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Investing Basics

Top 5 Investment Options in India for NRIs

India is the world’s 5th largest economy with a GDP of $3.9 trillion and will reach $5.1 trillion in 2027. (Source). By 2030, India is likely to surpass Japan and Germany to become the world’s 3rd largest economy. Evidently, the Indian economy is rapidly growing and so are the investment opportunities. While Indians are benefiting from these opportunities, NRIs (non-resident Indians) are not left behind. There’s a wide spectrum of investment options in India for NRIs. NRIs can comfortably invest in Indian markets and diversify their portfolio. Here’s everything you need to know.

Non-resident Indians (NRIs) can invest in Indian markets by creating a Non-Resident Ordinary (NRO) or Non-Resident External (NRE) bank account. Having either of these accounts is mandatory to be able to transact in Indian currency.

Experts at VNN Wealth will guide you through the entire procedure, including KYC, after which you can start investing in the following options.

top investment options for NRIs in India

Read in detail below👇

Mutual funds offer instant diversification to your investment portfolio. NRIs can invest in mutual funds via SIP or lumpsum, based on their financial goals and risk appetite. You can choose from equity mutual funds, debt funds, or hybrid mutual funds to balance risk-reward.

Equity funds are ideal for long-term investments. Debt funds offer a range of categories from short to long-term investments. Hybrid funds offer the best of both worlds. The rate of return on mutual funds depends upon the fund type and market movement.

Get in touch with experts at VNN Wealth for further guidance.

Note: Some Asset Management Companies (AMCs) may restrict NRIs from USA and Canada.

Alternative Investment Funds offer non-conventional investment options. NRIs can expand their portfolio beyond mutual funds by investing in AIF. AIFs have three categories: CAT I, CAT II, and CAT III. Each category provides diverse investment avenues such as private equity, venture capital, hedge funds, angel funds, etc. AIF CAT III is more popular among investors. You can contact VNN Wealth and our experts will walk you through the procedure.

Read more about AIFs.

Unlisted shares are gaining popularity among investors. NRIs can also buy shares of a company that hasn’t been listed yet. Unlisted stocks are traded off the market (Over-the-counter market). Therefore, it can be tricky to identify promising stocks.

VNN Wealth has handpicked unlisted shares with a good track record. These stocks are less volatile compared to the listed stocks as they’re not frequently traded.

Investing in unlisted shares unlocks the following benefits:
1. Guaranteed allocation if the company goes live on the stock exchange via IPO.
2. Pre-listing gains right before the company goes live.

NRIs can consider parking some of their funds in these shares to further diversify their portfolio.

The good old FD is always worth looking into. While the return may not be as superior as the avenues listed above, it’s safe and can accumulate wealth over a period of time. NRIs prioritizing safer investments along with steady interest income can consider fixed deposits.

Here are three ways NRIs can create an FD:

1. Non-Resident Ordinary (NRO) Fixed Deposit allows you to invest your Indian income such as rental income, dividends, pension, etc.

2. Non-Resident External (NRE) Fixed Deposit converts your foreign currency into Indian currency to invest.

3. Foreign Currency Non-Resident (Banks) Fixed Deposit is a term deposit account. You can maintain and invest funds by transferring from your NRE account.

Portfolio Management Service (PMS) provides tailor-made investments for HNIs. NRIs seeking personalized investments can also opt for PMS. A dedicated portfolio manager makes decisions on your behalf to optimize your investments & maximize returns. The minimum investment requirement for PMS is INR. 50,00,000. You will have to transfer the entire amount to the PMS house. Or, you can transfer your existing portfolio to the PMS house. If your portfolio is worth less than INR. 50 lakhs, you can invest the remaining funds by transferring the amount.

PMS helps you keep track of your stock, ESOP, and other asset holdings. The portfolio manager leverages market opportunities to deliver superior returns on your investments. You can directly communicate with the portfolio manager to gain insights. Read more about when is the right time to opt for PMS.

Taxation is an important factor to consider while investing. Tax rules for NRIs are similar to the Indian residents with slight exceptions.

The tax implications will depend upon the investment avenue and the investment horizon. The most important thing is to avoid double taxation. Make sure your country of residence has a Double Taxation Avoidance Treaty (DTAA) with India. You must also file The Foreign Account Tax Compliance Act (FATCA) self-declaration.

Also read- Mutual fund taxation for NRIs in India.

1. NRIs with funds lying idle in India can invest without moving funds out of India. This will generate steady income for themselves or dependant parents in India.

2. NRIs returning with foreign assets can explore investment opportunities in Indian markets to amplify wealth.

3. NRIs planning to return to India after retirement can build a solid retirement plan by investing funds in various assets

India is likely to overtake Japan and Germany to become the 3rd-largest economy in the world. Sectors like Auto, Cement, Telecom, Financials, etc will significantly contribute to the growth. NRIs can explore plenty of investment options in India across various sectors and expand their portfolio.

A wide range of investment instruments, such as mutual funds, AIFs, unlisted shares, and FDs, are easily accessible. Savvy Non-resident Indian investors can also opt for Unlisted Shares/Pre-IPO to help generate that extra alpha on their portfolio. Make sure you evaluate your risk appetite and align your investments with your financial goals.

For more insights and guidance, contact VNN Wealth, and our experts will streamline your investments.

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Investing Basics

How to Choose The Right Balanced Advantage Fund?

Balanced Advantage Funds bring the best of both worlds- The thrill of equity and the safety of debt. 

BAFs are hybrid active funds that distribute your money into equity, debt, and cash. These funds dynamically shift allocation between equity and debt for superior returns with downside protection.

If you are wondering how to choose the balanced advantage fund, this blog holds the RIGHT answer.

Spoiler alert: Past performance is not the only criteria for selecting funds.

Let’s unwind the strategy.

What are Balanced Advantage Funds?

Balanced Advantage Funds invest about 65-80% of total assets into equity and 35-20% in debt. These funds also hold a small percentage of cash for liquidity or capitalizing on market conditions.

Fund managers strategically and dynamically move the allocation from stocks to bonds. 

For example, if the markets are going through a correction, fund managers can increase equity exposure. Similarly, if the markets are overvalued, they can sell off equity and reallocate that money to debt instruments. 

These funds deliver superior returns over the horizon of 3 to 5 years or more. Investors with moderate risk appetite can consider hybrid funds instead of pure equity funds. BAFs are the perfect way to introduce instant diversification to your portfolio. 

Now, let’s answer your question…

How To Select The Balanced Advantage Fund?

Many investors believe that past performance is the only way to evaluate mutual funds. While past performance can help you understand the consistency of the fund against the benchmark. It’s not the only, or the primary, criteria to evaluate funds. 

The most effective way to evaluate any fund is to compare it with benchmark and other funds from the same category. To do so, you can refer to the factsheet of funds to compare key measures.

The key measures AKA key ratios are the technical aspects of the funds. The numbers are always easy to read and they project accurate expectations.

Now, coming back to Balanced Advantage Funds. 

Apart from benchmark comparison, one of the important ways to choose BAF that fits your requirements is to compare Cash vs Equity Exposure. You can find this information in the factsheet of the fund. 

Let’s take a few BAF examples. 

Fund Name

Equity Exposure

Debt Exposure

Cash Holdings

HDFC Balanced Advantage Fund Direct-Growth

59.74

26.07

14.19

ICICI Prudential Balanced Advantage Direct-Growth

46.96

22.38

30.66

Nippon India Balanced Advantage Fund Direct-Growth

60.56

27.51

11.93

Edelweiss Balanced Advantage Fund Direct-Growth

71.97

14.69

13.35

The values were fetched on 3 Jan 2023. Click on the hyperlink on each fund to view current values. 

BAFs with Higher Cash Exposure

Balanced Advantage Funds hold a small percentage of cash for liquidity or to benefit from market movements.

If you think the markets are expensive at the moment and may fall- choose BAFs with higher cash holdings as they can buy more equity.

The more cash holdings, the more you can benefit by increasing equity exposure.

In the above table, ICICI Prudential Balanced Advantage Fund has cash holdings of 30.66%. 

Compared to the other funds, ICICI pru BAF will be able to buy more equity when the markets fall.

BAFs with Higher Equity Exposure 

Contrary to the above filter, if you think the market may rally further, choose the BAF with maximum equity exposure.

When the market boosts, BAF with more equity exposure will naturally deliver superior returns. 

In the table above, Edelweiss Balanced Advantage Fund has 71.97% equity exposure. That fund will deliver higher returns compared to other funds during a market rally.

Final Thoughts

Equity exposure vs Cash holdings is one of the important criteria to consider before investing in Balanced Advantage Funds.

However, as mentioned above, you must also evaluate the fund’s factsheet for more insights. The fund should fit your risk appetite and financial goals.

Now, if you don’t have a view of the market to filter BAFs, you can always contact your financial advisor. They can keep you informed about the market movements and also plan your investments.

Or, you can get in touch with experts at VNN Wealth. If you are looking for financial advisors in Pune, we can meet in person (write to us). Not to worry if you’re not from Pune as you can schedule a virtual meeting with VNN Wealth at your preferred time slot. 

Follow @vnnwealth for more insights into the world of finance.

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Investing Basics

7 Myths & Facts About Mutual Funds You Must Know

At what age did you realize mutual funds can grow your wealth over the years? And if you haven’t realized it yet, the reason could be the lack of information.  Despite diverse options and ease of investment, mutual funds are surrounded by many misconceptions. Investors are still confused and, hence, are missing out on opportunities. In this blog, we will shed light on the facts about mutual funds to debunk the myths. 

Mutual Fund Myths Busted

Myth #1: You Need a Demat Account to Invest in Mutual Funds

Fact: A demat account is not required to invest in mutual funds.  All you need is a bank account, PAN card, and KYC details. The online interface that you use to invest in mutual funds is not a demat account. Unlike stocks, mutual funds do not have a dematerialized form.  Your existing bank application also has a mutual fund section. You can invest in a mutual fund of your choice without any hassle. It’s an easy way to automate the investments from your savings account to the mutual funds. You will only need a Demat account if you plan to invest in direct stocks. 

Myth #2: You Need Financial Expertise to Invest in Mutual Funds

Fact: Investors do not have to be financial experts to invest in mutual funds.  Mutual funds are designed to make investments easy for anyone. Choosing direct stocks requires knowledge, constant awareness, and time to monitor the investments. Mutual funds, on the other hand, offer instant diversification. Each fund distributes your money in various asset classes such as stocks and bonds as per the category of the fund.  Mutual funds are already managed by an expert, so investors don’t have to. However, it’s always better to be informed about mutual fund categories and scheme objectives which can be found on a fund factsheet. You can consider taking inputs from your wealth planner/relationship manager. They can guide you with the suitable asset allocation.

Myth #3 You Need a Large Sum to Invest In Mutual Funds

Fact: Again, incorrect. A large sum is not required to invest in mutual funds.  You can start an SIP of as little as Rs. 100 per month and gradually increase the amount. A lump sum investment can also be made with a minimum of Rs. 5000. 

Myth #4 You Can Invest in Mutual Funds Only For a Long Term

Fact: Mutual funds are available for short, medium, and long-term tenure.  The investment horizon depends upon your financial goals and risk appetite. There are various categories of equity mutual funds, debt mutual funds, and hybrid funds. Based on your investment horizon, you can choose the category of mutual fund you want to invest in. The longer your time horizon, the more you can invest in equity or equity-related instruments (if your risk appetite allows). For a shorter horizon, you can choose from debt funds. Debt funds have 15 different categories with variable investment horizons. Liquid funds (7 days), Ultra-short duration funds (up to 3 months), and low duration funds(3-6 months) can help you achieve short-term goals. Medium and long-duration debt funds are suitable to achieve long-term goals. 

Myth #5: A Mutual Fund with a Lower Unit Price (NAV) is Better Than One with a Higher Unit Price

Fact: The unit price (NAV) is not relevant to compare two mutual funds. Two mutual funds with identical portfolios will deliver similar returns irrespective of the NAV. The unit price is nothing but the value of all the underlying assets in a fund. These assets include stocks, bonds, and money market securities.  Let’s take an example: You have 5000 to invest in a mutual fund. The NAV of a fund ABC is Rs. 50 and of a fund XYZ is Rs. 100. Both schemes have similar composition.  If you invest in ABC, 100 units will be allotted to you. Whereas, if you invest in XYZ, you’ll get 50 units. Now, let’s assume the underlying assets of both funds appreciated by 12%. Since both funds hold the exact same stocks and bonds, both funds will deliver 12% returns. Fund ABC’s NAV will become 56 and fund XYZ’s NAV will become 112. In both cases, your 5000 will increase to 5600 irrespective of the NAV. 
Fund Name Unit Price Investment Amount Units Allotted Return Rate p.a Total Value of Investment
ABC 50 5000 100 12% 5600
XYZ 100 5000 50 12% 5600
Therefore, while comparing two mutual funds, check the key ratios instead of NAV. 

Myth #6: Mutual Fund’s Past Performance Guarantees Future Returns

Fact: The past performance of a fund is just a way to evaluate the fund’s consistency over the years. It does not guarantee anything for the future.  A fund that performed well in the past may not perform the same in the future. Similarly, a poorly performing fund may show promising outcomes in the future. There are various other factors apart from past performance that can offer better insights about a fund. For example, the underlying assets, the fund manager’s strategy, economic changes, etc. If you still want to check the past performance, analyze the rolling returns of a fund. Rolling returns suggest how the fund has performed in changing economic cycles.   

Myth #7 Equity Funds are Riskier than Other Funds

Fact: Every investment instrument has a risk associated with it. The decision to invest depends upon the time horizon, investor’s risk appetite and financial objectives. Would you buy a house and sell it within 6 months or a year? No! Real estate investment is meant for a longer horizon.  Similarly, equity investments also deliver risk-adjusted superior returns over 5 or more years. For a short horizon, equity investments are not ideal. Instead, you can invest in debt funds with a suitable tenure. Additionally, you must choose investment options based on your risk appetite. That way, you can choose different asset classes to diversify your portfolio and balance the risk. 

Final Verdict

Mutual funds have become a popular investment avenue for many investors. Not only does it offer hassle-free diversification but also significant wealth growth. A Systematic Investment Plan is a consistent way of investing in mutual funds. That way, you can achieve your financial goals in a given timeframe.  Don’t let any misconceptions stop you from becoming financially independent. Craft your investment portfolio and enjoy the benefit of compounding. If you are based in Pune and are looking for a financial advisor in Pune, experts at VNN Wealth can meet you in person to discuss your portfolio. If you’re not based in Pune, you needn’t worry as you can schedule a virtual meeting at your convenience. For more information, follow @vnnwealth and explore investment insights here.
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Investing Basics

Impact of Elections on the Indian Stock Market

The Lok Sabha elections are right around the corner and the stock markets are already experiencing the impact. If the historical data is any indication, the bull run of the stock market leading up to the general election is inevitable. Many events influence stock market movements. And the Lok Sabha elections are probably the biggest event to move the market before and after the results. In this article, we will shed light on how elections can spark jumps in the stock market. 

History of Market Movements Before and After Elections (Between 1999 to 2019)

The election period is often the time when the market sentiments change. It’s an uncertain period of change causing volatility in the stock market. Indian economy and the policies may shift during these times.  The average returns a year prior and a month prior to the elections are 29.1% and 6% respectively. This indicates the market returns boost a year before the elections. Below is a snapshot of how the market performed before and after the elections.

Lok Sabha Elections 1999 (Took place between Sept 1999 to Oct 1999)

  • The controversy around PM Rajiv Gandhi and his assassination in 1991 took the market by storm. The market instability amplified. However, PV Narasimha Rao regained economic conditions with liberalization policies thereby restoring stability.
  • From 1996 to 1998, the market confidence struggled due to the unstable Coalition Government and the Asian Financial Crisis. Indian prime ministers changed three times during this course of time. 
  • NDA came to power in 1999, prior to which, the market delivered 57.07% returns between Sept’98 to July’99. However, the market corrected by 7.67% a year after the victory. The structural changes and sectoral reforms caused GDP growth of 6-7%.

Lok Sabha Elections 2004 (Took place between April 2004 to May 2004)

  • A year prior to the 2004 election, the market delivered 82.70% returns between April 2003 to Feb 2004. The market declined by 7% following the elections but soon rallied up until 2007.

Lok Sabha Elections 2009 (Took place between April 2009 to May 2009)

  • The market dropped by 41.73% a year before the 2009 election. This was the year when a financial meltdown dramatically changed the worldwide economy. The market delivered 12.92% returns a month before the election. UPA’s second term saw policy uncertainties, scams, a high inflation rate and a struggle to stabilize the economy, which resulted in an economic slowdown.

Lok Sabha Elections 2014 (Took place between April 2014 to May 2014)

  • NDA, led by the BJP, returned with a victory in the 2014 election, reducing market volatility to 9.1%. The market delivered 10.02% gains a year before the win and 10.48% a year after the win, with 37% 2-year returns.

Lok Sabha Elections 2019 (Took place between April 2019 to May 2019)

  • BJP continued governing the nation after the 2019 election, aiming for economic stability. However, COVID-19 made all the nations suffer, causing the markets to drop significantly. The market corrected by 19.12% a year after the election, which was the COVID period. The bull phase was seen when the impact of COVID-19 was fading in 2021-22. 
As BJP won the assembly polls in Rajasthan, Madhya Pradesh, and Chattisgarh, both Nifty and Sensex climbed up the new lifetime highs. The election wave will see the market rally until the elections in April-May 2024. Only the time ahead will tell where the market eventually stands before and after the election. 
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Investing Basics

Mutual Fund Taxation for NRIs in India

Mutual funds are a popular investment avenue among investors. Similar to Indian residents, NRIs can also explore mutual fund opportunities.

With the right balance of equity mutual funds and debt mutual funds, one can achieve financial goals. However, it is important to know that the capital gains on mutual funds are taxable. Both Indians and NRIs have similar tax implications with slight exceptions for NRIs.

In this blog, we will understand the NRI mutual fund taxation.

NOTE: Tax rules on Mutual funds have been changed after April 1, 2023. Read along to find more details. 

Non-resident Indians (NRIs) can invest in Indian mutual funds as long as they follow the Foreign Exchange Management Act (FEMA). A PAN card and KYC via eligible documents allow NRIs to invest in mutual funds, fixed-income securities, or even real estate. However, the tax rules for each investment avenue will be different for NRIs.

Tax on the capital gains earned from mutual funds depends on the type of the fund and the holding period.

1. Short-Term Capital Gains tax will be applicable on investments redeemed before 12 months for equity funds and 36 months for debt funds. 

2. Long-Term Capital Gains tax will be applicable on investments redeemed after 12 months for equity funds and 36 months for debt funds.

3. Dividends are considered as income. Hence, the tax implications on dividends earned from mutual funds are different from capital gain taxation.

4. The asset management firm may also deduct TDS (tax deducted at source) on the capital gains. 

Now, let’s dive into the tax implications.

Equity Mutual Funds allocate the majority of the assets into the stocks of different companies. There are 7 different types of equity funds that you can explore based on your risk appetite and financial goals. 

Tax on capital gains on equity and equity-oriented funds are as follows:

Short-term capital Gains Tax (STCG)Short-term capital Gains Tax (STCG)Tax on Dividend (Income through mutual funds)
15%10% above INR 1 LakhAs per the investor’s tax slab

Non-equity mutual funds are either Debt funds or Hybrid funds with a combination of both equity and debt. Debt funds allocate your money to debt instruments such as government bonds, corporate bonds, T-bills, commercial papers etc. Debt funds have 15 different categories to explore based on the tenure and associated risk. 

Funds with less than 35% exposure to equity will also have debt fund taxation. Whereas funds with 35% exposure to equity will have the old taxation rule with indexation. 

Taxation on Gains on debt or other than equity funds:

Mutual Fund TypeShort-Term Capital Gains Tax (STCG)Long-Term Capital Gains Tax (LTCG)Tax on Dividend (Income through Mutual Funds)
Non-Equity Funds invested before April 1, 2023As per the investor’s tax slab20% (for listed securities) and 10% above INR 1 Lakh (for unlisted securities)As per the investor’s tax slab
Non-Equity Funds invested on or after April 1, 2023As per the investor’s tax slabAs per the investor’s tax slabAs per the investor’s tax slab
Funds with 35% exposure to equityAs per the investor’s tax slab20% (for listed securities with indexation benefit)

10% above INR 1 Lakh (for unlisted securities)
As per the investor’s tax slab

Indian residents do not have to pay TDS on capital gains. However, the asset management firm will deduct TDS on capital gains for NRIs. 

TDS depends upon the type of the fund and the holding period. 

Mutual Fund TypeTDS on Short-Term Capital Gains TDS on Long-Term Capital GainsTDS on Dividend
Equity and Equity Oriented Funds15%
(Holding period less than 12 months)
10%
(Holding period more than 12 months)
20%
Debt Funds or Non-equity Funds
(Invested before April 1, 2023)
30%20% with indexation for listed securities.
10% for unlisted securities. 
20%
Debt Funds or Non-equity Funds
(Invested after April 1, 2023)
30%30%20%

Question 1: Do NRIs have to pay tax in their current residence country after paying capital gains tax in India?

Answer: No. NRIs do not have to pay the double tax if their country falls under Double Tax Avoidance Agreements (DTAA) with India.

Question 2: Can NRIs set off capital gains with losses?

Answer: Yes. NRIs can also set off capital gains with losses. For example, if an NRI gained profit via one mutual fund but made a loss in another, he/she can set off the gains against losses to reduce the overall gains, thereby reducing the tax on it. 

Understanding taxation rules is crucial to plan your investments accordingly. If you are a non-resident Indian wanting to invest in the Indian stock market, keep this blog in handy. Taxation rules for mutual funds are pretty much the same for both Indians and NRIs, with TDS as an exception.

If you have any questions regarding mutual funds or its taxation, feel free to reach out to us. DM us on Instagram or LinkedIn.

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Investing Basics

What is Portfolio Management Service and How Does it Work?

A Portfolio Management Service (PMS) is a financial offering where an experienced portfolio manager handles your investments in stocks, bonds, debt instruments, and individual assets. 

Unlike Mutual Funds, the portfolio handled by PMS can be customized as per the investor’s goals and objectives to some extent.

Asset management or Wealth Management firms offer PMS catering to high net-worth individuals (HNIs) with a minimum investment value of 50 lakhs. 

Here’s everything you need to know about it.

How Does Portfolio Management Service (PMS) Work?

A tailor-stitched suit will always look better on you than a readymade suit. Similarly, an investment portfolio created for your goals will deliver ideal outcomes. 

Mutual funds can deliver superior returns over the years, but investors cannot customize the underlying assets. And, retail investors may not have the ideal resources to create their own custom portfolio by investing in direct stocks. 

That’s when PMS comes into the picture.

Unlike mutual funds, PMS is flexible. You get to have more control over your investments and shape your portfolio as per your choices. 

Types of Portfolio Management Services

1. Discretionary Portfolio Management

Here, the portfolio manager takes investment decisions and actions on your behalf. It includes choosing what and when to buy/sell the asset and how to distribute your money across various asset classes.

These decisions are made keeping your goals in mind. Most PMSs in India operate with this model. 

2. Non-Discretionary Portfolio Management

In this model, the portfolio manager will first lay the suitable suggestions in front of you. Once you approve the advice, the manager will go ahead and make the transaction on your behalf.

3. Active Portfolio Management

Active management will focus on maximizing the returns by investing in various asset classes. Portfolio managers will adjust your portfolio as per market conditions to ensure suitable risk-reward.

4. Passive Portfolio Management

Passive management focuses more on safety by investing in avenues that replicate the benchmark-such as index funds. Here, the returns may not be as superior, but the portfolio will carry lower risk. 

Why Should You Choose Portfolio Management Service?

1. Freedom to Create a Custom Portfolio

PMS opens up a gateway for you to build your own portfolio. 

You can choose:

  • The allocation across various asset classes such as equity, debt, gold, etc.
  • Increase exposure to stocks/sectors/themes you want to explore.
  • Decrease exposure or exclude the stocks/sectors/themes you don’t want to invest in.
  • Maintain liquidity for emergencies. 
  • Periodically re-shape your portfolio.

2. Having an Expert to Act on Your Behalf

You may not have the time or resources to execute all the customizations on your portfolio. With portfolio management services, a certified expert handles all your transactions.

The portfolio managers have the required knowledge to minimize the risk and maximize returns. They analyze the market, revisit your financial goals, and adjust your investments accordingly. 

3. Flexible Cash Holdings

Portfolio managers have the freedom to hold up to 100% cash to use it when the opportunity arises. This flexibility comes in handy to turn the market conditions in the investor’s favour. 

4. Direct Communication with the Portfolio Manager

Having an option to directly communicate with the portfolio manager ensures transparency and increases your awareness.  

You can discuss the investment strategy with the portfolio manager and seek performance insights at your convenience. Your account statement will highlight all the necessary information regarding your portfolio. 

Factors to Consider Before Investing via PMS

1. Minimum Investment Value

PMS has a high minimum investment threshold of 50 lakhs. It is not easily accessible by the majority of the retail investors.

As a thumb rule, investors should go for a PMS only when 20% of their overall net portfolio or net worth is equal to or less than 50 lakhs and they have a prior experience in products like Mutual Funds.

2. Associated Risk

Unlike mutual funds, PMS hold a concentrated portfolio of investments. 

Mutual funds usually have a small allocation to about 50 to 60 stocks. PMS, on the other hand, prefers to hold 20 to 30 stocks with high concentration, enabling high-risk-high-reward opportunities for investors.

3. Fee Structure 

Every portfolio management service has a different fee structure. You may have to pay fixed maintenance fees, audit fees, exit load, and profit participation fees. 

The fixed maintenance fees can be about 2 to 2.5% of the asset value. Exit load may range between 1 to 2.25% of the withdrawal value based on the holding period. And many PMSs also follow profit-sharing fees above 10% returns.

Make sure you review and understand the fee structure of the PMS before investing. 

4. SEBI Norms

Before April 2023, PMSs didn’t have as strict norms as mutual funds. Now, SEBI has issued new regulations for PMS houses. 

As per new norms, investors can know specific situations in which the transactions will take place from the investor’s account or pooled from the portfolio manager’s account. 

SEBI has also set rules to protect investor’s information. As a well-informed investor, you are allowed to seek this information from the PMS house. 

Who Should Opt for Portfolio Management Services?

PMS is for sophisticated investors who can comfortably invest 50 lakhs for a longer horizon. As mentioned above, those 50 lakhs shouldn’t be more than 20% of your portfolio. 

Investors who possess a long tail of stocks or ESOPs can transfer their portfolio to PMS. That way, you can customize your portfolio as per your preference. For example, skipping the stocks you already hold ESOPs of or investing in companies that fit under Sharia law. Your entire portfolio can be reshaped by an expert portfolio manager. 

Investors who have prior experience in the equity market via mutual funds and have an appetite for a higher risk can look into PMS. 

Non-individuals such as HUFs, partnership firms, sole proprietorship firms and body corporations can also invest via PMS. 

Also Read- When is the right time to invest via PMS

Conclusion

Opting for a Portfolio Management Service is the next step after your mutual fund and stock investments. 

As your income and portfolio grow over the years, you can start exploring PMS. Make sure you compare multiple PMSs before choosing the one that works best for you. Understanding how the portfolio manager works is worth looking into.

A wealth manager with years of experience can help you choose the right PMS. If you don’t have a financial planner, VNN Wealth is just a call away. Reach out to us for more information on Portfolio Management Services. 

Explore more personal finance tips here. 

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Investing Basics

Types of Returns in Mutual Funds: CAGR, XIRR, Rolling Returns

Ever wondered what 12% returns on mutual funds mean?  Returns on mutual funds depend on capital appreciation, compounding, investment tenure, dividend payouts, and more. Therefore, that 12% holds more meaning than you think.  In this article, we will explore all the different types of returns on your mutual fund investment with an example. 

Types of Returns in Mutual Funds

1. Annualized Returns aka CAGR (Compounded Annual Growth Rate)

As the name suggests, CAGR indicates the returns earned by investors annually including the effect of compounding. It is calculated as- Annualized Returns (CAGR) = [((Current NAV / Purchase NAV) ^ (1/number of years)) – 1]*100 Let’s say, you invested INR 1,00,000 in a mutual fund with NAV of INR 100. 
  • If the NAV increased to 110 in one year, the CAGR would be = [((110/100)^(1/1))-1]*100 = 10%
  • If the NAV increased to 115 in two years, the CAGR would be = [((115/100)^(1/2))-1]*100 = 7.24%
  • If the NAV increased to 130 in three years, the CAGR would be = [((130/100)^(1/3))-1]*100 = 9.13%
  • And so on…
Tip: CAGR is a useful measure to compare the returns on two mutual funds over a specific period of time. 

2. Absolute Returns

Absolute returns are the percentage growth/decline in a mutual fund between any two points. The duration could be two months, a couple of years, or two and a half years, the percentage will show the growth/decline in your total assets.  To put it simply, these are the non-annualized returns over a specific tenure.  The formula to calculate absolute returns is- Absolute Returns = [(Final investment value-Initial investment value)/Initial value]*100 Your investment of 1,00,000 increased to 1,50,000 at any given point; The Absolute Returns would be= [(150000-100000)/100000)]*100 = 50%

3. Extended Internal Rate of Return(XIRR)

The annualized returns (CAGR) formula works only for the lumpsum or one-time investment. But in case of multiple regular/irregular cash in-flows/out-flows, the calculation will change. One such scenario is the SIP.  Let’s say you start a SIP of INR 10000 on the 3rd of every month for 12 months, so your total investment will be 120000. The first 10000 that you invest will compound over 12 months. The next month’s installment of 10000 will compound over 11 months and so on. The XIRR formula captures the time each investment has spent in the market and calculates the returns accordingly.  Assume that your 120000 became 135000 on the 13th month. Now, to calculate the returns, you will have to use the XIRR formula.  You can use Google Sheets or Microsoft Excel to use the inbuilt XIRR formula = XIRR(values, dates, [guess]). The guess returns can be kept blank, in which case, the formula will by default assume 10%. The negative sign in front of each investment indicates cash outflow.  Your monthly investment amount and dates could vary. In such cases, the XIRR formula gives the accurate calculation of returns.

4. Trailing Returns aka Point-to-Point Returns

Trailing returns indicate the returns earned during a specific horizon. Here, you can choose the two points between which you want to calculate the returns. For example, the NAV of a fund on 1 January 2021 was 100 which became 145 on 1 January 2023. The Trailing Returns would be= [(Current NAV/NAV at the start of the trailing period)^(1/Trailing period in years) -1] x 100 Trailing returns =[(145/100)^(½) – 1] x 100 = 20.41%
You may also like to read- Mutual Fund Factsheet: How to Read The Technical Aspects

5. Rolling Returns

Rolling returns calculate returns on your investment for a particular period on a continuous basis. If you calculate trailing returns on a daily, monthly or quarterly basis, you’ll get the rolling returns. Let’s simplify it. For example, you want to calculate 2-year rolling returns on a mutual fund over the 6-year period, say between 2018 and 2023.  Now, if you choose to calculate the trailing returns on a daily basis, you will have to calculate the trailing returns of each day between 2018 and 2023 in sets of 2 years. I.e. 1 Jan 2018 to 1 Jan 2020, 2 Jan 2018 to 2 Jan 2020 and so on.  Repeat the same by calculating the daily trailing returns between 2019 and 2021, 2020 and 2022, 2021 and 2023.  Rolling returns gives you the range of returns the fund has earned over the year in a specific duration. So, if you are planning to invest in a fund for 2 years, the above data will give you an idea of the returns you can expect for that duration. Rolling returns provide accurate insights as they are not biased towards any investment period. This data is more valuable to understand the fund’s performance. 

6. Total Returns

Total returns are the overall gains on a mutual fund including the capital appreciation, interest earned, and dividends. Let’s say you bought 1000 units of mutual fund with NAV 100 by investing 1,00,000. You also received a dividend of INR 10 per share, which would be 10000. After two years, if you sold the mutual fund at a unit price of 120, your capital gains would be (120-100)*1000= 20,000. Your total returns = [(Capital Gains + Dividend)/Total Investment]*100 = [(20000+10000)/100000]*100 = 30%.

Final Words

A mutual fund factsheet usually has all the data you need to understand the performance. Numbers can be confusing but never vague.  You can make your investment decisions by trusting the numbers. Next time you analyze two mutual funds, make sure you have this blog in handy. You can always reach out to VNN Wealth for more guidance on investments. Take a look at our Instagram @vnnwealth for more insights. 
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Investing Basics

Alternative Investment Fund(AIF): Types, Benefits, & Taxation

An Alternative Investment Fund (AIF) is a privately pooled investment avenue consisting of private equity, venture capital, hedge funds, managed funds, etc. SEBI regulation 2(1)(b) defines AIF as a Limited Liability Partnership (LLP) or a company or a trust. 

  • These funds open a doorway beyond conventional equity and debt instruments. 
  • Generally caters to Indian, NRIs, and foreign high-net-worth individuals with a minimum of 1 crore of investable amount. 
  • AIF typically has a four-year tenure which can be extended by two more years with unit-holders’ approval. 

Here’s everything you need to know about AIF.

3 Categories of Alternative Investment Fund (AIF)</span>

Category I AIF

Investment across early-stage start-ups, venture capital, angel funds, and the infrastructure sector. The government and regulators refer to this category as socially or economically desirable. 

  • Venture Capital Funds invest in start-ups with high growth potential. VCFs offer funding to these companies by buying the equity stake. These funds often target a specified sector which is declared at the launch of VCF. Social VCFs invest in companies that create a positive impact on society. 
  • Angel Funds raise investments from angel investors with at least 2 crore net tangible assets. Angel investors are required to have investment experience, serial entrepreneurship experience, and ten years of experience in a senior management role. AIF Investors are allotted units of the funds. 
  • Infrastructure Funds invest in companies that develop infra projects such as roads, railways, renewable energy, etc. These funds generate capital from private investors. AIF Investors can purchase units of these funds. 

Category II AIF

This category invests across private equity, debt, and funds of funds. It also includes securities that do not fall under category I and III, and do not use borrowing or leverage for other than meeting operational requirements. 

  • Private Equity Funds invest in unlisted private companies. Listed companies raise funds via equity or debt instruments. Similarly, unlisted companies raise capital via private equity funds. These funds may come with four to seven years of lock-in period. 
  • Debt Funds in category II AIF invest in debt instruments offered by listed or unlisted companies. The funds choose the companies with a high growth potential looking to raise funds. 
  • Funds of Funds invest in other AIFs, hence the name. These funds do not have their own portfolio. 

Category III AIF

This AIF category invests across listed or unlisted derivatives such as hedge funds, open-ended funds, or funds trading to make short-term returns. These funds use diverse trading and arbitrage strategies. Category III can be both open or close-ended funds.

  • Hedge Funds gather investments from private investors and invest in both domestic and international markets. Underlying assets in these funds, including listed and unlisted, can have both short and long-term horizons. These funds can be highly volatile and may charge higher fees to optimize returns. 
  • Private Investment in Public Equity (PIPE) invests in publicly traded companies at a discounted price. These funds primarily help small and medium-sized companies to raise capital. 

Category III AIFs are more common among the three. Contact VNN Wealth Advisors for more information. 

Benefits of Investing in Alternative Investment Fund

1. Specialized Diversification in Your Portfolio

Though mutual funds are diverse, they are regulated and restricted to certain asset classes and exposure to those asset classes. 

AIFs allow investors to expand their portfolios beyond mutual funds. These funds bring non-conventional investment instruments such as private equity, angel funds, venture capital, unlisted stocks, and more.

Investors wanting to explore diverse investment strategies can invest in AIF.

2. Potential of Earning Superior Returns

With a large corpus, fund managers have enough flexibility and scope to explore unique investment strategies. They aim to maximise returns using their analysis and expertise.

Therefore, AIFs have the potential to deliver significant returns over the years. 

3. Lower Volatility

The underlying assets in alternative investment funds are less volatile compared to pure equity funds. Some of these instruments are not listed on the stock market, hence, do not fluctuate frequently.

The wide spectrum of instruments manages the volatility quite well.

Taxation on Alternative Investment Fund (AIF)

Taxation on AIF Category I and II: Since these two categories are pass-through vehicles, the fund doesn’t have to pay tax on the gains. Investors, however, have to pay the tax on capital gains. Short-term Capital gains will be taxed at 15% whereas long-term will be taxed at 10%. Returns on debt instruments will be taxed as per the investor’s tax slab. 

Taxation on AIF Category III: This category is taxed at the fund level with the highest income tax slab which is about 42%. Investors will receive the gains after the tax deduction at the fund level, hence, do not have to pay any additional tax.

Final Words

AIFs cater to more sophisticated investors with a minimum of 1 crore of ticket value. Hence, it is not easily accessible to many retail investors. 

Almost every AIF subcategory accepts investments from only 1000 investors. Angel funds have a limit of 49 investors. 

Regulated by SEBI, these funds are worth exploring for portfolio diversification. 

Though we have briefly discussed all categories above, there’s more to learn. Give VNN Wealth a call if you wish to invest in AIFs. Our team will review your portfolio and guide you through the process. Find more personal finance insights at @vnnwealth

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Investing Basics

Mutual Fund Factsheet: How to Read The Technical Aspects

Have you ever read a complete mutual fund factsheet? Bet not.

Investors often only look at past performance when comparing two mutual funds. However, that’s not the only criteria to know which fund may perform better.

A fund factsheet has more information to indicate the volatility and potential returns. This data may help you narrow down your search to a suitable fund.

In this article, we will learn what to compare in fund factsheets. Read along!

Technical Aspects of the Mutual Fund Factsheet

A mutual fund factsheet typically consists of past performance, scheme profile, fund house/manager information, fund composition, holding information, and volatility measures.

While all this information is useful, we are going to focus on volatility measures aka key ratios.

Volatility measures help you understand more about the fund than the past performance ever could. 

Let’s take two Multi Cap Funds to compare as an example. 

1. Nippon India Multi Cap Fund

2. ICICI Prudential Multi Cap Fund

Volatility Measures (Key Ratios) of a Mutual Fund

1. Standard Deviation (SD)

Standard Deviation measures the volatility of the fund’s returns with respect to its mean or average. It basically tells you about the risk associated with the fund. 

A high standard deviation indicates high volatility. 

A Standard Deviation of 17% indicates either a 17% gain or a 17% loss. 

In the above example, the SD of Nippon Multi Cap is 17.89 whereas the SD for ICICI Prudential Multi Cap is 15.1. 

Let’s say you’ve invested 5000 in these funds. 

Fund

Standard Dev

Value after Gain

Value After loss

Nippon India Multi Cap

17.89%

5894.5

4105.5

ICICI Prudential Multi Cap

15.1%

5755

4245

To check if the fund aligns with your risk tolerance, SD is the value you look for. 

2. Alpha

Alpha is the excess returns the mutual fund has generated compared to the benchmark, considering the associated risk. 

Positive alpha indicates that the fund performed better than the benchmark. Negative alpha indicates the fund could not beat the benchmark. 

3. Beta

Beta measures the fund’s volatility compared to the benchmark. The lower beta indicates a lower risk. 

If the Beta is more than 1, the fund is more volatile than the benchmark. And if the Beta is less than 1, the fund is less volatile compared to the benchmark.

In the above example, the Beta of Nippon India Multi Cap fund is 1.1 whereas ICICI Prudential Multi Cap is 0.97. 

Nippon Multi-cap fund is more volatile compared to the benchmark than the ICICI Prudential multi-cap fund. 

4. Sharpe Ratio

Sharpe ratio indicates the performance of the fund with respect to the risk it has taken. It’s the excess returns over and above the risk-free returns divided by the Standard Deviation. 

Note- Risk-free returns are the returns generated by a safe instrument, such as Fixed Deposits. 

A higher Sharpe Ratio indicates the fund will deliver better risk-adjusted returns.

In the above example, the Sharpe ratio of Nippon India Multi Cap Fund is 1.72 and ICICI Prudential Multi Cap Fund is 1.45. 

Therefore, Nippon India Multi Cap fund will deliver better risk-adjusted returns compared to ICICI Prudential. 

5. Mean

The mean value indicates the average returns generated by an instrument over the years in different market scenarios. 

Note that the mean cannot predict future returns nor is it the only measure to evaluate a fund’s performance. It only helps you understand how the fund has performed in various economic cycles. 

Now let’s draw a conclusion on which fund would deliver superior returns. 

  • Standard Deviation of Nippon India Multi Cap: 17.89
  • Standard Deviation of ICICI Prudential Multi Cap: 15.1
  • Beta of Nippon India Multi Cap: 1.1
  • Beta of ICICI Prudential Multi Cap: 0.97
  • Alpha of Nippon India Multi Cap: 9.4
  • Alpha of ICICI Prudential Multi Cap: 3.12

With only a 2.79% additional volatility measure (SD), Nippon is offering higher Alpha compared to ICICI. 

Nippon India Multi Cap fund has the potential to deliver superior returns than ICICI Prudential Multi Cap fund. 

So from now on, whenever you want to compare two funds from the same category, this is how you can compare. Don’t just rely on the past performance or the star rating of the fund. That will not tell you how the fund may perform in the coming years.

The key ratios are a more accurate indication of the fund’s performance against the benchmark and against each other.  

Found the blog interesting? Share it with your fellow investors, follow @vnnwealth, and explore more insights here
 

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Investing Basics

What Are Unlisted Shares? How to Apply?

Wondering what are Unlisted Shares and how to invest in them? Welcome to the club.

If you have landed on this page, that means you are interested in exploring pre-IPO shares. 

Unlisted financial securities can be beneficial for your portfolio if you know where to invest. See our top picks of unlisted shares.

But before that, it’s important to understand everything about unlisted shares.

Shall we?

What Are Unlisted Shares?

As the name suggests, these shares are not listed on the official stock exchange. Yet.

These are privately held shares that may get listed in the future through the IPO process. You can only invest in them via Over The Counter (OTC) market.

What does OTC even mean? It means buying shares over the counter just like you buy a movie ticket. Well, not literally, but similar. 

After buying, you receive these shares in your Demat account similar to any other shares. The prices of these shares will go up in a long run. Or whenever the company goes through the IPO process, you have a great opportunity to bag listing gains.

Benefits Of Investing In Unlisted Shares

1. Chance of Earning Superior Returns Via Listing Gains

As unlisted shares are not traded on the stock market, the liquidity is not as flexible. But, it can be used to your benefit. 

Most unlisted shares do not fluctuate in price as often as listed shares. They are either undervalued or overvalued and stay the same for a long time.

If you invest in them when they are undervalued, you can earn exponential returns.

There’s also a chance of earning listing gains whenever the company goes on IPO. 

Here’s a successful performance of some of the recent listings of unlisted shares-

StockInitial Investment PriceListing DateIPO Listing PriceReturn Multiple
TATA Technologies23030 Nov 20235002.17
Nazara Technologies43019 March 202211012.56
Anand Rathi Wealth1606 Dec 20215503.44
One97 Communications140011 Nov 202121501.54
Barbeque Nation22826 March 20215002.19

Note- Not all unlisted shares can offer exponential growth or higher listing gains. 

2. Lower Volatility

Unlisted shares are a great way to balance your risk profile and diversify your portfolio. These shares are not as volatile as equity shares.

If you have invested in high or moderate-risk stocks, unlisted shares can balance the risk.

You don’t have to pay constant attention to the changing prices. That takes away all the worry about buying and selling these shares as the market changes.

3. Allocation Confirmation

One of the major benefits of investing in pre-IPO is allocation confirmation. Promising IPOs often get oversubscribed during the IPO. There’s a solid chance that you may not get any shares allotted to you. 

Furthermore, when you invest pre-IPO, you already hold shares before the company goes live on the share market. This gives you an upper hand during IPO, which brings us to the next point.

4. Pre-Listing Gains

The valuation of private companies grows exponentially before the IPO. There’s often a high demand for these shares just before the IPO. Since the supply is limited, the prices aka the premium for these shares shoot up. 

For example, if the issue price for a share is 20Rs and the over-the-counter premium (price) is 40Rs, then people are ready to pay 60rs to get these shares before IPO.

Investors who already own the shares of these companies may earn a huge profit via pre-listing gains. 

Tax Implications

Taxation Before The Listing-

The income earned (Capital Gains) after selling the Shares is taxed as per the duration.

  1. Long-Term Capital Gains- If you sell the investment after 24 months (long-term), you will have to pay 20% tax on capital gains after indexation. For NRIs, the tax will be 10% without indexation.
  2. Short-Term Capital Gains- If you sell the shares before 24 months of investments, the tax will be calculated as per your income tax slab.

Taxation After The Listing-

If the unlisted shares get listed on the market, the taxation will be similar to any other listed stock. 

  1. You will have to pay a 10% tax on long-term capital gains (investments held for more than a year) above 1 lakh. 
  2. If you sell your shares before 12 months, then the tax on short-term capital gains will be 15%.

What Are The Risks of Investing in Unlisted Shares?

1. Lack of regulations

Unlisted shares do not have SEBI or Stock exchange regulations on them. In order to have a secure buy/sell, you will need a trustworthy wealth manager to work with.

2. Lack of Liquidity

Unlisted shares may not offer higher liquidity as the buyers and sellers are fewer on the OTC market. You may have to wait until you find a buyer who is willing to purchase your shares at a suitable price.

For ease of selling/buying unlisted shares, contact VNN Wealth. 

3. Lack of Certainty

You might always face a lack of certainty in terms of valuation, company performance, and the possibility of earning listing gains. The only way to avoid uncertainty is by investing in known brands that are likely to get listed. 

We have already hand-picked selective companies from the unlisted universe. You can get in touch with us to invest in your choice of unlisted shares.

How to Invest in Unlisted Shares?

The pre-IPO investment process is slightly different. You won’t find them on the stock exchange. 

Here’s how you can buy unlisted shares with us-

1: Explore from the list of companies to invest in

2: Click on Invest Now on the shortlisted company

3: Enter Your Investment Amount

4: Fill in your details

5: Upload PAN copy & CML/CMR copy of your Demat account

Once you submit the details, our team will share account details for you to transfer the trade amount. 

The shares will reflect in your Demat account within 24 hours.

Conclusion

Unlisted Shares can boost your investment portfolio if you invest in the right company. There is a possibility of earning listing gains, which will generate that extra alpha in your portfolio.

But the key factor to earning superior returns from these shares is to choose the right company(s). 

You have the option of investing in many startups to known brands. But not all are going to give you listing gains. 

We have already selected the top 5 unlisted shares for you. If you are interested in buying unlisted/Pre-IPO shares, get in touch with us today. Our advisors have been helping clients invest in unlisted companies for the past decade. Join them as you achieve your envisioned financial goals.

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