Arbitrage Funds: An Explainer 101

Arbitrage funds has been the flavour of the season recently. In CY 2021, it recevied net inflows of INR 42,287 crores. Before we understand what are Arbitrage Funds, let’s first see what does ‘Arbitrage’ mean.

What is Arbitrage?

Arbitrage is a practice through which an asset/security is simultaneously bought/sold to take advantage of the price differential. For e.g. You buy an iPhone from the USA for $1,000 (INR 75,000) and come and sell it in India for INR 1,00,000. You can earn a risk-free profit of INR 25,000 by simultaneously buying and selling the same asset i.e. iPhone in 2 different markets i.e. USA and India.

What are Arbitrage Funds?

Arbitrage Funds work on the same principle. They seek to generate income/gains through arbitrage opportunities arising out of the price differential in a security between the cash and derivative segment and within derivatives segment. They also allocate a certain percentage of their investments in debt securities and money market instruments.

The fund manager takes a completely hedged and off-setting position to ensure that the fund is not exposed to any specific equity risk.

How Do They Work?

Arbitrage funds buy in the cash market and sell the same security in the Futures & Options (F&O) market to lock in the profits irrespective of the actual price movement in the underlying security. For e.g. Suppose the price of security A in the cash market is INR 1,000 and in the futures market at INR 1,010. The fund manager will buy the security today and simultaneously short a futures contract to sell the shares towards the end of the month thereby locking in a risk-free profit of INR 10.

Or let’s say the price of Security A is INR 1,000 on the Bombay Stock Exchange (BSE) and INR 1,002 on the National Stock Exchange (NSE). One can simultaneously buy the stock on BSE and sell it on NSE and earn a profit of INR 2.  

Things to consider when investing: 

a. Risk: These are low-risk investments with the probability of loss of capital almost nil. Since these funds do not have any open equity positions, they have very little/no volatility compared to other equity mutual funds. Arbitrage Fund: Risk-o-meter

b. Return: There has been downward pressure on the returns generated by these funds. On average, they have delivered an annualized return of +4-5% in the last 2 years. This has been due to the expansionary monetary policy of the central bank which has led to the tightening in yields. 

c. Investment Horizon: These funds are suited to park your short-term money and ideally you should stay invested in these funds for a period of 3-12 months.

d. Exit Load: Arbitrage funds usually levy an exit load of up to 0.25% if the money is redeemed before 30 days.  

d. Taxation: One of the biggest benefits of arbitrage funds is the favourable taxation vis-à-vis debt mutual funds. Since these are taxed as equity, these funds generate higher post-tax returns compared to their debt counterparts.


Short-term Capital Gains

Long-term Capital Gains

Equity Funds


10% post gains of INR 1 lakh

Debt Funds

Per individual tax slab

20% post indexation benefits

Should I invest in an Arbitrage Fund?

Our view is that an Arbitrage fund offers a much better alternative to Liquid Funds or other short-duration debt funds because of its tax benefits. So, you should only consider investing in it if you are looking for a safe avenue to park your money for a period of 3-12 months. 

Short-term interest rates are expected to move up in the next 3-6 months. Arbitrage funds mostly index the short-term interest rate regime in the economy and therefore one can expect the returns from these funds to also move in line with the monetary policy. However, do not expect these funds to give you long-term wealth creation opportunities. 

As some of our clients would know, we at Daulat are never a big proponent of just recommending individual funds. Rather, we focus on providing holistic investment solutions through our multi-asset model portfolios called DMAS which takes into account a whole host of factors including your life goals, individual risk profile etc.

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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.


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

For Linking PAN for LIC IPO

  • Visit the official LIC website at or the direct page at
  • 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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Unwrapping Warren Buffett’s 2021 Shareholder’s Letter

Warren Buffett’s yearly letter to Berkshire Hathaway’s shareholders has become somewhat of a pilgrimage in and by itself. It gives a rare peek into the mind of Oracle of Omaha — the world’s most prolific investor — and how he is thinking about the markets. 

We will refrain from adding our (unnecessary) inputs and rather instead focus on some of the key tidbits we found the most helpful. 

Long-term thinking in a short-term world

“……we own stocks based upon our expectations about their long-term business performance and not because we view them as vehicles for timely market moves. That point is crucial: Charlie [Warren Buffett’s business partner] and I are not stock-pickers; we are business-pickers.”

Even he is not immune to it

I make many mistakes.”

Two key elements in building enduring businesses

The insurance business is made to order for Berkshire. The product will never be obsolete, and sales volume will generally increase along with both economic growth and inflation. Also, integrity and capital will forever be important. Our company can and will behave well.”

Be the master of your own fortune

We want your company to be financially impregnable and never dependent on the kindness of strangers (or even that of friends). Both of us like to sleep soundly, and we want our creditors, insurance claimants and you to do so as well.

on Berkshire Hathaway's $144bn cash pile

That imposing sum, I assure you, is not some deranged expression of patriotism…….Charlie and I have endured similar cash-heavy positions from time to time in the past. These periods are never pleasant; they are also never permanent. And, fortunately, we have had a mildly attractive alternative during 2020 and 2021 for deploying capital.”

Acts of generosity

Annually, I would call Paul [Warren Buffett’s business friend] and tell him his salary should be substantially increased. Annually, he would tell me, “We can talk about that next year, Warren; I’m too busy now.”

Never gets old

“……And people who are comfortable with their investments will, on average, achieve better results than those who are motivated by ever-changing headlines, chatter and promises.”  

We tried to talk about this here.

While we cannot emulate his strategy like-for-like, we can always use these nuggets of wisdom in our own investing journey. 

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9 types of Investment Risks While Investing in Indian Market

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.

Types of Investment Risks

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.


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!

Penny wise, pound foolish ? Regular v/s Direct mutual fund plans

At Daulat, our mission is to bring the benefits of an institutional-grade portfolio construction technique to every investor in India. Due to our ‘Free Portfolio Consultation’ service, we have been able to get access to hundreds of portfolios from investors all across the country (you should check it out too!). We will use a couple of them as a segue to answer the above question.

Let’s play a small quiz: Can you make out what’s wrong with the below 2 portfolios?

table 1
Fig.1: A correlation matrix of a collection of 15 funds
Fig.1: A correlation matrix of a collection of 15 funds
Fig 2: Common Holdings overlap of 11 equity funds

If yes, then great! You are on a good track.

And if not, and if you are still investing via Direct Plans – then you need to seriously reconsider your investment decisions.

Let’s quickly recap what each of those terms mean.

Mutual fund investments in India are currently offered under two plans:

Direct Plan: Direct plans are offered, as the name suggests, directly by the AMC/mutual fund company. Since there is no direct involvement of any third-party agents like brokers/distributors, these plans have a lower Total Expense Ratio (TER). TER typically accounts for commission/brokerage charges paid to the intermediaries – which in this case is zero. Anyone can purchase these plans either directly from the AMCs website or through various internet platforms which offer these plans.

Regular Plan: Regular plans are often sold through an intermediary. These third-party intermediaries can be banks/distributors/advisors etc. The mutual fund company pays a small fee in the form of a commission to these intermediaries for facilitating investments into their schemes. This is reflected in the scheme’s TER and hence these plans have a higher TER than Direct plans.

The table below outlines the differences between a Regular and Direct plan:


Regular Plan​

Direct Plan​

Total Expense Ratio​



Net Asset Value​




Marginally Lower (due to a higher TER)

Marginally Higher (due to a lower TER)

Mode of Purchase

Online/Offline through a third-party

Online/Offline directly from the fund company

Optimal portfolio construction

Provided by the advisor

Not available

Portfolio rebalancing​

Provided by the advisor

Not available

Tax-loss Harvesting

Provided by the advisor

Not available

Personalized Investment Advice

Provided by the advisor

Not available


Regular Plan

Direct Plan

Total Expense Ratio



Net Asset Value




Marginally Lower (due to a higher TER)

Marginally Higher (due to a lower TER)

Mode of Purchase

Online/Offline through a third-party

Online/Offline directly from the fund company

Optimal portfolio construction

Provided by the advisor

Not available

Portfolio rebalancing

Provided by the advisor

Not available

Tax-loss Harvesting

Provided by the advisor

Not available

Personalized Investment Advice

Provided by the advisor

Not available

Let’s evaluate what are the advantages of each of the plans:

Advantages of Regular Plans

1. Professional fund selection process: It usually helps to trust someone who does something for a living. Selecting the appropriate set of investments from over 1,450 funds offered by over 45+ AMCs requires a lot of work and painstaking research. The advisor is usually equipped with industry-leading analytical tools that help them sift through vast troves of information and make sense of the data.

2. Portfolio Construction: Portfolio construction is a scientific-process that has been studied for many decades by leading researchers all across the world. Amongst other things, it involves not only studying individual investments but more importantly how these work and impact each other. A good advisor is able to construct a portfolio that is suited to your individual risk profile

3. Portfolio Rebalancing: Portfolio rebalancing is the process by which an investor’s portfolio is restored back to the original asset allocation. This is important to keep the portfolio in sync with your intended risk profile. A financial advisor will constantly monitor your portfolio and re-balance it as and when needed.

4. Advise and guidance: The 2-year market bull-run has made every investor look smart. Yet, we know that equity markets are inherently volatile. An expert would provide you with timely advise and guidance when markets go down.

Here’s a Tip:

Due to how the industry has come of age, a lot of the advisors and intermediaries are often focused on just pushing new investment products onto their clients without providing any ongoing support or value. If you are an investor investing in a Regular plan, you should definitely hold them accountable to the above.

Advantages of Direct Plans

1. Lower TER: Since Direct plans do not account for any commission/brokerage paid to third-party agents, these have a lower TER than Regular plans.

2. Higher return: On account of a lower TER, Direct plans deliver a marginally higher return to the investor.

Which is right for me?

If making money really just came down to a binary choice of Direct v/s Regular plan — everyone in fact would be reach. But clearly, everyone is not. 

Hence, it’s not a question of this or that. Rather, it is about which of those plans is a better fit for your own needs. Direct plans are beneficial to individuals who have the time and knowledge to go through the entire investment process. However, if you’d rather channel your energy into doing your day-time job and enjoying your weekends, you are better off outsourcing this entirely to a professional at a small cost.

Here's another tip:

Here's another tip:

It is tough to escape the marketing campaigns of new investment apps encouraging everyone to invest in mutual funds via a ‘Direct’ plan or shift their holdings from a ‘Regular’ plan to the former. As if that is the supposed holy-grail of investing.  So, next time you see advertisements luring you into the traps of ‘Zero Commission/Brokerage’ or ‘How commission is eating into your earnings’ – ask yourself this:

  1. Is this the right solution for me?
  2. Or am I being penny wise, pound foolish? In other words, by trying to save 0.5%-1% — am I taking uninformed decisions that will cost me much more in the long-term.

Yes, commissions do impact your overall returns. But, ignorance is more expensive. The choice is yours.

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Investment Strategy in Stock Market

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 :

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.

investment strategy


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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Where to Invest Money: Financial Assets or Physical Assets?

Where to invest money in 2022

Let us guide you on where to invest money in 2022. We all start planning investments even before we start working. The general tendency observed is that people go to buy houses or FDs. This gives us a chance to explore how we try to invest in assets as they have the tendency to grow and give good returns on the invested amount. There are many kinds of assets to invest in. There is gold, fixed deposits, mutual funds, property, bonds, stocks, etc. where one can invest their savings to generate a second source of income or to achieve their financial goal. Assets can be anything that has value. These may represent economic resources or ownership that can be liquidated and hence converted into something that holds value, like cash. Most commonly these assets are categorised under two names, financial assets and physical assets. Each of these categories has its own risk and reward characteristics.

Before we look at where to invest money in 2022 or which asset to invest in, let us see what these assets are and how these can be defined.

Where to Invest Money

Physical Assets

As the name suggests, these assets have a physical and tangible presence. Something we all can see, touch, or feel. Physical assets include land, buildings, machinery, plants, tools, equipment, vehicles, gold, silver, or any other form of tangible economic resource. Physical assets have useful economic life. Once they lose their useful life, they may become obsolete or too old to be used. Hence they must be resold before they perish and lose their value.

Financial Assets

Contrary to physical assets, financial assets are intangibles. They have no physical presence except for the document that indicates the interest of ownership in the asset. These cannot be seen, touched or felt as they cannot be physically located. Even the paper and the certificates on which the ownership is defined hold no intrinsic value. The only property of those sheets is the value of the assets defined there. Examples of such financial assets are bonds, stocks, patents, copyrights, mutual funds, company goodwill, investments, the amount receivable, and funds held in a bank in the form of fixed deposits or recurring deposits. Daulat’s fully-managed, low-cost mutual fund portfolios is also an example of a financial asset which gives you exposure to stocks.

Difference Between Physical Assets and Financial Assets

While both kinds of assets are money generation techniques, they differ in their presence and use. Physical assets, on one hand, are the tangible ones while financial assets have no tangible presence. Physical assets mark the requirement of maintenance, wear and tear, upgrades and repair due to their physical presence whereas financial assets hold no such issues. Physical assets are prone to decrease in their value due to depreciation in the price or loss of economic value while financial assets lose or gain value as per market trends such as market interest rates, fall in investment returns, or fall in stock market prices.

Now that we have understood the terms physical assets and financial assets, let us now look at how investing in financial assets is relatively more secure than investing in physical assets. Let us first consider the below example.

A man invested a part of his savings in financial assets while the other half in buying physical assets. The financial assets were mutual funds while the physical one was a piece of land. The motive for investing in physical assets was to fund his daughter’s higher education. He invested in financial assets for his retirement. But a few years later, when the time came for his daughter to go to her dream school, he had to liquidate his financial assets as it was very difficult to liquidate/sell land due to its highly illiquid nature. Thus in the hour of need, it was financial assets that came to the rescue. 

This example shows the power of financial assets over physical assets. Let us now explore this in more detail and know where to invest money in India.

Advantages of Financial Assets over Physical Assets

Physical Asset

1. Liquidity

When it is about liquidating the assets, financial assets score way higher as compared to physical assets. Liquidating physical assets may take time as one has to get the value of the money that was invested in the beginning. While financial assets on the other hand are very easy to liquidate and take about 1-3 business days for completing the process and getting funds in return. Gold for example is a physical asset that can be easily sold but in our culture, selling gold is seen as a financially distressed situation and hence people don’t prefer that. Financial assets like bonds and stocks come with no such pre-fixed descriptions.

2. Transparency

When one owns physical assets like a house or a piece of land, one has to constantly check for updated pricing. No two properties in the same place are necessary for the same price. Hence it is not easy to track the price of the physical assets, while the current value of financial assets can be tracked and checked on a daily basis. Hence financial assets show more transparency as compared to physical assets.

3. Diversification

Diversification of financial assets is very easy and highly recommended. That helps manage funds in a way so as to minimise the losses as much as possible. One can divide the investment into parts and invest that into different forms of a financial assets. While physical assets cannot be divided into smaller parts and hence one has to either buy all of them or none of it. Therefore the diversification observed in financial assets is way more powerful than the physical assets.


Physical assets offer a sense of ownership due to their physical presence while financial assets give advantages over physical assets in many forms. We have seen a few of the above. One more prevailing benefit of financial resources is that they can be partially liquidated. We can sell 100 stocks out of 1000 whenever we want but we cannot sell 1 acre of land out of 5 acres as per our wish.

Thus we suggest that people must maintain a good balance of physical and financial assets.

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What is More Beneficial – Higher Rate of Return or Higher Wealth

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%.

higher rate of return

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.


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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Equities Are Your Best Friend In Wealth Creation

Uncertain times such as the Covid-19 pandemic highlight the need for financial security, particularly wealth creation. The two fundamental tenets that we invariably learn vis a vis securing our finances are: first, we should make more money than we spend. Second, what follows is, save as much of the surplus as you can consistently. A significant number of people avoid investing, mainly investing in shares, because they think the financial markets are highly volatile and risky.

To reach any financial goal, it is vital that people actively create wealth by making prudent investments. The risky nature of the stock market makes people wary of investing in stocks. On the flip side, some more dazzling schemes promise quick money to attract many potential investors. Still, these may cause more harm than anticipated.

Wealth Creation Tips with Equities-

Any investment requires thorough research and financial planning on potential investors’ part. Doing so can help reduce and even hamper certain associated market risks. Equity investments have proven to be sound choices, especially for mid to long-term investments. It is so because, despite their short-term volatility, the market has historically always displayed growth.

Read on to find out how to create wealth with equities.

What are equities?

Equities are the shares of a company that you own. As an equity holder, you partially own the shares of the company. Hence, you are entitled to the dividends when the value of shares you own appreciates. But on the flip side, if the value of your equities depreciates, you will also incur the loss.

This indicates the volatility of equity investment. Despite this, you can build an impressive investment portfolio with the right investment tips.

Ways you can acquire equities?

Man running for money

Broadly speaking, capital investments in equities can be made either in publicly traded companies or privately traded ones. Private equity investments thus refer to investments made in companies whose shares are traded privately. Private equity firms are open only to investors who are either accredited or are deemed to have a high net worth. The capital investment in such cases is high as well.

On the other hand, public equity investments are much more accessible to different types of investors. The shares of any company listed as public are traded daily in the market and are highly liquid. When making public equity investments, you can do so directly or indirectly. Direct equity investment is when an investor buys the shares directly from the company during the initial public offering (IPO) or other traders when the shares can be traded publicly post IPO.

Indirect equity investment is when you invest in shares via equity funds, ULIP, ETF, ELSS. Equity funds refer to mutual funds that invest predominantly in stocks. Investment in equity funds can be either a one-off lump sum amount or by SIP. The fund then invests the amount, on your behalf, in multiple shares. The subsequent fluctuations affect the Net Asset Value. Equity Mutual Fund Schemes are a high-risk investment. What balances this risk is that your money is invested by a professional after conducting in-depth research of the market movement.

How to overcome the volatility of equity investment?

It is essential to understand that the market risk and volatility in equity generally refer to short-term investments. In the case of long-term investments, there is always net growth for the daily fluctuations are countered by the overall upward shift of the market.

A classic example is the dip in the market in March 2020 at the onset of the pandemic. Investors who liquidated their equity due to the panic caused by the situation incurred heavy losses. On the other hand, those who waited patiently have now been rewarded with immense profits since Sensex saw a growth of about 150% since March 2020.

A critical factor in reducing the risks of equities is to diversify your investment portfolio. By investing horizontally, i.e. in various industries and different companies, you are essentially minimising the risks since you’re not putting all your eggs in one basket. Fluctuations and troubles in the market that affect the share value of one company or even industry can be counterbalanced by equity investments made elsewhere.

Broken Piggy Bank

A consistent investment strategy also helps minimise the risks from volatility. By consistency, we mean that the investments you make are scheduled rather than a one-time investment. You put more money into your portfolio periodically. It can either be a fixed amount that you add or change it by monitoring how your existing equities are performing. This strategy is called rupee-cost averaging. Such strategies and consistencies help manage risks by taking decision fatigue out of the picture. Additionally, consistent investment over a long period results in higher returns than the interest that your cash investments, such as bank account, fixed deposits, etc., might accrue.

Key Takeaway

Equities might seem like a risky investment, but they are your best friend to build wealth in terms of long-term investments. In any case, short-term or long-term investment, direct or indirect, the choices you make must be well researched and strategic. Furthermore, diverse asset allocation is crucial for any investor.

Professional help is another factor that mitigates risks since it saves you from paralysis that can occur when confronted with so many choices. Feel free to reach out to us for any help regarding your investment portfolio.

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