistent returns are the steps to achieve your goals.

A few other tips to help you eat that elephant

Now that you have understood how to eat an elephant, here are a few other tips that can help you further:

— Set SMART Goals: Setting a smart goal is the first step towards achieving your massive goal. Often, SMART goal is described as (S)pecific, (M)easurable, (A)uthentic, (R)elevant and (T)ime bound

— Start breaking into small pieces: Even the biggest of the objects can be broken down into small atoms. Once you have set your goal, start breaking it down into small pieces. For example, if you are building a retirement corpus, find out how much you’ll need to invest yearly, monthly or even weekly to reach your goal in the desired time frame.

— Stick to the plan: “A goal properly set is halfway reached.” However, the next half is to stick with the goal– which is the toughest. If you are planning to build a corpus of Rs 10 crores in the next 30 years by investing in mutual funds, stick to your investment strategy. Do not stop your SIPs in between because of small-term market corrections.

— Celebrate small wins: Periodically measure how close you are to your goal and each time you reach a milestone, celebrate it. Achieving a massive goal will take time, and enjoying the small wins will keep you motivated to take your next bite.

— Mastermind: Probably the most important but often ignored tip. Keep close to people who encourage you and from whom you can learn. Surround yourself with people having similar goals as that of yours.

Closing Thoughts

The biggest mistake that people commit while chasing a massive goal is taking huge bites initially and try to eat the whole elephant at once. This eventually leads them to burn out too soon. Nonetheless, any big, enormous goal can be achieved by breaking it into small pieces and taking small steps.

Before we end this post, here is the final tip. Enjoy the journey. It’s gonna take time to achieve a huge goal. And enjoying is really crucial if you want to keep going.

That’s all. Take care and talk soon!

What is ETF (Exchange Traded Fund)? And How to Invest in them?

Exchange Traded Fund or ETF is getting a lot of attention among the investing population lately because of the ease and flexibility it offers to the investors. It is a basket of securities like mutual funds but can be bought and sold through a brokerage firm on a stock exchange.

In this post, we are going to discuss what exactly is an Exchange Traded Fund and how to invest in them. But before we start discussing ETFs, let’s brush up the basics of mutual funds as they are somewhere related.

Mutual Funds

Mutual Fund is a financial product where a Mutual Fund company pools funds from its investors and in return, allot them units. The amount collected is invested in a portfolio of securities which are traded in the markets. Mutual Fund schemes are low-cost investment options which help you to plan your personal finance effectively. You can start investing in mutual funds with an amount as low as Rs 500 per month via SIPs. Through Mutual Funds, you can invest your savings across diverse asset classes, industries, and economies.

In Mutual Fund investing, you can either choose to be an ‘Active’ investor or opt for ‘Passive’ investing style. The Mutual Fund schemes where the underlying assets are frequently churned to outperform their benchmarks are known as active funds. Passively managed funds are those which replicate the portfolios of their benchmark indices.

ETFs are the best representatives of passively managed funds. Let’s have a discussion on ETF basics.

Exchange Traded Funds

An ETF or Exchange Traded Fund is a variety of Mutual Fund which tracks any particular index, be it an index of stock, commodity or any other security. ETF invests in a portfolio of assets of a specific nature. For example, you can invest in a Gold ETF or Bond ETF or Currency ETF.

ETFs trade in the stock exchanges and therefore can be bought and sold during market hours like any instruments listed in a stock exchange. The price at which an ETF is usually traded is close to its Net Asset Value (NAV). In order to invest in an ETF, you need to have your own Share Trading Account and Demat account.

You can earn income from your ETF investments in two ways. Firstly, you can earn in the form of dividends. The second one is that you can trade your ETF units like shares and generate income in the form of capital gains.

Some people have this doubt in their minds whether ETF is the same as Index Funds or not. Well, what is the reality then? Let’s dig deep into it.

ETF vs Index Funds

An Index Fund is also a variety of Mutual Fund like ETF. The portfolio of an Index Fund is built in such a manner that its components look similar to that of a specific stock market index. An index fund aims in replicating the performance of a particular benchmark index.

On the other hand, an ETF is a special form of Mutual Fund consisting of similar securities, falling under any specific market index. An ETF is the only type of Mutual Fund which is traded like shares in a stock exchange. Its composition is similar to any index like Sensex or Nifty.

So, both ETF and Index Fund look quite similar except the fact that the ETF is traded in the stock market.

Is this the only difference between the said two investment options? The answer is a big no. Let’s have a look at some more key differences between the two:

  1. You can invest in an Index Fund only during a specified time in a day. But, you would be happy to know that you can trade in the ETFs throughout the day.
  2. The price of any ETF keeps fluctuating throughout the trading hours. On the other hand, the price of an Index Fund is fixed only at the end of the trading day.
  3. The basis for the pricing of an ETF is the demand and supply of the same in the market. Whereas, the pricing of an Index Fund depends on its NAV.
  4. To invest in an ETF, you will have to incur expenses in the form of brokerage. But, for investing in an Index Fund, there is no such transaction charge applicable.
  5. The expense ratio of an ETF is comparatively lower than that of an Index Fund.
  6. If you want to invest in an ETF in the Indian market, the minimum investment required is Rs.10,000. Whereas, you can invest in an Index Fund by paying a minimum lump sum of Rs.5,000. Moreover, you can choose to invest in the Index Funds with a minimum amount of Rs.500, if you choose the SIP (Systematic Investment Plan) route. Please note that investing in an ETF via SIP is not applicable.

Why you should invest in an ETF?

The next question that can come to your mind is why you should invest in an ETF? I can state a couple of reasons in favor of this.

Investing in an ETF is certainly convenient. Buying and selling an ETF unit can be done by having a look at the market price available on the trading platform. The exchanges where the ETFs are listed are well regulated by the concerned authorities. This has resulted in increasing transparency in the trading of ETFs.

Furthermore, you can choose to invest in ETFs as the expense ratio is much lower than any other Mutual Fund. Again, if you are unable to figure out which stocks to invest in, you can invest in a sector-specific ETF instead with a small corpus. 

performance of ETF in India

(Updated till 2nd May 2019 | Source: Moneycontrol)

How to invest in ETF in India?

In order to invest in an ETF you need to ensure the following two things:

  1. You are mandatorily required to open a Share Trading Account with any Stock Broker/ Sub-broker.
  2. You must also possess a Demat Account in your name for the purpose of holding the ETF units which you are going to buy.

Now, to apply for the above two things, you have to submit the following documents for complying with the KYC (Know Your Customer) norms:

  1. A copy of your Passport, Driving License, or PAN Card as your identity proof.
  2. A copy of your Passport or any Utility bill as a proof of your address.
  3. A copy of your Bank Account statement for the last 6 months.

After you have got access to your online trading platform, you can carry out any ETF transaction. You can invest in ETFs via any of the following two modes:

  1. You can place your order in the market through the online trading terminal provided to you. Trading in ETFs is no different than carrying out transactions with respect to stocks listed in the stock market.
  2. The second option is that you can place your order by calling your Broker over the phone and let them know about your trade requirements. 

Also read:

Closing thoughts

If you are willing to take part directly in the stock market but unable to figure out which security to pick, you can start investing with ETFs. In case you are an existing investor in the market and looking to try something different, you can look to include ETFs in your portfolio.

In India, people are still predominantly interested in investing in traditional saving schemes like PPF, FD, and NSC. Stock Market investing is yet to get popular among the Indians at a significant level. Not even ten percent of the income earners in our nation are having their Stock Trading Accounts. Therefore, there is no doubt in saying that the number of participants in ETFs in our economy is still pretty less.

AMFI has been working hard in the last few years to popularize the concept of Mutual Fund investing in our country. So, as the Indian Mutual Fund industry grows, it is expected that more and more investors will show an inclination towards ETFs.

Dividend Investing: Pros and Cons That You Should Know

One of the most popular ways to generate income from stocks is dividend investing. Here, the investors enjoy the benefits of dividend income along with capital appreciation.

Anyways, if you are new to dividend investing, let me give you a brief introduction.

Dividends are basically a portion of income that a company distributes to its shareholders. Dividend investing means investing in those stocks which give high consistent dividends to their investors.

For example, in the last financial year (Mar 2018), HPCL gave a dividend of Rs 17 per share to its shareholders (Dividend yield=3.8%). Therefore, if you were holding 100 shares of HPCL company in your portfolio 2018, you would have received Rs 1700, credited directly into your bank account without selling even a stock.

A lot of equity investors invests in stocks just for the dividends. Dividend investing is a good way to earn secondary income along with enjoying the capital appreciation for your invested stocks. When invested correctly, investors can earn amazing income through dividends. (Also read: How to make money from dividends- the right way?)

In this post, we are going to discuss the pros and cons of dividend investing that you should know before making your investment in dividend stocks.

Pros of investing in Dividend Stocks:

Let’s start with the pros. Here are a few best advantages of investing in dividend stocks:

1. Passive Income:

This is probably the biggest advantage of investing in dividend stocks. You can treat dividends as a passive income- which means getting paid without doing any work. For the people looking for a few alternate secondary sources of income, dividend investing is the answer.

Anyways, for making passive income through dividend investing, initially, you need to put big efforts to find good dividend stocks. However, once the work is done, you can enjoy the passive income for multiple years.

2. Double Profits:

If your invested stock goes up by 30% in the next 3 years, and you received a dividend yield of 3% per year from the same stock, the combined profits are way higher than just the capital appreciation. Here you can earn double profits compared to investing in companies that don’t give any dividends.

3. Hedge against bad markets:

Everyone makes money in a rising market. However, the scenario is different when the market turns sour.

In the bear market or corrections, the share price of a lot of your favorite stocks may fall. And hence you might not be able to make a good return from capital appreciation of stocks. However, if you have picked right dividend stocks in your portfolio, you can enjoy a decent dividend income even when your portfolio is down.

Further, dividend stocks are generally big matured companies and hence are less influenced by a bear or speculative market. Investing in these companies can provide a good hedge to your investment from a bad market. In addition, dividend investing also helps in capital preservation. Even if the stock price of your invested company doesn’t go up, if you are getting regular high dividends, you will be able to preserve your capital.

4. Steady Income:

Profits from stocks are only on ‘paper’ unless you sell them. This money is not in your bank account. The profits/loss are unrealized until the final settlement i.e. selling the stock. However, dividend stocks add steady income in your pockets without worrying about selling any stock.

5. Dividend Reinvestment:

You can use the dividends that you receive from stocks to buy more stocks and reap the benefits of dividend reinvestment. Else, you can use that money to invest in any alternative investment options like Bonds, gold etc if you want to diversify your portfolio. Once you get the money back in your account, you have immense options to re-invest them back in whichever investment option that suits you.

6. Long-term investment: 

One of the best strategies to make money from stocks is the same old philosophy of ‘buy and hold’. However, while investing for the long term, there may be a number of situations where the investors may be in the need of a few extra bucks. Here, selling stocks may be the only option available to them if they want to make money from their invested stocks.

Nevertheless, as dividend stocks offer a steady income stream, investors may prefer to hold the stocks longer and enjoy the benefits of long-term investing.

stock market meme 31

Cons of investing in dividend stocks:

No investment strategy is perfect and the same goes with dividend investing. Here are a few biggest disadvantages of investing in dividend stocks:

1. Low-growth companies

Most growth companies do not give dividends to their shareholders as they reinvest their profits in expanding their businesses like opening new plants, entering new cities, buying new machinery, acquiring small companies, etc.

On the other hand, big matured companies do not have so many opportunities and hence they offer a large profit to their shareholders. While investing in dividend stocks, the investors may be investing in low growth companies which may not always offer high returns.

2. High dividend payout risks

High dividend payout means that the company is distributing a major portion of their profits to their shareholders. For example, if a company made a profit of Rs 100 crores in a financial year and shares Rs 85 Crores as dividends, this means that the dividend payout ratio is 85%.

At first glance, it may sound favorable for the shareholders. After all, they are getting a major portion of the profit as dividends. However, in the long run, it may not be advantageous for investors.

Think of it from the other angle. When the company is not retaining enough profit for itself, it doesn’t have any big money left for reinvesting in its growth. And if the company is not reinvesting enough, it may face problem to grow, compete with the rival companies or even to retain the same net profit in upcoming years. Moreover, if the company doesn’t grow or increase its profits, it can’t add more value or increase dividends for the shareholders in the future.

3. Double Taxation

Companies pay Dividend distribution tax (DDT) of 15% to provide dividends to their shareholders. However, once dividends are credited to the shareholders, the investors again have to pay a tax on the capital gain. Although, small investors do not have to pay any tax on dividends. However, if the dividend received is more than Rs 10 lakhs, the investor has to pay a tax of 10% on the capital gain by dividends.

Also read: Do I Need to Pay Tax on Dividend Income?

4. Dividend cut

This is the worst case scenario. Dividends are not obligations and a company may decide to cut the dividends anytime in the future. Moreover, when the company cuts the dividends, even the share price falls significantly as the public sees it as a negative sign. And that’s why the dividend investors may face double side trouble.

Further, many times, the board of directors can also change the dividend policy of a company. This can again have an adverse effect on the dividend investors if the decision is made against the existing dividend policy.

stock market meme 23

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When you should exit a dividend stock?

Now, that you have understood the pros and cons of dividend investing, the next big question is when should you exit a dividend stock. If you’ve invested in dividend stocks, look for the following signs periodically to avoid any dividend pitfall in your invested company. Here are the three signals that you should exit a dividend stock:

— Dividends start declining: A fall in dividend for a year compared to the previous one can be ignored by the investors as businesses can always have a few losses in some years. However, if the dividends start continuously declining year-after-year, it may be a sign for the investors to exit.

— High dividend payout: A payout ratio greater than 70% for the continuous years may be a warning sign that the company is not retaining enough profit for its growth.

— An adverse change in dividend payout policy: If the company changes its dividend policy against the favor of the investors, then again it may be a sign to exit that stock.

Closing Thoughts:

Traditionally, dividend investing approach was used by the retirees or the people entering their retirement age. As these people do not have any primary source of income (regular paycheck) after retirement, receiving small dividends per year in their account can be a good secondary source of income.

However, these days even the young and middle-aged investors are looking forward to dividend investing. Why? Because it is always a joy to see dividends get credited to your account periodically. Moreover, they do act as a secondary income source.

That’s all for this post. I hope it was helpful to you. Happy Investing.

What are STP and SWP in Mutual Funds? A Beginner’s Guide!

Systematic transfer plan (STP) and Systematic withdrawal plan (SWP)

In India, the Mutual Fund industry has started growing off late due to the immense efforts by Association of Mutual Funds in India (AMFI). Previously people used to be more interested in parking their money in Fixed Deposits and Recurring Deposits. Today, many Indians are looking to invest in Mutual Funds for gaining higher returns, ensuring larger security, and enjoying more liquidity.

Unfortunately, the percentage of Indian population investing in the Mutual Funds would not even cross the one-fifth of the total number of income earning Indians. At present, as high as 80% of the Indian income earners are either unaware of Mutual Funds or they have a plethora of misconceptions regarding the same.

One of the myths that many Indians have is that SIP is a feature of the Mutual Fund. The fact is that SIP is a mode of investing in Mutual Funds. You can invest in Mutual Funds either via lump sum mode or through SIPs. Let us have a basic understanding of SIP.

1. Systematic Investment Plan (SIP)

SIP means Systematic Investment Plan. You can invest a fixed sum of money at specified intervals of time, over a time period in a systematic manner. You can choose to make SIP investments yearly, half-yearly, monthly, weekly, or even daily.

SIPs are similar to Recurring Deposits. You are required to invest your money on a predetermined date and the Mutual Fund Company will provide you units based on that day’s NAV.

If you are looking to invest in the Mutual Funds via SIPs, you do not need to time the market. The major benefit that SIPs provide you is ‘rupee cost averaging.’ Therefore, your investments are not subjected to the risk of market fluctuations as SIP investing averages out the cost of your investments.

Now, there are two crucial concepts associated with SIP. The first one is the Systematic Withdrawal Plan or SWP.

2. Systematic withdrawal plan (SWP)

SWPs allow you in withdrawing a specific amount of money at regular intervals of time. SWP plans are more suited for retired people who are looking for a regular income to meet their expenses, preferably on a monthly basis.

After investing a lump sum amount in a Mutual Fund, the fixed amount and frequency of withdrawal are to be set by you. Not only SWPs help in providing you with periodic income but also protects you from the ups and downs of the stock market.

SWPs work in the manner opposite to SIPs. In case of SIPs, your money is invested in the Mutual Funds from your Bank Account. While, in case of SWPs, your Mutual Funds units are redeemed and gets deposited in your Bank Account.

Let us consider an example to understand how SWPs work in reality. Suppose Mr. Akash is having 10,000 units of a Mutual Fund on 1st January. He wishes to withdraw Rs 5,000 per month through SWP for the next three months. Therefore he sets up an SWP to give effect to it.

The units from your Mutual Fund holdings will be redeemed automatically to provide you with a regular income of Rs 5000 per month. The table shared below explains the process.

Date Opening Units NAV Units redeemed Closing units
1st Jan 10000 20 250 (5000/20) 9750
1st Feb 9750 16 312.50 (5000/16) 9437.50
1st March 9437.50 15 333.33 (5000/15) 9104.17

Now let us discuss the second key concept i.e. Systematic Transfer Plan (STP) 

3. Systematic Transfer Plan (STP)

STPs allows you to transfer your money from an Equity Mutual Fund scheme to a Debt scheme. The opposite can also take place. STP acts as protection against market volatility. STP is an automated way of transferring your money from one Mutual Fund scheme to another.

Whenever you feel that the investment made by you in an Equity Fund is being exposed to a higher risk, you can transfer your units to a Debt scheme periodically. Therefore, you can set up STPs which transfers your funds from your Equity scheme to a Debt Fund. When the market settles itself, you can again transfer the money from that Debt Fund to an Equity scheme.

Let us now understand how STPs work. You need to select a Mutual Fund from which your funds should be transferred to another scheme. You can set up STPs in a manner where a transfer can take place. It could be yearly, quarterly, monthly, weekly, or even daily.

STP means redeeming units of a scheme and investing the proceeds in the units of another scheme. Generally, STPs are allowed to an investor by a Mutual Fund company only within the schemes of the same company.

Through setting up STPs, you can keep earning your returns on a consistent basis. Moreover, your investments are also protected against adverse market circumstances. STPs also help you enjoy the benefit of ‘rupee cost averaging’ similar to SIPs.

STPs help you in rebalancing your portfolio. You can keep your funds moving from debts to equity when the Stock Market witnesses a bullish trend. Similarly, you can move your Equity investments away from the market and invest in Debt schemes when the market corrects itself.

Also read:

Systematic transfer plan (STP) and Systematic withdrawal plan (SWP)-min

(Image Credits: Edelweiss)

Taxation rules

Investing via SIPs is not going to fetch you any tax benefit unless you invest in an ELSS scheme. Under section 80C of the Income Tax Act, 1961, you can enjoy a tax deduction on your investments up to Rs 1.5 lakh. This tax benefit is available if you invest in any prescribed securities including ELSS.

SWPs result in the redemption of units of a Mutual Fund. Let us assume that you have invested in a Debt scheme and set up an STP to transfer money to an Equity Fund. Assuming 3 years have not been completed, any capital gain you make due to the redemption of units in Debt Fund will be taxable as per your tax slab. If you withdraw your investments after 3 years, capital gains are taxable @10% and 20%, with indexation and without indexation, respectively.

STPs also result in the transfer of units and therefore the capital gains are subjected to Income Tax. Suppose, you shift your investments from an Equity Fund to Debt scheme within 1 year, the capital gain tax is chargeable @15%. If 1 year exceeds, the tax is attracted @10%, provided capital gains in a Financial Year exceeds Rs 1 lakh.

Also read: Mutual Fund Taxation – How Mutual Fund Returns Are Taxed in India?

Closing Thoughts

If you lack both time and knowledge for Stock Market investing, you can invest your money in the Stock Market via Mutual Funds. For investing in Mutual Funds, you require making use of SIPs, STPs, and SWPs in any phase of your investment journey.

When you earn regular income in our life, investing in Mutual Funds via SIPs seems ideal. As per changing market circumstances, you can set up STPs to maximize your returns by minimizing your corpus loss. SWPs usually come in the picture when you stop earning income actively and looking for a passive source of regular income for the rest of your life.

Mutual Fund is a great investment option for growing your long term wealth. The systematic arrangement of your investments and withdrawals in the form of SIPs, STPs and SWPs help you live a financially disciplined life.

7 Fun And Easy Tips to Save More Money

We all want to save money and build a comfortable financial cushion to plan for our future.  Many of us have milestones we want to reach like buying a house, a car, paying off debt or going on vacation. But although we may have good intentions, many of us don’t save money until much later in our lives because our current wants and needs seem much more important.

The trick to having enough money for a comfortable financial future is to start saving money as soon as you enter the workforce. Saving is not as overwhelming as it sounds and with a little prioritization and self-discipline, you can make it a life habit. Here are a few tips to help you get started:

7 fun and easy tips to save more money

1. Tackle your bigger debts

The first step to start saving money is to tackle your bigger debts, specifically the high-interest ones from any loans or credit cards you have taken out. This is because the fees on the loans add up quickly and can take up a significant portion of your income. Also once your debts are paid off, saving money in other areas of your life becomes much easier.

However, tackling the bigger debts can be intimidating so another effective way is to use the snowball method. This is when you start by paying off the small debts before you pay the larger ones. This method does not focus on the numbers in debt repayment but on behavior modification. When you pay the larger debts first, you will not see the numbers go down significantly and this can demotivate you. But paying off smaller debts is easier and you see the progress quickly which encourages you to stick it out until you’re debt free!

2. Cut down any unnecessary bills

When people budget out their expenses, they find many unnecessary leaks in their income. A major expense bracket is your grocery and entertainment bills.

For groceries, a great way to save money is by planning out your meals each week and taking account of what you have and what you need to buy. This will stop you from overspending on food and reducing any wastage. Managing your grocery expenses also reduces the money spent on restaurant meals as you can eat more home-cooked meals.

Brewing your own coffee at home is also very beneficial. Studies show that the average American spends $2,600 on Starbucks coffee every year which is a considerable amount of money to spend on coffee!

starbucks

3. Reduce household expenses

In addition to food and entertainment, there are many ways you can reduce your household expenses as well. A quick way is to have an eye on the thermostat in your home, lowering the temperature by 10 degrees Fahrenheit can reduce energy costs by 3-5%. Other ways to reduce energy costs includes taking shorter showers, washing your clothes in cold water or switching to LED bulbs that have a lower energy consumption.

With OTT platforms such as Amazon Prime and Netflix, many people no longer find the need for cable television. Although your cable bill may not seem like much, it adds up over the course of the year. Cutting ties with cable and switching to streaming services can help you reduce your expenses in the long run.

Another expense you can reduce is your phone bill. You can either opt for a family plan to lower your overall costs or minimize your data plan by using apps such as WhatsApp, Skype or Facetime to make phone calls.

4. Use a zero-sum budget

Saving enough money always comes down to a well-structured budget. If your goal is to save money aggressively, a good method to utilize is the zero-sum budget.

The goal of this budget is to make your income minus the cash outflow equals zero. This is done by allocating every single dollar you make to a certain category. So for instance, you could allocate money to food, entertainment, bills, savings and paying off debt. A survey conducted showed that people were able to save 19% more of their income with this method.

Also read:

5. Automate your savings

A fool-proof way to save money is to automate your savings. When you ensure that a portion of your income goes into a savings account, you will be living on less money without even realizing it.

Creating a budget is easy but sticking to it is the challenging part. By automating your savings, you no longer have to worry about not meeting your budget goals. It is a good idea to have a separate checking and savings account or an emergency fund where the money from your income can be transferred every month.

automating expenses

(Image credits: Forbes)

6. Get a side hustle

In addition to cutting your costs, another great way to save more money is to diversify your income. You can do this by getting a side-hustle.

A side hustle is a part-time job or a passion project which provides an extra source of income. Many people do side-hustles as a hobby and use it as an outlet to express their creativity while earning an extra income. Very often, bloggers and Instagrammers turn their side-hustle into their full-time jobs if they find it to be a lucrative career. A few great side-hustle ideas include writing, coding or teaching a class.

Also read: 11 Best Passive Ways to Make Money While You Sleep.

7. Take a ‘staycation’

A staycation is an inexpensive alternative to an actual vacation and can be just as fun! While it is a trendy term used in social media, the reasoning behind it is pretty rational. If you are looking to have fun while saving some money, you can find some fun activities to do in the area you live in instead of dropping money on expensive airline tickets.

A staycation includes everything you would do on an actual vacation like taking time off work to relax and unwind and spending time with family and friends.

Closing Thoughts

Saving money can be intimidating at first but with a little perseverance and discipline, it can become a life habit. Each person has different goals when it comes to saving and it is up to you to decide where you can cut costs to make the most of your income.

While saving is important don’t forget to indulge in experiences once in a while because at the end of the day it is the experiences that you will remember not the materialistic comforts.

10 Common Mistakes While Investing in Mutual Funds

Mutual Fund investment is the talk of the town. These days, many people who earlier used to invest in the traditional saving schemes like PPF and FD are showing more interest in investing in Mutual Fund.

Ideally, if you don’t have a good knowledge of analyzing the security market, instead of directly investing in stocks, buying through Mutual Funds is a lot safer and more convenient. For the middle-class Indians, Mutual Fund investing is a wonderful way of fulfilling their desired goals. You can even start investing with as low as Rs 500 per month.

Irrespective of these advantages, there are many people- especially novice investors, who make a plethora of mistakes investing in Mutual Funds. In this post, we are going to discuss ten of the most common mistakes while investing in mutual funds.

10 Common mistakes while investing in mutual funds

Here are some of the general mistakes which you should avoid while investing in Mutual Funds:

1. Not defining any goal: You should clearly define your financial goals before you jump into Mutual Funds. One requires specifying his/her short and long term goals before deciding over the investment portfolio. If you are planning to go for a tour abroad after a year from now, investing in a Debt Fund seems more appropriate. On the other hand, if you wish to retire after 30 years from today, you should set up your SIPs in an Equity Fund to have a large corpus in hand during your retirement.

2. Not researching the fund properly before investing: Investing in the financial market makes no sense if you haven’t done proper research. Before investing in a Mutual Fund scheme, you need to know its fund type, exit load, historical returns, asset size, expense ratio, etc. You need to have a clear idea about your own risk-return profile before you invest your savings in some scheme. This article can provide you with the necessary guidance regarding making the selection of the right Mutual Fund.

3.  Reacting to short term market fluctuations: There are many investors who get scared when the market witnesses a bearish trend. You need to understand that Mutual Fund investing is basically meant for generating long term wealth. So, you should not react to any sharp correction in the market or short term volatility. Moreover, you should refrain from blindly following the stock market analysts and business channels on television. If you don’t keep yourself away from the noise, your chances of making larger returns from Mutual Funds will decrease.

4. Not having a long-term mindset: People generally invest in the Equity Funds to make huge money. Equity Funds can only generate long term wealth if you stay invested for a substantially long period of time. Many people sell their funds losing their enthusiasm and patience after suffering from short term losses. This doesn’t make any sense if you are aiming for quick money from an Equity Fund scheme.

mutual fund memes

5. Waiting for the perfect time to start investing: I have recently talked to some friend, to whom I had explained about Mutual Fund investing a year back. I was taken aback knowing that he is yet to start investing. He still couldn’t commence investing because he has been looking for the perfect time to invest. I must tell you that when it comes to investing, you should never think of timing the market. Timing the market is important only when you look to trade, and not invest. The market goes through several ups and down in order to reach to point B from point A over a significant period of time.

6. Not having an emergency fund: Many investors invest their entire savings in the Mutual Funds at one go. Therefore, it goes without saying that they don’t have sufficient money for meeting emergencies like medical expenses. So, for paying such expenses, they have no option but redeeming their units and end up paying exit load. Exit load is one type of charge which is levied by a Mutual Fund company if you redeem any units within a specific period of time from the date of investment.

7. Inadequate investment amount: In case of Mutual Fund investing, you should increase your SIPs in accordance with the growth in your income. Many investors don’t understand the importance of this. Therefore, their SIPs remain the same over time and fail to generate their desired wealth in the long run. Moreover, the inflation rate goes up with time. So, this is also a reason that one should step up his/her SIPs with time to achieve the desired corpus.

8. The dilemma of dividend funds: You will find many people opting for Dividend based Mutual Funds. This is to be noted that the dividends from a Mutual Fund are paid to the investors out of that fund’s AUM. This results in decreasing the NAV of the units of such Mutual Fund. Mutual Funds work best only if you stay invested for a significant term and let the power of compounding play its role. So, if you invest in a growth plan instead of a dividend plan, the amount which you are not going to receive as the dividend is reinvested in the market. This results in creating more wealth in the future as compared to the earlier plan.

9. Not diversifying your mutual fund portfolio enough: When an investor invests in too many schemes of a particular type, he/she thinks that diversification is achieved. You should understand that each Mutual Fund scheme is a portfolio of diversified securities in itself. Therefore, investing in multiple schemes of a specific nature results in nothing but portfolio overlapping at a higher expense ratio. Instead of opting for it, investing in 2 or 3 schemes to the maximum helps in achieving the benefit of diversification.

10. Not monitoring your fund’s performances periodically: Among the investors who invest in the market regularly, only a few them track their investments periodically. If you review the performance of your portfolio timely, it would keep you aligned with your financial goals. Lack of periodic evaluation of funds results in keeping your portfolio filled with junk investments which keep pulling your mean portfolio returns down.

Also read:

Closing thoughts

AMFI came out with the campaign “Mutual Funds Sahi Hai” two years back. This four words campaign means that Mutual Funds are good in all respects. The main objective of this campaign was to create awareness among the Indians regarding Mutual Funds and bring more investors in the stock market.

However, it doesn’t mean that you can invest in any Mutual Fund scheme blindly. You must have heard this famous dialogue, “Mutual fund investments are subject to market risksPlease read all scheme-related documents carefully before investing.” Mutual Funds investments don’t guarantee a fixed return. You need to go through all relevant documents and analyze the key aspects of a scheme, before investing in the same.

In this post, we tried to cover some major mistakes which a plenty of investors make while investing in Mutual Funds. If you prevent yourself from committing these mistakes, we hope that you would become a better investor in the long run. Happy Investing!

What is Private Equity? And how does it work?

Whether its buying ice-cream at Cold Stone or filling gas at a Shell petrol station, a large proportion of companies that we consume goods and services from is backed by a private-equity firm. This makes private equity a favorable investment option for many people. In this article, we will explore how private equities work and how they can benefit private companies.

What is a private equity firm?

To put it into simple terms, private equity is a part of the much larger finance sector known as private markets. It is a type of financing, whereby, capital is invested by the investor, usually into a large business in return for equity in the company. They are termed private because the stocks in the company are not traded in a public equity market (i.e. stock exchanges).

The private equity firm will then raise capital for the private companies they buy equity in, to fund the new projects, pay off existing private debt or raise capital for mergers and acquisitions. The funding for private equity firms comes from institutional investors such as large banks or insurance companies. For example, in 2017, during Lyft’s series G funding, they raised $600 million from private equity firms. This increased the company’s valuation from $5.5 billion to $7.5 billion.

Private equity firms are funded by pension funds, labor unions, foundations and many other powerful organizations who invest large sums of money in the hopes of receiving a large return on their big investment. Due to the hefty investments, private equities often have a large control over the industry of the companies they invest in. They invest in companies and manage and improve their operations and revenue over a period of time. Once the private equity has improved the investment value of the company, it can do one of two things. The company can issue an Initial Public Offering (IPO) to go public or it can be sold to a larger corporation at a profitable price.

Between 2000 and 2006, all private equity buyouts worth over $1 billion rose from $28 billion to $502 billion and has been at a steady upward growth since. There is no denying that is an incredibly prosperous business in the finance sector.

Here is the list of the largest private equity firms by PE capital raised:

Largest private equity firms by PE capital raised-min

(Source: Wikipedia)

What do private equity investors do?

Private equity investors have a versatile and powerful job and it is a profession that attracts the brightest and smartest people in the corporate world. The job of a private equity investor can be focused on three important tasks:

— Raise capital from large entities

Just as private companies raise money from private equity firms, private equity firms also go through rounds of funding to raise capital from large institutional investors. Sometimes, the owners of the private equity put in their own capital but this is no more than 1-5%. When raising capital, private equity firms prefer large companies that invest 10-100 million dollars each vs. many small companies that invest money in the thousands.

There are two time periods when a private equity raises funding. ‘First close’ means that the company has raised the required amount of money but new investors can still join the equity for a short period of time. The ‘Final close’ is when the private equity is done raising capital and no new investors can join.

— Buying out private companies

The main function of a private equity is to invest in private companies in both single or multiple sectors. Therefore, a large part of a private equity investor’s job is to source out potential companies, perform extensive research on why the company would be a good investment and finally implement a plan of action to acquire the company.

Prospective deals on companies usually come as a result of a partner’s reputation in the industry or from the in an auction conducted by investment banks where equity firms raise bids for a company and in each round of bidding, companies are rejected from the race. The bidding process happens for companies that have a very high potential for growth.

Once the potential companies are sourced, the private equity investor will perform the due diligence to acquire the company.

— Improve the investment value of the acquired company

Once equity in the company has been acquired, it is the duty of the private equity investors to improve operations and increase revenue in the company. The investors are not in charge of the day-to-day running of the company, rather, they take seats on the company’s board and provide advice and support on the strategies and operations management of the company.

The level of involvement by the investor can vary depending on how big their stake in the company is. If they own a large stake, they will have a significant influence on how the company is run and will be more involved in improving the workflow of the company.

The end goal of the investor is to exit the portfolio company once the investment value of the company has improved. This exit may happen 3-7 years after the company has been bought.  The investors gain value in holding this investment through the revenue gained during the investment period, the reduction in costs as a result of streamlining the process and the revenue earned from selling the company which is used to pay off the debt incurred when the company was originally purchased.

Once the company’s revenue has been optimized the investors will either issue an IPO or sell it to a larger corporation.

Private Equity Strategies

Here are three commonly used private equity strategies:

— Growth capital

These are investments made in well-established companies who are looking for capital to expand their current operations or to expand their target markets. These investments are usually a minority investment by the private equity firm. The mature companies they invest in are looking to expand operations without affecting the ownership in the business.

— Leveraged buyouts

This is when a private equity firm borrows a large amount of capital to buyout other companies because they believe that they will get a significant return when they hold and eventually sell the company. Almost 90% of the LBO is financed through debt. Once the company is acquired, the private equity will either sell parts of the company or will improve the investment value of the company and exit at a profit.

— Fund of funds

A FOF strategy is when the private equity invests in various other funds and not directly into stocks and securities. Using this strategy provides a more diversified portfolio for the private equity and the ability to hedge the risk during the different stages of funding. On the downside, investing in funds of funds is expensive as there are additional fees involved such as the management fee and the performance fee.

Conclusion

A private equity investment is great for businesses that are looking to grow and expand their operations. The investors bring a lot of knowledge and experience to the table that can improve the company’s value and revenue and help leverage its position in both local or international markets.

3 Past Biggest Scams That Shook Indian Stock Market

Do you know that if you had invested Rs 100 in the Sensex in 1979, your corpus would have become over Rs 30,000 by the end of 2017?

There is no doubt in saying that the Indian stock market has yielded enormous returns to the investors in the last few decades. However, there were also times, when the market witnessed extreme malpractices carried out by a few wicked minds. Many people with foul intentions applied brainstorming techniques to manipulate the Indian stock market prices. You can have a look at this blog to understand a few common types of scams in the Indian stock market.

In simple words, a scam is referred to as the process of obtaining money from someone by deceiving him/her. The majority of the securities market scams that took place in India eventually led to a lot of financial distress to the retail investors. They adversely affected the normal functioning of the markets and degraded the trusts of lakhs of investors on the Indian share market.

3 Past Biggest Scams That Shook Indian Stock Market

Although there are hundreds of scams reported by the equity investors every year, let us have a brief study of three of the past biggest scams that shook the Indian share market.

1) Harshad Mehta Scam

During the early 1990s, Harshad Mehta, a stockbroker, started facilitating transactions of ready forward deals among the Indian banks, acting as an intermediary. In this process, he used to raise funds from the banks and subsequently illegally invest the same in the stocks listed in the Bombay Stock Exchange to inflate the stock prices artificially.

harshad mehta scamBecause of this malpractice, the Sensex moved upwards at a fast pace and reached 4,500 points in no time. The retail investors started feeling tempted seeing the sudden rise of the market. A huge number of investors started investing their money in the stock market to make quick money.

During the period from April 1991 to May 1992, it is estimated that around five thousand crore rupees were diverted by Harshad Mehta from the Indian banking sector to the Bombay stock exchange. After the fraud was revealed, the Indian stock market crashed consequently. And as guessed, Harshad was not in a position to repay crores of money to the Indian banks.

Conclusively, Harshad Mehta was sentenced to jail for 9 years by the honorable court and was also banned to carry out any share trading activity in his lifetime.

(Credits: Finnovationz)

2) Ketan Parekh Scam

ketan parekh

After the Harshad Mehta scam, a Chartered Accountant named “Ketan Parekh” had similar plans of arranging comparable securities scam. Coincidently, Ketan used to work as a trainee under Harshad Mehta earlier and hence also known as the heir of Harshad Mehta’s scam technique.

However, Ketan Parekh not only used to procure funds from the banks but also other financial institutions. Like Harshad Mehta, he also used to inflate the stock prices artificially. Apart from the Bombay Stock Exchange, the other stock markets where Ketan Parekh actively operated were the Calcutta Stock Exchange and the Allahabad Stock Exchange.

Nonetheless, Parekh used to deal mostly in ten specific stocks, also known as the K-10 stocks. He applied the concept of circular trading for inflating their stock prices. You might be surprised to know that even the promoters of some companies paid him to boost their stock prices in the market. Anyways, after the Union budget in 2001 was announced, the Sensex crashed by 176 points. The Government of India carried out an intensive investigation into this matter.

At last, it was the Central Bank who determined Ketan Parekh to be the mastermind behind this scam and he was barred from trading in the Indian stock exchanges till 2017.

3) Satyam Scam

satyam ramalinga rajuThe Chairman of  Satyam Computer Services Limited (SCSL), Mr. Ramalinga Raju confessed to SEBI of the manipulation done by him in the accounts of the Company. This corporate scandal was carried on from 2003 till 2008. It is estimated that the fraud took place for around Rs five thousand crores of cash balances as the company by falsifying revenues, margins.

The stock price of Satyam fell drastically after this incident. Eventually, CBI took charge of conducting the investigation into the matter. They filed three partial charge sheets against Satyam. Subsequently, these three partial charges were merged into one charge sheet.

In April 2009, Raju and nine others involved in the fraud were sentenced to jail by the honorable court. Consequently, Mahindra Group acquired SCSL and it was renamed as Mahindra Satyam. It subsequently merged within Tech Mahindra in 2013.

BONUS

Apart from the above-mentioned scams, here are a few other famous corporate scandals which also deserve to be mentioned in this post.

1) Saradha Scam

Sudipta Sen, the Chairman of the Chit-fund company called Saradha Group, operated a plethora of investment schemes. The schemes were called the Ponzi schemes and did not use any proper investment model. This scheme is alleged to have cheated over a million investors.

The Saradha Group collected huge funds from the innocent investors in West Bengal, Assam, Jharkhand, and Odisha. The money collected was used to be invested in real estates, media industry, Bengali film production houses and many more. The Saradha scam came to the fore in April 2013 when Sudipta Sen fled leaving behind an 18-page letter.

Although the Saradha scam didn’t have any direct impact on the Indian stock market, it had an indirect impact on the stock exchange. The Foreign Institutional Investors (FII) took a step back seeing such unregulated Ponzi schemes being floated in the market.

2) NSEL Scam

National Spot Exchange Ltd (NSEL) is a company which was promoted by Financial Technologies Indian Ltd and the NAFE. Two individuals named Jignesh Shah and Shreekant Javalgekar were held guilty for this scam. The Funds that were procured from the ignorant investors were siphoned off. This is because most of the underlying commodities did not have any existence at all. The transactions of commodities were being carried out only on the paper.

NSEL attracted the attention of the retail investors by offering them fixed returns on paired contracts in commodities. Around 300 brokers have been alleged role in the ₹5,500-crore NSEL scam in 2013.

Also read: NSEL scam: 300 brokers face criminal action

Closing Thoughts

Securities and Exchange Board of India (SEBI) was established in India in the early 1990s to administer and regulate the functioning of the Indian securities markets. It is the apex authority which regulates the affairs of Indian securities market participants. If you are a follower of the financial market, you would know the frequent amendments that come every year in the SEBI Act and Regulations.

Although the occurrence of stock market scams and corporate scandals has reduced subsequent to the establishment of SEBI, but haven’t completely stopped.

Additional resources to read:

Are REITS in India a worthy investment option?

In developed Asian countries like Singapore and Hong-Kong, REITs or Real Estate Investment Trust is a popular investment option. However, the concept of REITs in India is yet to gain popularity among the Indians.

In simple words, a REIT is a collective investment scheme just like a Mutual Fund. It is an investment vehicle which pools your savings and invests in the portfolio of income generating properties. REITs are licensed to operate in India by the SEBI.

Structure of REITs

Although REITs are similar to Mutual Funds, they have a three-tier structure. A REIT consists of a Sponsor, a Fund Management Company, and a Trustee.

The sponsor is responsible to set up the REIT while the Fund Management Company selects and operates the real estate portfolio of the same. The Trustee ensures that the investors’ money is managed in the interest of the latter. Trustees have defined responsibilities which involve complying with all applicable rules and regulations that protect the investors’ rights.

How does REITs work?

A REIT pools money from investors and spends that sum in diverse real estates. It creates a portfolio of real estate assets including Offices, Residential Properties, Hospitals, Restaurants, Hotels, Warehouses, Corporate Buildings, etc.

A REIT is a trust which requires to be registered with a stock exchange. It issues its units via an IPO or Initial Public Offering. These units are consequently traded as securities in the stock exchange.

You can invest in the units of the REIT scheme in a similar way that you invest in shares, either in the primary market or the secondary market. The minimum ticket size of investing in a REIT fixed by the SEBI is Rs 2 lakh.

Now, the next big question is how to make money by REITs?

You can get returns from REITs in the form of dividends. Besides, you can also earn income in the form of capital gains if the REIT makes any profit by selling any of its property.

Quick Note: The minimum assets that a REIT is required to own are fixed at Rs 500 crore by the SEBI. Further, SEBI has made a rule that the minimum issue size has to be less than Rs 250 crore.

Perks of investing in REITs in India

As per SEBI guidelines, REITs are required to pay you at least 90% of their rental incomes every 6 months. Moreover, when REITs dispose of any of their properties, they have to distribute a minimum of 90% of such capital gains to their investors.

The activities of REITs have been also made transparent by the SEBI. A REIT has to compulsorily disclose the full valuation of their investments every year. Further, they are also required to update the same on a half-yearly basis.

Further, REITs are required to invest their money in a minimum of two projects as per SEBI. If a REIT chooses to invest only in 2 projects, it has to mandatorily invest 60% of its assets in a single project.

Besides, REITs have to allocate 80% of their assets in finished and revenue generating projects. They can invest the rest 20% of their money in under construction projects, mortgage-based securities, Government securities, cash & cash equivalents, and many others. 

Should you invest in REITs in India or actual properties?

house

Living in own house is in the bucket list of the majority of the income earning Indians. Moreover, unlike stocks or equity market, the valuations of properties don’t fluctuate drastically. Ideally, the intrinsic value of properties keeps moving upwards and hence, investing in the real estate sector seems an appropriate idea for a majority of Indians.

Furthermore, one can also earn a significant income in the form of rentals by investing in a property. And that’s why, even after owning a house property, many people prefer buying their second or third home for earning income in the form of rental (and of course, capital appreciation over time).

Nonetheless, the ticket size of investing in real estate varies from a few lakhs to over crores which might not be affordable for the major earning population of India. Here, in order to earn a regular income, investing in REITs seems more bearable because of the lower ticket size and diversification benefits.

Overall, if you are looking to invest in the Real Estate sector of India but do not have a huge corpus, REIT seems to be a more appropriate investment option for you.

Also read:

Closing Thoughts

REITs in India provide diversified and secured investment opportunities in the real estate sector. They are managed by professionals having years of experience and expertise who ensure to provide maximum returns to the investors at reduced risks.

By now, although investing in real estate seems profitable, but it is not free from limitations.

Firstly, no doubt, it is a profitable investment alternative for creating huge wealth but, it is only affordable for the upper-middle-class families and the affluent people. Second, both capital appreciation and rental income from properties depend on a lot of factors like infrastructure, location, industrial development, which may not always be in favor of investors.

Third, the Real estate in India has been affected by liquidity crunch in the past owing to low demand and unsold inventory. And lastly, although the Indian real estate sector is functioning under the regulations of SEBI, becoming an organized industry is still a distant future.

10 Best Dividend Stocks in India That Will Make Your Portfolio Rich.

10 Best Dividend Stocks in India (Updated: May 2019)

“Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.” – John D Rockefeller

Whenever a retail investor, like you and me, buys a stock, then their main aim is to earn money through their investment. There are two methods by which anyone can earn money by investing in stocks. They are:

  1. Capital Appreciation
  2. Dividends

The first one, capital appreciation, is quite famous among investors. Everyone knows this secret to earn in the stock market. Buy low and sell high. The difference is capital appreciation or profit.

Suppose you bought a stock at Rs 100 and two years hence, the price of the stock has increased to Rs 240. Here, the capital appreciation is Rs 240- Rs 100 = Rs 140. In short, you made a profit of Rs 140 or 140%.

Almost everyone who enters the market knows this method of earning by stocks. It can also be concluded that most people enter the market hoping that their investment will be doubled or quadrupled and will make them a millionaire one day through capital appreciation.

Now, let us move to the second method of earning through stocks- DIVIDENDS.

Whenever a company is for profit, it can use this profit amount in different ways. First, it can use the profit amount in its expansion like acquiring a new property, starting a new venture/project, etc. Second, it can distribute the profit among its owners and shareholders. Third and final, it can distribute some portion of the profit to the shareholders and use the remaining in carrying out its expansion work.

This amount distributed among the shareholders is called DIVIDEND.

What is a dividend?

“A dividend is a distribution of a portion of a company’s earnings, decided by the board of directors, to a class of its shareholders. Dividends can be issued as cash payments, as shares of stock, or other property.”

Typically, most companies give dividends two times a year, namelyInterim dividend and final dividend. However, this is not a hard and fast rule. Few companies, like MRF, gives dividends three times a year.

Read more: Dividend Dates Explained – Must Know Dates for Investors

Why are dividends good?

Suppose you are a long-term investor. You have invested in the stocks of a company for 15-20 years. Now, if the company does not give any dividends, there is no way for you to make money until you sell the stocks.

On the other hand, if the company gives a regular dividend, say 4% a year, then you can plan your expenses accordingly.

A regular dividend is a sign of a healthy company. 

A company, which has given a consistent (moreover growing) dividend for an interval of over 10 consecutive years, can be considered a financially strong company. On the contrary, the companies that give irregular dividends (or skips dividends in harsh economic conditions) can not be considered as a financially sound company.

If you want to learn stocks from scratch, I will highly recommend you to read this book: ONE UP ON THE WALL STREET by Peter Lynch- best selling book for stock market beginners.

Big dividend yield can be an incredibly attractive feature of stock for the people planning for retirement.

Now that we have understood the meaning of dividends, let us learn a few of the important financial terms that are frequently used while talking about dividends.

Must know financial terms regarding Dividends

1. Dividend yield: It is the portion of the company earnings decided by the company to distribute to the shareholders. A stock’s dividend yield is calculated as the company’s annual cash dividend per share divided by the current price of the stock and is expressed in annual percentage. It can be distributed quarterly or annually basis and they can issue in the form of cash or stocks.

Dividend Yield = (Dividend per Share) / (Price per Share)*100

For Example, If the share price of a company is Rs 100 and it is giving a dividend of Rs 10, then the dividend yield will be 10%. It totally depends on the investor whether he wants to invest in a high or low dividend yielding company.

2. Dividend %: This is the ratio of the dividend given by the company to the face value of the share.

3. Payout ratio: It is the proportion of earnings paid out as dividends to shareholders, typically expressed as a percentage. The Payout Ratio is calculated as follows:

Payout Ratio = Dividends per Share (DPS) / Earnings per Share (EPS)

As a thumb rule, avoid investing in companies with very high dividend payout ratio. In other words, be cautionary if the payout ratio is greater than 70%. (Also read: The Fundamentals of Stock Market- Must Know Terms)

To move further now that we have understood the basics behind the dividends, here is the list of 10 Best Dividend Stocks in India.

10 Best Dividend Stocks in India-

Indian stocks- 10 Best Dividend Stocks in India

In addition, if you are interested to know about other high dividend stocks, then you can find it here: BSE TOP DIVIDEND STOCKS

The growing companies give less dividend yield to their shareholders as they use the profit amount in their expansion.

On the other hand, the Blue Chip stocks, which are large and established company and has already reached a saturation point, gives good regular dividends. Further, the public sector companies are known for giving good dividends. Industries like Oil and petroleum companies, in general, give decent dividends.

Here are few of such stocks with high current dividend yields which are also worth investing:

10 Best Dividend Stocks in India That Will Make Your Portfolio Rich - Indian stocks

Also Read: PSUs with high dividend yields

Where to find dividend on a stock?

You can find the dividend of stocks on any of the major financial websites in India. Here are few:

  1. Money Control: http://www.moneycontrol.com/
  2. Economic times- Market: http://economictimes.indiatimes.com/markets
  3. Screener: https://www.screener.in/
  4. Investing.com: https://in.investing.com/
  5. Market Mojo: https://www.marketsmojo.com/markets

Top Dividend Paying Indian Stocks in 2017 quote

That’s all. I hope this post about ‘10 Best Dividend Stocks in India That Will Make Your Portfolio Richis useful to the readers. Further, I will highly recommend not investing in stocks based on just high dividend yield.

New to stocks and confused where to start? Here’s an amazing online course for the newbie investors: INVESTING IN STOCKS- THE COMPLETE COURSE FOR BEGINNERS. Enroll now and start your stock market journey today!

If you have any queries or suggestions, feel free to comment below. I will be happy to receive your feedback. #HappyInvesting.

Equity Valuation 102: What is Value?

What is the ‘Intrinsic Value’ of a Stock? What are its components? How do they affect the way the company’s Stock is likely to behave? We will attempt to answer these seemingly daunting questions in simple terms and with relevant, real-world examples.

Intrinsic Value – What is it Anyway?

I personally rely exclusively on Discounted Cash Flow / Dividend Discounting sort of models to estimate the intrinsic value of stocks. The world’s foremost authority on Discounted Cash Flows, is in my opinion, none other than Mr. Warren Buffett, the billionaire investor and the Chairman of the half-a-trillion-dollar entity that is Berkshire Hathaway. He’s as good a teacher as he is an investor.

Sure enough, Mr. Buffett has talked about ‘Intrinsic Value’ in a number of places. In one of those interviews, he put in candidly:

To value something, you simply have to take its free cash flows from now until kingdom come and then discount them back to the present using an appropriate discount rate. If we could see in looking at any business what its future cash flows would be for the next 100 years, and discount that back at an appropriate interest rate, that would give us a number for intrinsic value. It would be like looking at a bond that had a bunch of coupons on it that was due in a hundred years. Businesses have coupons too, the only problem is that they’re not printed on the instrument and it’s up to the investor to try to estimate what those coupons are going to be over time.

— Warren Buffett.

Think about what he’s trying to say. In a Government Bond, you have pre-determined cash flows (Coupon Payments and Principal Repayment), a time period in which the cash flows will be credited to your bank account (Maturity) and a Risk-free Rate, which allows you to account for the Time Value of Money.

Now consider a Stock. How is it different from a Government Bond? You still have Cash Flows (Dividends and/or Free Cash Flow to Equity), but they’re not pre-determined. Businesses do not produce results in a straight line. You do have a time period, but it’s generally very long. In other words, this will be the entire Business Life Cycle of a company.

You also have a Discounting Rate, which is usually the Risk-free Rate + a Risk Premium you charge to account for the fluctuation in the results (Fluctuation which does not exist in a Government Bond). That’s it. These are the differences. So, if you are in agreement that a Bond should be valued at the Present Value of all its Coupons and Face Value, you should have no qualms in accepting that a Stock should be valued in a similar fashion too — except, it takes more time to value a Stock than it does a Government Bond.

Components of Intrinsic Value

I personally believe that the intrinsic value of a company (And consequently, its Stock) is composed of the following six components:

Without further ado, let’s take a look into each of them and why I think they matter when it comes to Value.

1. Explicit Drivers

Explicit Divers of Value are those factors which are readily considered by amateur investors while investing in a stock. In fact, most Analysts trying to sell their reports highlight the ‘Explicit Drivers’ the most, because they are easily understandable by the common man.

Management Teams also mostly flaunt their Explicit Drivers in order to boost their rapport with the shareholders. It’s made up of two sub-components: Growth and Margins.

Growth

The easiest of all the drivers. We know for a fact that as a company sells more of its products and services, the more it is known and the more revenue it produces. While thinking about how a company can grow, it has to be tied to reality.

For example, a while back I valued D-Mart, the famous Indian retail chain. In it, I had assumed that the company will grow its Revenues at the rate of 35% in the initial years, and dropping to 25% for the farther years. Here is how I attempted to ‘justify’ my assumptions.

I took the Invested Capital of D-Mart from 2009-2018 and used it to calculate Capital Required per Store, based on the CEO’s comment that D-Mart had been growing at a pace of 10 stores per year. I also calculated the Growth in the Cost of Acquisition per store for the period.

This allowed me to project the Capital Invested per store from 2019-2028. Then, working backwards with this information and my own assumptions of Invested Capital, I calculated that from 2019-2028, D-Mart will grow at an average of 19 stores per year. This coincides with the CEO’s vision of boosting D-Mart growth from 10-ish to 15-20-ish in the next decade or so. Hence, my set of assumptions for Sales Growth stood justified.

avenue supermart income statement-min

Dmart Income Statement (Source: Screener)

However, not all growth is good. Sustainable Growth Rate is the rate at which a company can grow its Revenue without resorting to raising additional capital, which is detrimental to Shareholders. Therefore while valuing a company, it is advisable to restrict oneself to the SGR, unless there’s a very good reason that the company’s products will suddenly become more desirable.

Margins

This refers to the Net Margins of a company. Prof. Sanjay Bakshi often quips that the best kind of value creation happens with a ‘Margin Expansion’ i.e. when a company is able to charge more from the customer for the same kind of products or services they have been selling for so long.

Warren Buffet also claims that the best measure of a Durable Competitive Advantage is to ask whether the company will be able to raise prices tomorrow without affecting sales. Of course, it is also not hard to imagine how a company can save more on its Margins by simply being cost-efficient.

Clearly, a steady or increasing Net Margins is a favorable feature in a company. As Prof. Bakshi was so apt to note, indeed Margins contribute a whole lot to Value creation. One only needs to look at some of the biggest Multi-baggers to realize this truth (Say, Symphony, Eicher Motors etc).

But this means that the opposite is also true. Take the case of Lupin, for instance. In the last five years, Lupin’s Sales has grown by 10.38%, but its Profits have decreased by 26% and change. This is because their Net Margins have fallen from 18% to 1% in the same period. In fact, Lupin has created very little value for someone who bought its stock 5 years back. It’s currently trading at almost the same level as it was half a decade back.

avenue supermart income statement-min

Lupin Income Statement (Source: Screener)

So while attempting to value a company, one has to ask the question “Will this company be able to charge more prices for the same kind of product/service in the future?” or “Will this company be able to spend less for producing the same kind of product/service in the future?” and depending on the answer (Based on research and groundwork), the Margin assumptions can be made.

2. Implicit Drivers

Implicit Drivers are those factors which are considered in line with the Explicit Drivers by good investors. They know for a fact that the Explicit Drivers are superficial if the Implicit Drivers are not up to the mark. Reinvestment and Risk are the two Implicit Drivers of a Stock’s Value.

Reinvestment

Remember earlier when I said ‘All growth is not good’? While a part of it has to do with the concept of the SGR, a bigger part of it lies with the concept of ‘Reinvestment’ or the amount of Assets a company has to reinvest to a certain level of growth.

Let me provide you with two investment opportunities. Company A, which may produce Rs. 100 in Profit, but has to reinvest Rs. 50 in order to end up with that profit. Company B, which may produce Rs. 10 in Profit, but has to reinvest Rs. 3 in order to end up with that profit. If you are a smart investor, you will choose Company B, because they are more productive, that is to say, they only require 30% of their profits to be ‘reinvested’, while Company A requires 50% of their profits.

The efficiency is Reinvestment is usually measured via the Return Ratios (Return on Capital Employed, Return on Invested Capital, Return on Equity).

Charlie Munger, Warren Buffet’s investing partner, loves companies with massive Returns on Invested Capital. It is almost guaranteed that for a stock to grow multi-fold, the company has to temporarily or permanently boost their productivity.

On the other hand, look at any company in a flailing industry (Say, Telecom) and you will realize that they haven’t created any value in the last decade because they found it more and more difficult to retain customers without investing in advertising or some sort of new technology.

Bharti Airtel has grown its Sales by 10% over the last decade, yet it has destroyed value for its shareholders over the same time (Imagine having to hold a stock for 10 years, only to end up with a loss). In fact, it took a massive disruption in Jio to make the entire industry re-think how they can invest better to create value.

Risk

Risk is very personal and it’s not quite easy to explain. In fact, I wrote an entire blog post attempting to explain the fact, but I am pretty sure I didn’t even scratch the surface with understanding Risk. Without getting into complex monsters such as the Capital Asset Pricing Model or the Fama-French Five-Factor Model, the most logical definition of ‘Risk’ is an opportunity foregone.

In Finance, ‘Risk’ is usually measured as an interest rate (Termed the ‘Discounting Rate’), because the Time Value of Money demands that we do. So when it comes to investing in stocks, one needs to ask “If I do not invest in this stock, what is my next best investing option and how much am I likely to earn from investing in that option over the long term?”

I personally use a Discounting Rate of 15% for most of my valuations, because that is the median long term returns on Mutual Funds investments in India (The actual figure is 14.88% if you are curious). So my ‘next best option’ to investing in any stock is investing in a Mutual Fund scheme.

This is where it gets ‘personal’. Some people may not consider investing in a Mutual Fund as their next best option. For a Hedge Fund specializing in Start-ups, 15% may be chump change, so they may demand anywhere between 50–60% on their investments.

At the same time, for a retired pensioner, even an 8% return from a Post Office scheme would look amazing. However, even a retired pensioner can invest in an index fund and earn close to 12–13% over the long term (In India). So it’s not wise for anyone to demand anything lesser than the long term index returns in their country (For instance, in the US, it is about 8–9%). But some academics consider the Risk-free Rate (Usually the 10-year local Government Bond yield) as the true Discounting Rate for any valuation.

3. Hidden Drivers

These are Value Drivers which can be ascertained only by master investors. They aren’t found in Management Commentary, Financial Statements or Analyst Reports. They require additional research to be uncovered.

Redundant Assets

These are mostly Real Estate or some sort of Patent/Right held by the company, which has been long since written off from the books. However, if they were actually sold in the market, they might fetch a fortune for the shareholders of the company.

In the Indian context, Wonderla would be a good example. The company is currently trading at about Rs. 1550 Crores, but the company has unused land parcels of around Rs. 1000 Crores. Of course, this doesn’t mean that the company automatically demands supreme valuation. It simply means that if an investor finds the company’s intrinsic value to be Rs. 600 Crores only, he can go ahead and purchase the stock, because the intrinsic value is actually Rs. 1600 Crores, thanks to the ‘Redundant Asset’ in unused land.

But finding this bare fact isn’t really useful all the time. Take the case of Binny Mills.

Binny Limited, the listed entity which holds Binny Mills, also holds several land parcels and real estate (Mills) in Chennai. But they hold these properties in North Chennai, which is crowded and used to be a trading hub decades back (When ‘street shopping’ was famous). Nobody wants these properties, because of them being located in an archaic trading community. If it was possible to sell these off, some rich investor would have bought out Binny Mills and sold it for parts. thereby netting himself a cool profit via a Special Dividend. The fact that this hasn’t happened tells us the follies of betting on companies simply because the company has a hidden “land bank”.

Competitive Advantage Period

I saved the best for the last. This relates to the most sought-after four-letter magic word in investing: Moat. Before giving my views on this, you should check out Michael Mauboussin’s paper on this topic. It’s bloody brilliant.

It is economic truth that if a specific kind of business is profitable, competitors will emerge to get their own piece of the pie. ‘CAP’ measures how long a company can fend off the competitors, while keeping most of the pie for themselves. This is often too difficult to measure or even see, because the beauty of a good moat is realized over very long time periods. Left unattended, some competitors will breach the moat and run off with a piece of the pie. Let unattended for a long time, the moat will dry up and the survival of the company itself will become a concern.

Once again in the Indian context, I think Eveready Industries would be a great example. Post its initial success as a battery-maker, Eveready’s profits started to dwindle from 2007–2012. But the company still had an amazing ‘Moat’—the brand name, which is known to almost every Indian who’s ever used battery-run appliances. Post 2012, the new management levered the brand name into several new divisions, especially the consumer electronics space, where their products have picked up with little to no investment, thanks to the company’s brand name. The profits in the last 5 years have ballooned at an amazing pace of 56% and more. One could argue that Eveready Industries’ CAP has been lengthened dramatically, which led to the sudden spike in their stock price.

I usually use a 10–20 year projection period, based on a company having no moat, having a thin moat or having a massive moat. The truth stands that very good moats can make companies have CAPs in excess of 20 years (Think Coca-Cola).

However, the Time Value of Money will make sure that profits earned 100 years from now aren’t as important as the ones earned, say, 15 years from now. I still adjust for this by demanding a lesser Margin of Safety for companies that have a proven operating model and a Moat.

In the end, this is just the theory behind why I do what I do when I Value a company. To put it lightly, Value is a marriage of numbers and stories. One cannot do without the other. Only when these ‘stories’ are grounded in reality using ‘numbers’, does the Valuation get complete?

Micro vs Macro Economics -What’s the Difference?

Economics is the study of how humans use limited resources (land, labor, capital and enterprise) to manufacture goods and services and satisfy their unlimited needs and distribute it among themselves. It is divided into two broad branches, microeconomics and macroeconomics.

Each branch has its own policies and regulations relating to different sectors such as agriculture, labor market and the government. Microeconomics is the study of the behavior of an individual, firm or household in the market while macroeconomics is the study of the economy as a whole- that is, the individuals, households and firms collectively.

What is Microeconomics?

Microeconomics was first introduced by the economist Adam Smith and is the study of the economy at a lower level, it is commonly termed the ‘bottom-up’ approach. This branch of economics focuses on how decisions made by people and organizations can affect the economy as a whole. As individuals, we make numerous decisions everyday from what clothes to wear to what food to eat. These decisions are made by the different agents in the economy and serve as the basis for microeconomists to study how they affect supply and demand and ultimately the economy as a whole.

Tools such as supply, demand, consumer behavior, spending and purchasing power of people are used by economists to build models that they base their learnings on, one such model is the supply and demand curve. By understanding the buying and spending habits of people, economists come up with various theories to understand relationships between different elements and how these small parts fit into the larger picture.

However, in the real world, things are different and cannot always be represented through a model. Hence some economists study subsets of microeconomics such as human behavior which is the actions taken by an individual when making a decision and the behavioral model which uses disciplines such as psychology and sociology to understand how people make decisions.

Since microeconomics is the study of the economy at a lower level, many people use it as a starting point for learning economics. The theories used in microeconomics are then used to study the economy at a larger scale- also known as macroeconomics.

Also read: What is Top Down and Bottom Up approach in stock investing?

What is Macroeconomics?

While microeconomics is a bottom-up approach, macroeconomics is considered a top-down approach as it is the study of the economy on a larger scale. Prior to 1929, many economists only studied microeconomics (people’s individual decisions) however after the crash of 1929 (aka the great depression), many economists were unable to explain its cause. They found that there were forces in the economy, which based on people’s decisions, could have a positive and negative impact. In addition to looking at individual decisions, it was also important to look at the big picture.

Macroeconomics is the study of larger issues affecting the economy such as economic growth, unemployment, trade, inflation, recessions and how decisions made by the government can affect the economy. For example, the Central Bank creates their interest rate policies based on the macroeconomic conditions in the country and around the world.

John Maynard Keynes is considered the founding father of Macroeconomics and his understanding of the subject was largely influenced by the Great Depression. During the 1930s Keynes wrote an essay titled The General Theory of Employment, Interest and Money where he outlined the broad principles of Macroeconomics that led to the development of Keynesian economics. Keynesian economics are macroeconomic theories about how during a recession, in the short run, the output is influenced by the aggregate demand in the economy. Milton Freidman another pioneer of macroeconomics used monetary policy to explain the reasons for the depression.

Micro vs Macro Economics -The key differences

micro vs macro economics big picture-min

As mentioned earlier, microeconomics is the study of individual and household decisions and the issues they face. This could be analyzing the demand for a certain good or service and how this affects the production levels of a company. It could also be the study of effects of certain regulations on a business.

While macroeconomics is the study of the economy as a whole. This involves looking at the gross domestic product (GDP) of the economy, the unemployment rates and the effects of inflation, deflation and monetary policy. For example, they may look at how an increase in taxes can affect the economy using the GDP, national income and inflation rate as a metric rather than individual factors.

Microeconomics is useful for determining the prices of goods and services in the economy along with the costs of the factors of production (land, labor, capital) while macroeconomics helps maintain price stability and creates policy to resolve problems dealing with unemployment, inflation and deflation.

However, both micro and macroeconomics come with their limitations. For example, the study of microeconomics assumes that there is full employment in the economy. This can lead to unrealistic theories as this is never true. In macroeconomics, there is a fallacy of composition where economists assume that what is true for an individual is true for the economy as a whole. However, in the real world, the aggregate factors may not be true for individuals too.

Micro and macroeconomics are interlinked

By definition, microeconomics and macroeconomics cover completely different aspects of the economy and while this is true, the two fields are similar and also interdependent on each other.

When dealing with inflation, many people think of it as a macroeconomic theory as it deals with interest rate and monetary policy. However, inflation is an important part of microeconomics because as inflation raises the prices of goods and services, it reduces the purchasing power that affects many individuals and businesses in the economy. Like inflation, government reforms such as minimum wage and tax rates have large implications in microeconomics.

Another similarity in microeconomics is the distribution of the limited resources. Microeconomics studies how the resources are distributed among individuals while macroeconomics studies how they are distributed among groups that consist of individuals.

Also read: How Does The Stock Market Affect The Economy?

Conclusion:

Although micro and macroeconomics affect different levels of the economy and cover different policies, they are in fact two sides of the same coin and often overlap each other. The most important distinction is their approach to the economy. Microeconomics is ‘bottom-up’ and macroeconomics is ‘top-down.’

What are the Different Career Options in Indian Stock Market?

The equity market has opened a lot of career opportunities in recent years. This market is getting bigger day by day and the opportunities for employment in the Stock Market are growing every day. People from all background whether science, commerce or humanities, are showing more and more interests to pursue their career in Stock Market today.

At one hand, many people are opting to become a financial market participant and work independently. On the other, a significant number of Startups are establishing innovative ideas to create disruption in the Indian Securities Market.

In this post, we are going to discuss a few excellent share market career opportunities in India. Let’s get started.

Different Career Options in Indian Stock Market-

Stock Broker

As you might already know, if you want to trade or invest in the Stock Market, you must open a trading and Demat Account. These two accounts are offered by stockbrokers. So, given the largely growing investing population of India, you can easily guess how prospective the career as a Stock Broker could be.

For example, If we take of Mr. Nithin Kamath, the founder of Zerodha (discount broker), he started off his career as an Engineer and subsequently started taking interest in the Stock Market. Later, he found the financial market so fascinating that he switched his profession as an engineer to a Stock Broker. In the year 2018, Zerodha, his stockbroking company was awarded the best discount broker entity in India by NSE.

zerodha kamath

Further, in order to become a Stock Broker or open a stockbroking entity, you don’t require a strict eligibility criterion in terms of academics. Nonetheless, you need to clear NISM exams and get your license from the SEBI. Anyways, if you plan to be a Stock Broker, it is important to gain a practical understanding of the Market. So, it is better to work with a Securities Broker for at least 5 years to gain requisite experience if you are willing to start your own venture.

Next, if you want to get employed in a Stock Broking Firm, you will need to clear 12th standard at the minimum. Graduating in Accounting, Economics or Finance will help you start your career from a decent level. Qualifying Post Graduation is not necessary but it might help in fast promotion in the industry. In case you have qualified professional courses like CFA, CA or FRM, no doubt your career path would become really smooth.

(Note: You can read detailed information regarding making a career as a Stock Market Broker here.)

Financial or Investment Advisor

If you want to start your own consultancy business in the Financial Market, becoming a Financial Advisor or an Investment Advisor is a perspective option.

In recent years, AMFI has been trying hard to bring the income earners in our country to invest in the Mutual Fund industry through their campaign “Mutual fund Sahi hai!”. However, just AMFI is not big enough to educate and convince billions of people in our nation to invest their money in the financial market. As an Investment Advisor, you can reach a plethora of prospective clients.

Preparing customized financial plans, providing consultancy services on wealth management and educating people on financial products can assuredly help you to build a career and make good money in this industry.

To become a Registered Investment Advisor, you will require an education and certification criterion. If you have a graduate degree in Finance/commerce or at least 5 years of work experience with a financial company, you meet the educational criteria. Note that if you are an engineer with just a B.Tech degree, you do not meet the educational criteria by SEBI. Here, you need work experience in the finance field for at least 5 years or a post-graduate degree in finance.

Anyways, if you are a Post Graduate degree in finance, you won’t require any work experience to apply for your license from SEBI. Further, whether you are a Graduate or a Post Graduate, you mandatorily need to clear the NISM Investment Advisory Certification exam to apply for the SEBI registered Investment advisor. Once you meet all the educational and certification criteria, you can apply to SEBI and get your license. (Note: You can read this post to learn further on how to become an Investment advisor in India.)

Besides, completing CA, CFA or CFP will also help you get the required knowledge you need to render professional services to your clients.

Also read: What is SEBI? And What is its role in Financial Market?

investment advisor

Research Analyst

Apart from becoming an investment advisor, Equity Research Analyst is also a lucrative career option nowadays. Let us have a brief understanding of this.

Equity Research includes Buy-Side Research and Sell-Side Research. In the case of the former, the researcher work with a financial service organization which directly invests people’s money in the Stock Market. Here, you need to research the stocks to help the Fund Managers make decisions with respect to managing the available financial assets. In the case of Sell-Side Research, the researchers analyze equities and equity derivatives for the clients who are retail traders and investors.

If you want to start your own business as an independent Research Analyst, the eligibility criteria are similar to Investment Advisory option. Further, if you want to take a job as a Research Analyst, the top financial service entities in India look for candidates who are MBA graduates from Tier 1 institutes. Nonetheless, you can also make a career as a Research Analyst if you have completed CFA or CA. (Note: You can read further regarding Equity Research Analyst profession here.)

Portfolio Management Services (PMS)

If you are a Mutual Fund investor, you might know that your investments are managed by the experienced and skilled Portfolio Managers. The Wealth Management firms operating in India handle clients’ money via professionally qualified Fund Managers. Portfolio Management could be an extremely rewarding career if you are good with managing money and have a strong understanding of the Financial Market.

In order to enter this field, you will require professional qualifications like CA, CFA or MBA (Finance). Moreover, if you are a fresher, it is extremely hard to get into this field. Here, you may need experience of at least a decade of working in the Finance domain as you need to grasp the level of maturity of handling assets which amount in crores. Therefore, if you are considering to become a Portfolio Manager, you may first start working in the marketing and research for 5 to 10 years. (Note: Here is a blog that can answer your additional questions on the career as a Portfolio Manager)

Conclusion

In this article, we tried to cover different career options in Indian stock market. Parting advises- if you are planning to make a living from the Stock Market, you need to have an in-depth understanding of the financial world.

Although possessing academics and professional qualifications are necessary but having practical exposure to how the market exactly works is more important. Besides, whichever stock market career option you choose, having strong communication and analytical skills are always add-on advantages.

What is the Difference Between DVR and Normal Share?

Have you ever heard of DVR shares? In the year 2008, Tata Motors came out with the DVR shares for the first time in India. These DVR shares of Tata Motors trade at a discount of 50% compared to their normal shares. Later, this DVR issue approach of Tata Motors was followed by multiple companies like Jain Irrigation, Future Enterprises, Pantaloons India, etc.

What are DVR Shares?

First of all, many people have a misconception that DVR shares are similar to preferred shares. However, in reality, both these shares are different. Preferred shares usually do not carry voting rights.

On the other hand, DVR shares are similar to normal Equity shares. One notable difference in DVR and normal share is that the DVR equity shares have differential voting rights. A DVR share may have higher or lesser voting rights compared to an ordinary share. Another major difference is that the holders of DVR shares receive a higher dividend than ordinary shareholders.

Although both DVR shares and ordinary shares are traded in a similar way in the stock market, however, DVR shares are traded at a discount as they have generally offer lesser voting rights.

Why companies issue DVR shares?

Issuing DVR shares help the company in raising equity capital without adversely affecting its management and control. In other words, DVR shares result in bringing passive investors in the company’s list of members and can also protect the company from a hostile takeover in some scenarios. Moreover, as these company generally issues DVR shares at a considerably discounted price, this makes such shares attractive to prospective investors. Therefore, it enhances the likelihood of the company to raise a huge equity share capital.

Are DVR Shares good for retailers?

As stated earlier, DVR shares have generally fewer voting rights. However, if you are a retail investor with a small number of shares in a company, this type of share may be suitable as you are more concerned with dividends than voting rights.

Further, as these shares trade at a discounted price compared to the normal share, they may be more attractive for retail investors over normal shares. You can definitely consider investing in DVR shares of a company if you are looking to generate long-term wealth rather than seeking control in the issuer entity.

Also read: Case Study: Tata Motors Vs Maruti Suzuki

Closing Thoughts

The concept of DVR shares looks like an attractive alternative for investors so far. After all, retail investors are more interested in getting dividends than attending Annual general meetings (AGMs). However, the concept of DVR shares is yet not flourishing in the Indian securities market because of a few common reasons.

For example, TATA Motors offer DVR shares, but only with 5% dividend advantage. Therefore, hypothetically, if dividend per ordinary share is Rs 10, the dividend on a DVR share is Rs 10.5.  This makes the investors analyze whether it is worth waiving around 90% of voting rights for receiving a dividend hike of just 5%. (A Tata Motor DVR has 10 percent voting right as compared to an ordinary Tata Motor share).

Further, the majority of Institutional investors are more interested in checking a company rather than enjoying higher dividends. Therefore, financial Institutions show less interest in the DVR shares as they seek participation in managing the affairs of the company.

Overall, although the DVR shares seem to be advantageous for both the issuer company and the shareholders, one simply can’t ignore their shortcomings. Nonetheless, if these cons can be worked upon, the DVR shares can eventually become one of the best financial instruments in the Indian financial market.