Category Archives: Investing

What Is An IPO?

An Initial Public Offering or IPO is a privately held company’s debut as publicly-traded security on a stock exchange. The issuing company or firm raises capital through the primary market. Once the IPO is complete, public investors can trade shares on the secondary market.

IPO issuing firms raise more capital than they would as a private company by offering shares to the public. From an investor’s perspective, these IPOs like the LIC IPO, offer an opportunity to buy shares of a company that can grow into a larger and more profitable Company.

LIC IPO

The Life Insurance Corporation of India (LIC) has applied with the market regulator – SEBI – for its much-anticipated initial public offering (IPO) and wants to sell 5% of its stock through an offer for sale (OFS). According to LIC’s Draft Red Herring Prospectus (DRHP), filed on February 13, the insurance giant’s embedded value is Rs 5.39 lakh crore. LIC has become a household name and currently has nearly 29 crore policyholders. LIC has a 64.1% market share in terms of premium and 66.2% market share in terms of new business premium.

Furthermore, the administration, which owns 100 percent of LIC, intends to offer policyholders a premium in the IPO. The government has not yet confirmed the extent of the issue, but it is expected to be announced soon.

When Is It Coming?

The IPO of LIC was expected to open in March, however with the evolving geo-political situation the government is yet to decide on the exact timeline. An IPO usually takes 4 to 6 months to complete. With the support of consultants, the government has already met a long list of operations in the pre-IPO phase, including agreeing on the timetable for the IPO, company valuation, creation of revised financial information, DRHP, offering to file, finalizing IPO details, and so on.

Price of LIC IPO

The price of the LIC IPO has yet to be announced. The Government of India will decide the IPO issue price and discount to retail and employees a few days before IPO  opens. The issue price could be between Rs 1,693 to Rs 2,962 per share. Face value for LIC IPO is Rs 10 per equity share.

LIC IPO for Policyholders

Budget officials announced in the 2022-2023 fiscal year that up to 10% of the LIC IPO share capital would be designated for policyholders. On the other hand, experts believe that the launching of LIC will indirectly help policyholders. The offering of LIC will improve openness and administration in its operations because it will be required to comply with all SEBI listing criteria, hence increasing its efficiency. Furthermore, LIC policyholders may be given a protected quota in this IPO.

PAN Details for LIC IPO

For Update

• Visit https://linkpan.licindia.in/UIDSeedingWebApp/getPolicyPANStatus to check the status of your policy.
• Enter your Policy Number, Date of Birth (dd/mm/yyyy), PAN, and captcha in the appropriate boxes. After that, click Confirm.

For Linking PAN for LIC IPO

• Visit the official LIC website at https://licindia.in/ or the direct page at https://linkpan.licindia.in/UIDSeedingWebApp/.
• Pick the ‘Online PAN Registration’ tab from the home page if you’re on the web page.
• Tap the ‘Proceed’ button at the bottom of the Online PAN Registration page.
• After that, input your date of birth, gender, email address, PAN, full title as per PAN, cellphone number, and LIC id number on the new page.
• Select the declaration checkbox from the drop-down menu.
• Request an OTP from your registered mobile number.
• When you get your OTP, enter the digits into the site and submit.

Current Finances for LIC IPO (in crores)

Apply For LIC IPO

Given the LIC IPO craze engulfing the country, many individual investors want to get in on the action. Using their Unified Payment Interface (UPI) ID is one of the ways individual investors can bid for shares in the IPO. Only individual investors, eligible workers, and eligible policyholders can use the UPI method, according to the LIC DRHP published with SEBI.

Eligible consumers bidding in the Policyholder Allocation Portion can use the Condition Related by Blocked Amount and UPI Mechanism. Interested retail investors must confirm the UPI mandate request before bidding through the UPI Platform.

The following are the Do’s and Don’ts to follow when bidding for an IPO using UPI, as per LIC DRHP:

• Do not fill out the Bid Cum Application Form with a third-party bank account or a UPI ID connected to a third-party checking account.
• If RIBs are bidding using the UPI Mechanism, do not upload one Bid cum Registration Form for each UPI ID.
• Since you’re a RIB, Eligible Client, or Eligible Covered entity bidding through to the UPI Method, do not enter incorrect details for the DP ID, Client ID, PAN, and UPI ID.
• To apply for the Offer, they must utilize only their ASBA Account or bank account linked to UPI ID, not the ASBA Account or bank account related to the UPI ID of any third person.
• Investors that use the UPI Mechanism should only mention the Bidder’s and the first Bidder’s valid UPI IDs.

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The worth or the value of your money keeps on declining with time. Hence, one must invest a part or complete sum somewhere where it is easily accessible, safe, and provides some form of protection against inflation. It can be either in physical or financial assets. But as the list of options increases, the list of investment risks related to investments also increases.

Investment risks are defined as the probability or the likelihood of incurring losses instead of profits against a specific investment. It is, in a way, a measure of uncertainties and possibilities associated with any investment. There are many types of risk in an investment like market risk, reinvestment risk, foreign investment risks, concentration risks, credit risks, etc. that are getting covered in the dreams of earning profits over investments. It often includes the downside of investing money and is thus able to explain the financial losses that can occur due to investments.

While many people will tell you about the investment options, very few will overview the risks involved. Hence, to expand your financial literacy and give you independence in the field of investing, we’d like to highlight some of the most common investment risks that can be incurred with investments.

1. Market Risk

The market is as unpredictable as the weather or even more than that. Economic developments, exchange rates, inflations, and political and social policies are all considered while studying the market. All these factors impact the financial market. This, in turn, puts us at financial risk.

There are broadly three types of market risks-

a. Equity Risk: This type of risk is mainly involved in the share market. The price of shares of a company is dynamic and ever-changing. It depends on many factors and hence cannot be kept constant. With this comes the opportunity to increase money by increasing the shares’ valuation. But it also involves the risk of the declining value of profits with a drop in its share prices.

b. Interest Rate Risk: Interest rate risks generally come into play with bonds. It works similarly to equity risk, but the varying factor here is the interest rate instead of share prices. With an increased interest rate comes the loss as the value of bonds drops with rising interest rates.

c. Currency Risk: As we all must have heard and observed the volatility of the currency, we all can together vouch for the risk involved in currency exchange. When you own a foreign investment, you are prone to this risk as the value of your investment can change with the value of the currency.

2. Liquidity Risk

Liquidating assets is as important of a process as investing in assets. To put it simply, if we cannot get our money back when we need it — it is usually of no good use to us. E.g., A vast majority of Indians tend to invest their money into real estate, a highly illiquid asset class. It often involves a lot of time and energy to sell off a real-estate asset.

3. Concentration Risk

This is the most common risk that an individual investor usually faces. We all have options of putting all our eggs in one basket or distributing them across several. When we invest all our money in one type of investment, we place all our bets on that one. If it performs well, we make a profit. If that investment goes down, we incur a loss. We diversify our portfolio across different investments to decrease that risk of loss. Since the concentration of money in one place leads to high chances of loss, it is highly advised to have different investments across geographies and industries.

4. Credit Risk

Whenever we put our money into any investment, we inherently hope it will work in our favour. The credit risk involved with the investment makes it difficult to be entirely sure of the decision. Credit risk indicates the possibility of a company running into a financial crisis. One must evaluate the credit rating of the bond that they are purchasing before investing any amount in that.

5. Reinvestment Risk

As the name suggests, reinvestment risk is the possibility that a cash flow received from an investment earns less when it is put to use in some new investment. Reinvestment risk affects an investor if the interest rate drops and one has to reinvest the sum at a lower interest rate. The tools to mitigate such risk are to use of non-callable bonds, zero-coupon instruments, long-term securities, bond ladders, and actively managed bond funds. If you plan to spend the regular interest payments or the principal amount at maturity, you will also remain unaffected by reinvestment risk. This type of risk is common among investments in bonds.

6. Inflation Risk

We all have heard of the different types of investments and their necessity. As we discussed initially, investing money in assets is important to keep money’s worth growing. Keeping cash will ultimately lead to a loss in the value of money. We all want money’s time value in our favour, so we invest. Now every investment carries a different level of inflation mitigation. Every investment has different returns, profits, losses, and yes, investment risks. But the primary reason for investing is to fight inflation. Hence, a person must consider the inflation risk associated with the investment before locking the money. Investments like shares are a perfect option to mitigate such risk.

7. Horizon Risk

Horizon risk refers to the unexpected or sudden change of plans about the investment made. You have to invest a certain amount to save for the house. Now you have suddenly lost your job and cannot manage the expenses in your current state. You might liquidate your investments before the expected duration in such a situation. This may lead to selling at a lower price than you originally planned. This leads to the shortening of your investment horizon because of unplanned emergencies.

8. Longevity Risk

When we start earning, we divide that money into different streams. We save some amount for current expenses, some for future investments, some for retirement plans, and some for emergency funds. Now, if, by chance, you run out of your savings and fall into the trap of longevity risk, you may have to withdraw your investment before the right time. This is the risk of outliving the savings. People who are retired or near retirement are more prone to such risks as they don’t have multiple income sources and do not have the health to generate any. You must regularly keep track of your savings.

9. Foreign Investment Risk

Foreign investment risk is very difficult to mitigate as these risks involve completely new factors to you. If you invest in companies or industries in some other country, you might not be aware of that place’s ongoing economic, social, or political updates. This may lead to a lack of knowledge about predicting the investment’s future. We may be able to foresee the coming times as we cannot experience them ourselves. Thus, when you plan to buy foreign investments, you need to spend an excellent time understanding the risks that may exist in that country. This will help you take a chance with full preparedness.

Summary

All the investments come with different profiles. It may include varying investment risks as well as financial risks. Thus various types of investment risks are needed to be evaluated at different stages of investment. Sometimes, one has to prioritize risks to get better benefits. As we have already said, nothing comes off easy; good investment returns cannot be expected without the risks underlying them. It is thus very necessary to understand and study different types of investments and their risks. Financial planning begins with investment, and financial literacy is the first step to having a worry-less and safe future.

Thus, invest smartly and play well with risks!

Investment Strategy in Stock Market, Key Lessons to Learn!

The year 2021 was dynamic in a stagnant way. By the end of 2020, we were hopeful of overcoming the storm of Covid-19. There was vaccination going around the world, and the world was witnessing a swift economic recovery. As soon as we saw the hope of stability, we got struck by the second wave, proving to be even more disastrous than the first one. There was the loss of lives, jobs, stability, and economic activities.

However, on the bright side, the market gained momentum positively. Equity markets, Sensex, and Nifty all showed positive growth in 2021. Also, the number of people investing in stock markets, IPOs, trading, cryptocurrencies, etc., increased significantly over the past few years.

2021 has been a year where a lot was happening around the world. We had many lessons that could be learned from such an eventful year. We have composed a few meaningful investment strategies from which we can take inspiration for our investing journey and start stitching the perfect investment strategy.

1. Do not fall into the trap of ever-changing strategies

Our investment strategies need to evolve over time. We must be on the lookout for the next big thing and always be on our toes with the market situation. But it is not advised to make your strategies too volatile. It is important to stick with your investment strategy irrespective of the market conditions. Sometimes, an asset is worth growing, but it may show loss due to a highly sensitive market in the short term. Covid-19 struck the world with a big uncertainty about when will the world become normal again. In such a situation, sticking to the already performed strategy helps cope with the economic losses and reduces such losses.

A list of ways that together can make or break your investment strategy :

• Budgeting
• Goal planning
• Asset allocation
• Systematic Investment Plans (SIPs)
• Portfolio rebalancing

These strategies are something that can be kept constant throughout the investment life. But one also needs to understand the growing markets. Small and mid-cap industries, for example, were showing no or very few returns during the past few years, but with Covid-19, they have shown positive growth and have given good returns to investors. This is important to keep an eye on the market and the investment strategies planned. Thus, being patient and sticking to the investment strategy that keeps you going is one of the most important lessons from 2021.

2. Creating and maintaining an emergency fund

We have all tried to maintain some savings in the emergency fund and ended up exhausting it on other expenses. An emergency fund serves excellent in times of adversities. Covid-19 came with too many uncertainties. There was the loss of life, jobs, economic failures, and whatnot!

Let us say you were earning INR 1 lakh. You had a good lifestyle; you paid monthly EMIs on car and rent. You were able to invest and save too. Now suddenly, owing to Covid-19, you lost your job. Unless you don’t have over INR 6 lakhs in your emergency fund, you might cripple.

Thumb rule: Have at least 6 months worth of your salary parked in a liquid fund or in an investment avenue which can be easily liquidated without any loss of your capital. Emergency situations don’t come with an invitation, and hence it is important to be prepared for anything and everything.

3. Covid crash was not like other market crashes

The market crash that came with Covid wasn’t the first that the world witnessed, but the difference. In the past few years, we have seen Dot Com bust in the year 2000, the global financial crisis of 2008, and then the Covid crash of 2020. While the former two resulted from man-made disasters, Covid-19 was because of the natural calamities. The previous two hits pushed the market deep down and took years to gain recovery incurred in those losses. While the market crash due to Covid-19 was immense, it was short-lived. The market recovered within 5 months, and it was ready to be involved in full-grown investments again.

Thus, the biggest lesson learned from this situation was that not all crises are the same, and one must learn from the past but should not consider every situation the same.

Summary

Apart from those mentioned above, the biggest lesson that the pandemic taught us was to keep calm and keep moving. The world is changing every minute, and it is also becoming unpredictable. Thus, it is necessary to be updated with the market and investment strategies to minimize risks and maximize profits.

Be prepared for emergencies, make an appetite for risks and make well-informed decisions. With these golden rules, you’ll be able to fly high.

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Anyone looking to build personal wealth knows the pivotal role investment plays in achieving that goal which most often is around getting that high rate of return. Experts suggest that a general rule of thumb is buying low and selling high. Although sound advice, it might be difficult for a novice to understand why.

On the other hand, beginners often tend to buy high and sell low. That is, they invest in an asset when the market is doing well, and when the market skews to lower rates, they panic and sell or liquidate. They employ the rationale that if the rates are high, they could make a quick buck on their investment.

Many investors are left confused with miscellaneous advice from various sources vis-a-vis investment. They intuitively gravitate towards a high rate of return. The question then is, is a higher rate of return enough to achieve your financial goals or for building wealth?

To answer this question, we must first understand some important terminology used in investment and its function. Let’s start with the Rate of Return or RoR.

RoR is the measure of net profit or loss of an investment over a specified time. When the investment is made for longer than a year or if there is a reinvestment, the RoR is calculated as Compound Annual Growth Rate or CAGR. CAGR takes into account the compounding effects on the initial investment. CAGR can thus provide a clearer picture of the performance of your investment. Real Rate of Return offers an even more accurate picture of your investment by taking into account the effects of taxes and inflation on your investment.

We need to understand that all these kinds of RoR are calculated retroactively for individual investments. When you invest in mutual funds, equity mutual funds, shares, hedge funds, or any other asset that is subject to market risk, the calculations you make vis-a-vis the value of your investment and your profits are based on historical averages and thus only speculative.

Thus, a high RoR isn’t the primary factor you should rely on when investing. It is particularly true if your goal is to multiply your initial investment. This can be illustrated if we compare two people’s investments.

Take person X, who invests ₹ 5,000 for a period of 3 years, and at the end of 3 years, the value of the investment is ₹ 15,000. The CAGR for person X would be 44.22%.

Person Y invests ₹ 4,000 after waiting for the market to stabilize. But as there is a drop in the market, they withdraw the investment after 2 years. The value of their investment at that point is ₹ 10,000. The CAGR for person Y would be 58.11%.

Even with the high rate of return, or CAGR of person Y, the wealth they accrue is lesser than person X. The obvious takeaway is that higher RoR may not always result in a higher investment value. Being consistent and patient may lead to better results.

Another possible factor that may have affected person Y’s investment is their reluctance to start investing immediately. Often the best time to start is ‘right now.’

Given the fluctuations in the market, the best method to generate higher wealth is consistent and disciplined, long-term investment strategies. The cycles of growth and fall in the market can be highly unpredictable. Relying on averages, even in the case of conservative estimates, is not prudent.

The portfolio allocation should be such that you do not solely rely on market-dependent asset classes to generate wealth. An alternative is fixed-income assets such as bank fixed deposits, public provident funds, or systematic deposit plans. Fixed-income assets are not subject to market risks and provide steady growth in your investment at a fixed rate. These are predictable and risk-free options, but the downside is that the rate of interest they offer could be low, and the returns might not be as high as you’d like.

Conclusion

Many investors rely on the performance of the market to start investing and managing their investments. Generally, people avoid investing or withdrawing their investments when the market is high. Such a heavy reliance on the market may not be the wisest decision. Neither is it prudent to prioritize high rates of return to build wealth.

Wealth creation works best when you have a diverse portfolio that minimizes the risk profile. Additionally, a well-planned and consistent investment strategy will pay off better, resulting in a high rate of return i.e value of the investment in the end.

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