If you invest in mutual funds, you must have often heard about NFO. When an AMC opens a mutual fund scheme to the general public for the first time, it does so through NFO. Just as a company is listed for the first time in the stock exchange during IPO, in the same way any new scheme in mutual fund is launched for the first time through NFO. You can also call it IPO of mutual fund. “What is NFO” Through this article, we will try to understand all the processes of NFO and how it is beneficial for us.

What is NFO?

NFO means: New Fund offer.

NFO is the process through which units of a mutual fund scheme are made available for purchase for the first time by an AMC (Asset management company). Whenever a mutual fund house starts a scheme for the first time, it is first opened for subscription to the general public through NFO. This subscription usually remains open for 10 to 15 days during which we can buy units of the mutual fund at its face price i.e. Rs 10. After the closure of the NFO, the money invested by the people in its subscription is invested in its asset class to build the portfolio of the fund. This asset class can be stocks, government securities or commodities. Depending on the performance of these assets, the NAV of the units of the mutual fund scheme increases or decreases and the higher the NAV increases, the better will be your returns.

Types of NFO

NFO can be mainly of 3 types:

Open Ended: Open ended funds are those which are always open for investment. In these you can invest and redeem money anytime. If NFO of an open ended scheme is launched, it is reopened for investment a few days after the subscription is closed.

Close Ended: You can invest in this type of fund only during the NFO period. Once the NFO is closed, no investment can be made in it. On maturity of these funds, the principal amount along with the return is credited to the customer’s account.

Interval Fund: Interval fund has the characteristics of both open ended and closed ended funds. These funds are opened for a fixed time interval during which investment and redemption can be made only in them. Apart from this time period, no transaction of any kind can be done in these funds.

How does NFO work?

During NFO, an AMC or fund house offers its new fund to investors for subscription for the first time. The following steps are involved from its launch to unit allotment.

NFO Face: AMC launches a new scheme and does its marketing and advertising. In this, it makes common people and big investors aware about its features, nature and objectives.

Subscription: Common investors can invest in these during the subscription period. During this phase, units of the mutual fund are offered at face value which is usually Rs 10. NFO subscription remains open for several days.

Minimum Investment: A minimum amount is set by the mutual fund house for investment in NFO. The investor has to invest equal to or more than this amount.

Allotment: After the end of the NFO tax period, units are allotted to the investors according to their investment. After allotment, the money received from subscription is invested in its theme asset class to build the fund’s portfolio.

Trading: After the subscription is over, the NFO opens for trading to the general public after a certain time period. Here investors can buy and sell mutual fund units anytime.

How to invest in NFO?

It is very easy to invest in NFO in India. For this you:

First of all choose the new fund offer in which you want to invest. want. Different AMCs in the market keep launching NFOs based on different themes. You can choose one according to your investment goal, risk and objective.

If you are already an investor in financial security then your KYC must be made, if you are investing in mutual funds for the first time then make your KYC first. You can make this by applying online or submit offline application to KRA.

After this you can submit NFO application through any mutual fund distributor, direct AMC or online platform. Along with the application, you also have to make payment for the applied unit.

Once the NFO application is submitted, wait for its allotment. Once the allotment is done, you are provided with the account statement and other account related things.

What things should be kept in mind in NFO investment

Investment goals: The reason or goal behind investing can be different for every investor. This goal depends on their age, income and risk. Therefore, before investing in any NFO, it is important to analyze things like nature, objective, theme and risk of the fund and keep in mind whether it is matching with the investment goal or not.

Fund House Performance: We invest in any investment tool with the hope that it will give us a good return and help in increasing our wealth. Therefore, whatever AMC you are going to invest in NFO, definitely find out the performance of its other funds and the capability of the fund manager.

Expense Ratio: Expense ratio means the charges that mutual fund houses charge from investors for the management of their funds. The higher their ratio, the greater will be the impact on investment returns. Therefore, before investing in NFO, keep its expense ratio also in mind.

Minimum Investment and Exit Load: Before investing in NFO, know what is the minimum investment limit in it. Exit load means the charges levied on taking redemption from the fund. Depending on the theme of the fund, these charges may or may not be non-applicable. Therefore, keep in mind that if you are investing for short term, then there should not be any or much exit load on it.

Comparison with old funds: There may already be funds available in the market matching the theme of NFO. You can improve your investment decision by comparing the new fund with the old one.

Offer Document: When an NFO is launched, AMC also publishes the offer document related to it. In this document, necessary analysis is given on the basis of theme, objective, asset class and market data etc. of NFO. By reading this offer document, you can gather all the necessary information about NFO.

Difference between NFO and IPO

When an AMC launches and offers a mutual fund scheme for subscription for the first time, it is called NFO. On the contrary, when a company lists its shares for the first time in the stock exchange for investing and trading by the common people, then it is called IPO. Which is called Initial public offer.

In NFO, units of mutual funds are bought and sold which are managed by the fund manager, whereas in IPO, company shares are bought and sold for tax reasons, the company aims to raise capital for its expansion and repayment of debts. It is possible.

The returns of NFO depend on the assets being invested in it and the ability of the fund manager, whereas the returns of IPO depend on the performance and valuation of the company.

Whenever AMC wants to launch a new mutual fund scheme, it can do so through NFO, whereas for a company, IPO is a one-time process through which it transforms from private to public.

Benefits of NFO

NFOs are usually launched on the basis of new themes and strategies. This brings a new investment opportunity for us.

In NFO, units of mutual funds are available for investment in face value which is usually Rs 10. In this way investors can buy mutual fund units in the initial phase with less money.

NFOs are launched keeping in mind the present situation and sentiment of the market. These often have the ability to perform better than the older funds running in the market.

Disadvantages of NFO

We can track old mutual funds on the basis of their past performance and historical factors which help us in taking right investment decisions but in the case of NFO, there is no past performance record of the fund due to which mistakes can be made in taking investment decisions. Might be possible.

Similar to the funds being launched in NFO, funds of other mutual fund houses may already be in the market, which are easy to analyze on the basis of historical data.

The future performance and success of NFO is not guaranteed which is not good for the returns to the investor.

Conclusion

Amc launches a new mutual fund scheme through NFO and this is a great opportunity for people to invest on a fresh theme and according to the ongoing market situation. During NFO, investors can buy units of mutual funds at face value which is usually Rs 10. Investing in NFO can give you good returns in the long term, but before investing in it, it is important to check the facts related to your objective, risk and capital.

IIFRA Indian Institute of Financial Research & Analysis

IIFRA is India’s top stock market training institute, renowned for its integrity and innovation. They offer expert-led courses covering everything from basics to advanced strategies. With small classes and personalized attention, students get tailored guidance to achieve their goals. IIFRA fosters a vibrant community and provides networking opportunities for students to connect with industry professionals. It’s not just education; it’s a pathway to success in finance.

iifra.com/blog

The post What Is NFO? New Fund offer appeared first on IIFRA's Official Blog - Indian Institute of Financial Research & Analysis.

In the insurance world, different plans are available according to our every need. ULIP plan is a unique financial product offered by the insurance company which fulfills both our insurance and investment needs. Through our article, we will try to understand this plan and know its working.

What is ULIP plan?

ULIP stands for: Unit Linked Insurance Plan

ULIP is a plan offered by the insurance company in which we get the features of both investment and life insurance together. That is, if a person takes a ULIP policy, he not only gets life cover but also gets the benefit of good investment returns. Some part of the premium paid in ULIP plan is invested in your insurance cover and some part in different investment options like equity, debt, hybrid etc. Due to investment in equity and debt, the returns received in it are also higher as compared to other investment options. If the policyholder dies due to any reason, a lumpsum amount is paid to his nominee as death benefit.

How does ULIP plan work?

As mentioned earlier, in ULIP plan you get the qualities of both investment and insurance. Whenever you pay the premium of a ULIP plan, a part of it goes towards insurance coverage and the other part is invested in different funds selected according to your risk profile. This fund can be equity fund, debt fund, hybrid fund or index fund. In exchange for the investments made in these funds, you are allotted units whose NAV is calculated on a daily basis and your investment returns depend on the NAV. The premium paid towards the insurance cover provides you life coverage in which if the insured person dies, the death benefit is given to the nominee. Many charges can be taken from you in ULIP plan, which may include fees for fund management, administration charges etc. Almost all ULIP plans come with a lock in period which is 5 years. You cannot withdraw any money during this lock period. After 5 years, partial withdrawal can be taken from ULIP plan as per your need. If you wish, you can change the fund being invested during the tenure of the policy or increase or decrease the sum assured amount.

Types of ULIP plans

We can divide ULIP plan into different parts on three basis. The first is based on the investment in funds made by ULIP plans, the second is based on their returns and premiums and the third is based on the death benefit received.

On the basis of investment

ULIP plans invest in different asset classes or funds to generate good returns. These funds include:

Equity: In this type of plan, a part of the premium is invested in equity fund i.e. a mutual fund scheme that invests in the stocks of private companies. Such funds involve high risk and high returns. People who want higher returns on their investment can choose this asset class.

Debt: Debt are funds that invest in fixed income instruments like government bonds, securities, debentures etc. where fixed returns are guaranteed after a time period. The risk in these funds is less but at the same time the returns are also less as compared to equity.

Balanced: As the name suggests, such funds include a combination of both equity and debt. Due to investment in the balance amount, both its risk and return are reduced. We can say that these funds are less risky than equity funds but give higher returns than debt funds.
Based on returns and premium

The following plans come under this category:

Single Premium ULIP Plan: In such plans, the premium is paid in one go only at the time of purchasing the policy.

Regular Premium ULIP Plan: In such plans, premium can be paid regularly like monthly, quarterly, half yearly or annually. This premium may have to be paid from the inception of the policy till its maturity.

Guaranteed ULIP Plan: The returns received in such ULIP plans are guaranteed. Under this plan, most of the investments are made in less risky i.e. debt funds. If you are investing for a specific goal then this plan may be right for you.

Non-Guaranteed ULIP Plan: In non-guaranteed ULIP plans, investments are made in instruments like equity funds to maximize returns. Due to investment in equity, the returns here can be higher but it is also equally risky and volatile.

Life Stage ULIP Plan: In this type of ULIP plan, the investment goes according to the age of the insured. It is often seen that a person’s ability to take risk decreases with age. In his youth, he is able to earn well and work, hence he is able to take more risks, whereas as his age increases, safe and less risky options of investment are suitable for him because at this stage of age, everyone needs a stable income. . This ULIP plan works on this principle. As long as the age of the insured person is young, this plan invests more in equity funds and as his age increases, the proportion of investment is reduced from equity to more in debt. It works to balance the risk and return of investment.

On the basis of death benefit

Type 1: Under this plan, the nominee gets either the sum assured or the fund value as death benefit. In such a case, whichever option has the higher value is paid.

Type 2: In Type 2 plan, both fund value and sum assured are paid to the nominee. In this, the value of sum assured remains higher but at the same time the amount of premium to be paid also increases.

Locking period in ULIP plan

ULIP plans have a mandatory lock-in period of 5 years. Any partial withdrawal can be taken only after 5 years and that too is subject to minimum and maximum limits depending on the policy. Here it is also important to keep in mind that to withdraw any amount, you must have paid all the premiums for the last 5 years and you can withdraw only about 20% of the policy value in a financial year.

Benefits of ULIP plan

Market Linked Returns: Unlike other life insurance plans that offer a fixed return that often does not beat inflation, ULIP returns are market linked and are generated by investing mostly in equity and debt funds. This return can be much higher than other investment tools.

Insurance Coverage: Along with investment, ULIP plans also provide insurance coverage. On the death of the insured person, a lump sum amount is paid to the nominee.

Tax Benefit: Tax benefit can be availed on the premium paid and returns received in ULIP plan under the Income Tax Act.

Flexibility: The investor has the option to choose the investment option as per the risk. Keeping in mind his returns, he can choose what portion to invest in equity and debt.

Helpful in creating wealth: Since ULIP plans offer a good return compared to other plans, we get the benefits of both wealth creation and insurance coverage in the long term.
Disadvantages of ULIP plan – Disadvantages of ULIP plan

Charges: On taking ULIP plan, you may have to pay many types of charges. These may include charges like fund management charges, administration fees, mortality etc. which reduce the total returns of the fund.

Market Risk: To generate good returns in ULIP plans, investments are made in market related instruments and funds. Along with giving higher returns, they also involve more risk.

Lock in period: There is a lock in period of about 5 years in ULIP plan, only after which partial money can be withdrawn. This can cause problems for investors who need money in the short term.

Complex: Understanding the insurance and investment part of a ULIP plan can be quite complex for investors. They may have difficulty understanding the many terms and investment components involved.

Not suitable for everyone: Such plans are not suitable for those people who have good knowledge of the financial market and can manage their investments themselves. Such people can just take a pure life insurance policy and manage the investment themselves and generate good returns.

Difference between ULIP and traditional plan

Conclusion

ULIP is a plan that gives us the benefits of both insurance coverage and investment. While in other insurance plans the returns are fixed or low, in ULIP plans the returns are generated by investing in market linked equity, debt and balance funds etc., hence it is better in many ways. While ULIP plan has its own advantages, it also has some disadvantages such as investment and administrative charges associated with it, lock in period and market risk. If you are also thinking of taking a ULIP plan, then keep all these facts in mind and take any decision only after comparing it with other insurance and investment options.

IIFRA Indian Institute of Financial Research & Analysis

IIFRA is India’s top stock market training institute, renowned for its integrity and innovation. They offer expert-led courses covering everything from basics to advanced strategies. With small classes and personalized attention, students get tailored guidance to achieve their goals. IIFRA fosters a vibrant community and provides networking opportunities for students to connect with industry professionals. It’s not just education; it’s a pathway to success in finance.

iifra.com/blog

The post What is ULIP Plan And How Does It Work? appeared first on IIFRA's Official Blog - Indian Institute of Financial Research & Analysis.

Mutual funds are a very good tool to get a good return by investment. Apart from giving you equity market returns, it also helps in diversifying your portfolio. We can adopt many methods to get maximum benefit from mutual fund returns. One such method is STP which not only increases the returns of your mutual fund but also reduces your risk. Through today’s article “Mutual fund STP kya hai”, we will completely understand the working of STP and also know the difference between it and SIP.

Full form of STP is: Systematic Transfer Plan

Mutual fund STP is a facility in which a fixed or flexible amount decided by the investor is transferred from one mutual fund scheme to another at a given time. Under this, the investor’s money can be transferred from one mutual fund scheme of the same AMC to another scheme and for this the investor does not have to apply again and again. Similar to SIP, the instruction is given to the AMC by the investor in one go, after which the installment of STP starts transferring from one scheme to another automatically. STP provides two main benefits to the investor, one is that your money gets invested systematically in every market situation and secondly, you get the benefit of market linked returns even on your lump sum money.

How many types of STP are there?

STP is mainly divided into three parts:

Fixed STP: As the name suggests, in this type of STP a fixed amount is transferred from one scheme to another after a fixed time period. This amount is determined by the investor and remains the same throughout the tenure of the STP.

Flexible STP: In this type of STP, how much fund to transfer and when to transfer is decided by the investor as per the market conditions. According to the ongoing situation of the stock market, the investor can decide to transfer more or less amount.

Capital Gain STP: In this type of STP, only the return or capital gain on the investment in the investor’s source scheme is transferred to the other scheme.

How does STP work?

To invest through STP, you have to decide three things. The first is the source scheme in which you invest lump sum money. The second is the target scheme in which the installments of STP are transferred in a fixed time and the third is the amount that you have to transfer under STP which can be a fixed or flexible amount.

For source scheme, you should choose a fund in debt category which has low risk and volatility and does not have to pay any exit load on withdrawal of money. Exit load is taken into account because in STP, units from one scheme are redeemed and units of another scheme are purchased with the same money.

The investor then decides the amount he wants to invest in the debt scheme at one go. After investing in a debt scheme, a request is given to the AMC to transfer the scheme to the target through STP installments, after which the money starts getting transferred systematically. You can use online platforms like groww, etmoney etc. to compare and invest in mutual fund schemes of different AMCs.

Benefits of STP

Cost Averaging: By investing through STP, the investor gets the benefit of rupee cost averaging. That is, mutual fund units are bought when their average price is low but at the time of selling, when their market price is high, you get good returns.

Higher Returns: STP helps you earn higher returns on your investment. In this, your money is transferred from a less risky scheme to a scheme in which the possibility of returns is higher. If the investment is held for a long time, the returns on it also increase manifold.

Portfolio Balancing: In STP investment mode, your portfolio has a mix of both debt and equity, which is why it helps in maintaining the balance of both risk and return of your portfolio.

Things to keep in mind when investing through STP

Investment through STP is done with the aim of keeping your risk low and returns high, but it is also important to keep in mind that it is not suitable for all people. You should know your objective before investing through this. The points given below will help you understand this.

Invest through STP only if you want to remain invested in it for the long term. It takes time to transfer the lump sum money invested in one scheme to another scheme and to earn a good return from the other scheme, it is necessary to stay invested in it for at least 3 to 5 years.

Choose the source scheme of STP wisely. Generally, short term or liquid funds are chosen for this, which have less volatility and risk and no exit load has to be paid for withdrawing money in short term.

When investing through STP, also keep in mind the applicable taxation. Since in STP, money is redeemed from one scheme and transferred to another, tax may be applicable depending on the long or short term capital gain arising from it.

While investing through STP, it is very important to keep in mind the ongoing market situation. Even if you do not have complete information about this subject, then definitely consult your financial advisor once.

SEBI has prescribed minimum 6 installments of STP from one scheme to another. Keep this thing in mind before investing.

What is the difference between SIP and STP?

Conclusion

There are many strategies and plans available to get good returns in mutual funds, among which STP has its own place. However, before investing through this, it is very important to pay attention to our long term objective and risk profile because this plan is not suitable for everyone.

IIFRA Indian Institute of Financial Research & Analysis

IIFRA is India’s top stock market training institute, renowned for its integrity and innovation. They offer expert-led courses covering everything from basics to advanced strategies. With small classes and personalized attention, students get tailored guidance to achieve their goals. IIFRA fosters a vibrant community and provides networking opportunities for students to connect with industry professionals. It’s not just education; it’s a pathway to success in finance.

iifra.com/blog

The post What is STP? Systematic Transfer Plan appeared first on IIFRA's Official Blog - Indian Institute of Financial Research & Analysis.

This is a closed ended debt mutual fund, in which we can invest for a fixed time period. Under FMP, investors invest a fixed amount and it is returned on maturity after a fixed time period. This investment plan is usually for 1 to 3 years and the indicative return can be 7% or more.

FMP is one of the low-risk investment options in which you can invest only during its subscription period i.e. NFO. This is a fixed interval, closed ended scheme which you can also consider as an alternative to FD. By investing in this, you can balance your portfolio and if a 3-year scheme is chosen, you can also take the benefit of indexation in long term capital gains.

Features of FMP

Closed Ended Scheme: FMPs are closed ended schemes, that is, investments can be made in them only when an AMC opens them for subscription for the first time through NFO. Once the subscription is over, they cannot be invested in and they remain locked in till their maturity.

Lock in period: As already mentioned, there is a lock in period in FMP. It is issued for a fixed time period such as 1 year, 3 years or 5 years. During this period, no investment or redemption can be made in them and on the arrival of maturity date, the entire money of the investor is returned to his bank account along with the return.

Investment Asset: FMP falls in the category of debt schemes, that is, to generate income, the fund manager invests in debt instruments like government and corporate bonds, commercial paper, treasury bills and debentures, etc., whose maturity time is also the maturity of the scheme. Is equal to time. For this reason, the returns received from them are less than equity mutual funds but stable.

Low Risk: FMPs are a low risky investment option due to investment in the debt market and stable returns. The indicative returns that can be earned on these are disclosed at the time of NFO or subscription itself.
How does FMP work?

Investment Period: Before investing in FMP, you should know for how long you have to invest. In FMP, you have to choose the scheme for a fixed time period, like 1 year, 3 years, or 5 years. During this time, your money remains invested and no withdrawal can be taken from it. Therefore, invest only that money in FMP which you do not need in the short term.

Portfolio Structure: Once your money is invested in the FMP, it is invested by the fund manager in debt instruments such as government bonds, corporate bonds, and other fixed income securities keeping in mind their ratings and risk. These instruments operate on fixed interest rates, which is why the returns in FMP come with less risk and are stable compared to other investment options.

Lock in period: There is a lock in period in FMP, that is, you cannot withdraw your invested money during the lock in period. This keeps your money fixed and less affected by market fluctuations.

Returns: The AMC informs the investor when the maturity date of the FMP arrives. On maturity, the investor’s money is credited to his registered bank account along with the returns.

How to invest in FMP?

Like investing in any mutual fund, investing in FMP can be done. Here it has to be kept in mind that since FMP is a closed ended fund, investment can be made only when it is opened for subscription. Any scheme is opened for subscription for the first time during NFO i.e. New Fund Offer.

Almost every AMC comes up with new funds from time to time in which units of the fund are offered for purchase at its face value, which is usually Rs 10. FMP is also opened for investment by common people through this, where any investor can invest in it through online or offline medium.

To invest online in FMP, you can take the help of any online broker, registrar or AMC’s own website. Some of these are groww, etmoney, mycams etc. Your KYC must be done before investing in any mutual fund scheme. Even if your KYC is not made, you can apply for eKYC on these platforms or fill the offline KYC form and submit it.

After completion of all these processes, you can easily apply for NFO of FMP. After which after about 5 days you are allotted mutual fund units.

Who should invest in FMP?

FMP is a low risk debt mutual fund. The value of investments made in these increases or decreases according to daily changes in NAV. FMP can generally be a good option for those who can bear some risk and want better returns than FD.

If your investment horizon is not short term, that is, if you are going to need the money after 1 or 3 years, then you can still invest in FMP. But here it is also important to keep in mind that due to being locked in, you can get your money back only on maturity.

Benefits of FMP

Stable Returns: Investment in FMP is made for a fixed time period, the indicative returns of which are already known to you. Therefore, it is very beneficial for those people who want to invest in a fixed return instrument in a short period of time with low risk. Apart from this, during the downfall of equity market, these instruments can be a great means to protect your capital and generate a good return.

Low expense ratio: FMP has a lower expense ratio than other mutual fund plans. Expense amount means the charge that a mutual fund house charges from the investor in return for managing the scheme. Its reduction also increases the returns you get.

Risk Management: FMPs are managed by professional fund managers whose main objective is to generate good returns by investing in fixed income instruments. Because they invest only in the securities of good and stable private and government companies, hence the risk involved in investment is reduced to a great extent.

Better returns than FD: The returns in FMP are better than any other fixed income instrument like bank FD, RD, PPF etc.

Low Risk: The risk involved in FMP is much lower than equity mutual funds, so it can be a great option for investors looking for better returns with less risk.

Disadvantages of FMP

Liquidity and Lock-in: FMPs have a lock-in period, which requires you to keep your money invested for a fixed period of time. If you need money in emergency, you have to wait. Although FMP is traded in the secondary market i.e. stock exchange after allotment, it is not easily encashed due to lack of flexibility and liquidity.

Interest Rate Risk: FMP involves interest rate risk. The money you invest in FMP generates returns through fixed income instruments, which are influenced by market and economic conditions. If interest rates increase in the market, your returns may reduce.

Credit Risk: In FMP your money is invested in corporate bonds, government securities, or other debt instruments. If a company defaults or their financial condition worsens, your money may also be at risk.

Conclusion

Investment in FMP helps to diversify and balance your portfolio. It gives you a good stable return with low risk, which many people need. But before investing in it, it is important to keep some things in mind, like what is your investment goal, or if you are going to need money in short term, then instead of putting it in a lock-in instrument, you can invest in a liquid fund. Can.

IIFRA Indian Institute of Financial Research & Analysis

IIFRA is India’s top stock market training institute, renowned for its integrity and innovation. They offer expert-led courses covering everything from basics to advanced strategies. With small classes and personalized attention, students get tailored guidance to achieve their goals. IIFRA fosters a vibrant community and provides networking opportunities for students to connect with industry professionals. It’s not just education; it’s a pathway to success in finance.

iifra.com/blog

The post What is FMP? Fixed Maturity Plan appeared first on IIFRA's Official Blog - Indian Institute of Financial Research & Analysis.

Absolute return is a simple concept that tells you the total profit and loss on your investment without taking into account any time factor. In simple words, it tells you the total return you got in your investment. It does not take into account the time period for which the investment has been made, or the benchmark against which it is compared. It helps in telling the total returns from the beginning of investment in mutual fund or any other instrument till its present time.

How does absolute return work?

Absolute return is one of the easiest and most accurate ways to calculate your investment’s performance and the returns it provides. Using this, we are able to know how much return we have received from our investment time period to the present value of the investment.

Through this return, fund managers and investors can estimate how effective their investment strategy is, and whether they should work further according to this strategy or not. Unlike other returns, profits and losses here are not compared to any benchmark, nor does it matter what the market condition has been during this period. Overall, it shows the difference between the time period of your investment and its initial value in percentage format, so that we can make a correct opinion about our investment.

When is absolute return used?

Every investor, whether long term or short term, wants to know the risks and rewards involved in the investment he makes. This type of investment is usually done in market linked instruments like mutual funds, stock portfolio etc. Using absolute returns, investors can track the returns generated by investment instruments such as mutual funds over a given period of time. A good return confirms that the invested scheme has performed well in the past, and similar performance is expected in the future. All these factors help an investor in taking long term investment decisions, and choosing a good investment instrument.

Importance of Absolute Return

Simple Calculation: Calculating Absolute Return is very easy. Any common citizen or investor can easily understand this. For investors who do not have much knowledge of market ratios and financial formulas, this is a great way to know the performance of their investments.

Portfolio Diversification: Absolute return refers to the simple return of an investment without any fundamental or benchmark factors. Keeping this in mind, the investor can check his various investment returns and take appropriate steps to diversify the portfolio.

Short Term and Long Term Goals: Absolute Return calculates returns without taking the time factor into account. In this way, it can be beneficial for both long term and short term investors. This helps them in taking future decisions related to their investment by looking at its current value.

Effect of market volatility: Market volatility is not taken into account in the calculation of absolute returns. It only works to show positive or negative returns while making the investment returns stable. Thus, it is beneficial for those investors who do not have much knowledge of various market factors and consider total returns as the benchmark for their investment decisions.

How to calculate absolute return?

Absolute returns can be calculated very easily. For this, the principal value of the investment is subtracted from the current value of the investment, after which the value obtained after dividing it by the current value is the absolute value. For example, you invested Rs 1 lakh in a mutual fund on January 1, 2023, the value of which has increased to Rs 1 lakh 30 thousand in December 2024. Your total profit in this case was Rs 30 thousand. By converting this into percentage, we can find out the absolute value, for which the formula given below is used.

Absolute return’s formula

Absolute Value = ((Current price – Purchase price) / Purchase price) * 100

Using the example values above:

Absolute Value : ((130,000-100,000)/100,000)*100 = 30%

Difference between absolute and annual return

Conclusion

IIFRA Indian Institute of Financial Research & Analysis

IIFRA is India’s top stock market training institute, renowned for its integrity and innovation. They offer expert-led courses covering everything from basics to advanced strategies. With small classes and personalized attention, students get tailored guidance to achieve their goals. IIFRA fosters a vibrant community and provides networking opportunities for students to connect with industry professionals. It’s not just education; it’s a pathway to success in finance.

iifra.com/blog

The post What Is Absolute Return? appeared first on IIFRA's Official Blog - Indian Institute of Financial Research & Analysis.

In today’s time, mutual fund is one of the best means of investment. It is capable of giving you a good return which helps you in achieving your financial goals even with small amount of investment. But here it is also important to note that like other means of investment, mutual funds are also not exempt from tax, and if you are investing without knowing about the tax imposed on mutual funds, then you are not a conscious investor. Do not fall in the category of. Taxes on mutual fund investments can reduce the value of your investment, but if you invest wisely, you can also save on tax liability. How much tax is levied on Mutual Funds? Today we will know about at what rate it occurs and under what circumstances.

Factors determining tax on mutual funds

We get two types of income from mutual funds, capital gains and dividends and both of them come under the tax bracket. The percentage of tax rate depends on many factors like the type of mutual fund scheme in which the investment is made, the holding period, which tax bracket the investor’s income falls in, etc. If we want to understand the tax levied on mutual funds completely, then let us first know about the factors or facts on which the tax calculation depends. These factors are:

Dividend: The securities or assets in which mutual funds invest usually distribute a portion of the profits to investors. This profit share is called dividend. Dividends do a good job of providing the investor a source of regular income as well as partial income.

Capital Gains: The increase in the value of an investment as its holding period increases is called capital gains. When an investor sells his mutual fund unit, the tax charged on the profit made from it is called capital gains tax.

Types of fund: Mainly two types of securities are invested in mutual funds. Equity and Debt. In equity, shares and assets related to private sector and stock market are invested which have higher risk and higher returns. Whereas debt mutual funds invest in government securities, bonds and fixed income securities which offer low risk and low returns. Apart from this, there are many other types of fund schemes such as hybrid and tax saving schemes. The rates and conditions of all these taxes are different.

Holding time – Holding period: The tax charged on any investment also depends on its holding period i.e. for how long it has been invested in a fund.

Taxes levied on Mutual Funds

The tax imposed on mutual funds can be divided into mainly 5 parts.

Capital gains tax

Capital gains tax depends on the time period of mutual fund investment. This tax is calculated on whatever return you get on your investment. According to the period of holding mutual fund, it is divided into two parts. Short term capital gain – short term capital gain and long term capital gain – long term capital gain. It is also important to keep in mind that capital gains tax is applicable only when mutual fund units are sold/redemption is taken. If you have held your investment then you will not have to pay any tax no matter how much profit you make. For example, if you invested Rs 1000 in any of your funds and after one year you took redemption, its value was Rs 1100. In this case, you will have to pay capital gains tax only on the capital gain i.e. only Rs 100. This tax is applicable differently in different types of funds, which is explained below.

Equity Mutual Fund – Equity-oriented mutual: These funds invest at least 65% of their portfolio in equity assets. If you hold the units of these schemes for less than one year, then the profit earned will fall in the category of short term capital gain, which is taxed at the rate of 10%. On the other hand, investment profits of more than 1 year come under the category of long term capital, on which tax rate of 15% is applicable. It is important to note here that if the amount of capital gain is less than Rs 1 lakh then it is completely free from tax.

Debt Mutual Fund – Debt-oriented mutual funds: These funds mainly invest in debt instruments like government securities, fixed income schemes and bonds etc. If you hold the investment of these funds for less than 3 years or 36 months, then it comes under the category of short term capital gain which is taxable as per your income tax slab. If the fund is held for more than 3 years then it will fall in the category of long term capital gain on which *Indexation – After indexation, 20% tax rate is applicable.

Hybrid mutual funds – Hybrid mutual funds: These funds invest in a mix of debt and equity securities. The tax applicable on these depends on the allocation of equity and debt and the holding period.

Different long term and short term taxes are levied on different funds as per the table given below:

Dividend income tax

Before April 1, 2020, whatever dividend was declared by the fund house, Dividend Distribution Tax (DDT) was paid before distributing it to the investors, hence investors did not have to pay any tax on mutual fund dividend income. But after the Union Budget of 2020, this rule was changed and all the dividends received by investors started being included in the tax net under “income from other”. Apart from this, if the dividend paid by the fund house crosses the limit of Rs 5000 in a financial year, then the AMC has to deduct flat 10% TDS on it. However, you can claim this TDS when you file tax returns.
ELSS Schemes

ELSS means Equity Linked Saving scheme. This scheme is mainly designed for the purpose of tax saving, on which profits up to Rs 150,000 can be availed of tax rebate under section 80c.

Tax on SIP

SIP is a disciplined and periodic way of investing in mutual funds in which small amounts can be invested over a fixed period, such as one month, three or six months. Every time you invest through SIP, some units are deposited in your portfolio according to the investment amount. The investment made in SIP and the redemption taken are calculated on first in first out basis.

Based on this concept, tax is also applicable on SIP investment. That is, for equity investment, all the units which are in your portfolio for less than one year will come under short term and all the units which have been held for more than one year will come under the purview of long term capital gain. Similarly, for debt funds, units of less than 3 years come under short term capital gain and units of more than 3 years come under long term capital gain. For example, you have invested in a scheme for 2 years. At the time of redemption, the units which are under 1 year (investment made within 12 months) will be short term and the units which are after 1 year will be in the category of long term capital gains (investment after 12 months). However, if the total capital gain amount is less than Rs 1 lakh then you will not have to pay any tax on it. It is important to note here that short term capital gain is applicable only on investment units purchased from the second month onwards. While paying capital gains tax, you also have to pay the cess and surcharge applicable on it.

Tax on SWP

It can be said that in SWP only money is transferred from one scheme to another but this process is much more than that. Under SWP, the money is first redeemed from the scheme from which the units are to be transferred, which is considered as selling the units of the fund. Similarly, in the scheme in which money is transferred, it is considered as purchasing the unit. Now this entire process involves buying and selling of mutual fund units, hence it comes under the tax net like normal situation. Whereas in SIP you can invest a fixed amount in a mutual fund at a fixed time, similarly in SWP you can withdraw a fixed amount at a fixed time. In this, the investor has the freedom to choose whether he wants to withdraw a fixed amount or only a part of the capital gains. If investment is withdrawn from equity fund before 1 year then it comes in the category of short term capital gain and if it is more than 1 year then it comes in the category of long term capital gain. The rate of short term capital gain is 15% while long term capital gain is taxed at 10% without indexation. In case of debt scheme, if redemption is taken before 36 months, then the profit is added to your total income and tax is applicable as per the prevailing income tax slab. After indexation, 20% tax is applicable on capital gains after 36 months.

State Transaction Tax

STT is collected by the Government of India, which was first introduced in the Union Budget of 2004 and implemented on 1 October 2004. STT or State Transaction Tax is different from the tax on capital gains and dividends. The Government of India collects this tax when you sell your mutual fund units from equity or hybrid funds. Its fund is separate from its mutual fund and this tax is not applicable on debt mutual funds. Its rates on equity related mutual funds are shown in the table below.

Indexation benefit

If we are talking about tax then it becomes necessary to clear the indexation benefit also. Through indexation benefit, capital gains on mutual funds are compared with inflation, thereby reducing the overall tax liability. Whenever an investor sells his mutual fund units, the capital gain is taxable. Under indexation benefit, an investor can adjust his investment profits as per the ongoing inflation rate. Such adjustments reveal the actual value of capital gains on investments. That is, the price which is obtained by subtracting the ongoing inflation rate. To calculate this price, a standard is used which is called Cost of Inflation Index (CII). This standard is revised by the Finance Ministry every year at the time of budget and it can be easily seen on the Income Tax website.

Indexation benefit is applicable only in case of long term capital gains on debt mutual funds. For example, an investor bought 5000 units of a debt mutual fund in 2012-13 at Rs 18 and sold it at Rs 27 in 2018-19. Now this time is more than 36 months, so the profit made here will come in the category of long term capital gain.

Total profit made in this: 5000 (27-18) = Rs 45000

Net value after adjusting for inflation: (280/200)*18 =25.2

Here the Cost Inflation Index number is 280 for 2012-13 and 200 for 2018-19 and 18 is the price at which the units were purchased.

Thus, the long term capital gain on this after indexation will be:
5000 x (INR 27- INR 25.2) = INR 9000

Now whatever tax the investor has to pay will have to be paid on the capital gain of Rs 9000 and not on the capital gain of Rs 45000.

Conclusion

The government raises money for the economy and national interest of any country only through taxes. For a common citizen who files his ITR every year, it becomes necessary to declare the income earned from mutual funds. According to your convenience and tax planning, you can keep it in the category of long term or short term tax. Even if your income does not come under the ambit of tax, still declare it, whatever refund is made, you can claim it later. There are many such provisions in Income Tax, through which you can avail tax rebate on your investment profits under different sections. If you use the right information and professional advice, then these small savings will give rise to big savings in the future.

IIFRA Indian Institute of Financial Research & Analysis

IIFRA is India’s top stock market training institute, renowned for its integrity and innovation. They offer expert-led courses covering everything from basics to advanced strategies. With small classes and personalized attention, students get tailored guidance to achieve their goals. IIFRA fosters a vibrant community and provides networking opportunities for students to connect with industry professionals. It’s not just education; it’s a pathway to success in finance.

iifra.com/blog

The post Tax On Mutual Fund Returns, How Much, When and How? appeared first on IIFRA's Official Blog - Indian Institute of Financial Research & Analysis.

In today’s inflationary era, mutual fund is one such instrument which has the potential to give you good returns even with minimal investment. Apart from increasing your wealth, it is also a very good means of diversifying your portfolio. Due to its good returns and ease of investing, it has become popular among almost every citizen these days. Through today’s article, we will completely understand the concept of mutual fund and after knowing its advantages and disadvantages, we will look at every important aspect of it.

What is a mutual fund?

Mutual fund is an investment instrument which generates returns by investing the money collected from different sections of people in various types of assets like bonds, stocks, gold, indices, government securities etc. This investment is done through various types of funds and schemes which are operated by AMC or Asset Management Company. Experienced fund managers working in these asset management companies manage these schemes. In mutual funds, there are plans and schemes according to everyone’s need and risk, in which the fund manager keeps changing the invested assets as per the market conditions so that it generates a better return for the investor with minimum loss. The returns earned in this way are distributed among the capital collected from the people in the form of growth and dividends.

How many types of mutual funds are there?

An AMC manages a variety of mutual funds and schemes that are designed to suit every investor’s needs and goals. Due to their diversity, it is difficult to separate them into any one category. Therefore, on the basis of various facts, we can divide mutual fund schemes into the following categories.

How does a mutual fund work?

Before knowing the working of a mutual fund, let us know what is the structure of a mutual fund company and who are the people who can start a mutual fund company. There are mainly three layers in the structure of mutual which are sponsor, trustee and asset management company.

A sponsor is a person who has to start a mutual fund company so that he can earn profit from it like a business. A sponsor must be eligible in several ways to start a mutual fund company such as:

1. A sponsor has to show profits for at least three years out of five years to start a mutual fund.
2. He should have at least 5 years of experience in the financial services sector.
3. Its share in the total net worth of AMC should not be less than 40 percent.

If a sponsor fulfills all these things, then he along with many people establishes the second layer i.e. a trust whose job is to look after the AMC and the fund. With this trust, the sponsor has to work according to a contract which is called Trust Deed. It is mandatory for this trust to be registered with SEBI and within its limits it takes all types of management decisions. According to the rules, the trustee has to submit AMC’s report to SEBI every six months.

AMC i.e. Asset Management Company comes in the third layer of mutual fund. In this company, all the work related to the management of mutual funds and providing services to investors is done. It is registered under the Companies Act of SEBI and launches funds or schemes according to the market situation. To launch any scheme, she makes agreements with brokers, RTA (Registrar and Transfer Agenst. ie cams, karvy) and transfer agents and does all her work as per their help and advice.

It was a matter of establishment of mutual fund and its main parts. Now let’s take a look at how investment in mutual fund schemes generates returns or works.

Before starting a fund or scheme, a mutual fund company first drafts a document called prospectus. In this, the purpose of the fund is to describe its size, risk, nature, assets to be invested etc.

After all the necessary formalities, the fund is opened for subscription which is called NFO (New Fund Offer). NFO works similar to IPO. It can remain open for about 15 days during which units of the mutual fund can be purchased at its face value which is usually Rs 10.

After the closure of the NFO, the mutual fund house allots the units of the scheme to the people participating in the NFO within 5 days. If the NFO is of an open ended scheme then you can buy its units even after its closure. In case of closed ended schemes, no investment can be made after the NFO is closed. If for some reason the allotment of NFO is not possible then the deposited money is returned to the investor’s account.

How to invest in mutual funds?

Investment in mutual funds can be done easily through both offline and online methods. For offline investment, you can do it through mutual fund branch, financial advisor and mutual fund agent. Every mutual fund, AMC and RTA has a branch in almost every city. To invest, you have to submit all the necessary documents and the payment to be invested through one of the mentioned means. Here it is important to keep in mind that before investing, you should have an idea of the investment objective and the risk you can take. If you do not know much about all these things then you should take any decision only according to the advice of a good financial advisor.

If you want to invest online then you can do so by visiting the website of AMC or RTA. For this, you have to create an account on any website and submit all the necessary documents. Apart from this, nowadays there are many online broker companies which provide you the facility to invest easily in just a few clicks sitting at home, such as Grow, Zerodha Coin, ET money etc.

Ways to invest in mutual funds

There are two ways to invest in any mutual fund: Lumpsum and Sip.

Lumpsum means you are investing a fixed amount like Rs 5000, Rs 10000 or several lakhs in a mutual fund scheme at one go. The second method is SIP i.e. Systematic Investment Plan. Under this, a fixed amount is deducted from your account on a fixed date and is invested in the chosen mutual fund scheme. This method of investment is very good for low and middle class people because you can start a SIP with just Rs 500. In many mutual fund schemes, SIP can be started with even Rs 100.

Benefits of Mutual Fund

Better Returns: Compared to other means of saving and investment, mutual funds offer very good returns. Whereas nowadays only 5 to 7 percent interest is available in FD and savings accounts, mutual funds can increase your investment returns manifold. Although the returns from these are not fixed and are subject to market risk, still almost all mutual funds seem to perform well in the long term.

Diversification: Mutual funds manage many types of funds depending on the need and risk of the investor, in which many options are available from low risk to high risk, tax saving to fixed returns. An investor can create a well diversified portfolio by investing in different funds as per his need, where the chances of loss and risk are reduced to a great extent.

Expert Management: Mutual funds are managed by expert fund managers who are experienced professionals in their field. These expert managers take all fund related decisions under the supervision of SEBI and its guidelines. In such a situation, even those people who do not have much knowledge about financial securities can avail the benefits of these services at very low charges and get a better return on their investment.

Regulated: Mutual fund market is completely regulated by SEBI and works as per its guidelines. From time to time, SEBI keeps imposing new rules for the benefit of investors, which are mandatory for all mutual fund houses to follow. In such a situation, we can say that apart from market fluctuations, investor’s money in mutual fund investment remains safe to a great extent from any kind of fraud and robbery.

Low value investment: Anyone can invest in mutual funds and such schemes are also available in mutual funds in which investment can be started with just Rs 100. In this way, mutual funds are a good investment option for low and middle class people also.

Disadvantages of Mutual Fund

Market Risk: Most of the investments made in mutual funds are made in instruments related to equity and government securities such as stock market, real estate, bonds and debentures etc. Despite having expert management, there is no guarantee of returns here and returns depend to a great extent on market fluctuations and economic factors. For this reason, before taking any investment decision, the investor should thoroughly investigate the risks associated with it or take any decision only with the advice of a good financial advisor.

Capital Gain Tax: The returns received on mutual fund investment come under the ambit of tax, which is called capital gains tax. Although tax saving schemes are also available in the market and rebate of up to Rs 1 lakh can be availed under section 80c of ITC, still their tax rate is quite high as compared to other means of investment which is difficult for the investor. Plays an important role in reducing the profit percentage.

Lack of control: Managing mutual fund investment is completely in the hands of the fund manager, due to which the common investor has no role in it. This can become a cause of loss for those people who are well acquainted with the market and know how to manage their investments well.

Fees and Expenses: In exchange for managing the investments, the mutual fund house charges a small percentage fee for its expenses and management salary, which is called expense ratio and exit load. Expense ratio is different for every scheme, which is deducted from the amount paid by the investor in return for managing the investment, whereas expense ratio is the deduction that is made for exiting a mutual fund scheme before a certain time. But it is charged as penalty. These charges and fees have a negative impact on mutual fund returns.

Conclusion

In the end, we can say that mutual funds are a great investment option for all types of investors, which provide a good opportunity for wealth creation in the long term. But it is also important to note here that like other means of investment, it Neither is safe from risk and loss. Therefore, every investor should think carefully before taking any investment decision or take the decision only after taking the advice of an expert.

IIFRA Indian Institute of Financial Research & Analysis

IIFRA is India’s top stock market training institute, renowned for its integrity and innovation. They offer expert-led courses covering everything from basics to advanced strategies. With small classes and personalized attention, students get tailored guidance to achieve their goals. IIFRA fosters a vibrant community and provides networking opportunities for students to connect with industry professionals. It’s not just education; it’s a pathway to success in finance.

iifra.com/blog

The post What Is A Mutual Fund And How Does It Work? appeared first on IIFRA's Official Blog - Indian Institute of Financial Research & Analysis.

What is Index Fund?

Index funds are a type of mutual funds which track the performance of a stock index like Nifty 50, Nifty Bank etc. It is a copy of a stock market index which gives you almost the same returns as a stock market index. Now the question in your mind will be that what is this stock market index?

You must have heard about Nifty 50, Nifty Bank or Sensex. This is all a stock market index. There are thousands of companies listed in the stock exchange and it is not possible to track the daily movements of everyone. For this reason the stock market index was created. Some of the leading companies of the country are included in the stock market index which are listed and traded in the stock exchange. Now since these are leader companies, we can estimate the status and direction of the entire stock market from their average performance. The two main indices mentioned above include top 50 companies in Nifty 50 and 30 companies in Sensex.

As already mentioned, an index fund is a copy of a stock index. For example, Nifty 50 ETF, which is built on the basis of Nifty 50, will also include the same 50 companies and will be included in the same ratio as in the Nifty 50 index. Now, whatever Nifty performs, we can expect the same returns from the index fund.

How does an index fund work?

As mentioned above, an index fund is an exact copy of its base stock index. Whenever a mutual fund company has to start an index fund, it first selects a stock index on the basis of which it has to make stock selection. Stock exchange includes many types of indices according to the sector and nature of companies like Nifty Pharma, Nifty Psu, Nifty Transport etc. A mutual fund house selects a stock on the basis of a stock index and invests in it in the same proportion as it is included in an exchange.

Index funds are called passively managed funds because they do not need to be managed daily. Changes are made only when a stock is removed or included from the index or its ratio is changed.

How to invest in index fund?

You can invest in index funds both online and offline. Like investing in any common mutual fund scheme, investing in index funds is very easy. To invest online, you can use any discount broker like Grow, Etmoney, Zerodha Coin etc. By creating an account in these, you can easily invest in index funds and stocks etc. without any extra charges.

Another option for online investment is AMC i.e. Mutual Fund House’s own website. That is, if you want to invest in the index fund of any AMC, then login to the website of that AMC and after following a few easy steps, invest in the index fund. For example, if you want to invest in HDFC’s index fund, then you can know about it and invest by visiting the website of HDFC Mutual Fund.

To invest offline in index funds, you will have to take help from AMC office or any mutual fund agent. You can invest in these index funds by submitting the application form and necessary documents.

Why invest in index funds?

Diversification: Index funds, as mentioned earlier, are copies of their base stock index and include more than one stock. For this reason we get the benefit of diversification in index funds. Diversification reduces the loss and risk in our portfolio to a great extent.

Low expenses: Index funds are passively managed funds because no research or analysis of stocks is done to manage them. Due to this, the expense ratio of the fund also reduces, which further increases the return potential of our investment in the long term.

Ease of tracking performance: To track the performance of investments in index funds, we do not need to learn any separate skill or take help from any expert. You can track your investment returns simply by tracking the performance of the base stock index.

Ease of investing: Investing in index funds is very easy as it is available in almost every AMC and broker in both offline and online modes. For this reason, you can easily invest in it without any hassle.

Beneficial for long term investors: Only those people who have long term perspective invest in index funds. Mostly it has been seen that stock indices give positive returns in the long term.

What is the difference between Index Fund and Mutual Fund?

Both index and mutual funds are good means of investment but there is a lot of difference in their functioning and management. Let us know how index funds are different from mutual funds:

Management: Index funds are only passively managed funds because they are created only as a copy of their base index and they only copy its performance. The same mutual funds can be of both active and passive types. In this, the main objective of the fund manager is to invest people’s money in the market in such a way that it can give better returns than the benchmark index.

Expense Ratio: Being passive managed funds, the expense ratio of index funds is much lower than that of mutual funds, whereas mutual funds can be of both active and passive types. In active mutual funds, the fund manager has to constantly make changes to the fund as per the market conditions, hence its expense ratio or fee is higher than that of index funds.

Performance: Index funds are copies of their base stock index, hence their returns also depend on the performance of the stock index. On the other hand, the performance of a mutual fund depends on its management and the quality of the assets invested. The effort of the fund manager of a mutual fund is that the returns of the scheme should be more than the benchmark index and the investor should get maximum profit.

Tax Benefit: According to index funds, mutual funds are tax efficient because their returns are also low due to which the investor does not have to pay much capital gains tax. The case tax rate of a mutual fund depends on its returns and its type. The tax rate is different in case of debt and equity mutual funds and it also depends on the return on investment and the investment objective of the scheme.

Diversification: The benefit of diversification in an index fund is limited only to the sector of which the benchmark index is a copy. That means, if an index fund is a copy of Nifty Bank, then only banking and financial stocks will be included in it. We also get the benefit of diversification in mutual funds, but each of its schemes is prepared under the supervision of the management keeping in mind an investment objective. For this reason, the scope of diversification in mutual funds is slightly more than that of index funds.

Conclusion

Index funds allow even an investor unfamiliar with the market to take advantage of stock market returns. Overall we can say that index funds are a simple and economical way of investment. Its objective is to provide you a good return from old methods of market investment like FD, RD etc. which can beat inflation. This is a better option for long term investors than short term. We hope that this article has helped you to understand index funds better.

IIFRA Indian Institute of Financial Research & Analysis

IIFRA is India’s top stock market training institute, renowned for its integrity and innovation. They offer expert-led courses covering everything from basics to advanced strategies. With small classes and personalized attention, students get tailored guidance to achieve their goals. IIFRA fosters a vibrant community and provides networking opportunities for students to connect with industry professionals. It’s not just education; it’s a pathway to success in finance.

iifra.com/blog

The post What Is Index Fund? appeared first on IIFRA's Official Blog - Indian Institute of Financial Research & Analysis.

To increase our savings and get good returns on it, we have to invest in some means or the other. This instrument can be a mutual fund, bank FD or in the form of stock in the stock market. Before or after investing, we all want to know how much return we can get on the investment we are making. This return is usually expressed as a percentage, which is called Absolute Return, but if you track the returns of any mutual fund scheme, then the returns are shown in the form of CAGR. CAGR is an important ratio which helps us in calculating the average return of investments made at different times. In today’s article “CAGR meaning in Hindi” we will try to know about this ratio and also how it is calculated.

What is CAGR?

CAGR means: Compound Annual Growth Rate

CAGR helps in calculating the return or growth on the investment made by us in a given time period. In simple words, CAGR helps us to know how much return your investment has given annually after a certain period of time. This is one of the best ways to calculate compounding interest. Here your question would be that we can easily calculate investment return on the basis of increase in the amount invested, so what is the need of CAGR here. We understand the answer to this question through the example given below. Suppose you had invested Rs 1 lakh in a mutual fund scheme three years ago and today its value is Rs 1 lakh 20 thousand. Normally in this case it is said that the total return on your investment for three years is 20%, but the return of a mutual fund scheme is not fixed and it is not possible that the investment return is only 20% in all the three years. It is possible that you may have got 20% return in the first year, 7% in the second year and 30% in the third year. In such a case, we use CAGR to calculate the average return of three years. The return after CAGR calculation is 6.27%. This is the average return received every year for three years.

How does CAGR work?

CAGR is a useful tool that helps you calculate the average return each year based on the present value of your investments made at different points in time. Let us try to understand it with the help of the example given below: Suppose you had invested Rs 1 lakh in a mutual fund scheme 5 years ago and now its value has become Rs 1 lakh 50 thousand. According to simple return, we can say that the 5 annual return on our investment has been 50%, but from this return we do not know how much return we have received on our investment every year in the last five years because in mutual funds Returns are not guaranteed and returns on investment may vary from year to year depending on the performance of the scheme. Therefore in such a case we use CAGR and the return we get from it is 8.45%. That means the average return on your investment every year is 8.45% and not 50%.

How to calculate CAGR?

To calculate CAGR, we first need the figure which is our initial investment amount. After this, the value that we get by depositing the return on investment in the principal value, i.e. the present value of your investment. Thirdly, we have to keep in mind the time period i.e. the number of years for which the investment has been made. Once these three values are known, use the formula given below:

CAGR formula

CAGR = (Ending Value / Beginning Value)^(1 / Number of Years) – 1

Suppose your principal investment amount is Rs 50,000

Present value of investment is Rs 100,000

Time period of investment is 7 years

CAGR will be formed according to this

CAGR = (100000 / 50000)^(1 / 7) – 1 = 10.41%

10.41% is the average percentage by which the value of your investment has increased every year. Microsoft Excel can be used to calculate CAGR. According to this, you can download the format of the formula from the link given below.

Benefits of CAGR

1. CAGR helps us in long term investment planning. It represents the average annual return of investment which helps us to know how a mutual fund has performed in different market conditions.

2. It is very easy to calculate CAGR. It can be easily calculated with the help of online tools and Microsoft Excel etc. Even if you do not have software available, you can easily calculate this return according to the formula.

3. With the help of CAGR, we can compare one mutual fund with another and it helps us in taking a right investment decision. CAGR helps us to know the risk associated with investment. If the CAGR of a mutual fund has been consistently positive, then it can be seen as a low risk and good growth investment option.
Disadvantages of CAGR – Disadvantages of CAGR

4. To calculate CAGR, two values are used, that is principal investment amount and present maturity amount. Due to the tenure of the investment and different market conditions, returns may face volatility which CAGR does not take into account.

5. It is mainly good for lumpsum investment. In the case of SIP investment where money is invested in fixed time intervals, this is not much of a prison.

6. CAGR is mostly used to calculate long term investment returns. It is not very useful in calculating returns for short term investments that involve large amounts in a short period of time.

7. In the calculation of CAGR, external factors like economic factors, interest rates etc. are not taken into account which can have a major impact on the performance of the investment.

Conclusion

CAGR is an important ratio in the financial world which helps us in calculating returns on investment and long term financial planning. Through this, we can compare different investment options and choose a good tool for better returns. But here it is important to keep in mind that CAGR also has some limitations like it works well only in long term returns and lumpsum investments. This is not very useful in the case of SIP because many investments are made regularly after a fixed time period. In short we can say that CAGR is a useful tool with the help of which we can calculate and analyze investment returns.

IIFRA Indian Institute of Financial Research & Analysis

IIFRA is India’s top stock market training institute, renowned for its integrity and innovation. They offer expert-led courses covering everything from basics to advanced strategies. With small classes and personalized attention, students get tailored guidance to achieve their goals. IIFRA fosters a vibrant community and provides networking opportunities for students to connect with industry professionals. It’s not just education; it’s a pathway to success in finance.

iifra.com/blog

The post What is CAGR? appeared first on IIFRA's Official Blog - Indian Institute of Financial Research & Analysis.

Bonds are a popular investment option for people who can afford limited risk or want a consistent source of income. If you are considering investing your funds in an instrument that gives you a fixed income and has low volatility, then investing in bonds is a good option for you.

What is a bond?

A bond is essentially a loan to the issuer, who promises to return your investment with interest. Most companies and state or central governments raise funds through bonds to finance business expenditure and development projects. Therefore, bonds are investment instruments that can be classified as fixed income assets. The issuer of the bond is the borrower and as a bond holder you become the lender to the issuer.

What are the different types of bonds?

There are many types of bonds available now. Different types of bonds include:

1. Fixed Rate Bond:

Fixed-rate bonds are those that pay interest at a predetermined rate until the bond matures. Interest is calculated at fixed intervals and can be paid on monthly, quarterly, half-yearly or yearly basis.

2. Floating Rate Bond:

Returns on floating-rate bonds vary. Generally, the issuer of the bond promises to pay interest to the investor at a rate which is decided by the benchmark rate of RBI and SBI. These are considered good for protection from inflation.

3. Zero Coupon Bond:

As the name suggests, these bonds do not have any coupons or interest payments from the time of issue. Investors buy the bond at a discounted rate and receive a lump sum payment based on the value upon maturity. The difference between the discounted purchase price and the value received at the time of redemption after maturity is the return of a zero coupon bond.

4. Perpetual Bond:

With perpetual bonds there is no set maturity date, so in theory the issuer never has to repay the principal. However, such bonds have regular “call dates” – these are predetermined time periods (5 years, 10 years) after which the issuer has the option, but not the obligation, to repay the principal on the bond. it occurs. These bonds make regular interest payments.

5. Inflation Linked Bonds:

The purpose of inflation linked bonds is to protect against inflation. These are fixed income securities, whose principal and coupon prices are linked to inflation through indexing. These are designed to protect bond holders from the risk of inflation over the long term.

6. Convertible Bond:

In convertible bonds, you have the option to convert these bonds into shares of the holding company. This option is made available for a specific time period and the number of shares allotted after conversion is based on a pre-decided unit. However, if investors do not want to convert their bonds into shares, they can still hold the securities and enjoy the benefits of traditional bond instruments.

7. Callable Bond:

Callable bonds can be redeemed before maturity and the issuer can pay the outstanding amount to the investor or can redeem the bond at a pre-determined time. When the issuer calls a bond, investors receive the face value of the bond plus interest until the call posting date. In this, the issuer does not have the responsibility to pay any kind of interest to the investors.

8. Putable Bond:

In case of putable bonds, investors can return the bond to the issuer even before maturity. In this, the bond issuer will pay the principal amount based on the pre-decided rate.

How do bonds work?

Bonds are nothing but a way for the issuer to raise money. The money raised in this way is used to run the business and do development work. A bond investor is generally considered a lender, who lends money through bonds to the issuer of these bonds. The issuer of the bond, i.e. the one who is borrowing, promises to repay the principal amount along with interest.

Interest is paid to bond holders at regular intervals such as monthly, quarterly, annually, etc., which is also known as the coupon of the bond. On maturity of the bond, the principal amount along with the remaining interest is returned.

Advantages of investing in bonds:

The bond industry in India is in its nascent stage and due to limited understanding of the subject, bonds do not prove to be an attractive topic for general conversation about markets. While many investors underestimate the benefits of investing in bonds, there are some special advantages to investing in bonds, which make them an excellent investment option. Some of those benefits include:

High Interest:

The returns from bonds are often almost double that of fixed deposits and depend on the tenure. In case of bond public issues, individual investors are often offered higher interest than institutional investors.

Regular Earning:

Bonds are a source of continuous earning for you. Unlike an equity portfolio that is prone to market volatility, a bond portfolio can help you ensure predictable and regular earnings.

Safety and Security:

Investing in government bonds comes with a lot of protection and security and it is technically called a risk-free investment. While corporate bonds carry some degree of risk, most bonds are secured by collateral. This results in the collateral being sold to return your investment in case of default.

Portfolio Diversification:

To achieve a better balance between stability of earnings and returns, it is important to have a diversified portfolio. Bonds bring that balance to your portfolio. When the stock market falls, bonds will help you protect your capital.

Enjoy Capital Appreciation:

When market interest rates fall, investors may see the value of their portfolio increase, leading to capital appreciation. This is also possible when investing in corporate bonds and the underlying company is improving.

High Liquidity:

As an investment instrument, bonds are considered highly liquid as they can be easily traded in secondary markets through stock exchanges. There is no lock-in period and investors can easily withdraw their investments in case of emergency.

Priority during bankruptcy:

In case of bankruptcy, bondholders get priority in repayment of their investments because they are considered creditors.

Low Minimum Investment:

Investing in primary markets through bond public issues starts from Rs 10,000.

Factors affecting bond prices:

Market Interest Rates:

Interest rates and prices are inversely proportional to each other. This means that whenever market rates fall, bond prices rise. Whereas if market rates increase, bond prices decrease.

Dearness:

When inflation increases, bond prices decrease. Bond prices increase as the inflation rate decreases. This is because in times of high inflation the purchasing power of people reduces.

credit rating:

A good credit score indicates the financial stability of the bond issuer. If the credit rating goes down, the prices of bonds issued by that organization also fall.

Liquidity:

Not all bonds have the same secondary liquidity. Bonds issued by governments and big corporates have more liquidity.

Conclusion:

In passing, we can conclude by saying that bond investments are very prudent decisions. It provides the required stability to your investments and offers higher yields than bank instruments like fixed deposits. However, before investing in bonds, you are advised to do fundamental research about the company, so that you can take an informed decision. Like all investment options, bonds also have risks, but those risks are mitigated by its strength, making bonds a very good investment option for you. Therefore, one can safely say that bonds are a good investment option and should be a part of your portfolio.

IIFRA Indian Institute of Financial Research & Analysis

IIFRA is India’s top stock market training institute, renowned for its integrity and innovation. They offer expert-led courses covering everything from basics to advanced strategies. With small classes and personalized attention, students get tailored guidance to achieve their goals. IIFRA fosters a vibrant community and provides networking opportunities for students to connect with industry professionals. It’s not just education; it’s a pathway to success in finance.

iifra.com/blog

The post What is a Bond?, Types of Bonds, Why Should One Invest in it? appeared first on IIFRA's Official Blog - Indian Institute of Financial Research & Analysis.