Zebu blog

Tag: risk profile

  • Are Tax-Free Bonds Right For You?

    In the past few years, investors with a lot of money have been more interested in tax-free bonds. Large infrastructure players can raise money at the end of the fiscal year by selling tax-free bonds. By offering these tax-free bonds, the government can help pay for infrastructure. There are two main types of bonds that don’t have to pay taxes. Let’s try to understand them better.

    First, there are Section 54EC bonds. If you buy them with the money you made from a sale, you can get a tax break. Because of the benefit in Section 54EC, you won’t have to pay tax on your capital gains. The interest that investors get from Section 54EC bonds will be fully taxed in their hands. Second, there are bonds that the investor doesn’t have to pay any taxes on. This means that interest is paid on them regularly. If you are in the 30% tax bracket, a 6% tax-free bond will give you an effective yield before taxes of 8.57 %.

    Does it make sense to buy Section 54EC bonds?

    HNIs seem to want these bonds a lot because they see it as a good way to lower their capital gains tax. But there are a few important things you should remember about buying these bonds. To make up for the tax benefit, the returns on these bonds are much lower than on regular bonds and bank FDs. So, it only makes sense if you really have capital gains that you need to pay less tax on. Second, to get a tax credit under Section 54EC, you must invest the whole amount, not just the capital gains. There is a cost to that in the form of missed chances to invest in other things. So, unless capital gains make up a big part of your total sales profits, these bonds aren’t very helpful.

    Taking into account the indexing benefits of long-term holding might be a better way to figure out how much capital gains tax you have to pay. If, after accounting for indexing, your total tax bill is less than 10% of your income, it makes sense to pay down the tax and put the rest of the money into investments that will make you more money. You can also use Section 54 to your advantage if you use the money to buy another property. Taking into account the lock-in period and the opportunity cost of investing the whole return, the tax savings bond may not be worth much to investors.

    Are bonds that don’t get taxed a good choice for investors?

    As was already said, these tax-free bonds involve investing in a business that focuses on infrastructure and will allow you to get interest without having to pay taxes on it. When taxation is taken into account, the effective returns are at first higher than those of taxable bonds. During the lock-in period, however, your bonds are pretty much just sitting in your demat account. This can be quite discouraging. Since this asset doesn’t really make money over time, the key question is whether or not the lock-in period is worth it. The bond’s value hasn’t changed much, so it would be better to stick with traditional bonds and fixed deposits (FDs), which don’t have lock-in periods and can be quickly and easily turned into cash.

    Why not think about debt funds as a better option?

    Through debt, you should be able to meet your basic needs for security and guaranteed profits. Choose debt funds if you want to make the best choice. First, you won’t have to pay taxes on the dividends you decide to get. Second, debt funds are easy to cash out because they are liquid and can be sold in less than two days. Third, investors worry about interest rates and the chance of a default. The risk of interest rates will be looked at separately, but the risk of default can be cut down by focusing on risk-free G-Sec funds. Now, let’s talk about the risks that come with interest rates. In the current economic situation, rates have stayed low, which means that they should help with debt funds. When market rates go down, the NAV of debt funds goes up, so investors can make money from both interest and capital gains. Even bonds that don’t have to pay taxes don’t help in this way.

    In the end, it’s easy to get sucked in by how appealing tax-saving bonds seem, but you need to do the math right. Before you decide whether or not to buy these tax-free bonds, look at what else you can do.

  • Should You Invest In The National Pension Scheme?

    If you’re looking for assets that can lower your tax bill, the National Pension Scheme (NPS) should be at the top of your list. In addition to the tax benefit, NPS is a great way to invest if you want to increase your wealth and build up a strong retirement fund. This article will talk about the tax benefits of the National Pension Scheme and why it should be on your list of investments that save you money on taxes.

    The main goal of the NPS is to make sure that account holders continue to get a steady income after they retire, even if their investments have made a lot of money.

    What is the NPS program and how does it work?

    Before we look at the tax benefits of the NPS scheme, let’s take a closer look at how it works. People who have an NPS account can make regular payments to their account while they are working.

    If you are a Tier I subscriber, you must give at least Rs. 6,000 per year. If you are a Tier II customer, there is no minimum amount you must give. If you do decide to give, you may contribute Rs 250. A person with an NPS account can take out about 60% of the money in their account after they retire. With the remaining 40% of the total amount invested, an annuity should be bought so that there is a steady source of income after retirement.

    What are the basic parts of NPS tax savings?

    Not sure if investing in the NPS plan will be worth it? NPS has many benefits, such as being a cheap way to save for retirement and invest. It is important and helps you plan for retirement, and it also gives you stable long-term returns and a good income after you retire.

    Here are some more reasons why NPS is good:

    It’s up to the investor to decide where to put their money.
    Investments in the NPS are handled by people who are qualified to do so.
    The person who uses the account can decide how much to give each month.
    Accounts in the NPS can be managed from anywhere in India.
    NPS gives you a tax break.

    Let’s look at the NPS Income Tax Benefit in more depth. Under Section 80CCD, NPS gives tax breaks of up to Rs. 1.5 lakhs (1). Also, Section 80CCD(2) of the Income-Tax Act says that the employer’s contribution to the NPS can only be deducted from taxes up to 10% of the employee’s salary (base plus DA).

    Salary people who have already claimed the tax exemption of Rs. 1.5 lakh under Section 80C can save more money on taxes through NPS. Section 80CCD lets people who have NPS accounts and invest up to Rs 50,000 get a tax break. This is true for both salaried and self-employed people (1B). Section 80CCD allows this extra deduction, but only for owners of Tier I NPS accounts (1B). Unlike Tier I NPS accounts, Tier II NPS accounts are not affected by Section 80C of the Income Tax Act.

    Another thing to remember about the NPS tax benefit is that the deduction under Section 80CCD is available to both salaried and non-salaried people (1). But under Section 80CCD (1), the most a paid professional can deduct is 10% of their income for the year. Those who don’t get a salary, on the other hand, pay 20% of their gross annual income.

    An important point

    The government has also agreed to raise the costs of the NPS fund manager from 0.01% to 0.09%. This is a small raise to make sure that the pension fund’s management can pay for it. IPOs and more than 200 stocks are now available to NPS fund managers.

  • Equity Market vs Commodity Market – Part 2

    Investors in the stock market can choose to keep their stocks for only one trading day. Stocks, on the other hand, are great investments for the long term because they can be kept for many years or even decades. For commodities trade, on the other hand, the time frame is very different. On the commodities market, contracts that are usually short-term are bought and sold. Also, unlike stocks, they have an end date, which means you have to trade them before the deadline. So, the commodities market is a great place to invest for short-term goals.

    Compared to trading stocks, trading commodities often goes on for longer hours. Stocks can be bought and sold from morning to afternoon. However, commodities can almost always be bought and sold.

    Here are a few more differences between the stock market and the commodity market.

    Bid-Ask spread: The bid-ask spread, which is a measure of liquidity, is lower for stocks. In the stock market, the bid-ask spread is the difference between the highest price a buyer is willing to pay and the lowest price a buyer is willing to accept.

    Margin: The margin requirement for trading commodities is lower than for trading stocks. So, it lets traders take bigger risks, which can be very dangerous when the market moves quickly and in large moves.

    Key indicators: For equity traders and analysts, the most important things are the quarterly results, the company’s dividend payments, and the state of the economy as a whole in the country. When trying to understand the market, traders in the commodity market put more weight on the demand and supply situation than on other factors. Also, traders in commodities have to pay more attention to macroeconomic factors than traders in stocks, who focus on the fundamentals of the companies and their markets.

    Traders and market analysts thought that investing in commodities was a bit easier because it was mostly based on supply and demand. Before deciding how to invest in the stock market, you need to do more research. When you buy a security, for example, you need to look at the company’s earnings and how it has behaved in the past. To understand the copper market, on the other hand, you mostly need to keep an eye on the outlook for industrial growth. So, there are less things to keep an eye on in the commodities market than in the stock market, which may be good for a new trader.

    Stocks can be traded directly in the cash part of an exchange, but commodities must be traded using derivatives.

    Similarities between the stock market and the commodity market

    Both the stock market and the commodity market are affected by many different factors. Take the case of interest rates. Changes in interest rates affect both the market as a whole and the companies that depend on those rates. The interest rate affects how much it costs to keep inventory on hand, which in turn affects the price of goods.

    Pick either stocks or commodities

    Investors can choose to trade on the stock market or the commodities market, depending on how much risk they are willing to take. On the stock market, a common strategy is to buy an investment and hold on to it for a long time. This is not possible when trading commodities. Whether you trade stocks or commodities will depend on how willing you are to take risks.

    If you’re looking for short-term returns, the commodities market might be a better choice. However, investing in stocks is more likely to help you reach your long-term goals. So, investors should keep in mind that stocks and commodities are different in how they are owned and how long they are held.

    Open an account with Zebu to trade and invest in both stocks as well as commodities. Get in touch with us to get started today.

  • Equity Market vs Commodity Market – Part 1

    If a smart investor makes the right investment in the right financial market, they could make a lot of money, especially now, when the internet makes trading in almost every market easier and more accessible than ever. So, we’ll compare the stock market and the commodities market, two very popular markets, to see if it makes a difference.


    What is a stock market, anyway?

    A stock is a type of security that shows that someone owns part of a company that is traded on the stock market. The amount of company shares a person owns, which he or she can then sell or buy from other stockholders, shows how much of the company that person owns. The group of markets where this buying and selling of stocks takes place is called the “stock market.”

    A person can invest in the stock market by opening a trading and demat account with a brokerage firm. The brokerage firm could then set up accounts for you at the right stock exchanges and make trades for you.

    What is the commodity market?

    A commodity is a useful resource or item that can be traded for another of the same kind. There are two types of commodities: soft commodities, like food and livestock, and hard commodities, like gold or oil.

    A commodity market is a place where traders can buy and sell different goods, either in person or online. There are many ways to trade and invest in commodities. These include both direct investments in commodities and investments in futures contracts on commodities.

    Differences between the stock market and commodity market

    After we’ve talked about the difference between stocks and commodities, let’s look at how each market is different. Here are the most important things that set the stock market apart from the commodities market:

    Effects of inflation: Inflation often means that expected costs go up, which could mean that businesses lose money and the value of their shares goes down. This is bad news for the stock market. But inflation is sometimes good for the commodities market because it lets people who own the items sell them for more than they thought they would. But both situations give experienced players chances to make money. In the same way, a drop in the price of oil or other commodities could help stock market indexes.

    Ownership: When an investor buys stocks on the stock market, they get a piece of a company. Most people trade on the stock market by holding on to a stock they already own until the market turns in their favour. But futures contracts are the most common way to trade on the commodity markets. When you use futures contracts, there is no change of ownership. Instead, these agreements cover upcoming supplies of goods that are often traded but rarely owned.

    Volatility: Compared to other asset classes and financial markets, the commodity and commodity markets tend to have the most volatility. The patterns in the commodity market will be much more unpredictable than those on the stock market. This is because the commodities market has a reputation for having less liquidity and is affected by factors like supply and demand and geopolitics that change all the time.

    We’ll discuss more about the differences between the commodity and equity market in the follow up article as well.

  • Everything You Need To Know About Thematic Mutual Funds – Part 2

    A thematic fund’s portfolio is made up of stocks from companies in different industries that have something to do with the theme of the fund. Some investors might not know how each of these industries is growing. You can decide if certain sectors can help you make a lot of money if you know enough about them and how they relate to the subject of the fund. So, thematic funds are a good choice for investors who like to keep up with the news and are good at researching a wide range of industries. Investors can decide if they want to put their money into a certain topic by keeping an eye on a lot of places and getting useful information.

    4. Things to think about before putting money into theme-based funds

    Investment Goals: Before buying these funds, you should be sure of what you want to do with them. If you want the best return on your theme fund investment, you should invest for more than five years. It’s not hard to see why. Any business needs enough time to reach its full potential. So, when you put money into these funds, you should have long-term goals in mind, like retiring early, paying for your child’s college, etc.

    Investment Risks: The benefits of investing in theme funds may seem appealing, but it’s important to know the risks that come with it. It is a very dangerous way to go. Because of this, people who have never invested before are told not to buy themed funds. Let’s look at the main risks that come with these funds:

    Semi-Diverse Portfolio: Compared to sectoral funds, which don’t offer any variety, a theme fund’s portfolio is a bit more diverse. It does, however, offer fewer ways to spread out your investments than other equity funds, like multi-cap funds, whose portfolios include securities from many different industries. Since these equity funds don’t have a theme, it’s less likely that all the stocks will fall at the same time than it is with thematic funds.

    Some themes could take longer to develop than expected. Even if some of us can see that a theme has a lot of potential in the near future, say in the next four or five years, our predictions are likely to be wrong. It might take longer than we thought. There were a lot of brand-new funds with themes, and many investors hoped to make money from them. Even though infrastructure has been a topic for more than ten years, there hasn’t been much progress. When investing in themed funds, an investor may have to wait up to 20 years to see a profit. There is a risk of time with theme funds.

    Expense Ratio:

    You need to be honest about the costs that cut into your profits. For managing the thematic funds you want to invest in, Asset Management Companies (AMC) will charge you a fee called an expense ratio. This fee is mostly used to pay for the fund’s overhead costs, such as the salary of the fund manager and marketing costs. The fee is charged once a year.

    5. Taxation of Thematic Funds

    What matters are the profits after taxes. You should know how taxes work with that kind of money. The capital gains you made when you sold your theme fund are taxed based on how long you held on to it.

    If you sell your investments within a year, the profits are considered short-term capital gains (STCG), and you have to pay 15% tax on them.

    Long-Term Capital Gain Tax (LTCG):

    Gains from any investment held for more than a year are considered Long-Term Capital Gains and are taxed (LTCG). Gains of up to Rs. 1 lakh are not taxed in a fiscal year. Gains of more than Rs. 1 lakh are taxed at 10%.

    These are the important things to know about Thematic mutual funds. To start investing in them, open your demat account with Zebu today.

  • Everything You Need To Know About Thematic Mutual Funds – Part 1

    Each mutual fund is based on an asset that brings in money. Large-cap funds’ underlying assets are the stocks of some of India’s biggest companies based on market capitalization. In a similar way, thematic funds are made up of stocks of companies that all have something in common with a certain theme.

    For example, a fund with an ESG theme will invest in companies from different industries that have done well in terms of the environment, society, and the way the company is run (from technology to financial services to FMCG to Consumer Durables).

    Because of this, thematic funds are different from traditional investment strategies like market capitalization (large-cap, mid-cap, small-cap), style (value & growth), and sectoral investing (pharma, technology, infrastructure). As long as it has something to do with the topic, it invests in many different industries and market values. SEBI also says that 80% of a company’s total assets must be invested in stocks and securities related to stocks of a certain theme.

    1. What are the pros of investing in thematic funds?
    More options for diversification than sectoral funds.
    When you invest in a sector fund, your portfolio is limited to that sector, so you don’t have any other options for diversification. Your portfolio will suffer if the sector is doing badly for any reason. Thematic funds, on the other hand, invest based on a theme and may include stocks from companies in different industries. This gives you a bit of diversity. For example, think about a fund whose main focus is on manufacturing. This fund puts its money into a wide range of engineering, chemical, and construction businesses. So, even if businesses in one area aren’t doing well at a certain time, businesses in other areas will keep your portfolio from falling apart in a big way.

    2.Returns that beat the market

    If the investor chooses the right theme to invest in, thematic funds may produce amazing returns. Still, we need to realise that getting the theme right is harder than it seems. It requires that you keep an eye on the things you’re interested in and pay attention to the news and headlines all the time. If, after all your hard work, you really nail the topic, thematic funds could pay off in a big way for you.

    3. Who is a good fit for thematic funds?

    Investors with a high risk tolerance:
    Thematic funds are one of the high-riskmutual funds. When a portfolio is put together with a theme in mind, it limits the kinds of investments that can be made. It would only be able to put money into companies with shares in that area. So your portfolio has a little bit of everything. If for some reason this theme doesn’t come true, there is a big chance of losses. So, these ETFs should only be bought by investors who can handle high risk.

    Investors Who Want Long-Term Returns: It might take a while for a subject to reach its full potential. For example, we’ve known since the early 1990s that software and internet technologies had a lot of potential. But now, 20 years later, we can really see how these ideas work in the real world. So, it takes time and hard work to turn these topics into profitable investments. If you’re an investor who wants to make money over the long term, thematic funds may be a good choice for you. People who are just starting out with investing are told not to put all of their money into themed funds right away.

  • What Is Your Risk Profile?

    You must recall your first bike ride. That is the kind of encounter you will never forget. But, while you were enjoying the ride, there is always that one kid nearby who clearly wished he hadn’t had to go through the horrible experience.

    So, while you were ready to accept the risk of riding a bike, your friend would have preferred to stand back and observe. Similarly, some people may be more willing to accept risks than others when it comes to investing. And your risk profile indicates how much risk you are willing to face when investing.


    Risk Profile

    Everyone has different financial objectives in life. That is, your risk tolerance is determined by your financial ambitions as well as your existing financial health.

    Let’s have a look at the various risk profile groups. There are three major kinds –

    The careful investor – this means that you want to take a low risk.

    The average risk-taker – this indicates that you are willing to take a small level of loss in exchange for higher returns.

    The aggressive risk-taker – this indicates that you are willing to take on more risk in exchange for a higher potential return.

    However, you are not required to fit within any of the categories. Depending on your investment objectives, you can choose to participate in all of them.


    Consider the following example.

    When it comes to keeping an emergency fund, you want to invest in something that will provide you with security and liquidity rather than large profits. In that instance, you choose a low risk, low return profile, showing that you are cautious.

    However, if your financial goal is retirement, which could be 25 years away, you can be an aggressive investor. This is because you want to earn a good return over a long period of time. In this case, the high profits would be directly proportional to the risk. Furthermore, because your investment horizon is decades away, risks can be handled in the long run.

    Start by taking care of emergency funds and investments with low-risk investment options. Then, move on to the funds needed for your children’s education and retirement. Next, adjust your risk appetite to invest in stocks building your wealth.


    You can control investment risks in two ways:

    Invest for the long term.
    Regularly invest little sums.

    Some investors try to outperform the market in a relatively short period of time. However, history has shown that short-term investments do not generate the same level of return as long-term ones. Long-term investment works because bull and bear markets provide wonderful opportunities to ride through the highs and lows of cycles while investing in high-return, high-yielding assets.

    Investing in smaller quantities allows you to benefit from rupee cost averaging. This technique ensures that you purchase more shares (or units) when prices are low and less shares (or units) when prices are high. As a result, you can average out your investment costs and deal with market volatility.

    Furthermore, adopting a disciplined approach, such as investing little sums on a regular basis, helps create excellent financial habits that will undoubtedly come in helpful in the long term.

    Investing tiny amounts over time might help your investments develop. All owing to the compounding power. Earnings from stock investments are reinvested, allowing your investments to generate even greater income. So, even if you start with a tiny amount, the longer your money stays invested, the greater the chance for growth and compounding.

    But did you know that you may utilise both of these methods to reduce risk in high-risk investments?


    Here’s how it works:

    If you have a substantial money to invest in a high-risk investment, consider putting it in a low-risk investment vehicle such as a debt fund. You can then gradually transfer tiny amounts of money from that fund to a high-risk investment vehicle.

    For example, if you wish to invest Rs. 10 lakhs in equities stocks or funds, you can put Rs. 1 lakh into equity stocks or funds in the first month and the remainder in a short-term debt fund.

    The remaining funds can then be transferred in small increments over the next few months.

    This way, you may manage market volatility while still earning high long-term profits.

  • What is the Risk-Reward Matrix?

    If you have seen the recent miniseries about one of India’s famous scammers, you would have come across this phrase: Risk hai to Ishq hai (Where there is a risk, there is love)

    Think about the times that you enjoy going on a long drive. When you started learning how to drive, it must have seemed risky and scary. But now that you are an experienced and good driver, you can enjoy the road to a great extent. All that risk you took seems to be worth it, right?
    The same is true for investment. Every investment has some level of risk. While you cannot prevent risk, you can reduce it by being financially savvy and recognising your risk tolerance.

    The same is true for investment. Every investment has some level of risk. While you cannot prevent risk, you can reduce it by being financially savvy and recognising your risk tolerance.

    So, if you want to achieve your goals, you must invest. But, if no investment is genuinely risk-free, how will you achieve your objectives? That’s a problem! But there is a workaround. You can increase your return potential by diversifying into the correct investments to help limit market volatility and keep your financial goals on track.

    Investment risk-reward matrix

    Every investor seeks an investment opportunity that will provide them with the highest possible profits as quickly as possible. But remember that it’s better to proceed slowly in the correct way than quickly in the wrong direction.

    And, as the saying goes, “all good things take time.” Similarly, investments take time to mature. In terms of investments, the risk-to-reward ratio is an important issue to consider.

    Consider you and your friend deciding to participate in the ‘dice throwing’ Instagram trend. In this game, your friend suggests that each of you contribute Rs. 500, for a total contribution of Rs. 1000. You will win the complete money if the dice is tossed and lands on an even number. Your friend stands to win if it is an odd number. The risk to reward ratio, in this case, is 1:1, as both of you have a 50% chance of winning the money you put in.

    It doesn’t sound like an attractive investment, does it? Assume you opted not to play.

    Your friend decides to up the stakes after hearing this. He modifies the game and recommends that if you contribute 500, he would place three times that amount, or 1500, for the same bargain.

    This sounds amazing, doesn’t it? You still have a half-chance of winning. If you win, he will receive Rs. 1500, which is three times your initial investment. As a result, the risk to reward ratio is 1:3.

    In technical terms, the risk to reward ratio is a valuable measure that helps gauge an investment’s profit (reward) relative to its potential loss (risk).

    We have already learned that each investment carries a certain level of risk. According to the industry, the greater the risk, the greater the reward.

    We’ll look at common assets and their risk-reward ratios to see what you may expect if you invest in them.

    Equity

    Shares and equities are the most volatile of all investments, making them the riskiest. However, it has the greatest potential for long-term profitability.

    Debt/bonds

    Debt securities are issued with the promise of interest payment. Because the risk is lower, the rewards achieved over time may not be as great as in the case of equities.

    Property investment

    The real estate market is volatile by nature. Key risks are determined by a variety of factors such as geography, demand, structural challenges, and a lack of liquidity. Based on all of these criteria, the risks associated with real estate investing are likely to be comparable to those associated with equities and bonds.

    Gold

    When it comes to gold investment risks, the expense of keeping and insuring the precious metal may be included. However, you can now invest in gold through Sovereign Gold Bonds (SGB), digital gold, gold ETFs, and gold mutual funds. Investing in gold provides diversification and a distinct blend of reward benefits. However, the risks associated with commodities such as gold are determined by market demand and supply.

    Varied assets will provide you with different growth rates. After reading about the various degrees of risk associated with each investment, you may be wondering, what if you just keep the money at home? Wouldn’t that imply no risk?

    Keeping cash at home, for example, may be dangerous. Alternatively, simply having money in a savings account exposes it to inflation. This means that the money will continue to lose value over time. And that’s an extra risk you’d be incurring. So, it is always better to invest.