Category Archives: Investing

Banks have a number of ways to raise money for their institution – some of which are used in their day-to-day operations and some to build up the reserves as required by the relevant regulations. 

To do the latter, the banks can either raise equity, debt, or some combination of both. 

One of the debt-related instruments issued by the banks to increase their equity base is AT1 bonds. Sounds funny right? How can you increase your ‘equity’ by issuing ‘debt’ or bonds? Let’s find out.

What are AT1 bonds?

Additional Tier 1 bonds or AT1 bonds, fall in the category of perpetual bonds, and by definition have no maturity date i.e perpetual. AT1 bonds are issued by banks primarily to increase their core equity base and comply with the baseline requirements of the Basel III norms. Basel III is an internationally agreed set of measures developed by the Basel Committee on Banking Supervision in response to the financial crisis of 2008. 

The Basel III norms dictate that banks must maintain a capital adequacy ratio (CAR) of at least 8%. However, in India, Reserve Bank of India (RBI) norms mandate that India’s PSU banks like SBI, PNB, etc maintain a CAR of 12% and other private scheduled commercial banks maintain a CAR of 9%. The capital Adequacy Ratio is a measure of a bank’s risk capital. 

AT1 bonds offer higher returns with higher risk, most of it sourced from its perpetual nature – no maturity. Banks are not expected to pay back the principal amount, but they carry the right and not an obligation to return the principal after exercising a call option. Call options offer its holder an option to buy a financial instrument at a pre-determined price. 

Why do banks issue them?

As mentioned above, the primary reason for the banks to issue AT1 bonds is to increase the core equity base with the funds raised which is done periodically. The AT1 bond market took a massive hit in 2020 pegged by RBI allowing the write-off of AT1 bonds issued by Yes Bank worth Rs. 8,414 Cr during its reconstruction. But, investors are more confident about banking institutions with experts seeing issuances topping Rs 30,000 crore this financial year.

Features of AT1 bonds

Maturity: With no maturity period, AT1 bond issuers are not expected to return the principal amount. And hence they usually have no maturity date. Banks however do hold a call option if they do want to exercise their right to buy back the bond at a pre-determined price. 

Return: Interest rates offered on AT1 bonds are usually higher than other debt instruments like NCDs, and FDs offered by the same back. This is because these instruments are unsecured and can be written off by the bank during periods of extreme stress. To compensate investors for the additional risk, banks offer a higher rate of interest. 

Security: Banking institutions have the ability to write off these bonds which makes them the riskiest when the bank is under any constraints (as happened in the Yes Bank’s case).

Trade: These bonds can be traded on the stock exchange as well as sold in secondary markets.

SEBI’s AT1 regulation for Mutual Fund houses 

As per the recent directive from SEBI, mutual fund companies must value these AT1 bonds as 100-year instruments. This will have a significant impact on the fund’s NAV should there be a fall in the value/price of the bond due to an increase in the interest rate (Bond prices and the direction of interest rates are inversely related). 

Moreover, to limit the exposure that fund houses can have – they are mandated to have not more than 10% of the total assets invested in these AT1 bonds given their high-risk and long-dated nature. Therefore, as an investor before investing in any debt fund – it’s always good to have an understanding of their exposure to these bonds and ascertain the risk nature. 

FAQ

Why are AT1 bonds perpetual?

• AT1 bonds have no maturity date, i.e the investor doesn’t have the option to redeem the bonds and only the bank has the call option after a certain period of time.

Who regulates AT1 bonds?

• The Securities and Exchange Board of India (SEBI) regulates AT1 bonds in line with Basel III guidelines. 

Should I invest in AT1 bonds?

• From April 2023, SEBI has directed to increase the maturity of these AT1 bonds to 100 years. And therefore, you should stick to big brand names and have very limited exposure to these bonds as part of your debt allocation in your overall portfolio due to the high-risk nature of these financial instruments. 

With a plethora of investment options available today, gold still manages to find its way into your portfolio – whether knowingly or unknowingly. Some buy it for its sentimental value, and some because it provides a great ‘hedge’ during periods of macro and geo-political uncertainty. Whatever the reason may be, it is clear that gold is here to stay as an asset class for the foreseeable future. 

Usually, investing in gold is associated with the tedious process of purchasing jewelry or gold bars with the added cost of making and storing them. But, what if we could invest in gold without having to physically hold it? That’s Sovereign Gold Bonds.

Sovereign Gold Bonds

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 take away the hassle of safekeeping it.

Features of Sovereign Gold Bonds

Eligibility: The bonds are allowed to be bought by Indian Residents, entities including HUFs, Trusts, Universities, and Charitable institutions. 

Purchase criteria: You can buy SGBs in grams of gold and its multiples with the minimum size being 1 gram and the maximum being 4 kgs for individuals and HUFS and 20 kgs for trusts and similar entities listed by the government.

Interest: The investors will be paid Interest on your initial investment at the rate notified by RBI for a particular tranche on its launch and is paid semi-annually. For SBG 2022-2023 the investors will be paid a fixed interest of 2.50% per annum on the invested value, to be paid semi-annually

Disinvesting: The tenure for SGBs is 8 years with the eligibility to take out your investments from the 5th year i.e 5th, 6th, 7th, and 8th year of your investment on the interest payment dates.

Taxation: Under the Income Tax act of 1961, capital gains on Sovereign Gold Bonds are exempted. For long-term capital gain tax, the investor is provided with indexation benefits which are applicable when transferring SGBs as well.

Benefits of Sovereign Gold Bonds

Virtual: As you won’t be receiving any physical gold, it cuts out the need to store it and makes it hassle-free as you don’t need to take care of its safety.

Charges: There are no additional charges that you’d have to incur while investing in Sovereign Gold Bonds as compared to physical gold. 

Safety: Since it is issued by the Reserve Bank of India, it is essentially a risk-free investment. 

Collateral: SGBs can also be used as collateral for taking out loans in the form of gold loans with the value of gold being calculated after setting the Loan-To-Value ratio (LTV). As of now, only some banks provide this option.

Transferable: You are allowed to trade Sovereign Gold Bonds(SGBs) on the stock exchange after a certain period of time that you’ve invested in them.

Interest: Above all, unlike physical gold which just sits idle after the purchase and you’ve to wait for the asset’s value to increase, SGBs provide you with a regular side income in the form of interest.

Other Investment Routes

Conclusion

Although the investment returns of gold can be debated – what can not be debated is its importance as a store of value. And hence a small tactical allocation to gold in your investment portfolio through SGBs/Gold funds can provide an effective tool to ride out the volatility of the markets during periods of rising uncertainty and high inflation. 

Retirement planning is one of the most essential financial goals an individual saves towards. It is primarily concerned with ensuring there is an adequate income flow to meet the expenses in the retirement stage of the person’s lifecycle. However, to get there, one must invest a portion of his current income to create a sufficient retirement corpus. And once the corpus is accumulated at the time of retirement – one must be able to draw a regular income from it to help them live a comfortable life without compromising on the quality 

As we can see, there are primarily two stages: a) the Accumulation Phase: The phase in your life where you invest in building that nest, and 2) the Distribution Phase: Your retirement phase where you will need to draw on the corpus so created. 

Let’s see each of the phases in a bit more detail: 

Retirement Planning – Accumulation Phase: 

Ideally, one should start investing as soon as they are comfortable doing so. Even in the earlier stages of your life when your income is not very high, you should get into the habit of keeping aside a particular portion of your income for retirement. One of the biggest benefits of starting early is that you can let the magic of compounding work. 

Let’s take the case of Ram who started investing when he was 25 years old and Shyam who started investing when he was 35. If each of them wants to accumulate Rs 1 crore by the time they are 60 years, Ram would need to contribute only 1,555 per month whereas Shyam would need to save 5,322 per month. We have assumed a 12 percent rate of return on their investments. 

As we can see, starting early can have a significant benefit on the contribution one needs to make every month. Here are a few points to make a note of when thinking of this phase: 

1. Higher Equity exposure: Investments in the accumulation phase should primarily be made in equities or equity-related instruments since the long-term time horizon allows you to eventually smooth out the volatility of the markets and generate higher returns. 
2. Higher risk-taking ability: This is also because there is a greater willingness and ability to take risks in the early parts of your career.

Retirement Planning – Distribution Phase:

Once you have accumulated a significant retirement corpus during your accumulation phase, your goal now should shift from growth to preservation. In the distribution phase, you are now concerned about withdrawing a regular income from that corpus to help you meet your day-to-day expenses. 

Two things to note here: 

1. Lower Equity exposure: Investments in the distribution phase should primarily be made in debt or debt-related instruments since your goal now is to preserve your capital and generate regular income from it 
2. Lower risk-taking ability: This is because you can no longer afford an erosion of your accumulated capital and thus are primarily seeking safety. 

Great, now that we have an idea about that – how do we answer the two most important questions: 

1. How do we estimate our retirement corpus? In other words, how much should I have accumulated by the time I retire? 
2. How much do I need to invest every month to reach that corpus? 

Let’s answer each of those questions in a bit more detail: 

• Determining the Retirement Corpus

Determining your retirement corpus requires you to go through a step-by-step process: 

1. Estimate your monthly expenses in retirement: For e.g. If Ram has a current monthly expense of Rs. 35,000 and has 35 years left till retirement – then he will require Rs. 2,84,324 per month by the time he is 60. This assumes an inflation rate of 6%. 

Calculation – 35,000* (1+ 6%/12)^ 420 months. 

• Calculation of retirement corpus

The retirement corpus to be accumulated by the time Ram is 60 is Rs. 5.68 crores. This can be calculated using the PV formula in excel. 

In other words, Ram will need to invest Rs. 5.68 crores once he turns 60 at a rate of return of 8 percent to generate a monthly income of Rs. 2,84,324 to fund his monthly retirement expenses. Now you may ask that there will be inflation during his retirement years – but this has been accounted for since the calculation took into account the inflation-adjusted rate of return on the investment. 

Once you have an idea of much money you will need at the time of retirement – we need to now see how we get there. Or how much should we invest per month to reach the goal of  Rs. 5.68 crores in 35 years? 

1. Investing to accumulate the retirement corpus

Continuing from our previous example, we need to now determine how much will Ram need to save and invest monthly to accumulate a sum by the time he is 60. Let’s see the calculations: 

Once we have these parameters, we can calculate the amount using the PMT function in Excel. Inputting the values, Ram will need to invest Rs. 8,756 per month to generate a corpus of Rs. 5.68 crores by the time he is 60 years old. 

As you can observe, the monthly investment amount is dependent on the 1) time horizon 2) assumed rate of return and 3) the total corpus required at the time of retirement. If the time horizon increases and others remain the same then Ram will need to invest lesser amounts of money every month. But if the assumed rate of return decreases, let’s say, by investing in lower yield instruments like debt – then, assuming the time horizon and corpus remains the same, Ram will be required to invest a higher amount every month. 

Conclusion

Retirement may seem daunting and scary, but as we can see above that if we start early – then we can make the process simple and easy. It is just about being methodical in your approach and investing in a disciplined manner over your lifetime. 

SIPs or Lumpsum? This is the million-dollar question that everyone needs to answer when they are investing. While there is no right/wrong answer, each of the styles of investing is suited to different needs and personalities. 

In this post, we have made it that much easier for you to understand the differences between the two so that you can make a more informed decision for yourself. Let’s quickly recap what each of those terms first means: 

What is a SIP

A Systematic Investment Plan or a SIP is an investment strategy where you invest a fixed (or progressively increasing) amount in regular intervals (either weekly, monthly, or quarterly). The biggest benefit of SIP is that seemingly small sums of money set apart every month can compound very rapidly over long periods. 

That is the reason SIPs are the most chosen path when investing in Mutual funds. Also, the easiest to start considering the minimum amount of investment (SIP) can go as low as Rs. 100 a month.

Please note that SIP is not a mutual fund scheme. It is merely an approach to investing in mutual funds. And all mutual fund schemes allow you to invest in them via the SIP route. 

What is Lumpsum

Lumpsum investing, as the name suggests, involves investing your capital in one go, usually, a larger amount instead of breaking down your investments into smaller chunks like SIPs. This form of investing is useful to people who have irregular cash flows or often would like to take advantage of a temporary dip in the market from time to time. 

SIP v/s Lumpsum – Showdown

We try to define what’s good for what variable to better understand which mode of investment is the best fit for you. 

Capital Size

Small: When you don’t have a sizable amount to invest, a Systematic Investment Plan is the sure-shot way to go forward with, considering you can start with a very small amount. Waiting to accumulate a large capital and then going lump sum can be a risky affair and instead of waiting for a chance to join the race, you can start running slowly and eventually but surely reach the finish line. 

Also, SIPs add discipline to your investment routine, and with systematic investing, you don’t go overboard in spending your corpus and see your investments grow hand-in-hand.

In Mutual Funds, starting with a low monthly SIP plan can give you first-hand experience investing in the markets without committing vast amounts of money. If you are a beginner, you can also consider doing a SIP into ELSS mutual funds which provide both tax-saving and returns. This can give you a good understanding of your investing psyche. 

Medium: If you have a decent amount to start investing, it is important to strike an optimum balance between Lumpsum and SIP investment. This gives you good of both and helps you stay on top of the market by mitigating the risk with lump sum helping in speeding up the compounding process and SIPs diluting the volatility and averaging the rupee cost over the period.

Large: When you are dealing with a large corpus, you may want to invest the amount in a single instalment rather than spreading it out through SIPs. However, this can often turn out to be risky and you have invested in a falling market. Rather, you can invest the lump sum in a debt/arbitrage fund and opt for a Systematic Transfer Plan (STP) wherein every month (or whatever frequency you like) – you will be able to transfer the money from the debt fund to an equity fund of your liking. In this manner, you can spread out your investments over a while even if you have a lump sum to invest. 

Risk Appetite

Conservative/Balanced:  If you want to play it relatively safe in your investing journey, it is best to invest via SIP. Also, SIPs reduce the average cost of acquisition over time due to a process called Rupee Cost Averaging whereby you buy more units when markets are down and vice versa. This concept is most applicable when investing in equities — whether domestic/international mutual funds due to its volatile and unpredictable nature

Aggressive: If you are ready to take on a bit more risk and are comfortable with the ups and downs of the market, you should opt for Lumpsum investments. 

Volatility

High: If the markets are extremely volatile, it can become difficult to see a consistent drop in your portfolio value. Therefore, in such situations, it is usually advisable to stick with SIPs and continue investing by spreading out your risk over long periods. 

Low: With the markets looking seemingly safe (you can never be sure of it), you can consider putting in lumpsum investments from time to time to take advantage of that. However, it is often very difficult to accurately predict when the tide would turn. 

Conclusion

Having said everything, SIPs are growing hugely popular for all the right reasons as more and more investors step into the market.

A thorough revision of your corpus to invest, risk appetite, and especially age can give you the final answer to how your investments should be divided into SIPs and lump sums.

The Income Tax act provides you with various avenues to save taxes on your long-term capital gains (LTCG). Now, what constitutes long-term differs from asset to asset. We have already discussed this in detail for equity/debt instruments in our previous blog here. For this post, we will concentrate on LTCG on the sale of immovable property like land/buildings. The period of holding for such assets is 2 years or more and any tax liability for that period is taxed at 20% with the benefit of indexation.

But, we can save taxes on those gains under section 54EC of the IT Act by investing in capital gain bonds.

What is Section 54EC of the IT Act?

Section 54EC provides tax exemptions for long-term capital gains (holding period of 2 years or more) arising from the sale of immovable property. The exemption is available to a maximum limit of Rs. 50 lakhs.

The assessee must invest the proceeds of the gains within 6 months from the sale of such property in eligible bonds (discussed below) to claim the exemption. Any interest earned in the hands of the investor from these bonds is taxed at their individual tax slab rate. Currently, the bonds issued are paying an interest of 5% p.a.

Eligible bonds under Section 54EC 

The bonds offered under Section 54EC are often referred to as Capital Gain Bonds as they help in saving LTCG on the sale of immovable property. The following bonds issued by PSUs are eligible for tax exemptions:

• Rural Electrification Corporation Limited (REC) bonds,
• National Highway Authority of India (NHAI) bonds,
• Power Finance Corporation Limited (PFC) bonds,
• Indian Railway Finance Corporation Limited (IRFC) bonds. 

Eligibility criteria for investing under Section 54EC

• Investment shall be made within 6 months from the date of sale of the investment bringing in the capital gains.
• The maturity period for these bonds is 5 years and if you withdraw your investments before 5 years, you have to pay the original LTCG on your capital gains.
• Tax exemption from capital gain bonds is not available for Short Term Capital Gains
• The maximum exemption that you can get is Rs. 50 Lakhs.

Benefits of investing in Capital Gain Bonds

• Tax-exemption: the primitive advantage you get from Capital Gain bonds is saving taxes on the LTCG you earned over the years from your investments in property/land/building.
• Safety: As mentioned above, these bonds are AAA-rated and essentially are risk-free as they are issued by Government-backed institutions with virtually no risk of default on principal or interest repayments.
• Interest: You are also rewarded with 5% per annum of interest with these bonds although the interest earned here is not tax-free and you need to pay the taxes according to your tax slab.

FAQs on Capital Gain Bonds

On what assets is 54EC applicable?

• 54EC is applicable only on LTCG arising out of the sale of immovable assets like land or property. It is not applicable for investments in stocks/shares/mutual funds etc.

What is the lock-in period for capital gain bonds?

• The maturity for securities under section 54EC is 5 years.

Are interest earned on 54EC bonds tax-free?

• No, the interest earned is taxable as per the income tax slab. You will need to declare capital gain from 54EC bonds under your return filing since no tax is deducted for the interest earned from these bonds.

What is the mode of holding Capital Gain bonds? 

• The bonds can be held either in physical or Demat form.

Is it possible to invest more than Rs. 50 lakhs in these bonds?

• No, the maximum permissible limit under Section 54EC is Rs. 50 lakhs. An investor needs to consider other sections such as section 54 or 54F for the balance amount of investment.

Understanding mutual fund taxation is critical to making sound and informed investing decisions. Investing in mutual funds not only provides a good opportunity to get inflation-beating returns compared to other options like FDs, RDs, etc. but also is a much more tax-efficient vehicle.

Let’s first get a quick recap on how your investments in FDs are taxed to have a better understanding of its tax-inefficient nature and then move on to understand more about the taxation structure of mutual funds.

FD taxation structure

The interest you earn on your FDs every year is added to your income and taxed at your income tax slab rate. You will be taxed irrespective of whether you realize the interest or not. However, in mutual funds, even if the value of your investment increases and you do not redeem it – you will not be liable to pay any tax on that.

This is one of the biggest benefits of investing in mutual funds compared to FDs. FDs by nature are taxation-inefficient and if you look at their after-tax returns of them – you will be surprised to see how little they yield compared to other options.

Mutual Fund Taxation

Equity Mutual Funds

Equity funds are mutual funds that invest at least 65% of your money in equity and equity-related instruments:

• Short-term – If your holding period is less than 12 months. i.e you sell your investments before a year from the time of purchase, your gains are taxed at 15%.
• Long-term – If your holding period is more than 12 months. i.e you sell your investments anytime after a year from the time of purchase, you are taxed at 10% for gains over and above Rs. 1 lakh. For e.g. If you realized a profit of Rs. 1,10,000 by holding the mutual fund units for over 1 year then you will pay only Rs. 1,000 in taxes i.e. 10% of (Rs. 1,10,000 – Rs. 1,00,000) since gains up to Rs. 1 lakh is exempted from being taxed.

(Mutual fund taxation for equity funds is the same as the taxation for stocks)

Debt Mutual Funds

Debt funds are mutual funds that park most of your assets in debt-related instruments, a minimum of 65% of their portfolio.

• Short-term – If the holding period of your mutual fund units is less than 36 months. I.e you sold your investments in the mutual fund before 3 years from the inception of your investment, you are taxed according to your tax slab on your capital gains
• Long-term – If the holding period of your mutual fund units is more than 36 months. i.e you sell your investments in the mutual fund after 3 years from the time of purchase, you are taxed at 20% with an allowance of indexation on your capital gains. Indexation refers to adjusting the cost of purchase for inflation.

For e.g. Let’s say you invested in a debt mutual fund with a NAV of Rs. 100 on 1st January 2019. After 3 years, on 2nd January 2022, the NAV was INR 150. Since the holding period is >3 years, you will pay a long-term capital gain on this. However, your capital gains tax will be calculated after adjusting the original NAV of Rs. 100 for inflation. There is a formula to calculate the indexed cost of acquisition which basically factors in inflation and increases the cost of purchase thereby reducing the capital gains.

So, if the indexed cost of acquisition was Rs. 110, then your capital gains will be 20% of INR (150 – 110) of 8 rupees. 

Mutual fund taxation on dividends under the ‘Income distribution cum Capital Withdrawal’ option

Any dividends received by the mutual fund schemes from the company in their portfolio are not mandated to be distributed to the investors. Mutual funds under a separate option called ‘Income Distribution cum Capital Withdrawal’ (IDCW) may pay out dividends to the investors – however, any such payouts are their sole discretion and there is no guarantee that the fund will be able to continue to provide it regularly.

Dividends received in the hands of the investors under the IDCW option are taxed at the individual’s marginal tax slab rate. Hence, it is always advisable to choose the ‘Growth’ option since its more tax efficient. Under the ‘Growth’, any dividends or interest received by the mutual funds is reinvested back into the scheme which gets reflected in the form of a higher NAV.

Taxation Benefits under Section 80C of the Income Tax Act

Certain mutual fund schemes can also provide investors with the benefit of getting tax exemption under section 80C of the Income Tax Act.

Equity Linked Saving Schemes (ELSS) are a special category of mutual funds that are eligible for deduction under the 80C Act. These are primarily equity schemes that invest at least 65% of their portfolio in equity and equity-related instruments. Some salient points to note are below:

1. The scheme has a lock-in period of 3 years
2. The benefit is available for up to Rs. 1.5 lakhs per taxpayer per year
3. This is one of the many eligible investments under Section 80C which means that if you have exhausted your Rs. 1.5 lakhs limit by investing in other instruments like PPF etc. then you will not be able to claim any further deduction
4. If you are investing via the SIP route in the ELSS scheme, every instalment is subject to a 3-year lock-in period from the date of their respective investment

Conclusion

Taxation is a critical component of any investment option. Therefore, it’s always good to have a thorough understanding of the mutual fund taxation regime to help you take a more informed decision.

As we have often talked about in our posts earlier, Diversification is often called the only free lunch in investing. It is the process of spreading your investments across different asset classes (equity, debt, gold). Even within equities, you can be invested in the Domestic markets and International markets. Investing outside India can provide a great way to truly diversify your portfolio. A recent trend to gain that exposure has been via investing in Nasdaq. But first, let’s understand what is the Nasdaq, why should we invest in foreign markets, and finally how we can invest in Nasdaq from India. 

What is Nasdaq?

Like the Bombay Stock Exchange (BSE) & National Stock Exchange (NSE) in India, Nasdaq is an American stock exchange, where investors can buy and sell securities like shares, bonds, and other financial instruments. It is the second-largest stock exchange by market capitalization after the New York Stock Exchange (NYSE). 

If you wish to invest in Nasdaq, you can do so by either investing in Nasdaq100 or Nasdaq composite. The former consists of 101 non-financials firms listed on the Nasdaq stock exchange and includes some of the best known high-growth technology companies like Apple, Facebook, Amazon, etc. The latter includes all the companies listed on Nasdaq. While India has seen some of its new-age technology companies do their IPO recently, the U.S. continues to remain the mecca for tech companies. 

Why foreign markets though?

Accurate price discovery: US markets are the most mature and developed stock markets in the world. According to a recent survey, over 58% of Americans invest in the markets compared to only about 4% in India. As a result, this ensures that the price discovery of the stocks is accurate as there are many market participants involved. And, no single institution can usually influence the price of the stock for too long ensuring that the current price reflects the most accurate information available in the market. 

Diversification of funds: US stock market does not rise and fall at the same time as the Indian markets. Therefore, to build a diversified portfolio it often makes sense to also geographically spread your bets so that you reduce the risk of your portfolio and also have the opportunity to potentially generate returns even when the domestic stock markets are not performing well. 

Ways to Invest In Nasdaq from India

You could either invest directly i.e. hold individual stocks or invest through ETFs/mutual funds. Let’s discuss each in more detail. 

Direct Investment:

You have the option of investing directly in the stocks forming the Nasdaq100. E.g. You can invest in stocks like Apple, or Google by opening a US brokerage account either through a local broker or a foreign broker/bank which has a presence in India. For doing this, you will have to also transfer the fund to the US. As per current RBI guidelines, under its LRS program – an Indian resident is allowed to remit up to US$250,000 per year. 

You should be careful in selecting the broker that you choose because it can involve a lot of hidden costs like remittance fees, conversion fees, etc. 

Indirect Investment:

If you want to stay away from the hassle of going through the cumbersome process of investing directly, you should consider taking the passive/indirect route and investing through ETFs/mutual funds. 

• ETF

One way to invest in Nasdaq is through ETFs. Exchange Traded Funds (ETFs) are a bunch of stocks/bonds under the hood of a single fund which are very similar to mutual funds but unlike MFs, ETFs are traded in the stock market just like other stocks. E.g. You can buy the Invesco Nasdaq 100 ETF (QQQM) which tracks the Nasdaq 100 index. 

If you wish to purchase the above ETF, you are required to open a brokerage account in the US which allows you to hold those ETF units. Alternatively, you can also invest in these ETFs in India by buying equivalent ETFs like Motilal Oswal Nasdaq 100 ETF which allows you to get exposure to Nasdaq without having to open a US brokerage account. But even for this option, you will be required to open a Demat and a trading account with a local broker in India. 

• Mutual Fund

If you do not want the hassle of opening a Demat/trading account for buying ETFs, you can invest via the mutual fund-of-funds route. Funds of Funds (FoFs) are a type of investment route/instrument in which a local fund takes your money and invests it in a US-based mutual fund which in turn invests in Nasdaq.

Example: Kotak Nasdaq 100 FOF

The Bottom Line

If you are looking to spread your investments across different asset classes, you should invest in the Nasdaq. In today’s highly globalized and interconnected world, it is essential to have some part of your money invested abroad to diversify your portfolio. Technology and regulatory intervention have made it easier than ever before to do that. 

Target Maturity Funds (TMFs) have been the talk of the town for a while now. But, before we understand what they are, let’s quickly recap what are debt mutual funds (since Target Maturity Funds are a type of debt mutual fund). And how investments in debt/bond funds provides stability to your portfolio compared to equity investing.

Debt mutual funds are a type of mutual fund that invests in fixed-income generating securities like government bonds, and corporate bonds. They are often seen as a substitute for your more traditional debt investments like FDs, PPF, National Savings Certificates, etc.

What are Target Maturity Funds?

TMFs are debt mutual funds that are akin to index funds or ETFs in that it pools your money and track an underlying bond index. It comes with a maturity date, and unlike fixed maturity plans (FMPs) these funds do not have any holding period, i.e you can exit anytime you want.

TMFs are allowed to invest only in government securities, PSU Bonds, and State Development Loans (SDLs) making it less risky than investing in other debt instruments. Also, since they are passively managed – it saves you time and energy by helping you get market returns with little effort.

The good

Target Maturity Funds gained popularity for a wide variety of reasons, them being:

1. Open-ended nature: As mentioned earlier, you do not have a specific exit point for TMFs, and can therefore sell them whenever you want. But, it is usually not recommended to do so since holding it till the maturity date (which is the maturity date of the bonds the TMF has invested in) helps you to avoid taking any interest rate risks and thereby provides you with better predictability of returns.
2. Simplified tax structure: TMFs are taxed just like other debt mutual funds. Long-term capital gains (holding period > 3 years) are taxed at 20% along with indexation allowance (adjusting the cost of acquisition of security to inflation) and Short term capital gains (holding period < 3 years) are taxed as per your tax slab. Unlike FDs where the accrued interest is added to your taxable income every year and taxed at your slab rate, debt mutual funds like TMFs are generally seen as more tax-efficient investment vehicles.
3. Safety from interest rate movements: Bonds in a Target Maturity Funds portfolio is similar in nature as far as duration (Duration measures the interest rate sensitivity of a bond) is concerned since all of them are held till maturity and are slated to mature around the same time as the fund’s maturity. The maturity of a TMF is usually mentioned in its name e.g. Edelweiss Nifty PSU Bond Plus SDL Index Fund – 2027. By holding these bonds to maturity, the duration of the fund keeps falling and hence the investors are less affected by any price fluctuations due to interest rate changes.

The Bad: 

The flip side of TMFs is not a lot but still should not be ignored:

1. Lack of past performance details: The major disadvantage of a TMF is the lack of any historical data on its past performance. As a result, you are often dealing with less information when evaluating a fund than you would have otherwise.
2. Early exit error: Target Maturity Funds are open-ended in nature allowing you to exit whenever you want. However, that convenience also comes with a caveat that you may be subject to interest rate risk. For e.g. In a rising interest rate environment, TMFs may temporarily see a drop in their value as the new bonds issued by other issuers with higher interest rates become more attractive. Hence, it is not really advised to time your investment in a TMF and instead stay invested through the maturity date.
3. Another side of the passive coin: Since Target Maturity Funds are passive in nature, the fund manager often has very limited scope to actively manage the bond portfolio in response to the prevailing interest rate environment or a change in the credit rating of the issuer. Hence, the manager has no choice but to hold on to the bonds.

Is it for you?

If you are looking to lock in your returns and like the predictability of getting an assured return, you should invest in Target Maturity Funds. But, you should have the right temperament to hold the fund until its maturity and not make any hasty decisions in between.

The recent hike in the interest rate by RBI makes the newly-launched TMF’s overall yield more attractive and lucrative and therefore it can be a good addition to your debt investment portfolio.

The recent rise of new-age investment platforms has helped Indians double down on wealth management.

Investors have grown conscious of how their hard-earned cash is being invested and managed.

A gradual change in the pattern of investing has taken place recently from investors giving away total control of their assets to fund managers, to evolving into semi-DIY investors by investing through platforms like smallcase.

Why though?

Coming-of-age platforms gained popularity by picking out and killing specific anomalies with the products available in the market right now.

Will the new wave of investment tools, be able to sweep out old but cemented legacy products like mutual funds?

What is a Mutual fund?

A mutual fund is an investment tool that collects money from investors and invests it in equity, debt, bonds, and other assets. Fund managers working under an Asset Management Company (AMC) take the job of analyzing, picking, and investing in different asset classes.

What is a smallcase?

This is what smallcase proposes itself as ‘A smallcase is a basket of stocks that reflects an idea’. To give some more structure to it, it is a group of stocks or ETFs put together by SEBI Registered Investment Advisors that together track or point towards a single strategy, theme, or use case.

Want to invest in the recent innovation in the electric automobile sector? There are smallcases comprising stocks tracking that particular sector.

Let’s see how both of these investment options compare:

 Smallcase V/S Mutual funds

a. Control

When investing in a mutual fund, your money is invested in securities that don’t land directly in your demat account – you are instead allocated units of that mutual fund. This is different from a smallcase investment as the portfolio stocks are directly debited/credited in your demat Account giving you total control to rebalance or disinvest whenever you want without the intervention of the manager.

b. Investment size

For smallcase to provide you with the ability to control your investments from your demat account, it cannot allow you to invest in stocks in fractions. To invest in a smallcase with 10 stocks or ETFs you need to buy at least 1 share of each of these 10 stocks thereby increasing the overall amount you need to start investing. In mutual funds, you can start with as low as Rs.100 or Rs.500, reducing the overall friction for low-ticket-sized retail investors.

c. Fees

d. Volatility

Mutual fund managers take full responsibility for managing and rebalancing your stocks in response to how the markets are performing. With smallcase, rebalancing takes place only within the specified time restricting its ability to instantly react to the changes in the market.

e. Diversification

As smallcases focus on investing your money in an idea, it restricts themselves from diversifying in a wide range of stocks, which is not the case with Mutual Funds which have the liberty to diversify in as many stocks as they want (except index and sectoral/thematic funds)

What do the Markets suggest?

The market works always in the favour of the investor who understands how to mitigate risks.

As said before, smallcase has very less room for you to diversify, unlike mutual funds where fund managers take full control and responsibility. Diversification is one of the major tools to reduce the risks of your portfolio without affecting the investment goals you want to achieve.

What should I choose? 

Mutual funds are for you if:

• want to invest in well-regulated investment products
• do not like to monitor your portfolio actively frequently
• cannot bear the frequent trading/rebalancing costs

Smallcase is for you if:

• you want complete control over your investments
• have the time and expertise to manage your portfolio however you want
• are willing to bear the frequent trading/rebalancing costs associated with it (check the cost section above)

FAQs

Q: Can we start a SIP with a smallcase?

A: Yes, you can start a SIP with smallcase but the minimum investment will usually be on the higher side as compared to Mutual Funds as you have to buy at least 1 stock of each of the stocks in the group of stocks and not in fractions.

Q: Do we have a lock-in period for mutual funds?

A: ELSS mutual funds have a lock-in period of 3 years and except that no other mutual fund has a lock-in period. smallcase doesn’t have a lock-in period in any type or form.

Q: Do we have an exit load on the smallcase?

A. No, smallcase credits your shares in your Demat account directly, hence, selling a smallcase is basically you selling stocks bought from the list of the smallcase.

Q: Who manages a smallcase?

A: smallcases are managed by SEBI-licensed Registered Investment Advisers (RIAs)

Remember the time when you were told that investing in a Public Provident Fund (PPF) was the only available option to save tax and invest simultaneously? Well not anymore. There are plenty of options to do that now and one of them is through an ELSS Mutual Fund.

What are ELSS mutual funds?

ELSS Mutual Funds or Equity-Linked Savings Scheme is a type of equity mutual fund scheme that allows you to save tax under section 80C of the Income Tax Act while investing for your long-term goals.

Section 80C of the IT Act permits tax deduction of up to Rs. 1,50,000 per financial year under different investment instruments.

How to identify an ELSS Mutual Fund?

• A tax deduction of up to Rs. 1,50,000 on your invested capital every year.
• A lock-in period of 3 years – you cannot take your investments out of any ELSS funds before 3 years from the inception of your investment in the fund (every SIP instalment is locked in for a period of 3 years also)
• Allocation of most of the fund’s value in equity and equity-linked instruments.
• You can invest as high of an amount as you want although the tax rebate will be up to Rs. 1.5 lakhs only

Taxation of an ELSS Mutual Fund

ELSS Funds are taxed just like other equity-based funds. Details in the table below:

Is it the best option?

Here’s us comparing ELSS mutual funds with other similar investment instruments

The inference we can take out from this comparison of tax-saving instruments is that ELSS has an acutely lower lock-in period but is subject to market risks, unlike other safer options.

How to invest in an ELSS Mutual fund?

• Like every other Mutual Fund scheme, you can either invest lump-sum or through SIP. Most people tend to wait until the tax filing season to invest a lump sum but we recommend that if you are new to investing – you should spread out your investments via a SIP.
• Also, similar to other Mutual Funds you have options to either choose the Growth plan wherein the profits generated by the fund are reinvested back into the fund and get the lump sum after the lock-in period (if you wish to!), or the Dividend plan that provides you with regular dividend payouts (although the dividends are not guaranteed and are at the sole discretion of the fund house)

Some FAQs 

Where is my invested money going?

A: A minimum of 80% of the total fund’s assets are to be invested in equity and equity-related instruments.

Is it mandatory to take out our investments after 3 year lock-in period?

A: No, you can stay invested for however long you want but the minimum amount of time before you can redeem is 3 years.

Is ELSS meant for me?

A: Considering you have a risk appetite for equity markets, it is a good fit for your portfolio as it can provide higher returns over all of the available options

What is the right time to invest in ELSS?

A: You just cannot time the market. As the saying goes, the best time to enter the market was yesterday – the second best time is now.

How can Daulat help you? 

A: Our experts here at Daulat go through a whole host of factors before constructing a portfolio. Reach out to us if you want to have an ELSS portfolio constructed for you.