How to invest in Debt Funds?

How to invest in Debt Funds?

Most of our parents and grandparents have invested their hard-earned money into trusted FDs, and PPFs and relied on gold for wealth creation. That was a good option a long time ago, but today, that's a way to lose wealth than make wealth. A bank deposit earns 6% per annum. The interest earned on the principal is taxed according to the tax bracket. If the tax bracket of the individual is 20%, the net interest earned is 6%*(1-20%) = 4.8%. The current inflation ranging from 4% to 6%, erodes the wealth that is created by the bank deposit. Hence, in the current economic scenario, these instruments are not sufficient for beating inflation and creating wealth with reasonable returns over the years. Debt as an investment vehicle has always been trusted as there is a fixed promised return and a guaranteed principal payment, giving a sense of comfort to the investor. The debt market is a platform that enables the purchase and sale of loans in exchange for a rate of interest and periodic payments of the coupon. These markets are lesser risky than their equity counterparts, and hence also have lower returns when compared to equity instruments. In the following article, we explore various facets of this financial instrument.  What is a Debt Mutual Fund? A debt fund is a mutual fund that invests in fixed-income instruments such as treasury bills, commercial paper, government bonds, corporate bonds/debentures, money market instruments, etc. All the instruments that the fund invests in have a maturity and a fixed coupon or interest rate payment that the buyer/investor can rely on – hence have the name - fixed-income instruments. These funds are also known as bond funds or fixed-income funds. As the returns are pre-decided, they are not affected by market fluctuations when the instruments are held until maturity. Hence, these funds are low-risk options for an investor. Every debt security is assigned a credit rating which indicates the risk/probability of default, based on which the fund managers take a decision to either include or exclude them in their portfolios. If a paper or debt security has a high credit rating, it implies a low probability of default i.e., the borrower has a high propensity to pay back the principal and interest. Fund managers sometimes also choose a lower-quality debt to earn higher returns by taking a calculated risk. A debt fund with a higher amount of high-quality debt is more stable and less prone to market fluctuations however, earns a lower return. The fund manager also has the flexibility to choose long-term or short-term debt based on the existing yield curve or interest rate regime in the economy.  Types of Debt Funds Debt funds are classified based on the maturity period as follows - Liquid Fund: This fund invests in money market instruments that have a maturity of fewer than 91 days (3 months). The returns earned by these funds are greater than the savings accounts. These are considered one of the best alternatives for liquid and short-term investing. Gilt Fund: These invest over 80% of the assets into Government securities over a range of maturities (10 years, 5 years, etc). These funds are credit risk-free (as one is lending to the Government of India, which cannot default on its payments), however, are highly vulnerable to interest rate risk. Dynamic Bond Fund: These invest in debt securities with a range of maturities, adjusting for the interest rate regime or yield curve prevailing in the economy. These funds are ideal for investors seeking moderate risk with an investment horizon of 3-5 years. Money Market Fund: The fund invests in debt securities with a maturity of less than 1 year. These are sought after by investors looking for short-term investment options in low-risk vehicles. Corporate Bond Fund: This fund invests over 80% of the assets in corporate bonds with the highest credit rating (implying a low risk of default). These are suitable for investors seeking low risk and provide exposure to corporate bonds which provide higher returns than the G-secs. Banking and PSU Fund: The fund invests over 80% of its assets in Banks and PSU bonds. Credit Risk Fund: These funds are mandated to invest over 65% of their assets in bonds with a credit risk rating below AA+. They aim to generate a return higher than the funds invested in G-secs and other high credit-rating debt securities, by taking on more risk in their portfolios. However, these funds only thrive in a credit conducive environment where the economy is booming. These funds are very volatile and are suitable for investors seeking moderate-high risk. Floater Fund: These funds invest over 65% of their assets in bonds with a floating interest rate. One should consider investing in floater funds when there is a rise in interest rates in the economy to reap the maximum benefits. Short-term floater funds typically invest in Government securities with a tenure of less than one year. Longer-term floater funds invest in corporate bonds, debentures, and government bonds. Flexibility in tenure makes it an attractive investment to all investors in the market. Despite these funds providing higher returns (lower than equity funds), they are heavily reliant on market conditions, implying uncertainty in the prediction of returns that can be expected from these funds. Investors looking to make gains from the interest rate fluctuations, dilute the interest rate risk factor in their portfolio, or have their wealth unaffected by the volatile market fluctuations prefer to invest in these funds. Overnight Fund: These invest in securities with a maturity of 1 day. Due to the extremely small-time horizon, the interest rate and credit risk are almost negligible (SEBI also mandates these funds to invest in low-risk debt securities). The returns earned from these funds are also lower ranging from 3-5%. These funds do not charge exit loads even when the units are redeemed in a day, which was the primary reason for their popularity among investors. What is Macaulay's duration? This financial jargon indicates how many years it would effectively take for the bond to repay back to the investor with its periodic cash flows. It can also be considered as the time at which the investor’s investment reached a breakeven. It is also used as an indicator for the interest rate sensitivity of the bond, the higher the duration, the higher the sensitivity. The following table indicates the type of bonds that the funds would invest in depending on their fund type. FUND TYPEMacaulay DurationUltra-Short Duration Funds3-6 monthsLow Duration Fund6-12 monthsShort Duration Fund1-3 yearsMedium Duration Fund3-4 yearsMedium – Long Duration Fund4-7 yearsLong Duration Fund>7 years What type of Investor should invest in Debt Funds? Debt funds are considered ideal for risk-averse investors who aim to generate a regular income out of their investments. The funds diversify across various securities and ensure a stable return to their investors. If an investor has been saving in bank deposits for their stability, then he/she could prefer debt mutual funds and earn similar or higher returns in a tax-efficient manner. The funds are available for short-term (3-12 months) and medium-term investors (3-5 years). As an investor, if you are looking for a more liquid investment, you could prefer a short-term fund over a savings account and earn 7-9%. Monthly Income Plans (MIPs) also provide an option for the investor to receive a monthly payout, similar to FDs. Risks in debt funds We are not suggesting that debt funds are risk-free. That tag only belongs to the Government of India (Sovereign Debt). The underlying risks that one must consider while investing in debt funds are as follows - Liquidity Risk: In an economic downturn, the fund house could receive an umpteen number of redemption requests from the pool of investors. There is a possibility that the fund may not have enough cash and cannot sell/reverse their positions due to the economic conditions to oblige to all the requests. This risk is known as liquidity risk. Interest Rate Risk: When the interest rates increase, the NAV of the fund falls. In case of the interest rate decline, the value of bonds in the portfolio increases, due to their higher pre-decided coupon rates. This also pushes the NAV of the debt funds in an upward direction. Hence, the NAV of the fund is prone to interest-rate fluctuations in the economy. Credit Risk: The probability of default, i.e., the event when the borrower does not pay the principal and interest.  Expense Ratio: It is the fees paid to the fund house for managing your money. One should also consider this expense while investing in a debt fund. These funds earn lower returns than their equity counterparts. If the expense ratio is high, it could dent future returns/earnings. Hence, it is always advisable to stay invested for a longer duration and to choose funds with a lower expense ratio. Benefits of debt funds High Liquidity: Debt funds are typically considered alternatives to fixed deposits. Along with providing recurring returns, debt funds (especially liquid funds and overnight funds) have high liquidity where investors can redeem their investments in the shortest time frame. Investment Horizon: There are umpteen options available for any type of investment horizon that is preferred by the investor – a large number of options to choose from and hence make a portfolio customized for yourself. Higher Returns: The debt funds provide a higher return than the typical FDs, and savings accounts. Tax Efficiency: The interest rate earnings are taxed every year in the case of FDs. However, in the case of debt mutual funds, the investor reaps the benefits of indexation after a holding period of 3 years. Flexibility: The funds also provide an option to transfer the units to equity schemes if the investor is ready to take on additional risk for higher returns. Such options or alternatives are absent in the traditional route of FDs and bank deposits. FAQs What are debt funds? A debt fund is a mutual fund that invests in fixed-income instruments such as treasury bills, commercial paper, government bonds, corporate bonds/debentures, money market instruments, etc. What are the benefits of debt funds? High Liquidity Investment Horizon Higher Returns Tax Efficiency Flexibility Is it good to invest in debt funds? Yes, debt funds are a great investment option for investors. These offer higher returns over a long investment horizon and are tax efficient as well. Is a debt fund better than FD? Both are great investment options. FDs are more secure and offer fixed stable returns. A debt mutual fund offers high returns and has a risk factor involved.
SIP vs SWP vs STP. Which one is better?

SIP vs SWP vs STP. Which one is better?

Which is better: SIP vs SWP vs STP? Systematic Investment Plan (SIP), Systematic Withdrawal Plan (SWP), and Systematic Transfer Plan (STP) are the plans offered by the fund houses which are strategized in a way to suit the need of each of the investors. A parent aiming to regularly save for his/her child’s education could choose a SIP. A retiree who has received lumpsum earnings from his PF could invest in SWP and receive regular income. An employee who received a large bonus could invest in a debt fund, but also could reap the benefits of an equity fund by putting their money into STP. SIP: Systematic Investment Plan By investing in equity funds that are more volatile, you reap the maximum benefits from the structure of the plan - compared to debt funds which are relatively stable. Since you are investing at regular intervals irrespective of a market up/downturn, you receive the benefits of Rupee cost averaging – your cost of purchase is average over the time horizon. Also, as the investment is in small amounts, you do not feel the burden of investing or your future goals forming a hindrance to your present commitments and expenses. There are no tax implications in these plans, and ELSS schemes also provide provision for tax deductibility under Section 80C of the Income Tax Act 1961. Types of SIPs 1. Flexible SIP   Flexi SIP allows the investor to change the SIP amount according to market fluctuations. The predetermined formula enables the investor to invest more when the market is low and reduces the investment when the markets perform well.   2. Step Up SIP An investor can increase the investment amount or percentage at fixed intervals. Step Up SIP is perfect for investors who fail to regularly increase their SIP amount when their income rises.    3. Perpetual SIP   When an investor begins a SIP, the SIP mandate requires them to enter the start and end date of the investment tenure. In some cases, investors fail to enter the end date. Every SIP that does not have an end date becomes a perpetual SIP, and it will go on till 2099.   4. Trigger SIP  Trigger SIP allows investors to set a trigger value for the SIP investment. It can be when NAV falls to a particular level, specific dates, or even levels of an index like Nifty or Sensex. You can decide when a certain amount should be withdrawn from your bank and utilized to purchase units of a selected plan.    Benefits of SIP 1. Financial discipline    When you opt for a SIP, you indirectly get into the habit of keeping aside an amount of money from your income for investment.   2. Fund managers    Mutual fund investments are supervised by professional fund managers who have proven experience in managing portfolios. They observe market trends and make wise decisions in order to grow your money and minimize major losses.   3. Benefit from compounding  Compounding means you don’t just get the return on what you spend out of your pocket but also what you earn from it. This basically leads to your corpus getting richer with time.   4. Rupee cost averaging     When you invest an amount through SIP, you do not need to worry about timing the market. You buy a high number of units when the NAV is low due to the markets, and on the other hand, you buy a lesser number of units when the NAV is high. The cost of purchasing funds averages out over the period of investment.   STP: Systematic Transfer Plan This plan allows you to transfer amounts from one fund to another (within the same fund house). There is typically a transfer of amount from Debt to Equity Fund and is suitable for risk-averse investors who fear market risks and fluctuations. For example, if you have received a lump sum amount on account of your retirement or as a large bonus, you could invest in a liquid fund or debt fund. At fixed intervals, as an investor, one could give instructions to shift small amounts into an equity fund. Using this strategy, one eliminates the risk of investing a large amount at the wrong time in the market, thus averaging the cost of purchase. It also obtains the advantage of constant reallocation of the portfolio with debt and equity, earning consistent returns (greater than the amount earned in a bank deposit). The plan is similar to a SIP, but the amount is invested from your previous SIP instead of deducting the amount from your bank account. These plans do have tax implications. Every transfer from one fund to another is considered as redemption from the fund and is charged capital gains tax (the investor enjoys the benefit of being initially invested in a debt fund but is charged capital gains tax for an equity fund – which is lower). Compounding effects - as returns get reinvested at periodic intervals and rupee cost averaging are also the advantages of this plan similar to a SIP. Types of STPs 1. Fixed STP  Fixed STP allows an investor to transfer a specific amount at a fixed frequency   2. Flexi STP An investor can transfer an amount from a source to a specific fund according to market performance.   3. Capital Appreciation STP   The investor can choose to transfer only the returns from the source plan to a targeted plan and not the entire invested amount.    Benefits of STP 1. Rupee cost averaging  Similar to SIP, rupee cost averaging is also applicable for STP. Investors transfer fixed amounts to different funds at different price points, and hence the investor buys more units when the markets are low and buys a lesser amount when the markets are high. Eventually, the purchase price averages out over the period of investment.    2. The returns are consistent   STPs give investors consistent returns. As the money is invested in debt and equity funds, the returns are better than fixed deposits provided by banks.   3. Diversification Portfolio rebalancing happens naturally in STP as an investor can transfer a portion of the invested amount from a debt fund to an equity fund on a regular basis. As a result, they earn more returns during their investment tenure.   SWP: Systematic Withdrawal Plan  This plan could be considered an opposite of a SIP, where instead of investing fixed small amounts at regular intervals, one withdraws fixed amounts from the fund. The investor initially invests a large/lumpsum amount into the plan. One can choose to receive fixed amounts at an instructed frequency (monthly, quarterly) known as fixed income withdrawal, or can choose to only receive the gains (ROI or returns) on the invested amount, which is known as appreciation withdrawal. One can keep redeeming the amount until the balance with the fund reaches zero which can be considered as the maturity of the plan. SWP provides the freedom of choosing the amount that an investor wants to receive calibrated according to his/her expenses, as opposed to a dividend plan of a mutual fund where the fund manager decides the dividend.  Each withdrawal attracts a capital gains tax as it is considered to be a redemption. However, this plan is considered the most tax-efficient route when compared to the dividend plan of mutual funds and fixed deposit interest accruals.  NAV30Number of units held1000Invested Amount30000Withdrawal Amount2000NAV at Withdrawal (assumed)32Units withdrawn62.50 Cost1,875.00 Gain 125.00  Consider the example (as shown in the table). An investor has 1000 units in the ABC fund and has purchased them at a NAV of 30. Hence, his cost price per unit of the fund is Rs 30. The investor has fixed instructions for withdrawing Rs 2000 every month. In the first month of withdrawal, the fund made good profits and saw an increase in the NAV to 32. The units hence withdrawn would be Rs 2000/Rs 32 (current NAV) which is 62.5 units. The cost price of these units was Rs 1875 (62.5 *30). The gain made on the transaction is Rs 2000 – Rs 1875 = Rs 125. In an SWP the investor pays tax on the gains from the withdrawal or redemption. Hence, in the above example, one would be paying a capital gains tax of Rs 125. However, if the investor had invested the same in an FD, he/she would have to pay tax on the interest income with the tax rate according to the individual’s tax slab (which is greater than capital gains tax). Types of SWPs 1. Fixed amount SWP The investor selects a particular amount and a specific date on which the amount will be withdrawn.    2. Appreciation SWP   The investor can withdraw only the returns on investment and not the principal amount.   Benefits of SWP 1. Financial discipline  An investor automatically receives a predetermined amount from their investment periodically. This can make them financially disciplined as they learn to live life with a limited amount per month. It also protects them from withdrawing large amounts from their portfolio during a poor market performance.    2. Steady Income They receive a steady income periodically, which can be a huge advantage to the investor in case of retirement or if they depend on a steady income to pay for their financial needs.   3. Achieve financial goals The second mode of income can always be helpful if you are looking to achieve a financial goal, especially when you have monthly commitments.     SIP vs SWP vs STP FactorsSIPSTPSWPTypeRegular InvestmentTransfer from one fund to anotherWithdrawal planGoalLong-term investment to gain from the appreciation of the marketCapital Appreciation of the lump sum money received (idle money)Regular income – SourceProcessInvesting fixed amounts at a regular frequency Asset reallocation by shifting a small amount between funds (Debt ? Equity)Withdrawal at periodic intervals from the fund (opposite of SIP)Tax implicationsInvestments do not attract tax capital gains are taxable (depending on the equity of debt and time period)Every transfer is taxed and is considered a redemption from the fundGains from the withdrawal are taxed. Considered Tax efficient over FDs and other recurring income optionsTypical Investor Profile/SuitabilityInvestors looking to save every month for a long-time horizonRisk-averse Investors who have idle money (large corpus – retirement money or bonus)Investors who would want a regular source of income and have a lump sum corpus in hand.  FAQs Is SWP better than SIP?   SIP helps you invest money on a regular basis, while SWP ensures you receive a portion of your invested money regularly. You can opt for SWP when you have a big corpus. Choose the best option based on your financial status and long-term goal.    Are SIP and SWP the same?   SWP is a systematic withdrawal plan that helps investors regularly withdraw a portion of their money from their funds. SWP is completely opposite to SIP, as, in the latter, the investor invests a predetermined amount of money at regular intervals.  Is STP a combination of SIP and SWP?   The systematic investment plan, Systematic withdrawal plan, and Systematic transfer plan are all systematic methods of investing and withdrawing money. Each has its own advantages and purpose. STP allows investors to transfer investment amounts from one fund to another. SWP allows investors to withdraw money regularly, and SIP allows investors to invest money in regular intervals.    Consult an expert advisor to get the right plan TALK TO AN EXPERT
Why you should hire a financial advisor? All you need to know

Why you should hire a financial advisor? All you need to know

There are enormous options available when it comes to investing, right from mutual funds to cryptocurrency. But which investment avenue is suited for you is different from other people. Your risk appetite is different, you have different cash flows, and you have your own financial goals. All these vary from individual to individual. Some investment options will help you provide regular income, some will help in capital protection, and some will help you generate wealth. Which one is the right choice for you, is the question? Financial instruments will provide you with returns, but you also need to evaluate their risk. A financial advisor will guide you through all this evaluation and help you make the right choice. Who is a financial advisor?  A financial advisor provides consultation or guidance on how, where, and when to invest. They will help you with the financial plan, strategy, how to save tax, etc.  Source: pexels Why should you hire a financial advisor? Now, you might think that why should you consider one, when there is plenty of knowledge available on the internet about investing because a financial advisor brings the right expertise in the financial market and the products available in the market. Financial advisors have the right tools to evaluate different products based on certain conditions. First, you need to ask these questions yourself: Do you have adequate financial market knowledge?Do you have expertise in financial products and instruments?Do you have enough time to track, manage, evaluate and rebalance your portfolio?Do you enjoy reading about finance topics like wealth management, derivatives, etc.?Do you have the skills to research and evaluate financial instruments? If you have answers to the above questions, you don’t need a financial advisor. But, if you don’t have the answers to these questions, you need a financial advisor. Read more: A parent checklist to send a child abroad Benefits of having a financial advisor Financial expertise: A financial advisor undergo several training and certifications which help them gain knowledge about the financial world. So, having a financial advisor in your planning will help you build a portfolio for your needs and help you keep track of it.Budgeting: A financial advisor helps you to create a budget so that your unwanted expenses can be minimized and you can save for your financial freedom.Financial plan: A financial advisor will help you to create the right financial plan, which will help you to achieve your financial goal effectively and efficiently.Investment strategy: A financial advisor will not only build a financial plan for you but also help you create investment strategies that will help you choose the right investment option for your targets with the right amount to invest in.Regular monitoring: You might not have enough time to track your portfolio. Here comes the financial advisor to keep track of your portfolio. Regular portfolio monitoring is required so that the investment remains aligned with your financial goals.Rebalancing of the portfolio: The portfolio requires rebalancing from time to time or depending on market conditions. There are situations when the selected investment option might underperform or outperform the expected required rate of returns; then, a rebalancing might also be needed in such situations. A financial advisor will help you to make the right choice.Helps in tax savings: A financial advisor helps you consult or provide guidance on saving taxes by investing in different options. Conclusion: Having a financial advisor in your financial journey could help to manage your finances properly with better investment strategies. Consult an expert advisor to get the right plan for you TALK TO AN EXPERT
Is international exposure a good investment choice?

Is international exposure a good investment choice?

Diversification is the foundation of any good portfolio. Diversification provides a cushion to unforeseen volatilities from the future.   In today's integrated world, getting hold of foreign stocks, bonds, and mutual funds has become much easier. New-age investors can now have a balance of domestic and international securities in a portfolio.   An international portfolio is a collection of stocks and other assets focused on global markets rather than home markets. An international portfolio, if well-designed, provides exposure to emerging and developed economies and diversification.   Buying an exchange-traded fund (ETF) that focuses on foreign equities is the most cost-effective approach for investors to own an international portfolio.  Let's now look at some of the advantages and disadvantages of having international exposure in the portfolio.   Advantages  Reduced risk It is possible to lessen investment risk by having an international portfolio. Gains in the investor's global holdings help increase profits if domestic stocks underperform.   Risk can be further lowered by diversifying the international portfolio with stocks from developed and emerging markets.  Varied currency exposure When investors purchase stocks for a global portfolio, they also buy currencies in which stocks are denominated.  As a result, currency fluctuations might help the investor offset losses or raise gains depending on the currency movements. It does, however, come with its own set of dangers.  Market cycle An investor with a global portfolio can take advantage of several countries' market cycles.  Accessing the entire supply chain International investing provides opportunities across industries as well as up and down the value chain often missed in domestic portfolios.   Manufacturing, services, and technology are all tiers in the supply chain. These companies benefit the most from the multiple stages of the global supply chain.  Innovation Beyond the home market, there is world-class innovation in industrial automation, payments, and renewable energy.  Source: freepik Disadvantages   Political and economic risk Many emerging countries lack the same political and economic stability as industrialized economies. Instability can drive already invested or budding investors away from the market.   Enlarged transaction costs When buying and selling international equities, investors often pay higher commissions and brokerage fees, lowering their overall returns.   Taxes, stamp charges, levies, and exchange fees may be required, further diluting gains. Many of these fees can be eliminated or reduced using ETFs or index funds to get exposure to a foreign portfolio.  Regarding assets, two ETFs stand out above the rest for individuals seeking broad exposure to international markets. With $110.3 billion in assets under management, the Vanguard FTSE Developed Markets ETF (VEA) is the largest.   The iShares Core MSCI EAFE ETF (IEFA), benchmarked to an MSCI index rather than an FTSE Russell-managed index, has amassed $104.34 billion in assets. These ETFs are best placed only to get the investor an upper edge over the developed markets.   The most significant distinction between the two funds is the nations they provide exposure to. South Korea is a developed market in the FTSE index tracked by VEA, accounting for approximately 5% of the fund.   South Korea is not included in the IEFA's MSCI index because it is listed as an emerging market by MSCI. Canada is also not included in IEFA because the fund ignores North America, even though it is VEA's third most significant country exposure.  ETFs like the iShares Core MSCI Total International Stock ETF (IXUS) and the Vanguard FTSE All-World ex-US ETF (VEU) contain both developed and exposure for those who want their international exposure to include emerging markets.   IXUS currently has around 12.5 percent of its portfolio invested in developing market companies, while VEU has 13.1 percent. It is a bit riskier than the developed markets due to the very structure of the emerging economies, which inculcates volatilities in the business environment.  Over the last decade, investors have done well while investing in the United States. This is particularly true when comparing U.S. equities returns against international equity returns.   However, trends change, and given the challenges in the United States and the opportunities that may exist elsewhere, investors may be more open to channeling funds outside of the United States to more countries for international exposure.   However, international exposure may win or lose, and investors should do their due diligence before investing. Consult an expert advisor to get the right plan for you TALK TO AN EXPERT
Guide to REITs in India. How to Invest in REITs

Guide to REITs in India. How to Invest in REITs

Source: Pexels, By: Tristan Paolo Investing in Real estate Investment Trust Funds (REITs) REITs or real estate investment trust funds work similarly to mutual funds or exchange-traded funds, except REITs invest in income-generating real estate. The main advantage to these trusts is that they earn from the real estate market without buying or maintaining these properties. India currently has 3 REITs and 2 InvITs or Infrastructure Investment trusts listed with SEBI. The only difference between the two is the asset type under consideration. REITs would own and operate a commercial space while InvITs invest in infrastructure. Why invest in Real estate Investment Trust Funds? From an investor's point of view, apart from the decreased responsibility of maintaining the property, REITs offers quick and easy liquidation, basically overcoming all limitations holding a physical property for investment purposes would entail. REITs can be considered a steady income source in high inflation as they offer risk-adjusted returns while helping diversify one's portfolio. From the government’s point of view, the rate of infrastructure development is a measure of the country’s growth. REITs are relatively cheaper and more accessible than investing in real estate, making it easy to invite investors.  Furthermore, REITs ensure concrete structuring of the real-estate financing industry. With the recent relaxation in REIT compliance rules, the Indian government wants foreign fund managers to relocate to India. How can you lose money in Real estate Investment Trust? While there always exists a certain amount of risk in every investment, each type of REIT has its limitations which we look into going further. A standard limitation that all REITs face regardless of the asset investment is the slow return on investment. Since the model works on capital appreciation and rental yield, REITs are susceptible to market fluctuations. Types of REITs and how to invest in it? Although there can be many bifurcations to the types of REITs, we categorize them on the basis of infrastructure - Retail REITs: Such trusts have heavy investments in the freestanding retail or shopping complexes. Given retail would require a considerable amount towards the maintenance of the property, it won't be a surprise if most of these structures are owned or/and managed by REITs. The majority of the income from these investments is from the rents that tenants pay. Hence, we advised seeking strong anchor tenants to avoid the end of these stores (e.g., grocery stores or home improvement stores typically experience an excellent cash flow). While investing in retail REITs, the REITs themselves must have a strong balance sheet, preferably with less short-term debt. In case of economic disturbance, REITs with a significant cash position have the advantage of increasing their portfolio. Residential REITs: like retail REITs, residential REITs majorly earn from rents from tenants. The rent collected from these properties depends on how popular the areas are Typically, areas where renting a house is more affordable than owning one are the ones that would yield higher returns. As a result, trusts in this category tend to focus on large urban centres. REITs to look out for should have the most available capital and strong cash flows. As long as the demand for residential properties keep rising and the supply remains low, the portfolio should yield good returns. Healthcare REITs: However new the concept of healthcare REITs are, as the healthcare cost and average Indian age continues to climb, healthcare REITs would continue to gain popularity. In the case of healthcare REITs, apart from the infrastructure and occupancy fees, REIT relies on Medicare and Medicaid reimbursement and private pay. An ideal option for such REIT would be a company with high, low-cost capital and a strong balance sheet on top of well-diversified property types and customers. Office REIT – Since these depend heavily on long-term leases, any factor that would affect a tenant economically would affect the performance of the overall portfolio, i.e. unemployment rate, state of the economy, and other things. Other factors to look out for would be the location of the properties and the capital available for acquisitions. A REIT that invests in average properties in Mumbai would fare better than luxurious office space in Udaipur.  Mortgage REITS – Such REITs invests in, you guessed it, Mortgages instead of equity. Mortgage REITs lend money to real estate either through loans or through the acquisition of mortgage-backed securities. The risk to such investments lies in increased interest rates, leading to a decrease in the mortgage REIT book value and hence decreasing the stock prices. Furthermore, an increased interest rate leads to more expensive financing and reduced weight of a portfolio of loans. In a low-interest-rate environment, most REITs would trade at a discount to net asset value per share when there is a possibility of an increase in interest rate. Listed REITs and InvITs in India Embassy REIT (2017): The company owns and operates 42.6 million square feet of infrastructure, office parks and buildings. The properties under their portfolio are in Pune, Mumbai and Bengaluru and the National capital region. Mindspace REIT (2020): Managed by K Raheja Corp Investment Managers LLP., the total leasable area under management is 31.3 million sq. ft. Their portfolio is well-diversified into business and IT parks spread across the main commercial hubs in India. It is well-established in Mumbai, Pune, Hyderabad and Chennai. Brookfield India Real Estate Trust (2019): Being the only institutionally managed REIT, Brookfield operates in Kolkata, Gurgaon, Mumbai and Noida. The trust's portfolio covers 18.6 million sq. ft of commercial real estate. IndiGrid Trust (2016): IndiGrid is one of the first movers in the Infrastructure Investment Trust (InvIT) in the power transmission sector. Ingrid owns and manages power transmission networks and renewable energy assets throughout India. Seven thousand five hundred seventy circuit kilometres of transmission lines and 13,550 MVA transformation capacity make IndiGrid the most significant Power transmission-based InvIT in India. IRB InvIT Fund (2017) -  IRB Fund invests in infrastructure development and construction in the roads and highway sector under the sponsorship of IRB infrastructure developers Limited. It is listed with India's Securities and Exchange Board since 2008. It has owned and maintained six toll roads in Maharashtra, Karnataka, Gujrat, Tamil Nadu and Rajasthan. Lastly, although REITs offer a slow return on investments, they offer as high as 90% of their income as dividends. Being regulated by SEBI and disclosed capital portfolio makes it a safe bet.
Understanding good debt & bad debt and the difference

Understanding good debt & bad debt and the difference

Is all debt bad debt? This is one of the age-old questions that have been asked for generations. After all, owing money to a bank or financial institution can’t be a good thing, can it? Isn’t it bad to be in debt in the first place? After all, we have all heard the saying, “All debt is bad debt”. However, the truth is far more nuanced than this. Now is a better time than any to understand debt - both good and bad. Debt can be good if it helps you grow your finances in the long run without affecting your ability to pay back the principal amount with interest. However, one needs to take excessive care and precautions when it comes to taking out debt - because it can either lead you to become extremely successful or drive you down a path of bankruptcy. With this in mind, we take a look at the differences between good and bad debt, and some examples of each to shed light on the topic beyond doubt. First, good debt. Good Debt To keep it simple, good debt leaves you better off than before you borrowed the amount. It often leads you down a path of prosperity and growth. There are many purposes one might take out debt that could eventually turn out to be positive for the borrower. For better clarity, let’s look at some examples of good debt -  To Start a Business - To be clear, not all debt taken out to start or grow a business is good debt. If one takes out a business loan and the business ends up failing or closing down, it may well be considered bad debt. With regards to business, debt can be considered good if it helps the borrower establish or grow a successful business that brings financial freedom and allows him/her to pay back the loan easily. To Buy a House - Everyone needs a house to live in. If the borrower takes out a loan to buy a house that ends up appreciating over time, such that the valuation is more than the debt that was originally borrowed, this may well be considered good debt. Student Loans - A better education often unlocks the doors to superior, higher-paying jobs. If you’ve gone ahead and taken out a student loan that improves your skills, and eventually brings you success in your career, this can be considered good debt. Bad Debt Bad debt can ruin one's financial position and leave one struggling to pay it off. The main reason for this is that it doesn’t help you generate more income. Here are some examples of bad debt -  Consumables - Some of the best examples of bad debt can be car/bike loans. While there’s nothing wrong with having a car or a bike as a means of transport, the issue begins with the fact that it is unlikely to bring you more income. Vehicles depreciate with time, meaning they are worth less than what you paid for them. Considering that the borrower also owes interest along with the principal, taking out loans for vehicles can become money pits quickly. Trips & Holidays - It is always said that trips and holidays shouldn’t be bought on a credit card, and there is a good reason for this. Many families today still struggle with paying off holidays they went on years ago, and it’s no surprise. Unless the purpose of the trip could bring you more income, you’re likely to be put in a position of difficulty paying it off over the long term. How Does One Know If Debt Is Good Or Bad? In short, good debt has the potential to earn you significant returns over the long term. For example, taking out debt to start a business which later goes on to be successful can be considered to be good debt. The reason being, taking out the debt has brought you to a much better financial standing than you were in before. Bad debt is often taken out to fund depreciating liabilities, that don’t earn you any income. These are often harder to pay back and do not leave you in a better financial position than you once were. So as it is clear, the difference between good debt and bad debt is the financial position it puts the borrower in. Loans taken out for consumables that depreciate over time are often bad debt. Debt taken out to produce income and add value to the economy is often considered to be good debt.
Questions you need to ask during University admissions

Questions you need to ask during University admissions

University admission interviews can often seem daunting and intimidating as a young student that’s about to enroll.”What questions will they ask?” “What if I answer wrong?” Don’t worry, university interviews are often not half as bad as you imagine. In fact, they’re a great way for you to touch base with those already working at the university and set expectations for what you will get out of the course, in terms of growth and future prospects.  To help you navigate these questions and come out on top, here are some of the most common interview questions asked during university admissions -  1. Why have you chosen this university? This isn’t a trick question or an opportunity for the candidate to appease the interviewers. Instead, it’s a genuine chance to explain why you chose the specific university you’re interviewing for, and what makes it special as compared to the other choices out there. It could be as simple as the fact that it is relatively close to where you reside, or because they offer a specific program that you’re looking for. Either way, make sure to be open and honest about the reason why you have chosen this particular university, and you should be good to go! 2. How did you enjoy high school? Interviewers ask this question for many reasons. Firstly, they would like to get to know a little background about you and how you fared during high school, from your point of view. Secondly, they are looking to hear about your general perception of educational institutions to get an idea of how you might perceive university in the future. Remember to be careful about your criticism, and definitely avoid bad-mouthing your high school, as these are red flags to university admission interviewers. 3. Tell me about your strengths and weaknesses This is an interesting question that can reveal a lot about you. Avoid the worn-out, “I’m a perfectionist” and “I work too hard”, answers that the interviewers have heard before. Instead, choose to be honest about your weaknesses and come forward with a truthful answer like, “I struggle with deadlines”. They will appreciate it much more, and you won’t feel like you’ve had to lie in an interview. 4. Do you have a role model? Here’s an interesting question that will allow you to speak more about the people you look up to. Maybe you’re pursuing a literature course and greatly look up to a renowned author. This is your chance to show the interviewer that you have role models in line with your aspirations, making it far more likely that you will complete the course and pursue a career in your chosen field. 5. What are your goals? This is your chance to be open and honest with the university about what you aim to achieve with your time there. Remember to leave nothing on the table and be clear about your dreams and goals, no matter how outlandish they may be. You never know how many candidates before you might have shared similar goals as you have now. You might even hear interesting accounts of past alumni that have already achieved the goals that you currently aspire to. 6. Where do you see yourself on completion of this course? A very important question that you can definitely expect to be asked during your interview. With this question, interviewers are looking to find out what your endgame is, and how you plan to progress after you’ve graduated from the university. This is where they will get a chance to set your expectations straight if needed and find out how motivated to complete the course you are. Also, they’re looking to understand whether or not you are trying to pursue a career in a field related to the course of your study. 7. How do you wish to expand your skills with this course? This question might be a little more challenging to answer, considering you are likely a candidate that is just starting with the university. However, it is an opportunity for the interviewer to understand how you wish to grow and learn during your university study. Feel free to be honest and speak about the things that you would like to improve about yourself, and try and tie this into any weaknesses you might have mentioned about yourself earlier as a way to negate them. Conclusion While Universities don’t expect you to have all the answers upfront, make sure you do your due diligence by researching topics related to these questions. You want to come across as someone who is well prepared and informed about the university and their own goals and aspirations about the course you’re enrolling into. The more knowledgeable you appear, the more likely you are to ace the interview and land a seat in the university of your dreams. And to get you better prepared, EduFund is here to bring you the best education counselors in the country. They do their best to get you confident about the interview along with helping you with all the insider knowledge to give you an edge.
Demystifying Returns In Mutual Funds

Demystifying Returns In Mutual Funds

Why do we invest in mutual funds? The fairly obvious answer would be to earn returns on our investment and to have enough corpus for our future goals. We need tangible numbers on our screens which give us a good night’s sleep that we have invested in the right fund. However, there are multiple measures for the returns earned by the mutual fund, and we see multiple percentage numbers flashing on our screens. These measures are explained with examples in the following paragraphs - 1. Absolute Returns This represents the growth of your investment in absolute terms without considering the time period. For example, if you had invested Rs 10,000 in a mutual fund and it grows to Rs 15,000, the gain earned would be Rs 5000. Absolute returns would be Rs 5000/Rs 10,000 = 50%. Even if your investments grew to Rs 15,000 in 10 years the absolute returns would still be 50%. 2. Annualised Returns (also known as CAGR) This measures the increment in the value of your investment on a yearly basis. The effect of compounding is included in this return (Compounding in simple terms is earning returns on the profits earned from your investment). For example, if the initial investment is Rs 10,000 and the value of the investment after 5 years is Rs 15000, then the annualised returns would be 8.4% and if the time period was 3 years, the returns would be 14.5%. This measure takes the time period into consideration and gives a measure of y-o-y returns on your investment in the fund. 3. Annual Returns This is computed by considering the return earned by the scheme from January 1st (first day of business) to December 31st (Last business working day). If the NAV of a fund was Rs 100 on January 1st and the NAV on December 31st was 120, the gain would be Rs 20 and the annual return would be 20%. This is the most simplistic measure which is used for communication to the investor. Market conditions play a significant role in the returns earned by mutual funds. Hence, it is advisable to compare annual returns across time periods with respect to category average or the benchmark as declared by the fund. 4. Point to Point Returns This measures the annualised returns between two points in a given time period. For example, you would want to look at the performance of a fund in the pre-Covid years i.e., 2017-2019, one would consider the point-to-point return to compute the same. The NAVs at the start and end dates are required to compute these returns. 5. Total Returns Initial Values NAV Initial 50 Initial Investment 10000 Units Purchased = Investment/NAV 200 After 1 year NAV  52 Value of investment = Units * NAV 10400 Capital Gains 400 Assuming Dividend is declared by the fund in this 1 year Dividend Declared/ unit 2 Dividend earned (Units * Dividend/Unit) 400 Total Returns 800 Total Return % (Total Return/Initial Investment) 8% Total return includes the returns earned from capital gains and dividends and is expressed as a percentage of the initial amount invested. Consider that you had invested Rs 10,000 into a fund whose NAV was Rs 50. Total Returns % = Capital Gains + Dividend earned / Initial Investment Here, the total return earned would be 8%. 6. Trailing Returns It is the annualised return of the period that ends on the date of calculation (or today or latest NAV). Trailing returns of 1, 3, 5 or 10 years (etc) can be calculated. For example, a 1-year trailing return from today (27th Feb 2020) would be calculated by taking the latest NAV and the NAV of the fund 1 year ago. This measure is used by most of the mutual funds and pages which analyse the past performance of the funds.  Initial NAV (27th Feb 2018) 40 Final NAV (27th Feb 2021) 70 Years 3 Returns  20.5% For example, if the NAV of a fund today is Rs 70 and the NAV of the fund 3 years ago was Rs 40, the trailing 3-year return would be 20.5%. Returns = [Final NAV / Initial NAV] (1/Years) - 1 As an investor, this measure aids in screening the fund's performance and analysing the consistency of the fund manager in providing the returns to their pool of investors. However, one should note that these returns could offer a biased perspective as they are based on relative market conditions – current vs past conditions. Hence, an investor should consider 3,5 and 10 years to understand the consistency in earnings and the fund's ability to sail over market tides. In bull markets, where there is high optimism in the market, the trailing returns are high, as the Final NAV would be soaring high, whereas, in the bear markets, these returns would be on the low. 7. Rolling Returns These are annualised returns (CAGR) but are computed using overlapping periods. They give the measure of the growth of an n-year return over a period of m years.  For example, if you would like to invest in an equity mutual fund for 5 years, you would look at the data in 5-year blocks and compute the 5-year return over a 10-year period (say). As shown in the table below, we have considered a period from 2005-2020 to calculate the 5-year rolling returns (n=5, m=20). Aligning with our objective, to calculate the return of 2010, we consider the NAV that was 5-years ago which is 2005. The exercise is performed for all the years to obtain the range of returns that the fund has given to the investors. One can also calculate the Rolling Return Average, by calculating the average of all the returns computed in the previous step = 7.4% (in this example). Yearly Data NAV 5years ago NAV Returns (CAGR) 01-01-2010 100 01-01-2005 78 5.1% 01-01-2011 103 01-01-2006 80 5.2% 01-01-2012 110 01-01-2007 87 4.8% 01-01-2013 120 01-01-2008 90 5.9% 01-01-2014 150 01-01-2009 95 9.6% 01-01-2015 161 01-01-2010 100 10.0% 01-01-2016 172 01-01-2011 103 10.8% 01-01-2017 190 01-01-2012 110 11.6% 01-01-2018 198 01-01-2013 120 10.5% 01-01-2019 210 01-01-2014 150 7.0% 01-01-2020 200 01-01-2015 161 4.4% 01-01-2021 208 01-01-2016 172 3.9% The rolling returns give a perspective of the maximum and minimum ranges of returns that the fund has offered over a period of time, instead of only the point-point or annual returns, which could become biased measures based on the market conditions. These can be calculated on a daily/weekly/monthly basis till the latest NAV for a fixed period of time. It gives a more accurate picture of the fund’s performance in various market conditions, eliminating the bias that could be associated with calculating the return at a fixed point in time.  8. SIP Returns All the above measures are suitable for lumpsum investing where one considers the returns between two points. However, in the case of SIPs, there is a systematic flow of amounts into the fund at different points in time. This return can be calculated using the Internal Rate of Return (IRR), which is a financial metric used to compute the return of a series of cash inflows and outflows. Conclusion The measures for calculating returns have been highlighted above which are to be used in conjunction with the objective to obtain the accurate measurement of the performance. You could get started with your investment journey by analysing funds on the EduFund app or this website.
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