Category Archives: Financial Advice

Explained 101: Pros and Cons of Arbitrage Pricing for Financial Instruments

Introduction to Arbitrage Pricing

In the intricate world of markets, the concept of the “invisible hand” by Adam Smith influences how prices shape up. This idea suggests that individuals pursuing their interests guide prices in a free market. This can increase competition, allocate resources efficiently and thus help in economic growth. During such cycles, due to imbalances in demand and supply, certain instruments and similar financial derivatives can experience a mismatch in prices which is generally known as an Arbitrage Opportunity.

Arbitrage is a financial tactic that involves exploiting price differences for identical assets in various markets. The goal is to secure a risk-free profit by capitalizing on these temporary price gaps. Arbitrage is not a mythical concept; it’s a practical force shaping markets. Price variations, whether due to supply and demand, transaction costs, currency exchange rates, or regulations, create windows of opportunity for opportunists.

Market Strategies: Types of Arbitrage

Spatial Arbitrage:

Picture a commodity cheaper in one country and pricier in another. Traders seize this difference, buying low and selling high, aligning market prices. By navigating the price difference between the two geographic locations, the trader exploits spatial arbitrage. This strategic move not only aligns prices across borders but also capitalizes on market inefficiency, demonstrating how spatial arbitrage operates in the real world.

In India, there might be a high demand for gold due to cultural events or festivals, leading to increased prices. Meanwhile, in the UAE, where gold is a significant part of the market, prices may be relatively stable.

Investors often buy gold in the UAE, where it’s more affordable, and then sell it in India, capitalizing on the higher demand and consequently elevated prices. This exploits the spatial arbitrage opportunity, equalizing the gold prices between the two locations and reaping a profit by bridging the geographic gap in pricing dynamics.

Statistical Arbitrage:

Traders use quantitative models to identify pricing inefficiencies in related assets. When these deviate from historical norms, trades are made for expected convergence. From index and volatility arbitrage in financial markets to risk arbitrage in corporate events, arbitrage strategies span diverse areas, ensuring market equilibrium.

Generally, a trader observes arbitrage pricing by analysing a positive correlation between two stocks with similar characteristics and industry, let’s say Company A and Company B. The markets show and expect the prices of both companies to behave similarly until there are any company-specific factors influencing the prices of the shares of these companies. In case of an unexpected event, causing a sudden dip in Company A’s stock while Company B’s stock remains steady, this will create a  divergence from the usual correlation and will present an opportunity for Arbitrage Pricing.

The trader opts to short-sell Company B’s stock, anticipating its decline, while simultaneously purchasing Company A’s stock, expecting an increase in prices. The objective is to gain from the anticipated convergence of stock prices, capitalizing on the temporary departure from historical patterns.

Risk arbitrage / Merger Arbitrage:

This strategy of leveraging the price gap in a company’s stock before and after a merger, acquisition, or significant corporate event. Traders seek to profit from the price fluctuations triggered by the outcome of the event. For instance, if Company A is set to acquire Company B, a risk arbitrageur might buy Company B’s stock before the deal, anticipating its price to rise post-merger, and thereby, making a profit.

The contrary can also be true if a merger or acquisition is expected to be unfavourable for one or multiple parties involved, investors can use the opportunity to take short positions on the stocks of either one or multiple companies to capitalize on the opportunity.

Real-Life Examples

Arbitrage isn’t confined to financial markets; it’s a phenomenon we encounter in our daily lives.

Ticket Scalping refers to buying tickets for events like concerts or sports games and reselling them at a markup. Scalpers exploit the dynamics of supply and demand in the secondary ticket market, capitalizing on price differences, sometimes until the last minute.

Spatial arbitrage comes into play when scalpers sell tickets bought elsewhere at the event venue, where demand is higher and more immediate. A general trend of Ticket Scalping is observed in popular public events such as Cricket Matches, Music Concerts and Other Public Shows like Fashion Galas. The price difference in such situations is mainly caused by an artificial lack of supply caused by hoarding the tickets until the last moment. This also magnifies the effect in the form of artificial demand created due to the Veblen Effect.

The rise of online retailers has given rise to retail arbitrage. Shoppers buy products in physical or online stores and resell them at a profit on platforms like eBay, Shopify, or Amazon. Real estate arbitrage is another intriguing and sometimes controversial form. This involves exploiting price differences in the real estate market, such as buying a property undervalued due to market conditions and selling it when its value increases.

Real estate arbitrage occurs when renting a property is much cheaper than potential earnings on platforms like Airbnb. Landlords can maximize returns by opting for short-term rentals instead of traditional long-term agreements.

Controversy arises when long-term renters try to profit similarly. In tourist areas, landlords may offer long-term leases in the off-season and switch to higher-priced weekly rentals in peak months. Some renters take advantage by subleasing on platforms like Airbnb during the lucrative period.

However, this may be restricted by regulations or rental contracts, and not all landlords approve of such practices. Understanding agreements and regulations is crucial in these situations.

Conclusion

Investors can benefit from arbitrage by smartly identifying and exploiting market inefficiencies, like engaging in risk arbitrage during corporate events or utilizing retail arbitrage in e-commerce. Real estate offers earning potential through short-term rentals. However, caution is essential. Investors must be aware of regulations and adhere to contracts, especially in real estate, where subleasing may breach terms or local rules.

Ethical concerns, like those in ticket scalping, should be considered. Investors need to balance profit motives with ethical implications and legal compliance. Prudent risk management is key. Diversify strategies, conduct thorough due diligence, and stay informed about market dynamics, legal aspects, and societal norms for responsible investing.

While arbitrage offers profit opportunities, investors must navigate carefully. Balancing financial gains with ethics and compliance ensures sustainable and responsible investment practices in the dynamic world of arbitrage.

FAQs

  1. What is an Arbitrage Fund?
    An arbitrage fund is a type of mutual fund that capitalizes on price differentials in financial instruments, exploiting opportunities in various markets. These funds typically seek to benefit from the price variations of assets like stocks, bonds, or derivatives, aiming to generate returns by buying and selling these instruments strategically.
  2. Can somebody lose money in Arbitrage?
    Yes, like any investment strategy, arbitrage carries risks. Market conditions, unexpected events, or regulatory changes can impact the success of arbitrage transactions. While designed to exploit price imbalances for profit, there’s always a possibility of losses. Prudent risk management and understanding the specific market dynamics are crucial to mitigate potential downsides.
  3. Is Arbitrage possible in real life?
    Absolutely. Arbitrage is not limited to financial markets; it occurs in everyday life. Examples include ticket scalping, retail arbitrage in e-commerce, and real estate arbitrage. By leveraging price differences in various scenarios, individuals and businesses can capitalize on arbitrage opportunities outside the traditional financial realm.
  4. Is Arbitrage temporary or permanent?
    Arbitrage is typically temporary. It arises from market inefficiencies or imbalances in supply and demand, and as these disparities are corrected, the arbitrage opportunity diminishes. Investors and arbitrageurs must act swiftly to capitalize on these temporary price differences before the market adjusts, making it a dynamic and time-sensitive strategy.
  5. How is arbitrage calculated?
    Arbitrage calculations involve assessing the potential profit from price discrepancies. In financial markets, it may include comparing the cost of an asset before and after a corporate event. For real estate, it could involve evaluating the difference between renting a property and potential earnings through short-term platforms. The calculation varies based on the specific arbitrage opportunity, requiring a keen understanding of the market dynamics and potential risks involved.

Explained 101: Comprehensive Guide to Inflation Indexed Bonds in India

Introduction

Inflation Indexed Bonds (IIBs) were introduced in India in 1997 as a financial instrument designed to shield investors from the erosive effects of inflation. Issued by the government and backed by its full faith and credit, these bonds provide a hedge against inflation by adjusting both principal and interest payments.

Inflation is a constant concern for investors as it decreases the real value of money over time. The primary purpose of IIBs is to safeguard the purchasing power of investors’ capital by providing a reliable hedge against inflation.

Since their inception, these bonds have gained significant popularity among investors, particularly those seeking to preserve their wealth amidst inflationary pressures. The reliability of the government’s backing adds an additional layer of trust. Since India is an emerging market, and due to global supply shocks, Inflation levels are quite unpredictable in recent years, these bonds are a great option to hedge against inflationary pressures.

Defining Inflation Indexed Bonds

Inflation Indexed Bonds, as the name suggests, are debt securities whose face value is linked to an index, typically the Consumer Price Index (CPI). The unique feature of these bonds is their ability to adjust for both inflation and deflation, ensuring that investors’ returns are real and not eroded by changing economic conditions.

The real return on an IIB is calculated as the coupon rate minus the inflation rate. This guarantees that investors receive a consistent real value, factoring in the impact of inflation.

Features of Inflation Indexed Bonds

  1. Coupon Payment: The coupon payment structure of IIBs is designed to reimburse investors midyear, and it is based on the adjusted principal amount. This ensures that the returns account for changes in the inflation rate.
  2. Investment Limits: IIBs have specific limits to individual and institutional investments. For individual investors, the minimum investment is set at Rs 5000, with a maximum limit of Rs 10 lakh per year. Institutional investors face a cap of Rs 25 lakh per year.
  3. Economic Safeguard: One of the significant features of IIBs is their principal aim to safeguard the economy, particularly benefiting the poor and middle classes. This aligns with broader economic goals of inclusive growth and wealth preservation.
  4. Principal Indexing: The principal amount of IIBs is indexed to inflation. This means that as inflation rises, the principal value of the bond also increases. This indexing mechanism protects the real value of the investment against the impact of inflation.
  5. Interest Payment: The interest payments on IIBs are calculated using a formula that takes into account the current level of deficit finance. If the inflation rate is, for example, 3%, and the bond’s interest rate is 5%, the interest payment would be calculated as 5% of the current principal value plus 3% of the original principal value.
    Investment Channels
  6. Availability: Investors have multiple channels through which they can invest in IIBs. These include government websites, banks, and brokerages. The accessibility of these bonds ensures that a wide range of investors can participate and ensures there is sufficient liquidity for these instruments in the markets.
  7. Options in India: In India, Inflation Indexed National Saving Securities – Cumulative and Index Funds are common channels for purchasing IIBs. The government’s initiative to offer these bonds through various platforms facilitates easy access for investors

Why invest in IIBs and what to consider before investing?

    Advantages:

    1. Inflation Protection: IIBs offer a robust shield against inflation, preserving the purchasing power of investors’ capital over time. This is a critical advantage, especially in economies where inflation rates can be unpredictable.
    2. Stability: Compared to other types of investments, IIBs tend to be less volatile. The reliable returns and the link to inflation provide a sense of stability for investors seeking to balance risk in their portfolios and diversify their investments. Including such bonds in your portfolio can also help you mitigate interest rate risks and help stabilise your returns during market downturns.
    3. Low-Interest Rates: While this might be considered a disadvantage in some contexts, the relatively lower interest rates on IIBs make them an attractive option for income investors. The consistency of returns is often prioritized over high interest rates.

    Disadvantages:

    1. Lower Earning Potential: The interest rates on IIBs are calculated using the formula that takes into account the change in the Consumer Price Index (CPI), not the actual rate of inflation. This may result in lower yields compared to other securities which are positively correlated with the rise in inflation levels such as good company stocks and broad-market Index funds.
    2. Not a Perfect Measure of Inflation: The use of CPI as an indicator may not fully capture the true cost of living for individuals. As a result, the adjustment based on CPI may not be a perfect measure of the real impact of inflation on investors. CPI assumes a fixed basket of goods over time, which doesn’t account for consumers’ ability to substitute goods and services when prices change.
    3. Phantom Income: IIBs can create a scenario known as phantom income. This occurs when interest payments increase due to inflation, but the value of the bond does not keep pace. This can impact the real value of the interest payments for investors relying on them to cover living expenses. This can result in high tax liabilities for investors who may be compelled to declare their interest income because of the higher significance of the particular investment.

    Conclusion

    In summary, Inflation Indexed Bonds represent a secure and government-backed investment option. Their ability to protect against the detrimental effects of inflation, coupled with a fixed rate of return, makes them an attractive choice for investors aiming to preserve their wealth.

    While the benefits of IIBs are substantial, investors should conduct thorough research and, if necessary, consult with financial advisors before investing. Understanding the risks, such as lower yields and potential market risks, is crucial for making informed investment decisions.

    The requirement for a Demat account to hold investments in an electronic format adds another layer of consideration. Ensuring the necessary infrastructure is in place contributes to a seamless and efficient investment experience.

    Investors looking to combat the impact of inflation on their portfolios should carefully weigh the pros and cons of Inflation Indexed Bonds. Despite their limitations, these bonds offer a valuable means of safeguarding investments against the erosive effects of inflation.

    FAQs

    1. What is the difference between nominal and Inflation Indexed Bonds?
      Nominal bonds provide a fixed interest rate, unaffected by inflation. In contrast, Inflation Indexed Bonds, like those in India, adjust both principal and interest payments to counter the impact of inflation. This ensures that investors’ returns maintain their real value over time.
    2. What is the difference between capital-indexed bonds and Inflation Indexed Bonds?
      Capital-indexed bonds and Inflation Indexed Bonds are terms often used interchangeably. Both refer to bonds whose principal value adjusts with inflation, providing a shield against its erosive effects. In the context of India, they essentially denote the same type of investment designed to combat inflationary pressures.
    3. IIBs are issued by which entity?
      In India, Inflation Indexed Bonds are issued by the government. The government’s full faith and credit back these bonds, make them a secure investment option for Indian investors. This aligns with the government’s objective to offer a reliable hedge against inflation.
    4. How to buy Inflation Indexed Bonds in India?
      Indian investors can purchase Inflation Indexed Bonds through various channels. These include government websites, banks, and brokerages. Notable options in India are Inflation Indexed National Saving Securities – Cumulative and Index Funds. These bonds are accessible, providing flexibility for investors to acquire them through their preferred platforms.

    Interpreting PE Ratios like a pro!

    What is the Price-Earning Ratio?

    As the name suggests, the Price-to-Earnings Ratio (PE Ratio) is a financial metric that assesses a company’s relative valuation by comparing its current stock price with its Earnings Per Share (EPS). It is calculated by dividing the market price per share by the Earnings Per Share. The PE ratio is a key indicator for investors, providing insights into how much the market is willing to pay for each unit of a company’s earnings. A high P/E ratio may suggest that investors expect high future growth, while a low P/E ratio may indicate lower growth expectations or undervaluation.

    Its interpretation can vary across industries, and comparing a company’s P/E ratio to its industry peers or historical averages can provide additional context for evaluation. Additionally, other factors, such as the company’s growth prospects, risk profile, and market conditions, should be considered alongside the P/E ratio for a comprehensive analysis.

    Traditionally, the P/E ratio was merely seen as a hard cutoff that was seen as an estimator that would only tell an investor about the relative valuation of a particular company, but nowadays, this estimator is used rigorously to its full potential by considering many other variables, such as the historical trend of P/E ratio, comparing it across Industry P/E ratios and across companies with similar business propositions.

    This has resulted in the P/E ratio becoming a much more complex indicator than what it used to be. Today, a high P/E ratio doesn’t necessarily imply that a company is overvalued and has no potential upside, similarly, a lower P/E ratio doesn’t imply that a company is undervalued and has the potential to give high returns.

    Modern Interpretation of PE Ratio

    In today’s financial world, the Price-to-Earnings (P/E) ratio is looked at in a more detailed way:

    1. Comparison with Peers: Investors check how a company’s P/E ratio compares to similar companies or the overall market. This helps to understand if the stock is priced higher or lower than its counterparts.
    2. Considering Growth: The P/E ratio is assessed alongside a company’s growth prospects. A high P/E can be acceptable if the company is expected to grow a lot in the future, reflecting investor confidence.
    3. Evaluating Risk: P/E ratios are used to gauge risk. A lower P/E may indicate a safer investment, while a higher one might mean higher expectations and higher risk. Investors weigh the potential for growth against the risk.
    4. Market Conditions Matter: P/E ratios are seen in the context of the overall market. In good times, investors may be willing to pay more for earnings, and in tough times, they might prefer more conservative valuations.
    5. Checking Earnings Quality: Investors not only look at reported profits but also consider if the earnings are sustainable, consistent, and from core business operations.

    In summary, the modern understanding of P/E ratios involves a more detailed analysis, taking into account a company’s unique situation, growth potential, and overall economic climate. Gone are the days when just by comparing P/E Ratios between two companies, investors could determine whether to buy a stock or sell it.

    Challenges and problems faced while using P/E Ratio

    The challenges with using Price-to-Earnings (P/E) ratios come from trying to fit a one-size-fits-all approach to companies:

    1. Not All Companies Are the Same: P/E ratios don’t work well for every company or industry. Each business has different growth potential, risks, and financial structures, so applying the same rule to all can give misleading results.
    1. Quality Matters: P/E ratios don’t tell us if a company’s earnings are solid or if they’re just riding a wave. It’s essential to look at where the earnings come from and if they can be sustained.
    2. History Isn’t Everything: Relying too much on how P/E ratios behaved in the past might not be helpful. Economic conditions change, and what worked before might not work the same way in the future.
    3. High Expectations, Not Always Reality: A high P/E might mean people expect the company to grow a lot, but that growth might not happen. Investing solely based on optimistic PE ratios can lead to disappointment and poor Portfolio Construction.
    4. Economic Cycles Matter: Some businesses go through ups and downs with the economy. Ignoring these cycles can give a wrong impression, especially if you look at P/E ratios during extreme highs or lows.
    5. Comparing Apples to Oranges: Different industries naturally have different average PE ratios. Trying to compare them directly might not give an accurate picture. A peculiar example can be that P/E Ratios are very important when considering investing but not so much while trading in stocks.
    6. People’s Feelings Matter: How investors feel about a stock can heavily influence PE ratios. Overconfidence or fear can make ratios too high or too low, causing challenges for investors who rely solely on this measure.

    To handle these challenges, smart investors use P/E ratios alongside other measures and consider the bigger picture, like the industry, economy, and other details about a company’s performance.

    Overcoming the problems and making full use of PE Ratios

    Advantages of P/E Ratios:

    1. Quick Check: P/E ratios give a fast way to see if a stock is priced right, making them handy for a first look. Comparing P/E Ratios for companies in the same industry is a very easy and quick way to grasp the relative valuations of those companies.
    2. Easy Comparison: P/E ratios let you compare different stocks or the whole market, helping spot stocks that might be too cheap or too expensive. It also allows investors to check the market premium paid on global market indices relative to the economic status of the nation.
    3. The feel of the Market: P/E ratios can show if people are feeling positive (P/E going up) or sceptical (P/E going down) about a stock. Increasing P/E ratios indicate a bullish sentiment on the stocks while decreasing P/E ratios in a bullish environment can signal otherwise.

    Useful Benchmark: Investors often use P/E ratios to compare a stock’s price now with how it usually behaves or with others in the same industry. P/E Ratios of industries are also compared to analyse and check the relative growth of different sectors in an economy.

    Solutions to Challenges:

    1. Mix with Other Ratios: Combine PE ratios with other measures like Price-to-Book or Earnings Growth Rate for a more complete view. P/E Ratios are highly favourable when other factors also indicate a positive outlook, it is less likely that a company will behave according to its P/E Ratio if other ratios are indicating otherwise.
    2. Know the Industry: Understand how different industries work. Some have higher P/E ratios because they’re expected to grow more, while others are more steady. In India, Information Technology (IT) companies enjoy a high P/E Ratio because of their global competitiveness and quality, similarly, the PSU Banks in India do not enjoy P/E Ratios as high as Private Banks because they cater to a different consumer base, despite being in the same industry.
    3. Check Earnings Quality: Look beyond just earnings and think about if the earnings are solid and can keep going. Consider things like where the money is coming from and if it’s reliable. ITC is a company with good financials but the majority of its profits still come from its Tobacco business which is not a good sign for ESG investors.
    4. Think About the Economy: Consider where we are in the economic cycle when looking at P/E ratios. Different industries act differently during good and bad times. During economic booms, P/E Ratios tend to be higher than usual, the contrary happens in times of recessions and Bear Markets.
    5. Think Long-Term: Don’t just look at short-term changes in P/E. See how a company does over a long time and through different economic ups and downs. A steadily growing P/E Ratio over time indicates that the company has good growth potential, and is highly likely that the company is moving positively gaining market share in its industry.
    6. Watch for Feelings: Be aware that how people feel can affect P/E ratios. Keep emotions in check and don’t just follow the crowd. Markets can sometimes severely punish companies that have a negative market perception, this tends to distort PE Ratios and doesn’t give a fair justification for the valuation of the company.
    7. Spread Your Investments: Diversify your investments across different types of assets and industries. This helps balance risk and makes your approach more stable.

    By following these tips, you can make the most of P/E ratios while dealing with their challenges, making your investment decisions smarter.

    P/E Ratio in Context to Indian Markets

    Unlocking Growth Potential in the Indian Markets: A P/E Ratio-Centric Perspective

    In the realm of Indian stock markets, the Price-to-Earnings (P/E) ratio takes centre stage, offering investors a crucial lens through which to view market valuations. Despite its nuances, the PE ratio remains a key indicator, and in the context of the NIFTY, its high value may raise eyebrows. However, a deeper dive into this metric reveals a story of optimism and growth prospects inherent in the Indian economy. Yes, the PE ratio is higher than its historical average, but don’t let that set off alarms. In the Indian context, this high ratio is a reflection of the belief in the country’s growth potential.

    NIFTY’s High PE Ratio: A Sign of Promise

    As of the latest data, the NIFTY 50 index boasts a PE Ratio above its historical average, reflecting the market’s positive outlook on Indian stocks. The NIFTY’s PE Ratio was around 21 on 14th November 2023, signals that investors are willing to pay a premium for each unit of earnings, underlining confidence in the growth trajectory of the Indian economy.

    Key Patterns in PE Ratio Trends: Navigating Investment Decisions

    Consistent Upward Trend: A sustained upward trend in the NIFTY’s PE ratio might signify ongoing optimism and confidence in the market. However, investors need to evaluate whether this trend aligns with the economic fundamentals supporting such growth.

    1. Sharp Deviations from Historical Norms: Sharp spikes or drops in the PE ratio compared to historical averages demand attention. These anomalies could be triggered by specific events, such as economic reforms, global developments, or corporate earnings surprises.
    2. Correlation with Economic Indicators: A rising PE ratio should ideally align with positive economic indicators, such as GDP growth, corporate profitability, and employment figures. A disconnection between the PE ratio and economic fundamentals may warrant caution.
    3. Sectoral PE Analysis: Instead of a broad market view, dissecting PE ratios at the sectoral level provides a nuanced understanding. Variances in sectoral PE ratios may indicate specific growth drivers or risks within those industries.

    Conclusion: P/E Ratios as a Beacon in Dynamic Markets

    In the specific context of Indian markets, the P/E ratio serves as a guiding light for investors. Navigating the highs and lows, understanding historical averages, and recognizing significant patterns empower investors to make informed decisions. While the NIFTY’s elevated P/E ratio signals optimism, the key lies in aligning this optimism with the real economic forces propelling India forward.

    The P/E Ratio has become a complex instrument for market analysis, which requires depth in the form of other indicators and deep company analysis for it to make concrete predictions. Markets move on emotions and these indicators clearly communicate these emotions to the analysts for research and analysis. As the P/E ratio takes centre stage in the context of Indian markets, its role extends beyond a simple metric to a nuanced instrument for market analysis.

    As markets continue to move on the waves of emotions, a comprehensive approach to P/E ratio analysis becomes imperative, offering a clearer understanding of the intricate movements between investor perceptions and market realities.

    FAQs

    • What is a good P/E Ratio?
      In the context of Indian Markets, the average P/E of Nifty in the last 20 years was around 20.  So P/Es below 20 may provide good investment opportunities; the lower the P/E below 20, the more attractive the investment potential. However, there is no exact figure for an optimal P/E Ratio for any financial instrument because it is a relative indicator, which is not used in an absolute sense.
    • Can stocks have a negative P/E Ratio?
      A negative P/E ratio means the company has negative earnings or is losing money. Even the most established companies experience down periods, which may be due to environmental factors that are out of the company’s control.
    • Is a low P/E ratio good?
      It is a common perception in the markets that it is better to buy shares in companies with a lower P/E because this means you are paying less for every dollar of earnings that you receive. However, this is not always the case. Companies with structural inefficiencies also have lower P/E Ratios which are not a good indicator of the company’s upside potential.
    • What are the components of the P/E ratio?
      The PE for a stock is computed by dividing the price of a stock (the “P”) by the company’s annual earnings per share (the “E”). If a stock is trading at Rs. 20 per share and its earnings per share are Rs. 1, then the stock has a P/E of 20 (Rs.20/Rs.1).
    • How is the price-to-book (P/B) ratio different from the PE Ratio?
      The price-to-book (P/B) ratio measures the market’s valuation of a company relative to its book value. The market value of equity is typically higher than the book value of a company’s stock. The price-to-book ratio is used by value investors to identify potential investments.

    5 Government Investment Schemes: A Comprehensive view

    In a world full of investment prospects, government investment schemes often stand out as dependable, secure, and fruitful choices for individuals seeking financial stability and growth. These programs, ranging from Employee Provident Fund (EPF) to Public Provident Fund (PPF), National Pension Scheme (NPS), Senior Citizen Savings Scheme (SCSS), and Pradhan Mantri Vaya Vandana Yojana (PMVVY), present a plethora of benefits and cater to diverse financial objectives. In this article, we will delve into these five government investment schemes and help you grasp how they can contribute to your financial well-being.

     

    List of  Government Investment Schemes

     

    1. Employee Provident Fund (EPF)

     

    The Employee Provident Fund is among the most well-liked retirement-focused investment schemes in India. It is accessible to salaried individuals and is obligatory for employees working in organizations with over 20 employees. A specific percentage of the employee’s monthly salary, along with an equal contribution from the employer, is funneled into the EPF account. 

     

    The key attributes of EPF include:

     

    • Tax Benefits: EPF contributions and the interest earned are eligible for tax deductions under Section 80C of the Income Tax Act.
    • Fixed Interest Rate: The EPF interest rate is determined by the government and is typically competitive with other fixed-income alternatives.
    • Retirement Corpus: The accumulated EPF amount can be accessed upon retirement, offering a substantial financial safety net.

     

    1. Public Provident Fund (PPF)

     

    The Public Provident Fund is a long-term savings plan that encourages individuals to save for their future and provides tax advantages. Here are some notable features:

     

    • Tax-Free Returns: The interest and maturity proceeds from PPF are entirely tax-exempt, making it an appealing option for tax-conscious investors.
    • Lock-in Period: PPF comes with a 15-year lock-in period, but partial withdrawals are permitted from the 7th year onward.
    • Flexible Investment: Investors can initiate with a minimum deposit of only INR 500 and contribute up to INR 1.5 lakh annually.

     

    1. National Pension Scheme (NPS)

     

    The National Pension Scheme is a voluntary, long-term retirement investment scheme that aims to provide financial security during old age. Key features include:

     

    • Market-Linked Returns: NPS allows you to choose between equity and debt-based funds, providing the potential for higher returns.
    • Tax Benefits: Contributions to NPS are eligible for deductions under Section 80CCD of the Income Tax Act, providing additional tax savings.
    • Retirement Options: At maturity, you can withdraw a portion of the corpus as a lump sum and purchase an annuity with the remaining amount, ensuring a regular pension post-retirement.

     

    1. Senior Citizen Savings Scheme (SCSS)

     

    As the name suggests, the Senior Citizen Savings Scheme is designed for senior citizens seeking secure investment options post-retirement. Here’s what makes it appealing:

     

    • Age Requirement: Individuals above the age of 60 can open an SCSS account, while those aged 55-60 who have taken voluntary retirement are also eligible.
    • High Interest Rate: The interest rates offered by SCSS are relatively high, making it an attractive choice for retirees.
    • Fixed Tenure: The scheme has a 5-year term, which can be extended for an additional three years after maturity.

     

    1. Pradhan Mantri Vaya Vandana Yojana (PMVVY)

     

    PMVVY is a government-supported pension scheme tailored for senior citizens. It offers a guaranteed return on investment and other benefits:

     

    • Guaranteed Returns: PMVVY provides a fixed interest rate for the entire policy term.
    • Regular Payouts: Investors receive regular pension payouts, which can be chosen as monthly, quarterly, half-yearly, or annual.
    • Minimum Entry Age: The minimum age to invest in PMVVY is 60 years, making it an ideal choice for those looking for a steady post-retirement income source.

     

    Conclusion

     

    Official investment schemes offered by the government play a crucial role in assisting individuals in securing their financial future. Whether you are a salaried employee, a senior citizen, or someone planning for retirement, these programs provide various options to match your specific needs and goals. By comprehending the characteristics and advantages of schemes such as EPF, PPF, NPS, SCSS, and PMVVY, you can make well-informed investment decisions that set the stage for a financially stable future. So, explore these government investment schemes, consult with financial advisors, and embark on a journey toward financial security and growth.

     

    FAQs

     

    1. What is the key difference between the Employee Provident Fund (EPF) and the Public Provident Fund (PPF)?

    EPF is primarily designed for salaried employees and involves both employee and employer contributions, while PPF is open to all individuals and is a voluntary savings scheme. EPF is linked to employment, whereas PPF is a personal savings account.

     

    1. How does the National Pension Scheme (NPS) work, and what is the risk involved in it?

    NPS is a market-linked retirement scheme that allows you to choose between equity and debt funds. The risk in NPS arises from market fluctuations, as the returns are not fixed. However, NPS also provides opportunities for potentially higher returns compared to fixed-income options.

     

    1. Can I invest in multiple government investment schemes simultaneously?

    Yes, you can invest in multiple government investment schemes simultaneously. Many individuals diversify their investments by allocating their savings to different schemes that align with their financial goals. It’s essential to understand the rules and contribution limits of each scheme.

     

    1. Are the returns from Senior Citizen Savings Scheme (SCSS) taxable?

    Yes, the interest earned from SCSS is taxable under the income tax regulations. However, senior citizens can benefit from the higher interest rates offered by SCSS and can plan their investments accordingly to optimize tax liability.

     

    1. How can I apply for the Pradhan Mantri Vaya Vandana Yojana (PMVVY), and what is the maximum investment limit?

    You can apply for PMVVY through authorized insurance companies. The maximum investment limit under PMVVY is currently capped at INR 15 lakhs per individual. The scheme provides a guaranteed return and a regular pension payout, making it an attractive option for senior citizens.

     

    6 Effective Smart Investment Strategies for Success in the Indian Financial Landscape

    Making well-informed disciplined smart investment choices is a critical step toward ensuring financial stability and achieving long-term financial goals. In the Indian context, where the market presents numerous opportunities along with distinct challenges, the importance of making astute investment decisions cannot be overstated. This article is designed to offer guidance on key strategies for making intelligent investments in India.

    Smart Investment Strategies

    1. Emphasize Diversification

     

    Diversification is a fundamental principle of prudent investing. In the Indian context, diversifying your investment portfolio across various asset classes is essential for managing risk effectively. Consider distributing your investments across equities, bonds, mutual funds, real estate, and fixed deposits. This approach helps reduce reliance on any single asset class, providing resilience against market fluctuations.

     

    1. Equities: Navigating the Stock Market

     

    Investing in the Indian stock market can be highly rewarding, but it also comes with significant volatility.  We discussed on our podcast how to get started with investing when considering stock investments:

     

    1. In-Depth Research: Conduct thorough research on companies before investing in their stocks. Analyze factors such as financial performance, management quality, and industry trends.

     

    1. Long-Term Focus: Avoid a short-term perspective and adopt a long-term investment horizon. Historical data indicates strong returns on Indian stocks over extended periods.

     

    1. Diversify within Equities: Spread your investments across multiple stocks or opt for diversified mutual funds or exchange-traded funds (ETFs) to prudently diversify your equity holdings.

     

    1. Mutual Funds

     

    Mutual funds offer an excellent avenue for investment in the Indian market, especially for those not well-versed in-stock selection. Key considerations include:

     

    1. Understanding Fund Types: Familiarize yourself with various categories of mutual funds, such as international funds, debt funds, and hybrid funds. Select those that align with your financial goals.

     

    1. Embrace SIPs (Systematic Investment Plans): SIPs allow you to invest regularly, even with modest amounts. This disciplined approach leverages rupee cost averaging and compounding effects over time.

     

    1. Fixed Income Investments

     

    Fixed-income instruments like bonds and fixed deposits provide stability to your investment portfolio. Important factors to consider include:

     

    1. Government Bonds: Allocate a portion of your investments to government-backed bonds like National Savings Certificates (NSC) or Public Provident Fund (PPF) for secure and consistent returns.

     

    1. Corporate Bonds: While associated with higher risk, corporate bonds can offer higher returns than government bonds.

     

    1. Stay Informed and Seek Professional Guidance

     

    The financial environment in India is constantly evolving, marked by regular regulatory adjustments. It is crucial to stay informed about market trends, economic shifts, and changes in regulations that could affect your investments. Seeking guidance from certified financial planners or advisors for expert financial advice is highly recommended. We delve deeper into this topic on our podcast.

     

    1. Establish Emergency Funds and Procure Insurance

     

    Before initiating your investment journey, ensure you have emergency funds in place to address unforeseen expenses. Additionally, securing insurance policies, including health and life insurance, is crucial in safeguarding your financial well-being.

     

    Conclusion

     

    Smart investing in India involves three key steps: research, diversification, and a long-term approach. These strategies help you navigate the Indian market complexities and move closer to your financial goals. Keep learning and be adaptable as your financial situation changes.

     

    FAQs

     

    1. What is the importance of diversification in investment?

     

    Diversification is crucial in investment because it spreads your investments across different asset classes or securities, reducing the risk associated with a single investment. By diversifying, you can potentially enhance returns while mitigating the impact of poor-performing assets on your overall portfolio.

     

    1. How does compound interest work in savings and investments?

     

    Compound interest is the process of earning interest on both the initial principal and the accumulated interest from previous periods. In savings and investments, it means that your money grows exponentially over time as the interest you earn gets reinvested, leading to larger returns the longer you keep your money invested.

     

    1. What are the benefits of investing in mutual funds compared to individual stocks?

     

    Investing in mutual funds offers several advantages over individual stocks. Mutual funds provide diversification, professional management, and accessibility to a variety of asset classes. They are also suitable for investors with limited knowledge or time for stock analysis.

     

    1. How can I create a budget and stick to it?

     

    Creating and adhering to a budget involves several steps:

       

    1. Track Your Income and Expenses: Record all sources of income and expenses to understand your financial situation.

       

    1. Set Financial Goals: Define clear financial goals to motivate yourself.

       

    1. Categorize Expenses: Group expenses into categories like housing, transportation, and entertainment.

       

    1. Allocate Funds: Allocate a portion of your income to each expense category and savings.

       

    1. Monitor and Adjust: Regularly review your budget and make necessary adjustments to stay on track.

     

    1. Why is it essential to have an emergency fund?

     

    An emergency fund is crucial because it provides a financial safety net in case of unexpected expenses, such as medical emergencies, car repairs, or job loss. Having an emergency fund helps you avoid accumulating high-interest debt and provides peace of mind during challenging times. Financial experts typically recommend having at least three to six months’ worth of living expenses in your emergency fund.

    A comprehensive 101 guide : How to invest in SIP?

    Embarking on the journey of investing your earnings is a prudent choice that can pave the way for financial prosperity and stability. In the Indian context, one of the most favored and efficacious investment methods is through Systematic Investment Plans (SIPs). SIPs present the opportunity to routinely invest in mutual funds, making it an appealing avenue for both neophyte and seasoned investors. In this guide, we will navigate you through the process of delving into how to invest in SIP.

    Comprehending SIP:

    A Systematic Investment Plan (SIP) constitutes an investment strategy wherein a fixed sum of money is periodically invested (monthly, quarterly, or even weekly) into mutual funds. This approach comes with an array of benefits including methodical investment, rupee cost averaging, and the potential of compounding.

    How to invest in SIP?

    Enter the world of SIP investments: choose goals, pick funds, set amount/frequency, open an account, complete KYC, and start investing. Watch wealth grow steadily over time.

    Formulating Financial Objectives:

    Before embarking on investments, it is pivotal to outline your financial objectives. Are you investing for a near-term goal like purchasing a vehicle, or a long-term aspiration such as retirement planning? Defining your objectives will facilitate selecting the apt mutual funds and investment horizon.

    Electing Appropriate Mutual Funds:

    Diligent research is indispensable when it comes to selecting mutual funds. Options encompass equity funds, debt funds, and hybrid funds, among others. Evaluate the fund’s historical performance, expense ratio, track record of the fund manager, and the fund’s investment objective to ensure alignment with your goals and risk appetite.

    Determining the SIP Amount:

    Ascertain the amount that you are comfortable investing regularly. SIPs can be initiated with as modest an amount as ₹500, ensuring accessibility for a broad spectrum of investors. Consistency in investments is key.

    Selecting Investment Frequency:

    SIPs offer the flexibility of choosing investment frequency – be it monthly, quarterly, or even weekly. Opt for a frequency that complements your financial standing and is in sync with your budget.

    Commencing an Investment Account:

    To partake in mutual fund SIPs, possession of a demat account with an authorized mutual fund distributor is requisite. Alternatively, you can opt for direct investment through the fund house’s official website. Several investment platforms and apps are also available in India for a seamless experience.

    Completing KYC Formalities:

    The mandatory Know Your Customer (KYC) procedure is a prerequisite before initiating investments. This involves furnishing identity proof, address proof, and other documents to verify your identity and adhere to regulatory norms.

    Establishing SIP Setup:

    Once your KYC verification is in order, you can select the mutual fund scheme and initiate your SIP. Furnish pertinent details such as investment amount, frequency, and initiation date. Setting up an auto-debit from your bank account can ensure punctual investments.

    Vigilance and Assessment:

    Although SIPs endorse a hands-off approach, it is pivotal to consistently monitor your investments. Stay informed about the fund’s performance, prevailing economic trends, and shifts in your financial objectives. If deemed necessary, contemplate rebalancing your portfolio.

    Maintaining Discipline:

    A pivotal advantage of SIPs is the discipline they inculcate in investors. Adhere to your SIP schedule even during market fluctuations. This systematic approach over time facilitates capitalizing on rupee cost averaging and the exponential impact of compounding.

    Periodic Evaluation and Adjustment:

    Regularly review your financial objectives, investment performance, and market dynamics. If there are alterations in your goals or your portfolio necessitates tuning, do not hesitate to effect the requisite changes.

    In Conclusion:

    SIP investments in India represent a commendable avenue to leverage the potential of financial markets and progress toward your financial aspirations. Adhering to these stages and upholding discipline can optimize your investments and pave the way for sustained wealth accumulation. Bear in mind that each individual’s financial landscape is distinctive, thus seeking counsel from a financial advisor is prudent if uncertainty shrouds your investment choices. Initiate your SIP journey today and observe your capital flourish over time.

    Our CEO and founder, Varun Fathepuria, explored a comprehensive SIP planning guide during our weekly podcast session. For a more detailed explanation of selecting the date, frequency, and market timing, stream the podcast here.

     

    FAQs Regarding How to invest in SIP:

    Q1: What does SIP signify, and what is its functioning mechanism?

    SIP, denoting Systematic Investment Plan, entails investing a consistent sum at regular intervals into mutual funds. It offers a systematic technique to maneuver through market fluctuations by spreading out investments gradually.

    Q2: Are SIPs appropriate for objectives of a short-term or extended nature?

    SIPs accommodate both brief and lengthy aspirations. You possess the liberty to select schemes harmonizing with your temporal scope. Short-term aims could involve debt or hybrid funds, whereas equity funds might suit long-term goals for enhanced returns.

    Q3: What quantum should I allocate for SIP investments?

    SIPs boast adaptability. An entry point as modest as ₹500 is feasible. The crux is steadfastness. Opt for an amount that aligns comfortably with your financial plan and perpetuate consistent contributions.

    Q4: How can I discern the fitting mutual funds for SIPs?

    Thorough research is pivotal. Scrutinize the fund’s historical performance, overhead costs, track record of the fund manager, and investment orientation. An element of diversification amidst various fund categories can also curtail risk exposure.

    Q5: Can adjustments be made to my SIP amount or can it be temporarily halted?

    Indeed, the SIP amount can be amended or temporarily suspended. Most platforms extend this flexibility. It is prudent, however, to ensure that any alterations align cohesively with your financial targets and investment tactics.

    2023 Government Schemes for a Secure Future

    When it comes to investing, individuals often seek secure and reliable avenues that offer stability and potential growth. In this pursuit, 2023 government schemes emerge as attractive choices due to their inherent stability and backing by the government. These investment avenues provide individuals with a sense of security and confidence, making them an appealing option for those looking to protect and grow their wealth. In this blog post, we will explore some popular government-backed investment options and highlight their benefits and considerations.

    Benefits of Investing in Government Schemes 

    Investing in government schemes offers several benefits, contributing to their popularity among investors. Here are some key advantages of investing in such options:

    • Social-Economic benefits: Each government investment option is related to some social benefits; be it pension, social security, infrastructure financing, and forex reserves. Investing in these schemes is not only beneficial for investors but also plays a greater role in nation-building.
    • Safe and Secure Returns: As this scheme is government-backed, returns have assured this scheme, and their interest is reviewed annually. Being backed by the government it provides a safeguard against default as most of them have pre-determined maturity amount and time, making it trustworthy.
    • Diversification: Diversification is a key resource in portfolio construction, this practice helps investors tranquility against market volatility and provides the portfolio a safety net.
    • Accessibility and Flexibility: They may have lower investment thresholds, making them suitable for a wide range of investors, including those with smaller savings Additionally, some options offer flexibility in terms of investment amounts, periodicity of contributions, and premature withdrawal, providing individuals with greater control over their investments. 
    • Tax Benefits: These benefits may include tax deductions on the invested amount, tax-free interest, or tax exemptions on capital gains. Utilizing these tax advantages can enhance overall investment returns and contribute to long-term wealth accumulation.

     

    Some Famous 2023 Government Schemes

    The Pradhan Mantri Vaya Vandana Yojana (PMVVY) is a government-backed pension government scheme that is designed to provide a guaranteed pension to senior citizens after retirement. The scheme is open to senior citizens between the ages of 60 and 80 years. The minimum investment amount to the PMVVY is INR 1,000 and the maximum investment amount is INR 15 lakh. The PMVVY offers a guaranteed pension of 7.4% p.a. The scheme has a lock-in period of 3 years. 

    Type: Pension Scheme

    Tax Benefits: Benefits under 80CCD

    Interest Rate: 8.65% 

    Eligibility: 18-40 years, 20 years of minimum contribution

    Investment Amount: Rs. 42 to Rs. 1,454 per month

    Lock-in period: Unitil 60 Years

    The Atal Pension Yojana is a simple and effective government scheme that provides social security to millions of workers in the unorganized sector. The scheme offers a guaranteed minimum pension, affordable contributions, and tax benefits, making it an attractive option for individuals wishing to secure their financial future during retirement. With the growing awareness about the importance of financial planning and retirement, the scheme is likely to attract more subscribers in the future.

    Type: Pension Scheme

    Tax Benefits: Benefits under 80C

    Interest Rate: 7.40% 

    Eligibility: The contributor’s  minimum age should be 60 years

    Investment Amount: Rs. 12,000 – 15,00,000/ annum

    Lock-in period: 10 years from the date

    Health treatment should be accessible to everyone, but treatment costs are inflating at a rate of 14% per annum, which is highest among Asian countries, and 93.2% of Indians being employed in the unorganized sector can not afford health insurance. PMJAY, government scheme comes in as a savior for them, providing ₹5 lakhs per family per year for ₹500 per year. 

    Type: Health Insurance

    Cashless Treatment payment

    Coverage of Rs 5 lakh per annum

    Eligibility: Socially and economically deprived 

    Investment Amount: Rs. 500/ annum

    Lock-in period: None

    Kisan Vikas Patra (KVP) is a savings scheme introduced by the Government of India. It encourages long-term savings among individuals, especially in rural areas. You can invest a minimum amount (e.g., Rs. 1,000) for a fixed period. The investment doubles after a specified period, and the interest rate is set by the government. KVP is transferable, considered secure, and the interest earned is taxable. It is advisable to check the latest rules and regulations before investing.

    Type: Pension Scheme

    Tax Benefits: Benefits under 80C

    Interest Rate: 8.65% 

    Eligibility: 18-65 years

    Investment Amount: Rs. 42 to Rs. 1,454 per month

    Lock-in period: Unitil 60 Years

    NPS stands for the National Pension System. It is a voluntary, defined contribution retirement savings scheme introduced by the Government of India in 2004. The NPS aims to provide retirement income to individuals in the organized sector, including employees from the public, private, and unorganized sectors.

    Type: Pension Scheme

    Tax Benefits: Benefits under 80CCD

    Interest Rate: 10-12% (linked to market)

    Eligibility: 18- 65 years

    Investment Amount: Rs. 1000/annum

    Lock-in period: Unitil 60 Years

    Treasury bills are money market instruments issued by the Government of India as promissory notes with guaranteed repayment at a later date. Funds collected through such tools are typically used to meet short-term requirements of the government, hence, to reduce the overall fiscal deficit of a country.

    T-bills are offered for individual purchases at a discount from the total price. The investors can then profit from the disparity when they are redeemed for a minimum. T-bills are issued at zero-coupon rates, meaning no interest is accumulated.

    As a result, it serves as an essential financial instrument for the Reserve Bank of India. It supports RBI’s efforts to regulate and manage overall cash flow in the market. 

    Type: Debt Instruments

    Tax Benefits: Benefits under 80C

    Interest Rate: as per the issuer  

    Eligibility: 18 years and above

    Investment Amount: as per coupon price

    Lock-in period: as per bills ( 14 – 364 days)

    Sovereign Gold Bonds (SGBs) were introduced as an alternative to physically holding this precious yellow metal in 2015 by the Reserve Bank of India to reduce the gold imports in India and also open an investment route for millennial investors.

    SGBs are bonds issued by the Reserve Bank Of India under the Govt. of India that allow you to invest in gold (in grams) without the hassle of physically taking care of the purchased gold and taking away the hassle of safekeeping it.

    Type: Gold Investment 

    Tax Benefits: Benefits under 80C

    Interest Rate: capital appreciation + 2.5%/annum 

    Eligibility: entities including HUFs, Trusts, Universities, and Charitable institutions. 

    Investment Amount: as per the issue

    Lock-in period: 3 Years

    Sukanya Samriddhi Yojana was developed under the government’s ‘Beti Bachao, Beti Padhao’ initiative, it is a welfare scheme designed for the girl child. Investing in this child insurance plan allows their parents or legal guardians to ensure financial security for a girl child aged ten years or below. Under this government scheme, an account in the name of the girl can be opened across any private and public sector banks for 21 years. The tenure of investment under the SSY scheme is 21 years, starting from the account’s opening date.

    Type: Future Fund

    Tax Benefits: Benefits under 80CCD

    Interest Rate: 8.00% 

    Eligibility: Maximum age of the child should be 10 years at the seed investment

    Investment Amount: Rs. 50 per month and can be  increased in multiples of 50

    Lock-in period: Until beneficiary turns 21 years old

    Conclusion

    Investing in government-backed schemes offers numerous benefits that make them appealing to individuals looking for secure and reliable avenues for wealth protection and growth. These schemes provide social-economic benefits, ensuring stability and growth for both investors and the nation. They offer safe and secure returns, backed by the government’s guarantee, which provides investors with a sense of trust and confidence. Diversification is facilitated through these schemes, mitigating market volatility and offering a safety net for investors’ portfolios. Moreover, government schemes are accessible and flexible, accommodating a wide range of investors and allowing greater control over investments. The tax benefits associated with these schemes further enhance investment returns and contribute to long-term wealth accumulation.

    It is important to consider the eligibility criteria, investment amounts, lock-in periods, and tax benefits associated with each scheme before making investment decisions.

    Visit our blogs for a more detailed explanation of this scheme.

    Overall, government-backed investment options offer stability, security, and potential growth, making them attractive choices for individuals seeking reliable avenues to protect and grow their wealth.

    Pradhan Mantri Vaya Vandana Yojana : Secure your Retirement

    Are you a senior citizen looking for a secure and reliable retirement plan? Look no further! We are excited to introduce you to the Pradhan Mantri Vaya Vandana Yojana (PMVVY) – a government-backed retirement scheme designed exclusively for senior citizens. With guaranteed returns, tax benefits, and additional features such as loans and death policies, PMVVY is a comprehensive solution for your financial and retirement planning needs. In this blog, we will delve into the details of PMVVY and shed light on its numerous advantages.

    What is Pradhan Mantri Vaya Vandana Yojana?

    Pradhan Mantri Vaya Vandana Yojana is the government of India-backed scheme, managed by Life Insurance Corporation of India. To abide senior citizens with their financial planning goals, the scheme was launched in 2017 and offers “non-market linked” returns, unlike NPS. Apart from guaranteed returns, the scheme also offers the following benefits:

    • Periodic Pension payouts
    • Tax Deductions under 80C
    • Tax Benefits on interest and maturity 
    • Loan against the investment
    • Term insurance

    Would be discussing its feature as we proceed further. Buckle up for your retirement planning.

    Investment, Eligibility, and Returns 

    Like other government-backed pension schemes such as the Atal Pension Yojana and Sukanaya Samridhi Yojana, this scheme’s interest rate is fixed by the government and revised annually, currently, the interest rate is fixed at 7.40% per annum.

    With a minimum investment of 12,000 annually and an upper cap of 15,00,000 per annum, the scheme has a maturity period of 10 years and a lock-in period of 3 years. The scheme has eligibility criteria of a minimum age of 60 years, which is quite disproportionate to 18 in the case of NPS and PPF.

    Loan Facility

    During the lock-in period of 3 years, no pension is paid out but a loan of up to 90% of the purchase price is available for the scheme, which is a unique feature when compared to Atal Pension Yojana. 

    Here are some of the key points to remember about the loan facility under the PMVVY:

    • The loan amount is up to 75% of the purchase price of the policy.
    • The interest rate on the loan is determined by the LIC at periodic intervals.
    • The loan amount will be repaid within the remaining policy term.
    • If the policyholder dies before the loan is repaid, the loan amount will be deducted from the death benefit payable to the nominee.

    If you are considering availing of the loan facility under the PMVVY, you should carefully read the terms and conditions of the scheme. You should also consult with a financial advisor to determine if the loan is right for you.

    Premature Withdrawals

    Withdrawing from a government-backed scheme is a tedious job, due to many complications and penalties, however, withdrawals are applicable in the following circumstances.

    • Critical illness of the policyholder or spouse: In case of critical illness of the policyholder or spouse, the policyholder can withdraw 98% of the purchase price of the policy.
    • Death of the policyholder: In case of the death of the policyholder, the nominee can withdraw the full purchase price of the policy, plus any accumulated interest.
    • Medical emergency: In case of a medical emergency, the policyholder can withdraw up to 50% of the purchase price of the policy.
    • Surrender: The policyholder can surrender the policy after completing five years of the policy term. In this case, the policyholder will receive the surrender value of the policy, which is calculated based on the prevailing interest rates.

    It is important to note that there are penalties for premature withdrawal under the PMVVY. The penalty is 2% of the purchase price for the first year of the policy, and 1% of the purchase price for each subsequent year.

    Age of Policyholder at WithdrawalSurrender Charge (%)
    60-65 years8%
    66-70 years10%
    71-75 years12%
    76-80 years14%
    81-85 years16%

     

    Post Death Benefits

    The Pradhan Mantri Vaya Vandana Yojana offers a post-death benefit to the nominee of the policyholder. The post-death benefit is equal to the purchase price of the policy, plus any accumulated interest.

    If the policyholder dies during the policy term, the nominee will receive the full purchase price of the policy. The nominee will also receive any accumulated interest that has accrued on the policy.

    If the policyholder dies after the policy term, the nominee will receive the full purchase price of the policy, plus any accumulated interest, and the remaining pension installments.

    The post-death benefit under the PMVVY is a good option for the nominee of the policyholder. The nominee will receive a lump sum amount, which can be used to meet any financial obligations, such as medical expenses or education expenses.

    Here are some of the key points to remember about the post-death benefit under the PMVVY:

    • The post-death benefit is equal to the purchase price of the policy, plus any accumulated interest.
    • The nominee will receive the post-death benefit in one lump sum.
    • The post-death benefit is tax-free.

    If you are considering investing in the PMVVY, you should carefully read the terms and conditions of the scheme. You should also consult with a financial advisor to determine if the scheme is right for you.

    Here are some of the documents that will be required to claim the post-death benefit under the PMVVY:

    • Death certificate of the policyholder
    • Policy document
    • Identity proof of the nominee
    • Address proof of the nominee
    • Bank account details of the nominee

    The claim can be submitted to the LIC branch office where the policy is existing. The claim will be processed within 30 days of submission.

    Comparison with Atal Pension Yojana and National Pension Scheme

    FeatureAtal Pension Yojana (APY)National Pension Scheme (NPS)Pradhan Mantri Vaya Vandana Yojana (PMVVY)
    Age Limit18-40 years18-60 yearsFrom the age of 60 years
    Minimum investmentINR 100 per monthINR 1,000 (lump sum) or INR 500 (monthly)INR 1,000 (lump sum) or INR 1,000 (monthly)
    Maximum investmentINR 5,000 per monthINR 1.5 lakh (in a financial year)INR 15 lakh
    Lock-in periodNone3 years3 years
    Maturity60 years60 years or above60 years
    Interest rate8% p.a.8% to 14% p.a. (depending on the pension fund)7.4% p.a.
    Risk associatedLowHighLow
    Special featuresThe auto-debit facility, no lock-in period, guaranteed pensionChoice of pension funds, tax benefits, withdrawal optionsGuaranteed pension, loan facility

     

    Conclusion

    The Pradhan Mantri Vaya Vandana Yojana (PMVVY) is a government-backed pension scheme that is designed to provide a guaranteed pension to senior citizens after retirement. The scheme is open to senior citizens between the ages of 60 and 80 years. The minimum investment amount to the PMVVY is INR 1,000 and the maximum investment amount is INR 15 lakh. The PMVVY offers a guaranteed pension of 7.4% p.a. The scheme has a lock-in period of 3 years. 

    Please visit the PMVVY website for the latest updates and development.

     

     

    NPS – National Pension System

    Retirement. A variety of ideas come to mind when you hear this word, including travel, daily expenses, doctor visits, and so forth. It would help if you had a steady investment in some pension scheme like PPF, EPF, or NPS to last until the end because, post-retirement, you are unemployed or without a reliable source of income.

    In addition to helping to create a retirement corpus or offering pension services, several schemes provide investment options. In addition to Public Provident Funds (PPF), Employee Provident Funds (EPF), Fixed Deposits (FD), and others, there is one more program focusing on retirement plans called the National Pension System (NPS).

    National Pension System (NPS)

    The Government of India-backed and PFRDA (Pension Fund Regulatory & Development Authority) controlled NPS is a distinctive pension program that offers both assets and deficit accessing a single investment and ensures a monthly pension after retirement.

    NPS Eligibility

    • All Indian citizens, whether they are residents or not, between the ages of 18 and 65, may participate. At 60, one can join the NPS and keep making payments until they are 70.
    • Individuals should have their Aadhar card linked with their PAN number.
    • Individuals should fulfill the KYC requirements as per the Subscriber Registration Form.

    How NPS Works?

    • Individuals with NPS accounts can contribute a minimum of Rs. 1000 per annum.
    • PFRDA then pools the investments in a pension fund.
    • PFRDA-approved fund managers then invest the funds in diversified portfolios of government bonds, corporate debts, and shares.
    • The returns or interest rates offered by NPS vary according to market conditions.
    • Upon retirement, the individual can withdraw a tax-free matured amount equal to approximately 60% of the investment.
    • The remaining 40% must be invested in annuities, which generate monthly pensions through generated interest amounts.

    Features of NPS

    1. Low-cost scheme, requiring just a Rs. 1000 minimum yearly investment.
    2. Open program for all NRIs and citizens of India, ages 18 to 65, whether employed by any company or self-employed.
    3. Enables the choice of fund managers and investment strategies.
    4. The matured amount can be easily withdrawn after 60 years of age or withdrawn early after three years of investment.
    5. Enables fund diversification through asset classes, which are groups of assets based on the level of risk they involve.
    6. Using the dedicated NPS Portal, people can access their accounts from anywhere using a 12-digit Permanent Retirement Account Number (PRAN) card.
    7. Tax benefits of up to INR 2 lakhs for working individuals and a tax-free maturity amount upon retirement.

    NPS

    Tax Benefits of NPS

    Section 80CCD (1)

    The contribution made by a Government Sector Contributor (salaried) and a Non-Government Sector Contributor is described in Section 80CCD (1) of Section 80C. These contributions add up to 1.5 lakh INR. Salaried workers may deduct up to 10% of their salaries, while self-employed people may deduct up to 20% of their gross income.

    Section 80CCD (1B)

    Accompanying deduction of INR 50,000 for any additional self-contributions above Section 80CCD. Both salaried and self-employed individuals are subject to it and can avail of the benefit.

    Section 80CCD (2)

    Government and non-government employers’ contributions on behalf of their staff. A person may deduct the most is either the employer’s NPS contribution or 10% of their base salary plus Dearness Allowance (DA). Self-employed people are not eligible for this benefit.

    Types of NPS account

    1. Tier I
    • Each person must open the fundamental, required account to participate in the NPS scheme.
    • The entire amount cannot be withdrawn before age 60, but under certain circumstances, you may withdraw up to 25% of the invested amount three times in a five-year period.
    • You must open the account with at least INR 500, and there is a fee of INR 1000 per year.
    • It is eligible for tax deductions of up to Rs. 1.5 lakh annually under Section 80C and an additional sum of up to Rs. 50,000 annually under Section 80CCD (1B).
    • Sixty years of age allows for the tax-free withdrawal of 60% of the corpus.
    • Annuities may be purchased with the remaining 40% of the maturity amount. It is possible to use the annuity’s interest as a pension, but it is taxed.
    1. Tier II
    • The account is for retirement savings.
    • Only those with active Tier I accounts are eligible to open it.
    • Anytime is a good time to withdraw the money.
    • After a three-year lock-in period, government workers are eligible to claim tax exemptions, but contributions are not tax deductible for the public.

    Tier 2 vs Tier 1 NPS

    Conclusion

    It can be daunting to guesstimate the precise amount you’ll need to live comfortably during your retirement years. You can create the ideal retirement corpus that satisfies your financial needs by using NPS as a core retirement savings plan with some assets and supplementing it with other low-risk schemes that offer good returns and flexible liquidity.

    FAQs

    1. How to open an NPS Account?

    To open an NPS Account, you would need to:

    • Complete the NPS registration.
    • Submit the necessary paperwork along with the Verification paperwork.
    • Upon successful completion of your NPS login, the CRA will give you a PRAN (permanent retirement account number)
    • The minimal account opening charge and the fund management fee must also be paid.

    Lessons from the IPO of new-age technology companies

    The recent stock price performance of some of the hottest Indian technology companies have left investors bewildered. While it didn’t come across as a surprise to the more seasoned market participants, it served as a rude awakening call to the rest. 

    Let’s try and understand how we got to this and what are the 5 lessons from the IPO of these companies we can draw. 

    How We Got Here:

    The Indian start-up ecosystem is still in its early days and nascent compared to its counterparts in the US and China. The industry has grown significantly over the past decade however it has still been a challenge to produce self-sustainable companies. Most of these firms have bankrolled their growth on the back of a nearly endless funding flow from the VCs. This has also been due to the fact they had been forced to tap the private markets for their capital requirements as the Indian public markets and the market regulator remained sceptical of loss-making firms.

    However, come 2020 and all of that changed. With increasing free time on hand, investors took to investing as a national pass-time. Couple that with brilliant FOMO-led marketing with headlines like ‘How 2020 is going to be a watershed moment for the Indian technology industry’ – and you have got the perfect recipe to create the hype that these IPOs need.

    Where Are We Now:

    2021 saw the listing of 5 such notable technology companies i.e. Zomato, Nykaa, Paytm, Policy Bazaar, Cartrade. The table below shows their YTD performance –

    Sl. No.

    Name of the firm

    Price (as on 1/1/2022)

    Current Market Price (as on 17/3/2022)

    Gains / Loss (in %)

    1.

    Zomato

    137

    80

    		-42%

    2.

    Nykaa

    2,101

    1,517

    -27%

    3.

    Paytm

    1,334

    597

    -55%

    4.

    Policy Bazaar

    950

    745

    -20%

    5.

    Cartrade

    848

    571

    -32%

     

    5 lessons from IPO of these companies:

    a. It’s never a good practice to fall for hype: A lot of the investing apps have gamified the entire IPO process. It always helps to look beyond these gimmicks and one-off marketing fervors and think independently about such events.

    b. Do your own research and diligence: All the companies release a Draft Red Herring Prospectus (‘DRHP’) in a SEBI-prescribed format prior to their IPO. The DRHP contains vital information about the company, its future prospects, operations etc. It is a cumbersomely long document that most investors often tend to overlook – however, going through it in detail can help you uncover important details about the company.

    c. Look for the Offer-for-Sale component in the IPO: Offer-for-Sale (‘OFS’) is a practice through which existing shareholders of the firm offload their stake in an IPO. A higher OFS component is usually a negative sign as this implies that the promoters/investors are merely looking to IPO to cash-in on their own holdings.

    d. There is no get-rich-quick scheme in the markets: It may be tempting to think of IPOs as an opportunity to make some quick buck – yet that is rarely the case. As these IPOs have demonstrated, in the fullness of time the companies tend to trade closer to their intrinsic value.

    e. IPOs are indeed blind bets: Your friend or the Sharma-ji uncle may have scooped up some gains by playing the listing day game i.e. buying and selling on listing day at a premium. However, that does not mean that he/she will be able to do that repeatedly. Since 2007, 456 companies have conducted IPOs on the Indian bourses. Of these, 125 opened lower compared to the issue price, while 29 of them opened flat. Among the remaining which opened higher, 117 opened only with gains of up to 10% [1].

    It may be a truism but time in the market > timing the market. The earlier we learn that, the better investing experience we will have. We know that feeling when we see someone we know make quick and easy money – however, that is transient. It’s important to not fall for the supposed gold-rush in investing because unfortunately there is none. The upcoming LIC IPO will also be a test-case to determine whether the retail participation gets affected by these recent debacles.  

    If you are all too overwhelmed with all this and need a guiding hand, we are here to help. Daulat offers low-cost, fully-managed and diversified multi-asset model portfolios that can help you achieve your financial goals. We implement these using a combination of active and passive mutual funds/ETFs. 

    Speak to one of our wealth experts today! 

    References: [1] Capitalmind Research

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