What is ELSS? Is ELSS Different from Mutual Funds?
Mutual funds have revolutionized the way people invest. Earlier, risk-averse individuals preferred fixed deposits while risk-taking investors went for stock markets. However, lately, mutual funds are becoming a favourite among investors. They promise market-related returns while the risk is diversified over a wide portfolio. What’s more, even small investors can invest in a mutual fund scheme if they want to reap the returns promised by capital markets.
Mutual funds come in various types and ELSS plans are also one type of mutual fund scheme. However, many investors confuse between the two. While some believe that ELSS schemes are not mutual funds, others feel that both ELSS and mutual fund schemes are one and the same. Are these beliefs correct?
No, they are not. ELSS schemes are, actually, a subset of mutual funds. They are a type of mutual fund which has distinct features and benefits. Let us study ELSS and mutual funds in conjunction with one another –
ELSS and Mutual Funds
You can invest in ELSS and in mutual funds either through lump sum or through SIPs (Systematic Investment Plans– i.e. periodic installments).
Both invest in the capital markets and yield good returns.
Nature of investment
ELSS stands for Equity Linked Saving Scheme. As such, about 65% to 70% of the scheme’s portfolio is invested in equity shares. That is why ELSS plans promise good returns and are also prone to risks. Mutual funds, on the other hand, come in different varieties. There are debt mutual funds that invest a majority of their portfolio in debt instruments and equity mutual funds that have higher equity exposure, balanced funds that have a combination of debt and equity in moderate proportions and so on. So, while ELSS is primarily an equity fund, Non- ELSS mutual funds can be equity, debt, balanced, hybrid or any other type.
Tenure
ELSS plans have a lock-in period of 3 years. This means that your investments are locked in the scheme for three years and you cannot withdraw them. ELSS schemes are, thus, not very liquid. Non-ELSS mutual funds have no such lock-in period. You can redeem your investments whenever you like without any restrictions.
Tax benefits
ELSS is popular because it is tax-saving in nature. The investments you make, up to Rs.1.5 lakhs are exempt from tax under section 80C. Moreover, the interest earned and the redemption proceeds are also tax-free upto 1 lac of gain because they are called long-term capital gains.
The taxation of Non-ELSS mutual funds depends on the portfolio. The gains from equity mutual funds becomes tax-free upto 1 lac after 12 months. So, if you redeem your investment after a year, it becomes a long-term capital gain and is exempted from tax upto 1 lac and taxed at 10% on balance gain amount. For debt mutual funds, however, the redemption proceeds are taxable. If redeemed before 3 years, debt mutual funds are taxed at your income tax slab rate as short-term capital gains. If, however, you redeem your debt mutual fund after 3 years it becomes long-term capital gains and you get the benefit of indexation. The tax rate is 20% with indexation benefit.
Here is a comparative table for a quick analysis –
| Points of distinction | ELSS | Other Mutual Funds |
| Type | Equity oriented mutual funds | Can be equity, debt, hybrid, balanced, etc. |
| Tenure | Compulsory lock-in period of 3 years | No lock-in tenure. Can be redeemed when desired. |
| Taxation | Investments up to Rs.1.5 lakhs are exempted under Section 80C. ELSS are tax-free upto 1 lac after 12 months. | Investment is taxable. Equity mutual funds are tax-free upto 1 lac after 12 months. Debt mutual funds are taxed at income tax slab rate if redeemed before 3 years. If redeemed after 3 years they get indexation benefit and the tax rate is 20%. |
| Suitability | Investors who are looking to invest for tax saving purposes for long-term as ELSS have a lock-in of 3 years. | There are various Non-ELSS mutual fund options for all risk appetites and investment horizons. |
| Non-suitability | Investors towards retirement (low-risk appetite) or who have already exhausted their Sec 80c limit, can look at other tax saving options. | Investors with high to moderate risk appetite should invest in Non-ELSS plans. |
So, the next time you go shopping for investments, remember that ELSS and other mutual funds are not the same. They differ from each other in various aspects, as explained above. So, be wise and choose your investment instrument after a thorough analysis of your investment goals, time horizon and tax benefits. Do consult an expert, should you require help with picking up the best plans as per your requirements.
Impact of having Domestic stock in your Portfolio
The main aim of investing in stocks is to ensure that you are able to meet your future financial goals. The rise in inflation makes it difficult for us to just earn and save some part of our incomes. It is very important to invest your savings to meet the increase in prices due to inflation. The stock market is one of the oldest and most popular investment methods among investors due to its several benefits.
Buying stocks not only gives an opportunity to own a percentage of a company but it also comes with benefits such as dividend payouts and capital gains when the value of stock increases in price over time.
Domestic stocks happen to provide great opportunities for money growth in the long-term. It should be an important part of your investment portfolio. But, one should be aware that this greater potential for growth carries a greater risk, especially in the short term. Therefore, it should be looked upon for long term wealth creation, and for the short term, one needs to be cautious.
So it is crucial to understand your risk appetite before investing in domestic stocks. You should be aware that stocks are generally more unstable than other types of assets, your investment in a stock could be worthless when you take a decision to sell it.
Now let us see some of the benefits of having domestic stock in your portfolio which will have a positive impact on your overall financial health.
Related Article : Everyone is in love with international funds these days. Should you invest?
Advantages
Diversification
Diversification is the practice of laying your investments around in such a way that your risk to any one type of asset is limited. This practice is designed to help reduce the instability of your portfolio over time. The idea is to simply spread your portfolio across several asset classes. One way to balance risk and profit in your investment portfolio is to diversify your assets and get some exposure to domestic stocks. Diversification can help reduce the risk and instability in your portfolio. It will most likely help in reducing the frightening ups and downs of the stock market.
Higher Liquidity
The Indian stock market compromises of two major exchanges, the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). Both of them play important roles. Most of the companies trade their shares on either or both of these exchanges. This provides higher liquidity to investors because average daily volumes are high. Thus, if an investor wants to buy or sell any stock on the stock exchanges, he can easily do so.
It is also easier to understand the business activities and strategies of a domestic company. For starters, interviews with top managers, financial analyst reports about the corporation, and stock predictions will be the starting point to analyze a stock.
Wider Choice
The stock market offers different financial instruments, such as shares, mutual funds, and derivatives. This provides investors a wide choice of products to invest their money. The decision should be based upon the risk appetite of an investor. In addition to providing investment choices, this flexibility is beneficial in reducing the risks inherent to stock investing by enabling diversification of investment portfolios.
Get Ownership
Even if you acquire a single share in a company, you get a portion of ownership in the company. This ownership gives investors the right to vote. Although this may seem like an overstatement it is true and there are several instances when shareholders have prevented company management from making unreasonable decisions that are harmful to their interests.
Higher Returns in Shorter Periods of Time
If we compare with other investment products like bonds and fixed deposits, stock investing provides investors an incredible possibility of making high returns in comparatively shorter time periods. Sticking to the stock market basics, such as using stop-loss, take-profit triggers, and doing the research can significantly reduce the risks associated with stock investing. This will help in maximizing the returns on share market investments.
Related Article : P/B ratio – Is it a best way to select stocks?
Convenience
Nowadays, everything is online. The trades are also carried out on an electronic platform to ensure the best investment experience for investors. In addition to this, broking service providers offer online share trading facilities that make investing even more convenient. This is because investors from the comfort of their homes or offices can place their orders through the computer.
The Demat account holds all the products within their investment portfolio electronically in a single location, making it easier for investors to track and monitor the performance.
Regulated by SEBI
We know that the Indian stock market is regulated by the Securities and Exchange Board of India (SEBI). The SEBI has the responsibility of regulating the stock exchanges, its development, and even protecting the rights of the investors. This eventually means the interest of investors is well-protected by a regulatory framework while investing in the stock market.
This is how exposure to domestic stocks will impact your investment portfolio. It is suggested to have some exposure to stock investments to push your investments for that extra growth. Having said that you also need to be aware of the fact that stock market investment comes with a risk. Thus, doing your research before investing is a must.
Everyone is in love with international funds these days. Should you invest?
Nowadays, you must be hearing people investing in international equities. Also, many advisors might be talking to you about investing in international markets and get some global exposure. You must be hearing terms like “overseas investments”, “international equity” and “Global Diversification”.
In the last year during the COVID-19 pandemic, the number of folios in mutual fund schemes that invest overseas has increased to 4.4 lakhs from 1.44 lakhs. AUM (Asset under management) also rose to Rs.6482 crores from Rs.2470 crores.
What exactly all this means? Let us find out this in detail.
Before moving on to whether we should be investing overseas or not, let us first understand why there is a so much hype about it. Following are some of the reasons:-
- Post the announcement of the enormous stimulus package in the US, interest in the US market increased.
- Companies whose major business is online is expected to do well during and post COVID- 19 pandemic. Most of these companies are based in US like Facebook, Amazon, Netflix, alphabet etc. These companies are expected to comfortably face even huge disruptions that are happening owing to on and off lockdown in different parts of the world.
- Looking at the advance technology and huge investments capabilities, it can be seen that developed economies like US is more likely to overcome the coronavirus pandemic sooner than developing economies like India.
If you are not a seasoned investor and find it difficult to understand international markets, the best way is to take mutual fund route. You can benefit by taking advantage of professional expertise of the fund manager in picking up specific stocks and also the market. Almost all the Asset Management companies offer international funds.
What are international Funds?
International funds are type of mutual funds where the investor’s pool of money is invested in international equity markets. One can either invest lump sum or through SIP as well. Investments done in these funds can be made in stocks of companies all over the world.
Taxation of these funds
It is crucial to understand the taxation aspect of these international funds while taking a decision to invest in them. For the purpose of taxation, the schemes are exactly the same as debt schemes. This means the investor will either have a short-term capital gain or long-term capital gain based on a holding period of 36 months. If an investor holds this fund for less than 36 months, it will be considered short-term and will be taxed at the slab rate applicable.
On the other hand, if the investor sells the investment after holding it for more than 36 months, it will be considered a long-term capital gain. This long-term capital gain will be taxed at the rate of 20% with indexation benefit.
There are certain domestic equity schemes offered by AMCs that have some exposure of 20% -30% in international equity. The advantage here is that you get some exposure to US markets and it is more tax-efficient than international funds as these are taxed as equity funds. This implies that long-term capital gains are taxed at 10% only if the gain exceeds 1 lakh and short-term capital gain is taxed at just 15%. Here, long-term and short-term will be decided based on a holding period of 12 months.
Benefits
Getting global exposure has many benefits. One of the major ones is diversification of your portfolio not only in India but all over the world. It is always suggested to not park all your investments in one asset class. If we move one step ahead, you should also diversify your investments in each asset class as well. Investing in US and other countries will diversify your money in different economies. It protects your money and reduce risk to certain level.
Also, if you are looking to send your kids abroad for education, you can look at investing in international funds. This will help you to capitalize on dollar rates.
Related Article : Benefits of investing in global markets
Should you invest?
Now the main question arises, should you invest or not?
If you understand the international markets well, then only go ahead investing in international funds, otherwise it will do more harm than good. It is not recommended to invest major part of your portfolio globally. For balanced diversification and hedging purposes, limit your global exposure to 10%-15% of your entire portfolio.
It is further suggested to opt for schemes which focusses on US markets. It will be a good choice for Indian investors. If your risk appetite is high, you can also invest directly into US stocks instead of mutual funds.
Having said all this, it is always of utmost importance to understand the product where you are investing. Not only be aware of return potential but also don’t overlook risk associated with it.
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10 Tips to Raise Equity Investment in 2020-21
Now that this year is approaching the end, it is time to take a count of what was to be done, what is done, and what needs to be done if we wish to stay ahead. This applies to your investment portfolio same way as in case of your life goals. So, stay tuned as we present to you most important pointers to raise equity investment in coming year 2021.
Take stock
Past is the teacher as far as financial markets go. If you wish to understand the impact of the investment decisions (consider stocks, mutual funds etc.), then it is imperative that you look at your investment portfolio. This is an important step before diving into next year’s investment decisions, as it will give an adjustment chance if you need one.
For e.g. if you have been following your portfolio goals considering your kid’s higher education as mid- long term goal for all these years, and the next year is going to be the first year of college for your little one, then what? You will need to rearrange your portfolio to make way for liquid funds for admission and tuition fees, if your child opts for an expensive course.
You are not sheep
Yes, following the herd blindly and imitating every other move of any “favoured” group is something sheep do! So, avoid basing your investment decisions and ideology on any of your friend, relative or colleagues. Even if they are making profits based on any tip given by any broker or trader or any other so called insider source.
It may happen that bull market trend may turn into bear rally, once these sources achieve profit. This may cause a big setback if you have purchased the stock which is not so fundamentally strong in bull market and wait to see if it rises even higher. Ultimately, you might face the loss which may be huge enough to hamper the investment portfolio.
Value investing
Warren Buffet has introduced the concept of value investing or value stocks, which refers to investing pattern where the investor seeks to invest in undervalued but which possess the high growth potential in coming years. Such stocks must be researched and can be traced after deep technical and fundamental analysis. In brief, invest in a company and not in the stocks, which will make you seek for sound financial fundamentals and not fall for any hype for high-low or stop loss.
It also comes along in another way. You should always understand the business of the company in which you are going to invest. Think of the stocks as businesses and not as merely stocks. By this way, you will be inclined towards investing in fundamentally sound and potentially progressive but undervalued stocks in the market. Even you can hire financial planner for managing your financial portfolio.
Timing the market is a myth
If any investor boasts of timing the market, be it with technical analysis or just with gut instinct, it is just not true. This is because stock market is volatile and contains short term fluctuations. Ideally, stock market starts bull trend once investors start buying irrespective of any reason. It might be based on a tip or just looking at bullish trends. However, seldom people will know that such bullish trends may turn into bearish market anytime and again start selling the stocks at loss with a fear of incurring losses.
It is better to hold the stocks for a while since stock market corrects itself many a times, meaning that market reverses its trends and the stock prices may become lucrative if you hold them for a while. Speculation and day trading are hence, to be avoided if you are doing it based on certain tip or insider quotes. You may lose your money while squaring it off at the end of the day by selling it at loss, just because you may not have sufficient funds for clearing off the liability.
Diversification
We have always heard of the saying, “Do not keep all eggs in one basket”. This applies to your investment portfolio. Those investors who had invested their hard-earned money in one sector only, had to bear exorbitant losses. Only if they could diversify and invest in other sector and industries also.
Study and understand the various sectors which possess potential to grow and are trading at discount right now. Apportioning the portfolio investments to such weighted investing will increase the returns and reduce the risk magnitude.
Expecting more and more
Even if you have invested in value stocks and have held it for long enough, earning more than 12-15% would be just superficial and may happen rarely. It is just not right to have unrealistic expectations from equity markets, since these markets have their reversal trends. There may be some Mid or small cap stocks which have rallied almost 150% in one year, however, it will be imperative to invest in such stocks only after thorough understanding and analysis to avoid huge losses as they are already trading at premium now.
Take out your Piggy bank
Since the stock market can’t be timed and can’t be beaten with any strategy or idea, it is best to invest only surplus funds. Market has mind of its own and hence you really can’t predict the market ups and downs, so it is best to invest the money which is left after all appropriations for necessities and other secure investments. Needless to say, that this investment may also rise up in favorable conditions.
Discipline pays you
Emotion clad investing is another example of panic investing which may further fuel the bull market and may signal bear market coming through. It is always seen that the investors just see the momentum of the stocks and dive into them if they are rising, where they fail to understand that stock prices may reverse and all calculations may go wrong.
Disciplined and systematic investing always discourages such panic investing and thus you stay away from bouts of enthusiasm, and encourages investing in right shares and for longer time.
Related Article : Things To Know Before Starting An SIP – The Seven Step Guide
Where interest rates are heading?
Even if you don’t understand the whole dynamics of interest and stock market, be sure to check the interrelationship of the two. Any change in interest rates may bring down the stock markets, especially banking stocks.. Keep a look on RBI rate cuts, which may result in bout of panic in markets. However, you should be calm and not dive into such rush investing as you follow systematic investing approach.
Long term investing always helps
Last but not the least, long term time-frame generally results in value appreciation and reduces the risks of loss due to panic trading. Even where, the stocks are under performing or are undervalued, you should hold them long enough to receive desirable price for them. However, there is a condition that these stocks are fundamentally sound and you do not trade on any tip.
So these were the Top 10 tips to raise investment in equity markets. It is always recommended that you get in touch with a financial advisor to consult before making investing decisions. Investing in the stock market ensures long term wealth creation.
Start investing today !
P/B ratio – Is it the best way to select stocks?
Selecting one stock out of the pool of stocks available is a nightmare for many. Right?
But if one wishes to grow wealth then he should make sure that the returns from his portfolio should be beating inflation. On an average in past 20 years, the inflation rate has been around 7% p.a. So if you are someone who wishes to grow their wealth, it is important to have exposure of equity in the portfolio. This will be useful as equity investments beats inflation in the long run and it is tax efficient as well.
So looking at these 2 major advantages and current market situation where markets have moved up approx. 45% from lows of March 2020, if you have made up your mind to invest in equities, the next question comes where to invest your money. There are ample number of stocks available in the market. So it becomes a little difficult for a layman investor to select the best stock which gives him good returns.
An informed investor should not only look at past returns but also the risk component involved along with the fundamentals of the company.
Now there are many factors one should consider while selecting a stock. I will be addressing one such parameter that investors look at before investing into any one particular stock. I am talking about P/B ratio.
Let us understand the meaning first.
Price to book value ratio
There are many investors who look at P/B ratio to decide whether to invest in a stock or not. Are you one of them? If yes, read on to understand whether you were right or wrong?
And if you are someone who doesn’t have an idea as what is P/B ratio then also continue reading so that you could use it for your benefit.
So P/B ratio is used to compare a stock’s market value with its book value.
How it is calculated?
P/B ratio = Current Market price / Book value per share
In simple terms, Book value is nothing but Assets of the company less Liabilities.
It is important to understand the components of P/B ratio to deeply know what it reflects.
Let me take an example of Company ABC to explain:-
Market price = 300
Total shares = 60000
Assets = 1 crore
Liabilities = 40 lacs
Book value = Assets Less Liabilities = 1crore – 40 lacs = 60 lacs
Book value per share = Book value / No. of shares = 60 lacs / 60000 = 100
P/B ratio = Current Market price / Book value per share = 300/100 = 3
How to interpret P/B ratio?
In the above example, P/B ratio is 3. It means for one rupee of net asset of the company, people are ready to pay Rs.3. In other words, you are giving Rs. 300 to buy Rs.100 net asset of the company.
Many people interpret it as over valuation which implies that the stock is overvalued and thus one should not invest into such companies. You might have heard people saying that invest in a stock with a P/B ratio of less than 1. It is because of this reason they say so.
Currently, there are approx. 18 companies in BSE500 which have P/B of less than 1.
Now let us see how right it is to invest in a stock based on its P/B ratio.
P/B ratio is great way to analyse the stock but only if it is used correctly at the right place. As it’s rightly said half knowledge is always dangerous.
Although stock with low P/B ratio looks cheap to buy but instead of looking at the low price, one should analyse to find out whether there is a scope of that company to go up.
There could be many reasons for a low P/B ratio. Some of these could be a not so strong balance sheet, increasing non-performing assets, lower capital adequacy ratio or incurring losses.
It does not make sense to look at P/B ratio for all the types of companies.
Few Points to consider
- The companies who do not have much assets because they are labour intensive. There is no point of comparing the book value as assets are not much and the business model of such companies revolves around people. Eg IT companies. Their major asset is employees which is considered as an expense and not asset in books.
- The companies with depreciating assets. There are companies which have huge plant and machineries but these are depreciating assets. So in real the owners might not be able to get a value which is stated as book value in many cases.
P/B ratio will be more useful for sectors like real estate, Banks and NBFCs.
Points to consider while selecting a stock beside P/B ratio less than 1
- One should avoid companies which have high debt.
- Avoid companies which are loss making.
- One should also look at the future aspects of the company and if you feel that the future of the company is not so promising then stay away from it.
- Rule out the companies with poor growth visibility.
- Check consistency in returns and growth of the company.
Instead you should be looking at companies which are generating high cash flows and have lower debt to equity ratio. Looking at a company whose product has a longer shelf life will also assist you to select a good company stock to invest in.
So it is highly recommended that you do not fall in the trap by just looking at the P/B ratio. There are many other factors that one should look at to gauge the future prospects of the company and get benefit from the same in your decision making.
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