The Financial Book

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Wally: A simple way to manage your money

We don’t think once to spend money on anything or everything, admit it! We barely keep track of our monthly expenses. When we get our pay-check at the beginning of the month, without thinking twice we over spend at by the month end we are on debt and the important part is we don’t even remember on what product or services we spend our money. We all been going through this situation, but with advancement of technology and simple discipline we can easily overcome this situation. Things we need to keep track is after we received our pay-check, we note it down & they stared spending on our bills, essentials thereafter. We need to track our spending on a daily basis. Make a habit to note every spending in your day to day life, this will not only help you track your money but also you can save a lot. After you make a very good habit of tracking your money, next time you can see your notes that how much balance you left and how may days to go for next pay-check. This way you can lead a better life & as well as peace of mind. This is what we call “Spending Tracker”.

Now you can also argue that who has time in our busy schedule to note down every thing we spent daily, we have lot others work to do. But let me tell you some facts on a daily basis an average person stare on their phone screens for 4-6 hrs, So I hope you can manage few seconds here & there if you are really wanted to save some bit of money. There are many Spending tracker app you can find on App Store or Google Play store. But the app I would like to recommend is Wally. Its available on both Apple App Store & Google Play Store. Real simple to use & it’s a very minimalist app. Just put your amount & select the category your done, you can also review your monthly overview of your spending. Its present you with even pie chart format for better understanding. Some sample screenshot is given below. You can also visit our YouTube Channel to watch the full demo & usability of the Wally app.

Disclaimer: Recommendation of the app is not sponsored. This is my personal experience sharing with you all.

Android: https://apk.support/download-app/me.wallynext.android

iPhone: https://apps.apple.com/us/app/wally-smart-personal-finance/id1178011327

YouTube: https://youtu.be/Kqxw1J5oYJU

Featured

Want to be Wealthy?: Start investing early!

Hello, everyone today I am going teach you how to become rich as early as possible in your life. There is no magic formula. Everybody wants to be filthy rich in their life, but nobody seems to know how? What is the way? Some would say work hard, other would say work smart! But what exactly should be done! So before moving forward I would like to give you a brief introduction about “Investment”.

A common person does his/her savings from the monthly income but never invest and sometimes they would end up with an excuse that they are unable to save as their expenses increased. The common formula of savings, we all know:

(Income- Expenses)= Savings/Investment

But after reading this articles one should try to apply this in a different way:

(Income- Savings/Investment) = Expenses

So, I would suggest try this from now. A common man could see the difference instantaneously in their life & are able to save more than previous and can see how they have also cut down their expenses. So how is saving money is different from investing money, and how it is important in our life. “One of the main reasons investing money is important is that it helps to create more money, as opposed to just saving money in a bank account”.

Now that everyone have understood what is investment, let me speak about how investing from an early stage will help to create wealth more and more than ever before. Hence I would give some reason how early investment can help:

Time allows you to take risk: Typically, when it comes to investing, ventures that are more volatile yield the highest return on investment. Investors, who have the time to recover if something were to go wrong, have the opportunity to make riskier moves. Those who begin to invest late in life are often inherently more cautious with how they invest their money.

Compound interest will make the difference: Essentially, compound interest is the interest earned on interest. By continuously reinvesting your earnings, you are exponentially increasing your return on investment, continuously reinvesting your earnings, you are exponentially increasing your return on investment. Let us understand the power of compounding with a simple example:

See the difference both are of same age, one started early and the other delayed. Ram who started investing early has a retirement value of 9cr and Sham who started investing at his later stage has a retirement value of 2.5cr. This the power of compounding.

Your spending habits will improve: Investing early allows you to develop disciplined spending habits by focusing on your budget and cutting expenses when needed. The goal here is to earn money by saving money.

Be a step ahead: Compared to your counterparts, who may have chosen to invest later in life, over time you will be able to afford things that others can’t.

Your quality of life will improve: Early investment will reduce the risk that you’ll be forced to make reckless choices to secure a stable retirement.

Hence start investing early to get retirement benefits early.

Telehealth care Industry: Reincarnation of Healthcare

The Corona Virus pandemic has changed the life we used to live. Things are not similar anymore. Several industries and companies have been drastically impacted. Companies and industries have been trying to cope up with various business models to sustain in this economy. Industries like Airlines, Restaurant, and hotels industry have suffered the most due to new norms of living of social distancing and cross-country restrictions. But the industry which is under huge pressure to serve under these new-normal conditions is Healthcare. This industry has gone through a lot of changes. US Healthcare system has acquired new ways to treat patients with proper medical facilities. At the beginning of this pandemic, the US Healthcare system was at its break, we even saw new headline Hospitals shutting their doors as they were unable to treat the huge number of patient footfalls in hospitals and other small clinics. Doctors are finding new alternatives to treat their patients. People are still falling sick not only due to Covid-19 but also due to various other diseases or injuries. Doctors are now broadly using Telehealth care/ Telemedicine services to treat their patients. This term can be defined as “Use of electronic communications and software to monitor and treat patients without patient’s visit”.

According to IBIS World research suggested that the Telehealth services had grown 34.7% annually from the period of 2014-2019. The market size in 2019 was $45B and it is projected to grow by $175B by 2026. Despite an increase in revenue in this segment Americans were not quite using the service until the novel coronavirus pandemic hit in early 2020. But now doctors suggest more patients visit the telehealth care services more, for example, if 20 patients are visiting the clinic, 50-60 patients are taking the telehealth care service. So, we see a major change in consumer mindset where social distancing is a new norm of our normal life. Patients are more willing to opt for the telehealth service and Hospitals and Healthcare companies are adopting this service which is making changes in their way of treating and monitoring the patients and ensuring the safety measures.

US Government is also encouraging the service as in March it decided that users can opt for this service without any extra cost and private health insurers also have to settle in full. This gives a boost to this industry as well. Major tech companies are partnering with various healthcare companies to provide necessary services to both users and companies eventually boosting this industry. There are various companies which can get benefited from all these factors, this is a major shift in the Healthcare industry, and companies benefitting the most are Teladoc (NYSE: TDOC); American Well (Amwell) Healthcare company.

Teladoc Healthcare, Inc

Teladoc Health, Inc. provides virtual healthcare services on a business-to-business basis in the United States and internationally. It covers various clinical conditions, including non-critical, episodic care, chronic, and complicated cases like cancer and congestive heart failure, as well as offers telehealth solutions, expert medical services, behavioral health solutions, guidance and support, and platform and program services. The company’s platform enables patients and providers to have an integrated smart user experience through mobile, Web, and phone-based accessed points. The company revenue has grown quite significantly over the past few years, which is shown below:

Though the company is still not making its profits yet there is huge potential to grow, seeing the revenue growth. The company’s EBDITA has also improved form ($62,848) in 2016 to ($35,490) in 2019, we could see the company reporting its profit by end of the year 2021. We are expecting the company to perform well given the current situation and the change in our mindsets. We except the stock to perform well as soon the company starts making profits, so we may see a huge upside rally. An investor can buy this stock for the long term with Buy and Hold strategy. [Credit Suisse has given a good rating in its reports Top Ten Companies to invest in 2020].

American Well (AMWELL) Healthcare

Similar to Teladoc, Amwell is also is into telehealth services. It is a privately held telemedicine company based in Boston. The company operates in all 50 U.S. states and works with 55 health plans, which support over 36,000 employers and collectively represent more than 80 million covered lives. Amwell raised $500M till now and is planning to raise $560M through IPO. According to S-1 filing with the SEC (Securities and Exchange Commission), the company aims to sell 35 million shares with a price band of $14-$16 per share which will bring gross proceeds of $490-$560M. In the first half of 2019, Amwell’s revenue was $69 million, and that jumped 77% to $122 million in the first half of 2020. Though the company is in a loss like Teladoc we expect IPO could also have a major listing gain and investors can hold the stock for the long-term.

Source:

https://www.sec.gov/Archives/edgar/data/1393584/000119312520228478/d943395ds1.htm

https://www.fiercehealthcare.com/tech/amwell-prices-ipo-at-up-to-560m

https://www.ibisworld.com/industry-insider/analyst-insights/the-current-state-of-the-telehealth-services-industry

https://en.wikipedia.org/wiki/Amwell_(company)

https://in.finance.yahoo.com/

https://www.cnbc.com/world/?region=world

Netflix & Chill!!!

Entertainment industry has undergone huge transformation since last decade and NETFLIX’s success is the proof of this evolution. NETFLIX has become very common in North America; consumers are ditching their DTH services and subscribing to NETFLIX. But surprisingly, majority of subscription of Netflix is not from North America. It has subscriber strength of 58.5 million in U.S whereas 78.6 million in rest of the world. Netflix revenue for the quarter ending December 31, 2018 was $4.187B, a 27.42% increase year-over-year. The net income for the twelve months ending December 31, 2018 was $1.211B, a 116.71% increase year-over-year but the quarterly net income declined 27.8% on year-over-year basis.

The company has gained enormous publicity worldwide(expanded over 190+ countries) but the North American giant NETFLIX is facing difficulties to get foothold in India. As per analysts India’s video streaming services market is expected to grow at $2.3 billion by 2023. But Netflix is not getting their piece of pie in this market. This is largely due to local competition and pricing issue over the other video streaming services.

Both Netflix and Amazon Prime video were launched in India in 2016. Thanks to the drastic drop in wireless data prices, these video streaming companies have grown faster in India than expected. Streaming services which were considered as luxury suddenly became more appealing to Indians. India is the second largest internet market after China that’s the reason more than 180+ video streaming services have launched in India over the past few years.

Hotstar, which streams everything from local channels to exclusives shows like Games of Thrones, is leading the market with 70% market share. Sony Liv holds 13%, Voot holds around 10%, Amazon Prime Video holds 5%(which also gives access to Amazon Prime music and Amazon Prime customer facilities), and international star Netflix has earned 1.4% share only.

Major hurdle is price sensitivity of Indian market. Hotstar offers its premium service at Rs 99/month, Amazon Prime video is offering at Rs 129/month whereas Netflix is offering at Rs 500-625/month. Hotstar also holds streaming rights of majority of IPL tournaments. Facebook had also offered $600 million to get digital rights of IPL but lost the bid to Star Network (parent company of Hotstar). Indian consumer has hunger for local content which Netflix fails to offer such local content. Netflix cameto India with a big bang, streaming their most popular exclusive shows like House of Cards & Narcos(Home production of Netflix) but failed to win the hearts of Indian consumers, but recently Netflix has brought local exclusive contents like Sacred Games, Ghoul, etc which were a big hit and this has increased their paid subscriber base in India.

But even with good quarterly result (Q4 2018), Netflix could not impress the investors and shares were down by 4% after announcement of results. Investors were expecting more than strong subscription upside. The company expects domestic and international paid subscriber addition of 1.6 million and 7.3 million in first quarter of 2019. We see 20% upside over next 12 months using a long term earnings valuation framework and subscriptions are expected to reach around 300 million by 2026 end. So the market price can be estimated around $700 by 2025(Current Market Price on 13 February $359.97). Netflix’s growth story is incomplete without its viewers and its future depends only on Consumers’ gratification.

IPO: How to apply?

Continuing inflationary pressure has surged the equity market investment as equity shares deliver higher rate of return as compared to other havens. However, the investors have faced many complexities in understanding the equity market. We have tried to make the concept of equity shares a cakewalk through our YouTube videos, just click on the link to get the elementary knowledge of Equity market:

What is a Share? Why should we invest? (link)

Benefits of owning a share!! (link)

In order to be able to invest in share market in India, the following procedure is need to be followed.

Investor has a choice of timing for investment in equity shares, firstly when the shares are issued to the public to raise capital and secondly when these shares are traded on the stock exchange. The primary objective of investing is to buy the shares at low price and sell at a higher price. If a stock promises potential future growth and is under-priced in comparison to it’s book value during its Initial Public Offering (IPO), then it is most profitable time to buy the stock.

A common investor can apply for an IPO of a company in following procedure:

The first step is to choose the IPO that applicant wishes to apply for. One can find the list of upcoming IPOs on Securities and Exchange Board of India’s (SEBI’s) website. The best way to decide is by going through the companies’ prospectus available on SEBI’s site. The prospectus gives a fair idea about the company’s business plan and its purpose.
After the selection of desired IPO, investor has to ensure sufficient funds in his or her account.
A Demat account is a prerequisite to apply for an IPO. A Demat account is nothing but a facility to store your stocks and financial securities electronically. The account can be opened by submitting your PAN card, Aadhaar card, address and identity proofs.
Now, IPO can be applied through Trading or bank account. Sometimes trading, demat and bank accounts are clubbed together by the banks for better facilities. Applicant needs to bid while applying for shares, as per the lot size mentioned in the prospectus. Lot size is the minimum number of shares applicant has to apply during an IPO.
The company usually sets a price band. The upper limit is known as the cap price while the lower is called floor price. Applicant has to bid for shares in this price range.
When this application is submitted, applicant’s account doesn’t get debited until shares are allotted to him or her. During the IPO process banks are authorized to block the amount of application in applicant’s account as per ASBA (Applications Supported by Blocked Amount, a process developed by the India’s Stock Market Regulator SEBI for applying to IPO).
If the applicant gets full allotment then he will receive a Confirmatory Allotment Note (CAN) within six working days after closure of the IPO process. On the other hand if the applicant gets fewer shares than he had applied for or fails to get allotment then bank will unlock the bid money (in part or full).
Final step is to wait for the listing of shares on stock exchanges, which is done within seven days from the finalization of issue. After the listing investor can either sell the shares (partly or fully) or keep his money invested in that company.

Government Bonds: A substitute for Bank FDs or not!!!

In India, maximum percentage of investors are risk averse. “Willing to invest, unwilling to take risk” is the proverb describing the nature of Indian investors. Naturally whenever we think of risk free investment options bank fixed deposits are given preference. But there are many other financial instruments which are safer than your bank FDs. Yes, there is a risk associated with bank FDs. Most of the investors don’t know about this so let us tell you that your money kept with commercial bank in form of bank deposits such as FDs, RDs, & SBs are insured up to an amount of 1 lakh, which means in case of any uncertain event Banks are only liable to pay you upto only 1 lakh for each account even if you had more amount in the account at the time of incident. So, to avoid this risk we can choose sovereign bonds which are issued by Government of India. When government needs funds, it usually sells bonds to public. When you invest in these bonds government pays interest & repays the principal on maturity. These are safe heaven debt instrument. Sovereign rating makes this financial instrument safest bond. These bonds are issued with coupon which is interest rate paid annually, quarterly or half yearly. Unlike commercial banks, government is liable to pay the principal along with the interest on maturity even in case of uncertain incidents. So, technically sovereign bonds are safer than bank FDs. The GOI issues these bonds from time to time for periods of 5 years, 7 years and 10 years maturity. The yield on these sovereign bonds at which they are issued depends on 10year G-sec yield (the benchmark index for every bond coupon rate). Sovereign bonds usually have a spread of 15 bps from the benchmark. Let us look at the graphs & figures of 10year G-sec yield of sovereign bonds to get a better picture:

There are various types of Government bonds, let us discuss the types in the following points for having a clear conception:

Fixed or Floating rate bonds– Fixed rate bonds have fixed coupon rate till maturity, on contrary Floating rate bonds have fluctuating rate linked with the G-sec yield up to maturity.
Zero coupon bonds– These are deep discount bonds which are issued at a discount from their face value having no coupon but the at the time of maturity the face value is paid back to the investors. This difference between the issue price and face value is the gain for investors.
Capital Index bonds– These are inflation linked bonds whose yield increase or decrease on the basis of CPI (Consumer Price Index).
Callable bonds– Callable bonds are those where issuer has an option to buy back the bonds from investors after a certain period of time before maturity.
Puttable bonds– Puttable bonds are those where the investor has the right but not obligation to demand for early repayment of principal.

But as all financial instruments come with their own advantages & disadvantages there are few merits and demerits of sovereign bonds as well.

Advantages:

These are risk free securities. Government securities are the best option for investors looking for risk free return.
The returns are good in long term, sometimes even better than bank deposits.
There is good liquidity in these government bonds.
Ideally good for portfolio diversification.

Disadvantages:

The yield or the interest rate paid is very low in comparison with other investment avenues.
Government bonds can lose value for a particular time if inflation rises.
The interest earned is taxable.

How to invest?

We can subscribe to these bonds from our trading – demat account in electronic form.
Currently GOI is going to issue 7.75% taxable bond for a maturity of 7 years starting from 1 Jan 2019.

How to choose Mutual Fund?

Mutual Funds are perfect financial instruments for creating wealth only if we choose the right one. In India we have around 44 Asset Management Companies offering more than 9000 funds in various asset classes such as equity, Debt, gold, etc. Too many choices make it more confusing for common investors to pick up the exact fund which can cater to their needs properly. But with the help of internet solution is at your door step if you have the questions in your mind. We have prepared a set of questions to make this tedious task a bit easier for you, so just ask yourself and act accordingly.

• What is your Investment objective? The first task is to identify the investment objective. Each person has his own purpose behind the investment, viz. marriage, child’s education, retirement etc. Each of these financial goals has distinct requirement. For example, if you are at age of 25 and you want to build your retirement corpus, then you should choose an equity based mutual fund which is high risk & high return product. The risk or volatility will automatically get smoothed out as you will remain invested for longer time period & return on investment will be much higher. On the other hand if your child is 10 years old and you need to invest for his or her higher studies then you can go with hybrid or balanced funds having moderate risk or debt funds with minimal risk. Hence pick a mutual fund, allot it a particular financial goal & invest accordingly.

• How long you want to stay invested or Time Horizon? The duration for which you are willing to keep your money invested will determine the type of fund you must choose. The more time you stay invested the more return you get. It’s will have compounding effect on your investment. For example; if you want to buy a car (short-term goal), you can settle for a balanced fund which is mixture of equity & debt. Because for short period of time, investing in debt will reduce the risk of loosing money but at the same time equity will try to maximize your return. On contrary, pure equity mutual funds can be chosen with longer time horizon for higher returns.

• How much liquidity you need in your investment? There are basically two types of mutual funds, one is open ended in which you can invest whenever you like & make withdrawal anytime. Another is close ended fund which has a lock in period and open for a certain period of time to make investment or withdrawal. It is recommended to invest in close ended fund for long term financial goals like buying a house, child’s education and whereas open ended mutual funds are suitable for short term.

• What is your desired return & risk appetite? As earlier stated, there are various asset class. Every asset class has different risk & return characteristics. Equity has high risk & high return whereas Debt has low risk & low return. Those who are aggressive opt for equities as share price fluctuations increase their profit margin but conservative investors always stay out of the fluctuations and invest in nearly fixed-return investments. That is why aggressive investors gain more than the conservative ones but for this aggressive investors have to experience the jolts of volatility which are avoided by the non-equity investors.

These queries are enough to have a clear idea of an investor’s requirements so that he or she can make the best investment choice in mutual funds. But please note that the answers will vary from person to person, therefore, ask yourself and choose on the basis of your own needs. For learning the process of Mutual Fund investment read our article “Mutual Funds Decoded” https://financialbook.in/2018/11/10/mutual-funds-decoded/

US Markets Falls when Economy is at its Peak, Why? Is it a good time to invest?

In recent times, we have seen biggest correction in the U.S. market since November 2016. On 3^rd Oct 2018, Dow Jones made a life-time high of 26,952 which was appreciated by the President Donald J. Trump in his tweet, “The Stock Market just reached an All-Time High during my Administration for the 102nd Time, a presidential record, by far, for less than two years. So much potential as Trade and Military Deals are completed.” But index couldn’t digest this hike and within a month of its life time high, on 29^th Oct 2018 its slipped more than 11% & made a record low of 24,122. Same goes with other major indices Nasdaq composite and S&P 500. As the market went down, numerous reasons came into lime light, rising bond yields, fears of escalating tensions with China over trade and third time rate hike by Fed. All these factors come into the picture after the incident has taken place. These are news driven factors but what about the economic conditions of the country?

On contrary to the blood bath in the market, the US economic data had shown strong set of numbers during this quarter. Corporate earnings were good, US quarterly GDP growth rate made a high at 3.5%, Unemployment rate was also at its all-time low of 3.7% and Inflation was around 2.3% and the US currency also became strong. This leaves common investor wondering, if the economy is doing well then stock market should also follow the suit. No, not necessarily, before explaining this point we would like to point out that there are two types of information available in the market:

The information for the masses
The information for the classes

For investing in stock market, we need to follow information for the classes, not for the masses. Media will always try to show you the bad picture of everything & will always try to confuse you. “The masses” believe that “if the economy is doing better, so the stock market should also do better too.” But learned investors say “An ‘economist’ is a trained professional paid to guess wrong about the economy.” The Oracle of Omaha, Warren Buffet doesn’t think about the economic numbers while investing in stocks, he always looks for the company growth rates & earnings. There is no correlation between the economy and stock market because former is macro concept and latter is micro. Peter Lynch, famous stock market investor & money manager has said; “If you spend 13 minutes thinking about economic forecast, you’ve wasted 10 minutes.” Now let’s look out the crash of 2008.

In the above chart you can see that in 2008, when market crashed, US economic data showed that economy was doing really well. But in reality, it was in a bubble situation, & finally the bubble burst. After that in 2009, the market was trading at all-time low. There was blood all over wall street, no one wanted to invest in stock market. The Great Recession spread depression & pain among the investors which forced them to dump their stocks. Unemployment came at its highest level and suddenly just after a year of good economic data economy was doing worse. GDP growth rate fell to record low.

But to everyone’s surprise the market went up by 60% in the end of that year itself. Who was buying stocks at that point of time and why? The Insiders were buying at that time, the people who follow information for the classes not for the masses. They are the big shots investors, institutions like Goldman Sachs, J.P. Morgan Chase etc. It’s a fact that only 20 large funds do the world’s 80% trading. They have between 50-100 billion USD under management. These institutions employ the smartest people in the world to analyse the future economic trend because stock market is forward looking and we can anticipate the upcoming economic scenario with stock market reaction. The moment any data is released, the market has already reacted to it. That is why investors like Warren Buffet are always ahead in the game. Hence, the best time to invest in stocks market is when everything is bad. When nobody wants to buy, they buy & vice versa because at that time you can get the shares of really profitable companies at discounted prices. Always remember what the American Oil tycoon, John D. Rockefeller had said, “The way to make money is to buy when blood is running on the streets.”

Research work done by Soham Sharma & Sweta Sharma, Founding members of The Financial Book.

Editor: Sweta Sharma, writer & Editor in Chief of The Financial Book.

Data Source: Bloomberg, Investing, CNBC Network.

Mutual Funds Decoded

In past 2-3 years we have seen huge growth in Indian Mutual Fund industry. In spite of being a cash rich country, Indians mostly chose to keep funds in banks rather than investments. But with strengthening of economy interest rates on Bank deposits have fallen, which created the urgent need of another investment vehicle. Mutual funds filled up this empty space of safer investments. As per AMFI (Association of Mutual Funds in India) Average Assets Under Management (AAUM) of Indian Mutual Fund Industry for the month of September 2018 stood at ₹ 24,31,342 crore. But most of the investors have invested on the basis of their own perception without having proper knowledge of entire process of MF investment.
Let us learn a detailed explanation of What are Mutual Funds? – By definition, A mutual fund is a professionally managed investment fund which pools money from various investors for the purpose of investing in securities such as stock, bond, money market instruments etc. to generate return on investment for the investors.
The functioning of MF has been explained in the pictorial format given below:

Explanation:
Who are investors?
Any person who wants to invest money into assets which generate returns on invested amount.
Mutual funds provide a wide range of choices to the investors on the basis of risks and returns. Once the investor chooses a particular mutual fund he gets two options- lump-sum investment where a sum of money is invested at a time and SIP(Systematic Investment Plan) where a fixed sum of money is invested periodically.

Who is a Fund Manager?
A Fund Manager is the person who is responsible to manage the sum of money invested into a particular fund. His objective is to generate returns on that pool of money.
He has to select market linked securities such as stocks, bonds, money market instruments depending upon the type of fund. Basically, there are three types of funds:

Equity (Stocks)
Debt (Bonds, Debentures)
Hybrid (A mixture of Equity & Debt)

Returns are generated through interest on debts, dividend on shares and capital gains. These returns are then passed backed to the investors after keeping a percentage by the asset management companies for their service. In nutshell, the investors don’t need to take the trouble of direct investment in equities or debts, they can rely upon the professionals for their investments.
But, there are risks of market volatility and fraudulent activities and so this is a humble request to all investors “Mutual Fund investments are subjected to market risk please read all schemes related documents carefully”.

Fixed Deposits Or Fixed Income: Choose wisely !!!

Debt Market: India

There are two kinds of investors in the market one is risk-taker & other is risk-avoider. The Risk-taker (Aggressive Investor) always makes investment in risky instruments like equity for instance & end up making either huge profits or huge losses. But those who are risk avoiders (Conservative Investors) always choose an option which is least risky. India is a risk averse country especially when it comes to investment and hence most of the investors park their funds in Fixed Deposits due to its least risk feature. But there are various debt instruments which Conservative Investors can opt for, to earn higher returns than FDs.

Before proceeding further let us explain; “What are Debt instruments?”; Debt Instruments are obligation of issuer of such instrument as regards to certain future cash flow representing Interest & Principal, which the issuer would pay to the legal owner of the Instrument. Today let’s discuss debt investment opportunities prevailing in India:

Bonds: It is a debt instrument which is simply called “IOU”- I Owe You, in which an investor agrees to lend money to a company or government for a particular period of time in exchange of pre-determined interest rate. Various types of bonds issued in the market are – Government Bonds, Municipal Bonds, Institution Bonds, Corporate Bonds. Each bond has different risk & return involved in it. For example, Government bonds having sovereign rating (backed by Government) have the lowest risk & lowest return. On the other hand, there are corporate bonds which may vary in terms of risk return depending upon financial health of company.
Debentures: These are similar to bonds but they are mostly unsecured loans unlike bonds which are secured & backed by assets of the company. Simply put, debenture is a long-term debt instruments used by Government or large companies to obtain funds which are not secured by the any asset. These instruments are little riskier than bonds as they are not backed by any lien of assets. There are some more differences between bonds & debenture which you can read from our earlier blog; https://financialbook.in/2017/05/09/bonds-vs-debentures-whats-the-difference/
Commercial Papers (CP): CPs are also unsecured money market instruments which are issued in form of promissory notes. These were introduced in India in 1990s & are used for short term borrowings by the companies. Investment is done in denomination of 5 lakhs or more for a duration ranging between 15 to 365 days.
Certificate of Deposits(CD): CDs are financial products usually issued by banks, institutions or Credit Unions. These are regular term deposits often for 3 months, 6 months,1 year & 5 years having fixed interest rates which are usually higher than the rate offered by banks on Fixed deposits.
Government Securities: Commonly these instruments are known as G-secs which are issued by RBI on behalf of Government of India. These include Central G-sec, State G-sec, Treasury Bills. These are mostly issued in face value & do not carry default risk as they are sovereign rated. Maturity ranges from 2 years to 30 years. There is no TDS as well.
National Savings Certificate: NSC is a fixed income long-term investment. It is issued by authorized post offices with a rate of return of 8% for maturity period of 6 years. It needs minimum investment of 500 and there is no maximum limit. Its also qualifies for deduction u/s 80C. There is no TDS also.

These points have already highlighted that investment in debt market is much better than the fixed deposits. So rather than going for FDs investors must evaluate the profits that can be earned from debt instruments without using aggressive investment techniques.

Investment Opportunities: A Beginner’s Guide

Investment is the only means of wealth creation but the usually investors get confused by multiple schemes available in the market. People often invest their hardened money in risky investment plans for higher returns and blame the investments for eroding their capital. So to start investing we need to focus on our desired returns and risk appetite. Each investment option has its own rate of return and risk factor and a perfect portfolio consists of diversified investment avenues for optimum level of return. A million dollar question :

Here are some of the best investment options available in the market:

Equity: Equity market is the most profitable and riskiest investment avenue present in the financial market. It requires fair knowledge and experience to make money in the equities since it depends upon domestic & international scenarios and investor must know the exact time to enter into and exit from the market. Otherwise capital can be swept off within minutes. The investor receives dividends (portion of company’s profit) while holding the shares and capital gains if the shares are sold at profit. Both are taxable.
Debts: This is low risk low return asset class. Debt instruments are basically investment tools where large number of investors lend money to Government and corporate for a particular period of time. There are various types of debt instruments like Secured & Unsecured debentures, Government bonds & Corporate bonds, Treasury Bills, Non- convertible debentures, Fully or partly convertible debentures. The yield on investment varies from 6%-10% depending on the debt instrument. Longer tenure attracts high yield where as shorter tenure has lower yield. It’s also recommended to check the ratings of the debt instrument. Sovereign bonds or Government debts having good ratings have lower risk & low return whereas Corporate bonds has higher yield with higher risk.
Mutual Funds: Mutual Funds are professionally managed investment funds which invest money in equities, debentures, bonds etc. There are different types of Mutual Fund Schemes – Equity Mutual Fund (investment in equities), Debt Mutual Fund (investment in debt-instruments), Hybrid Mutual Fund (mix of debt and equity) & Solution-Oriented Mutual Funds (devised for particular goals). The return varies depending upon the type and tenure of investment.
National Pension System (NPS): This investment option is most suitable for those who want to plan for their retirement as it has been designed to invest the money in various asset classes- equity, bonds, government securities etc. and it matures the moment investor turns 60 years old. The investor can choose the Auto Choice option where assets are chosen on the basis of his or her age whereas in Active Choice option the ratio of asset classes can be decided by the investor. The returns are based on the corpus accumulated. It offers tax benefit under section 80C for maximum of ₹1.5 lakh and an additional tax benefit of ₹50,000 under section 80CCD.
Public Provident Fund (PPF): It is widely used investment scheme having sovereign guarantee with a lock-in period of 15 years, currently offering interest rate of 7.6% p.a. (April-June 2018). It offers tax benefit under section 80C of Income Tax Act exempting interest earned and maturity amount.
Bank fixed deposit (FD): Bank FD is another popular investment option offering fixed returns. One can easily invest in FDs by visiting the branch and or via net banking. State Bank of India is offering interest rate between 6.40% and 6.75% for tenures of 1 year to 10 years. There is an extra benefit of 0.50% for senior citizens. This interest amount is subject to tax deducted at source (TDS).
Gold: It is one of the most ancient modes of investment in our country. But now we can buy it in paper and digital form as well. Although, the return on gold investment has gone down in recent years, it is still used to hedge risk in the portfolio. Gold is the most important asset class in your portfolio when markets are on bearish mode as it acts as a cushion against the market risk.
Real Estate: Real estate is one the largest asset in a portfolio. The Real estate market in India is about to touch 180 billion by 2020 at an estimated CAGR of 11.2%. Usually, real estate investment is mistaken as purchase of house property but it also includes the land or building bought for commercial purposes.Total demand for housing is estimated at 4.2 billion by 2020 in India. In terms of costs and returns Real estate market varies from place to place. For example, housing demand in Delhi (NCR) is the highest in the country , the properties are sold like hot cakes due to scarcity of space. But the cities Hyderabad, Kolkata, Chennai & Noida still have around 45000 unsold homes either due to high prices or bad location irrespective of good demand. There are various other reasons behind variation in prices of properties. Thus it is always suggested to consult a real estate broker to crack a profitable deal.

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