Best Mutual Funds to Invest in 2021

Best Mutual Funds to Invest in 2021

Mutual fund investments are here to stay. They have become the most popular investment avenues for investors given their –
  • Diversified portfolio
  • Expert fund management
  • Types of available schemes
  • Ease of investments through SIPs
  • Returns offered (Of course!)

In fact, compared to the mutual fund industry of the developed countries like the USA, Europe and other Asian countries, the mutual fund industry of India has shown the maximum growth.

It has grown from USD 92 billion to USD 317 billion at a CAGR of 17% from 2008 to the first quarter of 2019. Have a look –

(Source: https://www.edelweiss.in/insight/chart-of-the-day-2/indias-mutual-fund-assets-show-highest-growth-in-the-world-280249)

Even now, in the post-COVID world, as the financial markets are regaining their lost lustre, mutual funds dominate in the investment segment as more and more investors divert their funds towards different types of mutual fund schemes.

The next year is around the corner, and, if you are looking for the best mutual funds to invest in 2021 look no further.

Here is a compilation of some of the best mutual funds in 2021 for your investment needs under different categories –

 

1) Equity Mutual Funds

Let’s consider the equity mutual fund category first, which is the most popular category among investors. Equity mutual funds have a high-risk profile which they compensate with the potential of high returns.

Moreover, ELSS schemes provide tax benefits to investors and are, therefore, highly favoured.

So, let’s have a look at the different types of equity mutual funds and the best funds in each category –

 

  • Large Cap Funds

Large cap funds are those that invest in the top 100 companies of the stock market.

These funds are better placed to weather out volatile markets as the underlying assets belong to established companies that can withstand a bearish phase.

The best performing mutual funds under this category are as follows –

Name of the fund (all are Regular Growth funds) 1-year return* 3-year returns*
Axis Bluechip Fund 14.80% 13.87%
Kotak Bluechip Fund 13.36% 8.85%
ICICI Prudential Bluechip Fund 11.78% 7.10%
Canara Robeco Bluechip Equity Fund 18.99% 13.19%
SBI Bluechip Fund 14.07% 7.41%

(Source: https://www.moneycontrol.com/mutual-funds/performance-tracker/returns/large-cap-fund.html)

 

  • Mid-cap Funds

Mid-cap funds invest in companies ranked between 101 and 250 on the stock exchange. These funds have a higher risk profile compared to large cap funds and also provide higher returns.

The top funds in this category are as follows –

Name of the fund (all are Regular Growth funds) 1-year return* 3-year returns*
Axis Midcap Fund 22.98% 13.26%
Kotak Emerging Equity Scheme 22.56% 6.55%
DSP Midcap Fund 25.55% 7.87%
PGIM India Midcap Opportunities Fund 48.46% 9.58%
Invesco India Midcap Fund 23.35% 7.55%

(Source: https://www.moneycontrol.com/mutual-funds/performance-tracker/returns/mid-cap-fund.html)

 

  • Small Cap Funds

Small cap funds invest in stocks of companies which are in their growth phase. These companies have a high potential of growth and so promise a high return generating potential.

On the other hand, there is a high risk of capital erosion in volatile markets since small cap stocks face maximum erosion when the markets fall.

So, these funds are suitable for long term investors having a high-risk appetite.

The top small cap mutual funds to invest in 2021are as follows –

Name of the fund (all are Regular Growth funds) 1-year return* 3-year returns*
Kotak Small cap Fund 33.84% 6.36%
Nippon India Small Cap Fund 28.32% 2.50%
Axis Small Cap Fund 22.53% 10.80%
DSP Small Cap Fund 36.53% 2.28%
ICICI Prudential Small Cap Fund 21.96% 1.94%

(Source: https://www.moneycontrol.com/mutual-funds/performance-tracker/returns/small-cap-fund.html)

 

  • Multi-cap Funds

Multi-cap funds are schemes which combine large cap, mid-cap and small cap stocks in their portfolio for diversified holdings.

The asset allocation to each type of stock is a minimum of 25% and then the fund manager is given the choice to allocate assets as per the market dynamics.

The best mutual funds in 2021under the multi-cap category is as follows –

Name of the fund (all are Regular Growth funds) 1-year return* 3-year returns*
Parag Parikh Long Term Equity Fund 31.19% 14.46%
PGIM India Diversified Equity Fund 24.57% 11.54%
UTI Equity Fund 26.62% 14.35%
Canara Robeco Equity Diversified Fund 11.15% 11.36%
DSP Equity Fund 17.53% 9.93%

(Source: https://www.moneycontrol.com/mutual-funds/performance-tracker/returns/multi-cap-fund.html)

 

 

  • ELSS Schemes

Equity Linked Saving Schemes are tax-saving mutual fund schemes which allow a deduction on your investments under Section 80C up to a maximum of Rs.1.5 lakhs. The scheme has a lock-in period of 3 years and offers good returns on investment.

Here’s a complete guide on taxation in mutual funds

The leading ELSS schemes for 2021 are as follows –

Name of the fund (all are Regular Growth funds) 1-year return* 3-year returns*
Axis Long Term Equity Fund 17.15% 11.99%
Canara Robeco Equity Tax Saver Fund 23.46% 12.78%
Mirae Asset Tax Saver Fund 19.50% 11.06%
Quant Tax Plan 40.02% 12.85%
Invesco India Tax Plan 15.22% 8.37%

(Source: https://www.moneycontrol.com/mutual-funds/performance-tracker/returns/elss.html)

 

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2) Debt Mutual Funds

Contrary to equity mutual funds, debt mutual funds invest in debt instruments, i.e. instruments that have a fixed rate of return on investment. That is why debt funds do not face volatility risks.

However, these funds are prone to credit risk and interest rate risk and so the returns from debt funds are not guaranteed. Debt mutual funds come in different categories, mainly based on the average maturity period of their underlying assets.

So, let’s have a look at which mutual funds to invest in 2021 under the debt category –

 

  • Liquid Funds

If you are planning to invest for a short period of time, liquid mutual funds are ideal.

They promise liquidity and good returns on your surplus funds over the short period for which you park your investments.

If the market becomes volatile and you want to book your profits, you can switch to liquid funds to protect the returns generated from your investments.

You can also use these funds for temporary investments and the best funds for 2021 include the following –

 

Name of the fund (all are Regular Growth funds) 1-year return* 3-year returns*
Quant Liquid Plan 5.04% 6.44%
Nippon India Liquid Fund 4.39% 6.20%
IDBI Liquid Fund 4.64% 6.26%
Franklin India Liquid Fund 4.49% 6.29%
Tata Liquid Fund 4.44% 6.17%

(Source: https://www.moneycontrol.com/mutual-funds/performance-tracker/returns/liquid-fund.html)

 

  • Short duration funds

These funds invest in instruments that have a maturity ranging from 1 year to 3 years. The returns are better than liquid funds since the instruments have a higher duration.

Some of the best short duration funds for 2021 are as follows –

Name of the fund (all are Regular Growth funds) 1-year return* 3-year returns*
HDFC Short Term Debt Fund 11.04% 9.07%
ICICI Prudential Short Term Fund 10.81% 8.48%
Kotak Bond Short Term Fund 10.09% 8.45%
Aditya Birla Sun Life Short Term Fund 10.52% 8.47%
Axis Short Term Fund 10.17% 8.57%

(Source: https://www.moneycontrol.com/mutual-funds/performance-tracker/returns/short-duration-fund.html)

 

  • Corporate Bond Funds

Corporate bond funds invest in corporate bonds issued by established companies for their financial needs. Fund managers invest in high rated corporate bonds for maximum gains at minimal risks.

Some of the best corporate bond funds are as follows –

Name of the fund (all are Regular Growth funds) 1-year return* 3-year returns*
HDFC Corporate Bond Fund 11.85% 9.25%
Aditya Birla Sun Life Corporate Bond Fund 11.87% 9.31%
L & T Triple Ace Bond Fund 12.91% 9.93%
IDFC Corporate Bond Fund 11.66% 8.62%
Sundaram Corporate Bond Fund 10.91% 8.69%

(Source: https://www.moneycontrol.com/mutual-funds/performance-tracker/returns/corporate-bond-fund.html)

 

  • Gilt Funds

Gilt funds invest in Government securities and promise the highest safety in terms of credit risk. They are, usually, long term investment avenues where the underlying assets have long maturity tenures.

The best-gilt funds to invest in 2021 include the following –

Name of the fund (all are Regular Growth funds) 1-year return* 3-year returns*
IDFC Government Securities Fund 15.19% 10.80%
DSP Government Securities Fund 14.64% 11.04%
Edelweiss Government Securities Fund 14.52% 10.25%
ICICI Prudential Gilt Fund 14.25% 9.53%
Axis Gilt Fund 13.54% 9.48%

(Source: https://www.moneycontrol.com/mutual-funds/performance-tracker/returns/gilt-fund.html)

 

3) Hybrid Mutual Funds

Hybrid mutual funds combine equity as well as debt instruments and give you a diversified portfolio. While the equity component of the portfolio allows better returns compared to debt funds, the debt component reduces the risk compared to pure equity funds.

Thus, if you are looking for a moderate risk-return profile, hybrid mutual funds are the best mutual funds to invest in 2021.

Hybrid funds are divided into different categories depending on their asset allocation. So, let’s have a look at the best funds in popular hybrid categories –

 

  • Aggressive Hybrid Funds

Aggressive hybrid funds are those that invest primarily in equity stocks.

At least 65% of the portfolio is allocated to equity stocks and instruments while the remaining is allocated to the debt.

These funds offer equity taxation and attractive returns and some of the best aggressive hybrid funds for 2021 include the following –

Name of the fund (all are Regular Growth funds) 1-year return* 3-year returns*
Quant Absolute Fund 29.78% 11.49%
Canara Robeco Equity Hybrid Fund 17.26% 10.41%
DSP Equity and Bond Fund 16.41% 9.41%
BNP Paribas Substantial Equity Hybrid Fund 13.06% 9.92%
Mirae Asset Hybrid Equity Fund 12.46% 8.78%

(Source: https://www.moneycontrol.com/mutual-funds/performance-tracker/returns/aggressive-hybrid-fund.html)

 

  • Conservative Hybrid Funds

Contrary to aggressive funds, conservative hybrid funds invest primarily in debt instruments and a part of the portfolio in equity. The fund is suitable for those looking for a low-risk investment with returns better than those provided by debt funds.

The top conservative hybrid funds are as follows –

Name of the fund (all are Regular Growth funds) 1-year return* 3-year returns*
Canara Robeco Conservative Hybrid Fund 13.31% 8.71%
Baroda Conservative Hybrid Fund 13.85% 9.00%
Kotak Debt Hybrid Fund 13.95% 7.84%
SBI Debt Hybrid Fund 13.39% 6.54%
Axis Regular Saver Fund 12.83% 6.21%

(Source: https://www.moneycontrol.com/mutual-funds/performance-tracker/returns/conservative-hybrid-fund.html)

 

  • Arbitrage Funds

Arbitrage funds are those which invest in arbitrage opportunities and bank on the price difference between the stock’s value in the spot and futures market.

Arbitrage funds are a good bet in times of market volatility when the price difference between spot and futures market increases thereby promising better returns.

The top arbitrage funds for 2021 are as follows –

Name of the fund (all are Regular Growth funds) 1-year return* 3-year returns*
ICICI Prudential Equity Arbitrage Fund 4.17% 5.49%
Nippon India Arbitrage Fund 4.16% 5.75%
L & T Arbitrage Opportunities Fund 4.60% 5.60%
UTI Arbitrage Fund 4.22% 5.59%
Edelweiss Arbitrage Fund 4.35% 5.60%

(Source: https://www.moneycontrol.com/mutual-funds/performance-tracker/returns/arbitrage-fund.html)

 

4) Other Mutual Fund Schemes

Besides the popular equity, debt and hybrid mutual fund schemes, if you are looking to invest in other, unconventional mutual fund schemes, there are many options.

You can choose international funds, gold funds, sectoral funds, index funds and other types of funds which have a different asset allocation.

Let’s check out the best mutual funds to invest in 2021 under the special category of mutual fund schemes –

Read more about how to choose the right mutual funds as per your financial goals.

 

  • International Mutual Funds

International mutual funds are ideal if you want investment exposure in international markets. These funds invest in stocks of companies listed in international stock exchanges usually by investing in international funds.

Let’s check out some of the best international funds which you can choose in 2021 –

Name of the fund (all are Regular Growth funds) 1-year return* 3-year returns*
PGIM India Global Equity Opportunities Fund 69.30% 30.31%
Franklin India Feeder – Franklin US Opportunities Fund 45.72% 26.46%
Edelweiss Greater China Equity Off-shore Fund 60.08% 23.71%
DSP US Flexible Equity Fund 26.81% 17.12%
Kotak Global Emerging Market Fund 32.76% 11.50%

(Source: https://www.moneycontrol.com/mutual-funds/performance-tracker/returns/fund-of-funds.html)

 

  • Gold Funds

As the name suggests, gold funds invest in gold instruments to offer you returns linked to the price movement of gold. Gold mutual funds are, usually, fund of funds which invest in gold ETFs to generate returns.

Some of the best gold funds are as follows –

Name of the fund (all are Regular Growth funds) 1-year return* 3-year returns*
DSP World Gold Fund 39.81% 18.21%
Axis Gold Fund 27.61% 18.82%
HDFC Gold Fund 27.42% 17.83%
Kotak Gold Fund 27.20% 18.67%
ICICI Prudential Regular Gold Savings Fund 27.00% 17.67%

(Source: https://www.moneycontrol.com/mutual-funds/performance-tracker/returns/fund-of-funds.html)

 

  • Sectoral Funds

Sectoral funds are equity-oriented mutual funds which invest in stocks of companies engaged in a particular sector.

For example, banking funds invest in banks and NBFCs while pharma funds invest in pharmaceutical companies.

Some of the best sectoral funds for investment in 2021 include the following –

Name of the fund (all are Regular Growth funds) 1-year return* 3-year returns*
ICICI Prudential Technology Fund 58.57% 26.23%
Aditya Birla Sun Life Digital India Fund 49.14% 24.80%
Franklin India Technology Fund 50.64% 23.93%
Tata India Pharma & Healthcare Fund 59.38% 20.11%
Nippon India Pharma Fund 64.49% 21.67%

(Source: https://www.moneycontrol.com/mutual-funds/performance-tracker/returns/sectoralthematic.html)

These are some of the best mutual funds to invest in 2021. These schemes have been picked based on their returns, consistency and performance over a long term period.

You can select one or more of these funds and build up a diversified mutual fund portfolio. When investing, however, keep in mind the tax implications of your investments. Equity funds attract equity taxation wherein-

  • Short term capital gains, if redeemed within 12 months, are taxed at 15%
  • Long term capital gains, if redeemed after 12 months, are tax-free up to Rs.1 lakh. Excess returns are taxed only at 10%

Debt funds, on the other hand, have a different taxation norm. Under such funds –

  • Short term capital gains, if redeemed within 36 months, are taxed at your income tax slab rate
  • Long term capital gains, if redeemed after 36 months, are taxed at 20% with the benefit of indexation

So, understand the taxation rules and choose the best schemes for a wealth maximizing portfolio.

(Disclaimer – The funds mentioned in the article are just our recommendations based on the returns offered by them. These recommendations do not certify any fund to be the best.) (*Returns as on December 2020)

Mutual Funds Sahi Hai but Are Your Financial Planning Sahi Too

Here’s Where to Invest your Money in 2021 – Recommended by Certified Financial Planner

Here’s Where to Invest your Money in 2021 – Recommended by Certified Financial Planner

The year 2020 passed in a blur. While it started on a positive note, the Coronavirus pandemic and the subsequent lockdowns brought about an economic slowdown in the country.
Even the financial markets buckled under the global effect of the pandemic. The BSE and NSE, which were at their highest values at 42,273 and 12,362 in the first month of January, fell by 38% when the pandemic struck.
The tourism, hospitality and entertainment sectors also fell by more than 40% due to lockdowns and transportation restrictions. (Source: https://www.researchsquare.com/article/rs-57471/v1.pdf). Though the markets are regaining their luster slowly, investors are confused about where to invest in 2021for maximum gains. What do you think?
Though 2020 was a roller-coaster, investors are eyeing the year 2021 with hope. Investment in 2021 is primarily guided by the recovery of the financial markets after the pandemic as the industry is waking up and normalcy is being restored.
Certified financial planners have also pitched in their recommendations for investments in 2021. Here are, therefore, some of the lucrative investment opportunities for 2021

Here Where to Invest Your Money in 2021:

 

1) Invest in Direct Equity

For most risk-loving investors, stock trading and investing into direct equity always holds attraction. Even though the equity market suffered losses in the beginning half of 2020 on the pandemic fears, the market is correcting itself and as of the market closing time on 27th November 2020, the NSE and BSE are already at their pre-COVID levels of 12,968.95 and 44,149.72 respectively. (Source: https://www.financialexpress.com/market/stock-market/).

The boost in the stock exchange was largely due to the promise of the COVID vaccine which is almost in its ready stages. This has resulted in positive market sentiments globally and so, direct equity is once again looking good.

Moreover, history has been a witness that the stock market always bounces back even after a crash, whether it was the Harshad Mehta scam or the 2008 crash. If you invest over a long term period, direct equity is known to yield exponential returns.

 

Have a look at how the stock market has performed over the last 30 years –

Sensex in last 30 years

 

 

 

 

 

 

 

(Source: https://www.tradebrains.in/wp-content/uploads/2017/11/Sensex-in-last-30-years-of-performance.png)

The stock market is, therefore, a good avenue, if you are looking at where to invest money in 2021. If you have the appetite to undertake risks it can be a good start for your investments in 2021.

Here’s a FREE certification course on Stock Market

2) Invest in Mutual Funds

For investors who do not like direct exposure to equity but want to invest in a diversified portfolio, mutual funds are the best solutions. Mutual funds are beneficial because –

  • They help you own a diversified portfolio
  • They come in different variants and you can choose a scheme which is relevant to your investment preference and risk appetite
  • ELSS funds allow you the benefit of tax saving on your investments
  • They are professionally managed allowing you to invest in the best stocks and instruments
  • You can invest in mutual fund schemes with as low as Rs.500 making them ideal for small-time investors too who want market-exposure with limited savings

Given these benefits, the mutual fund market is another avenue which you can explore. In fact, equity mutual funds are less risky compared to direct equity because of the diversification that they provide.

 

As far as returns are concerned, some equity funds have even outperformed the stock market in several instances. For example, Invesco India’s Growth Opportunities Fund, a large and mid-cap fund, has consistently outperformed the S & P BSE Index over the years. Have a look –

S & P BSE Index over the years

 

 

 

 

 

 

(Source: https://www.personalfn.com/fns/invesco-india-growth-opportunities-fund-rising-in-volatile-times).

So, as far as returns are concerned, you don’t have to worry. You can also choose SIPs to invest every month in a disciplined manner and build up a substantial corpus over a long term horizon.

 

In fact, the mutual fund industry has become so popular, that investors are increasingly investing in the avenue to bank upon its returns. The AUM of the mutual fund industry has, therefore, consistently grown over the years –

mutual funds assets under management

 

 

 

 

 

 

 

(Source: https://www.relakhs.com/top-mutual-fund-schemes-2019/)

So, consider investing in different schemes of mutual funds to create a diversified portfolio which is liquid, tax saving and also return generating.

Take a FREE certification course on Mutual Funds

3) Invest in National Pension System (NPS)

Have you invested in the National Pension System introduced by the Government? If not, you can consider it in 2021. The reasons? Let’s see –

#1 – It helps you create an earmarked corpus for retirement

#2 – The scheme is market-linked promising inflation-adjusted returns

#3 – You get lifelong incomes in the form of pension after maturity

#4 – Investments into the scheme are tax-free under Section 80CCD (1B) up to Rs.1.5 lakhs

#5 – Additional investments, up to Rs.50, 000 can be claimed as a deduction under Section 80 CCD (1B)

Moreover, if you choose the new tax regime and if your employer contributes to the NPS scheme on your behalf, such contributions would be allowed as a deduction from your taxable income for up to 10% of your basic salary and dearness allowance under Section 80CCD (2).

Besides the market-linked returns, the additional tax benefit, both under the old tax regime and the new one, tilts the scales in favour of the NPS scheme.

 

You can invest in the scheme for long term capital accumulation for your retirement. On maturity, you would be allowed to withdraw up to 60% of the accumulated corpus as tax-free income which would also be tax-free in your hands.

So, if tax-saving and retirement planning is your goal, you cannot go wrong with the NPS scheme.

 

4) Invest in Fixed Deposits (FD)

This is the avenue for traditional investors who are averse to any kind of market risk and want secured and safe returns. Fixed deposits have been an Indian favourite for a long time and this favour is not going to end anytime soon.

Even though the interest rate on fixed-income instruments, including fixed deposits, has been slashed in recent times, fixed deposits continue to find investors for the safety that they promise.

The popularity of fixed deposit schemes, especially when volatility struck during the pandemic, increased and the trend is expected to continue in 2021.

So, if you want to be safe with your investments, you can choose fixed deposit schemes. However, do not dedicate a large portion of your investment in fixed deposit schemes.

Direct about 5% to 10% of your investment in fixed deposit schemes and the rest should be invested in other market-linked avenues. If you are choosing fixed deposits, here are some tips which you can follow –

  • Invest in 5-year fixed deposit schemes offered by banks and post offices. These schemes allow tax-saving on investment under Section 80C
  • If you want higher returns, opt for fixed deposit schemes offered by NBFCs (Non-Banking Financial Companies)
  • Compare the rate of fixed deposit schemes across institutions and choose the scheme which has the highest rate
  • Do not withdraw your deposits before the completion of the tenure. It would attract a withdrawal penalty which would reduce your interest earnings.

For risk-free returns you can also choose debt mutual funds which would help you earn inflation-adjusted returns and also earn the benefit of indexation if you redeem your funds after 3 years.

 

5) Invest in Unit Linked Insurance Plans (ULIP)

While the primary objective of insurance plans is to offer financial protection against premature death, Unit Linked Insurance Plans (ULIPs) serve a dual purpose. Besides allowing insurance coverage, these plans also help you create wealth, a la mutual funds.

ULIPs work on the model of mutual funds. The premium that you pay is invested into different funds of your choice. Each of these funds invests in the capital market depending of the fund’s objective.

For example, equity funds invest in equity stocks while debt funds invest in debt instruments. Depending on the growth of the underlying assets, the NAV of the fund grows and you can earn returns on your investments.

In case of death during the policy tenure, you get higher of the sum assured or the fund value and on maturity, the fund value is paid. The distinct advantages of ULIPs are as follows –

  • Invested premiums qualify for tax deduction under Section 80C up to Rs.1.5 lakhs
  • A single policy gives you the option of different types of investment funds to choose from – equity, debt and hybrid. You can invest in one or more funds as you’re your investment preference. Moreover, you can switch between the chosen funds during the policy tenure depending on the market movements. This switching is completely tax-free and almost all ULIPs allow free switches up to a specific number of times
  • Partial withdrawals from the fund value can be made from the 6th policy year. These withdrawals are also completely tax-free in nature
  • The death benefit received is completely tax-free
  • If the premium paid is up to 10% of the sum assured, the maturity benefit received on maturity is also completely tax-free under Section 10 (10D) of the Income Tax Act, 1961

Moreover, the charges involved under ULIPs have also reduced in recent times pitching them as a favourable product against mutual funds.

 

6) Invest in Real Estate

This avenue is for those investors who want to bank on the growth in the real estate market. In 2019 the real estate market was valued at Rs.12, 000 crores and it is expected to reach Rs.65. 000 crores by 2040.

In 2019, real estate investments amounted to Rs.43, 780 crores and the number is expected to increase in the coming years. (Source: https://www.ibef.org/industry/real-estate-india.aspx) The introduction of RERA, reduced interest rates on home loans and the need to own a house are the major driving factors for the growth of the real estate industry.

Housing is one of the basic needs of individuals and if you want to create an asset, you can explore the real estate market as the pandemic has led to a reduction in the prices which would be good for you.

Moreover, if you avail a home loan to invest in a home, you would be able to avail tax benefits under Sections 80C, 80EEA and 24 on the principal as well as on the interest payable on the loan.

The loan would also improve your credit score and allow you to own your dream house. So, if you have considerable funds at your disposal, opt for real estate either for owning your house or for creation of an asset.

Here’s a complete guide on how to invest in real estate

7) Invest in Gold

Gold is another investment avenue which you can consider if you are looking to hedge against volatility and uncertainty. Gold holds a traditional value for Indian investors as festivities, weddings and gifting is marked with physical gold ornaments and jewellery.

From an investment point of view, however, different avenues are in vogue in recent years with the availability of gold ETFs, gold mutual funds and, the all new, digital gold.

These gold investment avenues are getting much attention because of their safety, liquidity and ease of investing in small amounts.

Here’s a complete guide on how to invest in gold SMARTLY!

When it comes to returns, gold is a safe haven, especially if you are looking for long-term savings. Gold gives cyclical returns and when the markets are volatile, gold is looked upon as a safe investment avenue and its prices surge.

The very recent example is the COVID pandemic wherein the prices of gold jumped in April and May when the pandemic struck India. Moreover, over the last few years, gold has outperformed the Sensex in terms of returns. Have a look –

gold vs silver vs sensex

 

 

 

 

 

 

 

 

 

 

(Source: https://www.businesstoday.in/money/investment/gold-sensex-returns-years-bse-silver/story/392920.html)

So, you can consider gold as an investment avenue but invest in Gold ETFs or gold mutual funds for liquidity and safety of storage rather than physical gold. You can also trade in gold through these investment avenues and book returns when the price of gold climbs.

2021 is supposed to be a breath of fresh air for the Indian economy and the financial markets as the effect of the unprecedented COVID pandemic is expected to ebb.

Use the afore-mentioned 2021 investment opportunities and make wise investment choices to grow your wealth especially if the pandemic ate into your portfolio in 2020. Plan your investment strategy for 2021.

Understand the avenues before you choose them and then pick suitable options based on your investment need, financial planning in 2021 and, most importantly, risk profile. Also monitor your portfolio regularly so that you can make changes to it as per your changing financial needs and market dynamics and keep your portfolio profitable in all seasons.

 

Here’s a FREE financial planning tool to help you with your investments in 2021

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Exchange Traded Funds (ETF) – What are ETFs and How to Invest in them?

Exchange Traded Funds (ETF) – What are ETFs and How to Invest in them?

The Indian economy has a plethora of investment options these days with Exchange Traded funds (ETFs) being a very lucrative alternative. Last five years has witnessed a phenomenal 30-times volume growth in the domain of ETFs, attributed to pension funds and increasing investor awareness.
Seventeen asset management companies have launched ETFs based on Nifty50, which contributes to 49% of the total market share, as of September 2020.The fund manager purchased stocks from Nifty50, which allowed the fund to offer returns, similar to those of the index. The total AUM of ETF is pegged at INR 2.07 lakh crore as of 31-Aug-2020, out of which nearly half of it was focused on ETFs that were based on the Nifty50 alone. However, retail investment is quite low on this product compared to the mutual funds, which is one of the main retarding factors to its growth. Hence more awareness needs to be created on how to invest in ETFs to foster an upward trending growth curve. Let us explore an investor’s guide to fine out how to invest in ETFs.

 

 

What is an ETF (Exchange Traded Fund)?

ETFs were launched in India in December 2001, though the fund flow in the ETF industry was very scanty till August 2015. Research shows that the effective growth in Nifty50 AUM and in the industry has taken place only in the last five years.

An Exchange Traded Fund (ETF) is basically a fund that pools in funds from several investors and can be traded on the stock exchange or the secondary capital market, similar to shares.

You need to have a Demat account and a Trading account to start investing in ETFs if done via an investment firm. It is a passively managed fund with a designated fund manager and has a Net Asset Value (NAV) like a mutual fund.

Though they are traded like stocks, their individual price is not determined by the Net Asset Value (NAV), instead by the demand and supply mechanism operating in the market.

Take a FREE certification course on stock market

Since ETFs track benchmark indices, their returns are closely linked to market movements, to overcome most mutual fund investment schemes. The buying and selling of the ETF units are usually done by any registered broker at any of the recognised and listed stock exchanges in India.

Since the units of the ETF are listed on the stock exchange and the Net Asset Value (NAV) varies according to the market sentiments, they are not traded like any other normal open ended equity fund. 

The investor has the liberty to trade in as many units as feasible on the exchange, without any kind of restrictions being imposed on them.

To state it very simply, ETFs are investment funds that track indices like the CNX Nifty or BSE Sensex, etc. Hence, when you decide to invest in the shares of an ETF, you are investing in the shares of a portfolio that tracks the yield and return of its native index.

Investing in ETFs does not entail it to outperform their corresponding index, rather replicate the performance of the Index as they depict the true picture of the market. 

 

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Are Exchange Traded Funds (ETFs) a Lucrative Option for Investment?

Exchange traded funds (ETFs) are a safe bet for beginner investors due to their innumerable benefits like higher daily liquidity and lower fund fees as compared to the mutual funds. Here’s a FREE course on mutual funds

Few factors like the wide range of investment choices, low expense ratios, high liquidity, option of diversification, low investment threshold etc. make them an attractive investment option for the individual investors.

These special attributes render the ETFs to be perfect options for adopting various trading and investment strategies to be used by new traders and investors.  ETFs are a lucrative investment option due to the following reasons:

 

  • Diversification of the portfolio – 

In today’s volatile market, diversification of the financial portfolio is mandatory and hence the need for ETFs, which can introduce investors to a huge variety of market segments.

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You can diversify your mutual fund portfolio by investing in Gold ETFs, by using the price of physical gold as its benchmark. You can also diversify your wealth among ETFs covering different types of investments like commodities or bonds.

 

  • High Liquidity due to absence of a lock-in period 

Investment in Exchange Traded Funds help in portfolio diversification along with providing liquidity. They are open ended funds with no lock-in period, which gives them the liberty to withdraw their holdings according to their requirement.

Since there is no holding period, investing in ETF is a lucrative investment option.

 

  • Cost Efficiency due to Passive Management– 

The expense ratio for maintaining the ETFs are comparatively lower as they are not actively managed like majority of the mutual funds.

Since there are no management fees or commissions involved, the incremental value of the overall fund is usually increased.

An ETF held with a low expense ratio can add on to the pay-outs if held for very long. For example, index ETFs just track the index, so the portfolio manager does not need to manage the fund. This calls for a lower management expense ratio (MER).

 

  • Single and transparent transactions – 

Investing in ETFs require you to make one single transaction similar to owning a mini portfolio.

Therefore, when you have to track the performance of this portfolio, for example if you have invested in a Gold ETF, you would need to track the price movements of gold only as a daily commodity, which is much easier for the investor.

Also most of the ETFs publish their holdings on a daily basis, hence you can find out their holdings, their relative weightage in the funds and if there has been any movement, thereby fostering transparency in the financial chain..

 

  • Offer flexibility to buy and sell – 

Unlike mutual funds, ETFs can be purchased and sold from an investment firm or at the stock exchanges on a daily basis, similar to the intraday trading mechanism.

They have the flexibility to be bought short and sold at a profit margin in a day during the market operating hours, at the current market price at the time of the transaction.

 

  • Professional Fund Management – 

Though ETFs maintenance or operation costs are pretty low, they are very professionally managed.

 

  • Tax Efficiency – 

ETFs are considered to be equity oriented schemes, which entails them to follow a taxation norm similar to any other equity related investment scheme.

 

Types of Exchange Traded Funds

With several options among ETFs available in the financial markets these days, consumers tend to get perplexed in which to invest.

Hence there are 4 broad categories of ETFs that one can invest in, namely:

 

  • Equity ETFs – Equity ETFs usually track the movement of sector or industry specific stocks. Here the performance of the index or the specific sector is replicated by investing in stocks accordingly.

 

  • International exposure ETFs – There are few ETFs that track stock indices of foreign stock markets. Since they give the investors an opportunity to gain exposure in some international markets, they are actively involved in weaving the growth stories for few economies.

 

  • Debt ETFs – Few exchange-traded funds try trading in fixed-income securities.

 

  • Gold ETFs – Gold investment is always considered a great hedge against currency fluctuation and a volatile market. However, investments in physical gold is faced with several concerns like quality, security, resale, taxation, etc. Hence, Gold ETFs are a safe option where you can invest in gold bullion, thereby having gold in your portfolio without the risk or fear of investing in physical gold.

 

Factors to be kept in mind before you decide to invest in an ETF

Today’s financial market is flooded by too many options even within the ETFs. There are four factors that one must consider before you decide to invest in an ETF:

  1. Trading Volume of the ETF – You should chose an ETF with higher trading volume if you need liquidity and a good price for the units traded on the stock exchange.

 

  1. Class of the ETF – Since ETFs are of four types, equity, international, gold and debt, once a category is finally selected, its sub category also needs to be decided. The specific sector ETF or their market capitalization needs to be focused upon if you are investing in an equity ETF.

 

  1. Lower Expense Ratio – Usually the expense ratio of an ETF is much lower than an actively managed fund. But even then many fund houses offer more discounts on the expense ratios to attract more investors, thereby increasing the chances of higher returns.

 

  1. Lower Tracking Order – ETFs usually track an index as they invest in securities that comprise the index in a manner that the returns are almost similar to those offered by the index, thereby making some differences feasible between the returns offered by the index and the ETF. Tracking error usually identifies variance in the performance of the ETF in comparison to the underlying index. If the tracking error is lower, the returns of the ETF will be closer to that of the index. Therefore, you should always invest in ETFs with a lower tracking error.

 

Comparison between Mutual Funds, Stocks and ETFs

A detailed study on ETFs has been quite helpful in understanding the market and drawing a comparison between them as against the mutual funds and stocks:

Mutual Funds Stocks Exchange Traded Funds
Definition A financial set up comprising of a pool of money collected from many investors to invest in different securities like bonds, stocks, money market vehicles and various other assets. The investment capital raised by a company through the issue of shares, thereby signifying some ownership in that company for the investors. An exchange traded fund (ETF) is an asset class consisting of a collection of securities like stocks,  that track an underlying index or a specific sector.
Risks Involved Though the exposure is diversified, there are market specific risks. Very risky proposition as the performance of the stocks are directly proportional to the company’s performance.  Though the asset class is diversified, it however carries market related risks.
Trading Time Mutual fund trading is done only once a day after the financial market is closed. Can be traded throughout the day. Can be traded throughout the day.
Degree of Control Not very highly regulated or controlled investment. Very highly controlled investment. Higher control on these type of investments as compared to mutual funds but lesser than stocks.

 

Tax Implications on ETFs

The taxation policy applicable on ETFs are quite unique as compared to the tax treatment meted out to mutual funds.

Read more about taxation in mutual funds 

The index ETFs and sectoral ETFs are considered as equity-oriented schemes from the tax perspective. They have the unique selling proposition of creating and redeeming shares with in-kind transactions, which are not rendered as sales.

Since there is no sale involved, they are not taxable.

However, if you plan to sell your ETF investment, this transaction will be taxable. The tenure of holding onto this ETF investment will decide if it was a short-term or long-term profit or loss.

Therefore, research reveals that short term capital gains from ETF units held for less than one year are taxed at 15% vis-a-vis the long term capital gains on ETF units being held for more than one year, being taxed at 10% without any indexation benefit.

If you are a new investor planning to enter the Indian financial market, ETFs consisting of a basket of securities offer a well-diversified approach. They are a much better proposition than purchasing the stocks directly for first time investors.

You should do a thorough research on the investment options available and devise a suitable investment plan based on your financial objectives, tenure to invest, intricacies of investing in ETFs and your risk tolerance level.

Since these funds are passively managed, they are cost efficient and usually match the returns offered by the index.

Also if you are an aggressive investor, ETFs are still a good option for stable investments if utmost planning is done well in advance.

Thus, with adequate knowledge and research, all the first time investors should allocate some of their funds to ETFs for a better wealth creation.

 

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Beginner’s Guide to Investing in Gold

Beginner’s Guide to Investing in Gold

The economy in current times has varied investment options. If you have decided to make a foray into the world of investing, there are an incredible array of options, ranging from stocks to equities to mutual funds and gold funds, to name a few.
Since the financial market is very dynamic, newer stocks could be volatile and hard to realise its returns.
However, gold investment is a very lucrative investment option as it can reap better returns especially in the long term and it is one of the world’s oldest commodities, which instill people’s trust more readily than the other asset forms.
It is considered to be the best insurance policy and hence an essential component of your financial portfolio. It is usually believed that one should consider allocating about 5% to 15% of their portfolio in gold or gold oriented investments.So let us see here, how to invest in gold especially for beginners. You should know varied nuances on how one should go about making an investment in gold.

 

Gold as an Alternative Investment Option

The people of India have been investing in gold for several reasons like cultural and religious, since time immemorial.

But in today’s dynamic market, gold investment as a very good investment option is considered to be quite favourable as well.

It has a long term store of value i.e. it is a valuable asset that definitely maintains its intrinsic value intact without depreciating over the years.

If you ever face any economic crisis, gold comes in handy as it can work as a safety deposit box thereby making it superior to the other investment options.

It is also considered an attractive means of investment due to its consistent outperformance of the currency value and always has a strong presence in the market, even if the market collapses.

A lot of investors also like the fact that gold is a tangible asset form, wherein you can actually hold the gold ornament or the gold coin in your hand. So once you hold it in your hands, the feeling is surreal and you realise that the investment is real.

While on the other hand, other assets like bonds, stocks and mutual funds are usually given to the investor in the form of a piece of paper.

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Liquid money usually involves a ‘promise to pay’, though gold does not require any such promise. In the last 3500 years’ history, gold prices have never been pegged at zero, thereby making it the only real financial instrument that is not an investor’s liability at any point of time.

The guide to Investing in Gold clearly states that gold helps to diversify your financial portfolio, thereby protecting the portfolio against any market volatility.

Gold is believed to have a low or a negative correlation with the other asset classes, like stocks and equity.

Even if gold may seem to be a volatile investment, that should not discourage you from making the investment.

History states that gold always increases in value and even if other traditional investments fail or falter, gold still reaps returns. Gold also offers good returns when the SENSEX generates good profits.

Gold investment is very lucrative as it provides a hedge instrument against inflation. The currency value usually drops as the inflation rates increase for a nation.

However, research states that gold prices have almost doubled in the last five years despite a rise in the inflation rates. In India, since inflation rates usually tend to transcend the interest rates, investment in gold is considered a good hedge against inflation.

 

Buying gold is also very essential in today’s volatile market due to its liquidity, which means that gold can always be bought and sold instantaneously.

If the need arises, you can sell all the gold stocks as they are highly liquid in nature. Even though the US dollar might rise or fall, the gold value is retained as it is, because it is placed in the global marketplace.

You do not need to possess any specialized knowledge to buy gold, it is fairly simple and straight-forward, thereby rendering it as an easy investment option for all the investors.

However, for investments in other stocks and mutual funds, you need some knowledge about the financial market volatility to make the right decision.

Here’s a complete guide on How to Buy Mutual funds in India .

Different Ways to Invest in Gold

Purchasing jewellery and ornaments is the best option to invest in gold, as witnessed in historical times. Several religious and traditional customs during any occasion like a marriage, engagement ceremony, the birth of a child in the family was definitely an opportunity to make a gold purchase.

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However, different ways to buy and own gold as a financial instrument have emerged now with the advent of paper gold, gold funds and physical gold like jewellery, gold bars, etc. to diversify your portfolio.

Hence you as an investor can get confused at times, with the type of gold you should buy and the place from where you should buy. You can invest in stocks in gold mining, refining and production.

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Given below are a few gold investment options that you should consider before taking the plunge.

  • Digital Gold Investment – Digital gold investment is the most cost-effective and lucrative means to invest in gold online. This way you can buy as well as sell gold in small fractions in absolutely no time, with a bare minimum of INR 10 too.The digital gold is usually backed by physical 24-carat gold and is linked to the actual real-time gold price movements. Majorly the companies offering to sell digital gold ensures that it is stored in properly secured vaults for insurance.

    Digital gold investment can be sold at any time and the funds will be credited to your account within two business days. The digital gold has zero making charge unlike the other jewellery or other forms of physical gold options and you can view your assets online.

    Also, there are a few digital gold platforms that allow you to possibly convert them into physical gold on public demand.

 

  • Gold Bars or Coins – Many investors invest in gold bars or coins as they do not require any skilled artistry and hence no making charges are levied on them.

    These bars and coins are easily available at the banks, online shopping or e-commerce websites, jewellers and many NBFCs, i.e. non-banking financial companies.

 

  • Gold Sovereign Bonds –   Gold Sovereign Bonds one of the safest ways for digital gold investment and are issued by the Reserve bank of India (RBI), on behalf of the Government of India.There is a lock-in tenure of 5 years for these bongs with the overall period being 8 years and annualised yield of a rate of interest of 2.5% p.a.

 

  • Gold Mutual Funds – Gold Mutual Funds usually invest in many gold reserves either directly or indirectly and include stocks of companies associated with mining and gold production, physical gold as well as distribution syndicates.Their performance is highly impacted by the gold price movements in the country.

 

  • Gold Exchange Traded Funds (ETFs) – The Exchange Traded Funds allow you to trade gold on the stock exchange while having both the pros and cons of investing in ETFs and the advantage of investing in gold.Investors with a smaller risk appetite often choose a gold ETF as it is a smaller investment compared to the gold bullion, while the broad exposure can minimize your risk. Investing in gold as an ETF does not require the gold to be stored as a physical commodity.

 

  • Gold Savings Schemes – There are various schemes available to help people make gold investments in instalments.There are a few predetermined amounts that you can deposit with the jeweller every month for a certain period. Once the period is over, you can buy gold from the same jeweller at a value equivalent to the amount deposited plus a bonus that is offered by the jeweller and can purchase gold at the ongoing gold price on maturity.

 

  • Jewellery – Indians have an emotional connect with gold jewellery, be it for traditions or any auspicious occasion.Since it is a valuable metal, its safety is very vital to the investors.

    Also the making charges can go up to 25% depending on the design which is recoverable even when you plan to sell the jewellery.

 

How or Where to Invest in Gold?

If you are wondering the right market place to buy gold bullion, a government mint connected gold dealer or seller is the best place to ensure that you receive the real gold. You can buy it physically or online and any currency can be traded for gold bullion.

But if you are procuring gold from an unknown source, its purity certificate should be obtained.

E*TRADE can offer future contracts at a reasonable price, where gold futures can be traded only during certain months and at certain times during the day. You can take a short position if the commodity is sold at a lower price later.

If you buy gold in anticipation of a price rise, you can assume the long position. Research states that futures contracts can be chosen for more financial integrity, flexibility and leverage, that you can get from trading in physical commodities.

 

How to Determine the Price of Gold in India?

Gold price is impacted by demand and supply. As the demand for gold rises, prices increase and when the investors sell gold, the price drops due to excessive supply.

Movement in gold price behaves very differently than the other commodities, as the precious metal inculcates trust.  When the other commodities’ performance decreases, demand for gold increases as people believes that the gold value will be intact.

This increased demand causes prices to soar higher thereby manifesting the desired effect and rekindling the trust in the yellow metal.

During an economic recession, a lot of panic is created amongst investors as stock markets crash. But people keep their focus on gold intact and the “gold rush” boosts gold price, thereby imbibing more investments in gold or gold stocks.

 

Tax Rates for Gold Investments

You should keep yourself well updated of the several taxation norms on gold, applicable in lieu of the profits that have been earned from the gold investments. You attract the capital gains tax in India when you sell gold.

In case the gold is held by you for less than three years, the returns earned are classified as STCG or short term capital gains and the taxes levied on it will be in accordance to the tax slab that is applicable to you.

In case you stay invested in the gold fund for a period of more than three years,  the profits on it are called LTCG or long-term capital gains and are levied tax at a flat rate of 20%.

 

The Road Ahead for Investing Gold in India

Although the yellow metal’s price had plummeted from 2011 to 2018, 2019 saw some price correction, after which the pandemic driven India again saw a huge increase in the price of the commodity.

There is no certainty that this trend would continue but the movement in price will certainly impact your decision making.

There are also other factors that have to be kept in mind like the economic and political,  geopolitical turmoil, while the future road is paved.

The dynamism in gold value makes them a not so favourable investment option for people who are quite anxious about the daily market performance.

So if you can handle a dynamic ride that entails such risky moments but ensures a substantial potential payoff at the end of this journey, then only you should take the initiative to invest in gold stocks.

Investment in gold is considered a long-term investment as it grows in value over time, though short-term investment is more volatile as the returns fluctuate a lot.

Based on the current and future economic conditions, gold is attractive in both the long term and short-term, but adequate research needs to be done to decipher if this is the right investment option for you.

If you have decided to move ahead to make an investment in gold, you should consider your financial objectives, risk-taking capacity, tenure and the investment horizon apart from using this beginner’s guide as a ready reckoner manual.

Hence, investing in a gold fund is very lucrative to strengthen your financial position for the long term.

If you are looking for a certified financial planner, feel free to reach out to us for a FREE financial planning consultation.

 

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Structured Products

Structured Products

Markets can be unpredictable and volatile. You may sometimes hesitate to invest out of fear of losing the capital.Hence, spreading risk across or diversification is an important part of investing. If you are looking out for a financial product that can offer you diversification and capital preservation in order to meet your unique risk-return objectives, you can consider structured products as an investment option.

A structured product is a result of financial innovation that offers an investment solution that can be structured as per your risk-return profile. Most of the wealth managers often come up with structured products for their high net worth (HNI) clients.

 

 

What are Structured Products?

Structured products are market-linked investment solutions that are hybrid in nature and are tailor-made to adapt to your unique needs such as risk-return objectives and liquidity requirements.

Basically, the investment strategy of a structured product is non-traditional in nature that combines two or more asset classes (conventional assets combined with derivative products) to meet your specific needs.

This integrated investment solution is highly customisable and can offer you efficient diversification to your investment portfolio.

The performance of structured products is often linked to the performance of the NIFTY index.

A typical structured product comprises bonds, equities and derivatives as an underlying asset class.

These products can either come with capital protection (full or partial return of principal) feature or without a capital protection feature.

The objective is to enhance your investment return by investing in market-linked instruments such as bonds and equities while balancing out the risk during a market downturn by investing in complementary instruments like derivatives.

 

What are the Components of Structured Products?

Structured products with debt securities/bonds and equity derivative exposures are quite popular in India.

Typically, the following are the components of structured products in India:

 

  • A bond: Capital protection is offered by the bond component as the issuer of the bond promises to return the principal. In the case of structured products without capital protection, you can expect additional income and stability.

 

  • Equities (one or more): Equities as underlying assets enhance the return potential of the investment. There would be a single equity instrument or basket of securities such as stocks along with ETFs that follow a popular index, foreign currencies, etc.

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  • A derivative product: The derivative component helps to balance out the overall risk. Options are commonly included as a derivative component in a structured product depending on the risk-tolerance level.

 

How does a Structured Product Work?

Though structured product majorly comprises traditional assets like bonds, it is strategized in a way to replace the usual returns of the bonds with non-traditional payoffs from other underlying assets, such as derivative products.

Let’s understand the working of a structured product with a simple example. Let’s assume, you invest Rs. 1,000 in a structured product with capital protection feature for five years.

That means you would receive the initial investment on maturity (on completion of a five years period) along with the return linked to the performance of an underlying asset over the period of five years. In this case, Rs.800 out of your Rs. 1,000 is invested in bonds or debt instruments whose value reaches up to Rs. 1,000 at the end of maturity, i.e. five years.

This is because the fund manager would invest in fixed coupon debentures to preserve your capital.

Now, the remaining Rs. 200 would be invested in equities and derivatives to generate the return and income.

The final return would depend on the performance of the particular index that the securities follow.

If the performance of the index is positive, say 25% over the last five years, then you would receive total return along with the amount invested (capital) on maturity.

In case, the performance of the index falls below the level at which investment was made, you would only receive the amount invested (capital) on maturity.

 

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What are the Key Features of Structured Products?

Structured products are issued by the private banking teams, wealth management firms and non-banking financial companies (NBFCs).

The top issuers in India include Edelweiss Capital Limited and Kotak Securities Ltd. including some of the foreign players like Merrill Lynch and Co. Inc and Citigroup Inc.

Following are the features of structured products –

  1. Asset composition: Structured products are hybrid investment products with a complex composition of assets.Basically, structured products consist of fixed income securities like bonds as a large component for capital preservation along with equities and derivative products as an underlying asset class for capital growth and income.

    The right composition of asset classes allows the structured products to maximise the probability of return with efficient management of risk.

  2. Investment amount: The ticket size for the investment into structured products may vary across issuers.In India, structured products are generally designed for high net worth investors (HNIs) starting with the minimum ticket size of Rs. 25 lakhs.

    Most of these investments are done through PMS (portfolio management services) and the guidelines of PMS are followed for the minimum cap on investment amount also.

  3. Risk-return profile: Risk-return profile of the structured product may vary totally depending on the way in which the particular product is structured.Being a highly customisable investment product, structured products can be modelled to suit the needs of conservative to highly aggressive investors.

    As the return of this product is linked to the performance of an index, the return generated generally ranges from CAGR (Compound annual growth rate) of 10% to 25% or even higher depending on the composition, market conditions and various other factors.

    Apart from the market risk, structured products are also subjected to the credit risk of the issuer as a bond being the major component.

  4. Tenure: Generally, structured products come with limited maturity which requires you as an investor to stay invested for the specific period.In India, the maturity of structured products ranges from 12 months to 36 months as these products are structured around the equity market.
  5. Professional management: Structured products are designed and managed professionally to meet the risk-return objectives of the investors.With professional management, structured products are effectively managed with various strategies to meet the return requirement.

    The structured product offers flexibility to meet the requirement even during the market downturn.

    The fees for the professional management of structured products may vary across issuers.

 

Structured Products Market in India

In India, structured products started garnering the limelight sometimes during 2007 and 2008.

Structured products are also referred to as market-linked debentures (MLDs).

According to CARE Ratings, the structured product segment or market-linked debentures in India will increase in size by the issuance of up to Rs. 17,000 Cr. in FY 2020 in comparison to Rs. 12,246 Cr in FY 2019.

You can take a look at the report issued by CARE ratings on this.

 

What are the Benefits of Investing in Structured Products?

Considering the market volatility in recent years, structured products are gaining popularity. You can benefit from the market upside by investing in structured products while limiting your risk during the economic downturn.

Mainly, the following are the benefits of investing in structured products

  1. Customised view: As structured products are highly customisable, it enables you as an investor to have a view on the market for two to three years specifically and then monetize the same.
  2. Capital protection: Most of the structured products come with capital protection features that make it a suitable choice for risk-averse investors. However, all types of investors can invest in structured products to benefit the diversification it offers.
  3. Higher return potential: Along with capital protection, structured products can generate attractive returns depending on the performance of the index the underlying asset is linked to.
  4. Risk return dynamics: Structure product boosts the portfolio return by investing in growth assets and manages risk efficiently by investing in derivatives.
  5. Hybrid exposure:Exposure to two or more asset classes and mix of traditional and non-traditional assets offer efficient diversification to your investment portfolio.
  6. Tax efficiency in Structured Products: Structured products are gazing the focus of high net worth investors (HNIs) and institutional investors due to its tax efficiency.When it comes to the tax treatment of structured products, long-term capital gains are taxed at 10% (for the investments held for more than 36 months) + surcharge for listed market linked debentures (MLDs).However, considering the complexity of the structured products, it is important to consult tax experts and seek advice before you invest in any structured product.

 

What are the Various Types of Structured Products

In India, structured products are mainly categorised in two types based on their benefits offerings and the way they are modelled.

  • Conservative structured products: Conservative structured products are the investment solutions that come with capital protection themes. The upside participation of these products in the risk asset returns is relatively lower.

Let’s take an example to understand this. Let’s assume you have invested in a conservative structured product with 140% upside participation in equity markets till maturity.

That means, on maturity if the market falls below the index level at which it was invested, you get back your principal.

Here, 140% upside participation means, if the index or benchmark increases 10%, then you would receive a 14% return on the equities/derivatives portion of your investment.

 

  • Aggressive structured products: Aggressive structured products are the investment solutions that come without capital protection features. The upside participation of these products in the risk asset returns is relatively higher.

Let’s take an example to understand this. Let’s assume you have invested in an aggressive structured product with 200% upside participation in equity markets till maturity.

That means, on maturity if the index fails to cross the level, you may lose out on a part of your capital also. But, there is potential for higher returns also depending on the performance of the index.

 

What are the Important Points to Keep in Mind While investing in Structured Products?

If you are considering investing in structured products for diversification or for higher returns along with the preservation of capital, here are a few important things for you to keep in mind.

  • Liquidity: First important point to keep in mind is the liquidity element in these investment solutions. In comparison to other short-term or medium-term investment options, structured products are not liquid in nature.As structured products pre-packaged investment solutions with limited maturity period, you are required to stay invested in the product till maturity to reap the benefits.

    However, some of the markets linked debentures that are listed on an exchange can provide you with intermittent liquidity.

 

  • Suitability to your risk appetite: Specifically when you are investing in a structured product with partial protection of capital or without capital protection features, you need to access your individual risk profile, as there are chances of losing in an aggressive structure.

 

  • Credit risk: Though many structured products come with capital protection themes, the complete return of capital on maturity may still depend on the credit risk of the debenture issuer.
    Hence, considering the credit profile of the issuer is also important while investing in a structured product.You need to also access the fixed income portion of the structured product to understand the ratings and to prefer the investments with higher ratings to avoid the credit risk.

 

Sometimes, a structured product (with capital protection) that comes with a cap on upside participation may limit your gains.

It is important to understand the complex nature of the structured product, the risk associated with each underlying asset needs to be understood before investing in this investment solution.

To sum up, the volatile market has created the need for a financial product that can sustain during all seasons of the market.

An investment solution like structured products that are highly customisable, tax-efficient and also offer attractive returns along with capital protection, are an apt choice for high net worth investors.

Professional design, management and diversification offered by the structured products manage the risk effectively along with enhancing the return.

Structured products can help you achieve your goals with its unique structure and investment strategy in every market situation.

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