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.

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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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Alternative Investment Funds (AIF’s)

Alternative Investment Funds (AIF’s)

The Indian market is saturated with different types of mutual funds and other investment options.
Alternative Investment Fund (AIF) is one of such alternative investment options for the high net worth individuals (HNIs), that entices them with its non-conventional mode of investment. How beneficial is it to the investor is indeed a thought to ponder upon.

 

 

What are Alternative Investment Funds (AIFs)?

Alternative Investment Fund or AIF refers to any private fund established in India, not available through Initial Public Offerings (IPOs) or any other forms of a public issue that are applicable under the Mutual Funds and Collective Investment Schemes that are registered with SEBI.

They deal in funds like real estate, private equity and hedge funds, pooled from both Indian or foreign sophisticated investors, for investing it, in accordance with specific investment policy for the benefit of its investors.

These funds do not comprise of any funds registered under the SEBI (Mutual Funds) Regulations, 1996, SEBI (Collective Investment Schemes) Regulations, 1999 to regulate the fund management activities.

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AIFs have been gaining widespread acceptance in India especially amongst the higher class as very strong investible platforms, though they were registered by the Securities and Exchange Board of India (SEBI) only six years back.

With gaining popularity, the total principal amount raised by AIFs rose to nearly INR 1.1 trillion in Q12019, a growth of nearly 79% than what it was in Q12018.

 

Are you eligible to invest in the Alternative Investment Funds?

If you are a risk-loving investor who likes to diversify risk amidst the asset portfolio and is eligible to invest, you can invest in the Alternative Investment Funds.

Usually, the resident Indians, Indians who have settled abroad (NRIs) and foreigners are eligible to make investments in Alternative Investment Funds.

For general investors, the permissible limit is INR 1 crore. Whereas for angel investors, the minimum investment is INR 25 lakhs.

Likewise, the minimum amount for investment is INR 25 lakhs for the senior management like the directors, fund managers and all the people working for the AIF.

Any investor willing to invest in these unlisted and illiquid securities should be prepared to undertake the underlying risk.

As per SEBI guidelines, any AIF will have not more than 1000 investors.

Whereas, in case of an angel fund, no scheme should have more than forty-nine angel investors.

An AIF cannot openly invite the public to subscribe its units, rather can only raise funds from the esteemed investors through a private placement.

Launch of schemes by AIF is supported by the filling of placement memorandum with SEBI. It is a norm to pay a scheme fee of INR 1 lakh to SEBI, while filing the placement memorandum, prior to at least 30 days of the due date of the launch of the scheme.

However, this payment is exempted for the angel fund investors and the first time schemes launched by the AIF.

Once the payment is made, SEBI evaluates the application and intimates the investor within twenty-one days about the status of the application and its success rate.

Once it is informed to the investor that its registration is successful from SEBI, an amount of INR 5 lakhs have to be submitted as the registration fees for being classified as an Alternative Investment Fund in India.

Once SEBI certifies that the AIF has been registered, the AIF contacts the stock exchanges for a listing of the funds by submitting an investment management agreement, draft information or a placement memorandum, a custodian agreement, a trust deed, memorandum & articles of association of the issuer and an undertaking from the CEO/ compliance officer that AIF is in accordance with Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012.

You need to submit your income proof, ID proof and the PAN card to invest in an AIF.

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Types of Alternative Investment Funds (AIFs)

SEBI classifies the private investment funds into three distinct categories – the first, second and third category funds, with the minimum investable amount being INR 20 crores. However, the angel fund, a subcategory of AIF-I, has a lesser fund corpus of INR 10 crores.

 

Let us discuss each of these fund types to get a better understanding of the categories:

  • Category I –This category consists of Venture Capital Funds, Infrastructure Funds, Startup or Early-stage funds, beneficial and lucrative to the Indian market thereby enhancing growth.These funds are entitled to receive incentive benefits or concessions from the SEBI and the Indian Government.These funds generally make investments in social set-ups like NGOs, new ventures, Small and Medium Enterprises, infrastructure and other sectors which are considered crucial for the country from an economic or social viewpoint.So if you are looking to invest in any of these ventures, Category I funds are the best option.

 

  • Category II –This category has private equity funds, real estate funds and funds for distressed assets, which are essentially the real estate PE funds.They usually reduce the exposure to risk by giving diversified fund portfolios managed by seasoned fund managers.Hence, it is a very lucrative investment option for you as it provides the double benefit of a conservative investment option and a hedging mechanism by means of an alternative investment option.They do not undertake leverage or borrowings except to meet their daily operational requirements as specified by the SEBI Regulations, 2012.

 

  • Category III – This category of AIFs are a very different group of privately held funds like PIPE funds and hedge funds.These funds deploy a pool of complicated trading strategies like margin trading, arbitrage, trading in futures and derivatives etc. to reap profits.This category of AIF has the flexibility to make investments in derivatives, both listed and unlisted, as stated by SEBI (Alternative Investment Funds –AIF) Regulation Act, 2012.If you are planning to invest in hedge funds, this category of Alternative Investment Funds (AIFs) is certainly a good option.

 

Does the Alternative Investment Fund have a Sponsor?

The investment funds are organised in the form of an LLP, a corporate body, trust or company.

There are a few exemptions from registration that are provided under the AIF Regulations to family trusts set up, for the benefit of ‘relatives‘ as defined under Companies Act, 1956.

Few employee welfare trusts or gratuity trusts are set up for the benefit of employees, ‘holding companies‘ within the meaning of Section 4 of the Companies Act, 1956 etc.

While you invest in the AIF, it’s pertinent for you to know who is a sponsor for that designated AIF.

A sponsor is someone who has established the AIF and for a company, it is the promoter.

A designated partner is a sponsor for the Limited Liability Partnership.

Every sponsor should be aligned to the need of the investors and have to abide by the few regulations that have been formulated.

The constant involvement of the sponsor has to be retained in this fund, which cannot be the fee waiver.

The sponsor will not fund any amount lesser than 2.5% of the whole corpus of INR 5 crores, whichever is lower for the fund categories I and II.

The contribution for category III will be 5% of the total or INR 10 crores, whichever is lesser.

The sponsorship amount for the angel investors should not be lesser than 2.5% of the fund or INR 50 lakhs, the one which is lower.

 

Flip sides of Alternative Investment Funds (AIFs)

Alternative investment funds (AIFs) are becoming a household name as they get into the funds of high net worth individuals (HNIs).

There are many pros and cons of making an investment in an alternative investment fund in India, that you should be aware of.

These non- traditional investments include assets which yield higher profits when compared to bonds, mutual funds and stocks.

Alternative investments are not in sync with the investments in the financial market, rather they diversify the portfolio to mitigate volatility.

Any market-related stock is volatile and its rate of returns are expected to be higher than that of traditional investments by the means of inflation, hedging and portfolio diversification.

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On the flip side, these investments are quite complicated and incur heavier fees than the traditional investment options.

You will find that most of the AIFs are invested in not-so-fluid investments, which makes them exit the fund regularly.

As we all know, if there are higher returns, risks will also be higher.

Tax Implications for AIFs

Alternative Investment Funds are privately held investment vehicles that have been pooled together with investments from high net worth individuals (HNIs). There are few taxation norms that each and every AIF has to abide by.

Usually, it is found that the funds in Category I and Category II are considered to be pass-through vehicles, which implies that they don’t have to pay any tax on their earnings.

But if you are an investor, you have to pay the tax according to the designated tax slabs.

The investors are entitled to pay 15% or 10% depending on the investment period if the fund has any capital gains on stocks.

Funds in category III AIFs are also taxable as per the highest tax slab level of income (42.7%), and the returns are passed on to the investors, but after deducting the relevant taxes.

 

Current Market Statistics

Data estimated with the SEBI states that alternative investment fund (AIFs) investments increased to INR 1.4 lakh crores in Q42019, registering an increase of 53% from a figure of INR 92,825 crores in Q42018.

AIF investments in Q32019 was recorded at INR 1.25 lakh crores.

Out of the three categories of Alternative Investment Funds, the category I AIFs pumped in INR 13,904 crore, category II Rs 92,433 crore and category III Rs 35,777 crore during Q42019.

Above source: Economic Times

The Category-I AIFs include the infrastructure, social venture and venture capital funds, which get grants and incentives from the government and other regulatory bodies.

The government has been contributing in different phases and INR 25,000 crore fund was set up to complete almost 1600 housing projects in November 2019.

The current AIF is said to comprise of INR 10,000 crore straight from the government, while the remaining will be funded by the state insurer LIC and the country’s largest public sector bank, the SBI.

The Category-II AIFs which include the private equity and debt funds or fund of funds can be invested in any combination, but are not allowed to raise debts unless and until they have to meet their operational requirements.

‘Fund of funds’ is essentially an investment strategy to make a complete portfolio of other funds for investment rather than doing the investment only in bonds, stocks or other securities.

The category-III AIFs, consisting of hedge funds, are those funds which are involved in trading activities to reap short-term returns.

Is there a redressal unit to tackle the complaints against AIFs?

SEBI uses a web-based centralized grievance redressal system known as SEBI Complaint Redressal System (SCORES), a portal wherein the investors have been lodging their complaints against the AIFs.

SEBI released few guidelines for compulsory performance benchmarking of AIFs for the welfare of the entire industry.

It will enable the investors to analyse the additional value that this AIF will yield as compared to the traditional investment options.

Lack of a proper benchmark does not give a clear indication of the market statistics and the way forward for the fund to perform.

Also in accordance to the AIF Regulations, for dispute resolution, the investment fund either by itself or through the sponsor or manager, is entitled to specify the procedure for resolving the disputes between the investors, AIF, Manager or Sponsor through arbitration or a preferred means, as decided by the AIF and the investors.

Detailed research on the above parameters for the Alternative Investment Fund is essential for you to invest in it.

In the current market scenario, as Alternative Investment Funds gain better acceptance amongst investors, diversification of risk is the only solution to reap higher returns.

Hence, investment in Alternative Investment Funds (AIFs) is undoubtedly the best option.

 

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Offshore Funds: A Safe Bet for Indian Investors?

Offshore Funds: A Safe Bet for Indian Investors?

An investor’s life is full of choices, especially when you can diversify the investment portfolio to combat any financial risk.
Out of the many investment options available these days, offshore funds have become a household name as more and more investors have been considering this fund as a suitable investment option.

 

 

What are offshore funds?

Offshore funds also referred to as the international funds are different mutual fund schemes that make investments in the foreign markets.

These schemes are known to invest in equities and stocks, shares, interests, partnerships, mutual fund schemes or even fixed income securities in the international market.

An international fund is an open-ended investment fund that could have its own entity, could be a corporation, a limited partnership firm with a presence abroad or a unit trust.

These funds and the Asset Management Companies (AMCs) managing these funds, have to comply with the rules and regulations devised by the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI) and also with the foreign country, where they have been registered.

The operating pillar behind an offshore fund entails a custodian, a fund manager, an administrator and a prime broker.

 

Offshore Funds in India

India has a huge variety of offshore funds in the form of thematic, country-specific and region-specific schemes.

You can choose from varied funds that consider the US or Brazil or the European market, as a safe haven for mutual fund investments. 

There are sector-specific funds too that you can select from in sectors like energy, gold, real estate and consumption.

The process to invest in this fund is fairly simple, first, you have to shortlist the fund after having done thorough research on both the Indian and the international markets.

Either you can invest online or you can submit a cheque and the application form to the selected fund house.

All these transactions are essentially done in the home currency, i.e. the Indian Rupee. There are three factors like taxation, investor demand and regulation, that influences the country to choose the fund they want to incorporate in.

If you, as an Indian investor is planning to invest in a mutual fund from the US, you have to consider your need and demand for the fund, the financial market rules and regulations that you would have to abide by and the tax implications of this investment. If it proves to be beneficial and lucrative, you would certainly decide to go ahead with this investment.

Alternatively, these funds also known as a fund of funds can be invested in the international markets either directly or have the option to be invested in other funds in those markets.

The international funds are called the ‘Fund of funds’ because it invests in companies located anywhere in the world.

Usually, the accumulated money will be in stock markets of other countries like the USA, Brazil, etc., in this fund.

Since the same fund is invested in more than one foreign market, it implies more risk exposure, thereby indicating chances of higher returns too.

The second option is called the ‘Feeder route’ and is quite prevalent these days. Funds investing in international mutual funds scheme generally of the parent company and is managed by an overseas fund manager. This is the concept of a ‘Feeder Fund.’

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Scepticism Around Offshore Funds in India

Foreign regulatory authorities manage international investment influx into the Indian markets as the Indian regulatory bodies like the RBI and the SEBI do not encourage fund managers based in India to manage foreign mutual funds.

In due course of time, asset managers who were employed by these funds in India to handle their accounts, relocated to offshore sites, as they were not authorized to handle offshore funds from India. This disrupted the growth of these funds here.

 

Hence few activities had to be shifted to manage the mutual fund sector internally.

One way is to manage the offshore funds from India without levying any tax on them as an Indian entity.

Alternatively, the RBI approved direct investment by overseas investors in foreign mutual funds established in India in 2015.

Some remedies were devised to ease this situation with the implementation of Section 9A of the Income Tax Act 1961 that was amended in the 2015 Finance Bill.

It states that the revenue from some offshore funds could claim tax exemption if a fund manager based out of India is handling them, to rule out double taxation.

Also, SEBI-registered foreign portfolio investors (FPIs) comply with broad-based requisites of diversification when it comes to the investors’ participation, thereby rendering it eligible as a viable investment option.

This leads to many investors considering offshore funds as an attractive investment option.

Why should you invest in offshore funds?

If you are in a dilemma whether to invest in an offshore fund or not, you can rest assured that you have taken one of the best financial decisions ever. Why so?

Though the Indian stock market has a diversified set of stocks, there are still many stocks or businesses that are not listed with the Indian stock exchanges, namely few IT giants and some cold beverage companies.

But the option of investing in the offshore funds can make you an integral part of their business growth stories as you diversify across sectors and geographies.

You get an opportunity to make investments in world-renowned brands and businesses, thereby creating an outreach into several sectors.

The global financial market is very volatile and with the current pandemic, rapid currency fluctuations are indeed worrisome.

The falling rupee (INR) has been a concern for Indian investors throughout this financial year.

Diversified investments could be a means to hedge the capital from so much uncertainty.

If you have invested in a US-based offshore fund and the rupee value depreciates against the dollar, the amount of a rupee to be exchanged for one dollar increases.

This signals a market downturn and loss of capital as more amount of the Indian currency has to be paid for every unit of the dollar.

Hence, the currency-adjusted returns yield positive gains for Indian investors if they invest in offshore funds.

Additionally, when the Indian market witnessed a bearish trend, the global markets could yield a higher return.

You as an investor can expect attractive investment returns as the countries in which they are invested, offer tax rebates to foreign investors (tax havens).

These offshore funds registered as an international corporation enable an easy establishment and administration of funds due to easier and lower regulations, coupled with few investment rules.

This causes the fund to reinvest the accumulated gains as the income is tax-free as these are considered a debt.

While their management fees and operating costs are comparatively lower, these funds protect the investors’ capital from being subjected a to high tax burden, which they would have otherwise been subjected to if they would invest in their resident country.

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Taxation of Income and Gains from Offshore Funds

There are few tax norms that the fund has to adhere to while trading in the financial market in accordance with the guidelines and compliance procedures mentioned under the Income Tax Rules, 1962.

International mutual funds are usually treated as a non-equity scheme for taxation, whereby they are taxed like the general debt mutual funds.

This is a major factor while you decide to invest in the offshore fund as you being the investor does not need to pay any tax on dividends declared by their schemes.

Several other factors to be satisfied by the fund, referred as eligible investment fund (EIF), would imply that the fund should be from a country with which India has a tax treaty or from a specified territory with a certain minimum number of investors.

The fund with a corpus of around 100 crores should not be involved in any kind of business operations, directly or indirectly in India.

In addition to that, the Indian investment manager or the fund manager has to be registered with the Securities and Exchange Board of India regulations and should not have any illegal connections with the eligible investment fund.

Learn more about the concept of taxation in Mutual funds

 

Risks of Investing in Offshore Funds

Despite getting a few advantages, there are a few limitations that these funds have, which you would like to bear in mind before making any investment.

Any kind of stock investment is risky, in addition to which international funds also have the fear of associated currency risk.

Currency risk is associated with market volatility in the value of the other currency against the Indian currency.

Since this fund is based out of a foreign country, the terms and conditions of the fund may not be well explained to the domestic investor, which might lead to unprotected and unexpected loss of capital.  

Even though you invest in the international market in Indian rupee, the fund house will take into account the risks associated with the international market exposure in various currencies, tax regulations, policies and other developments in both the resident and the foreign country.

Thus, if you are an investor planning to invest in the international stock exchange, you need to be wary of the associated currency risks as any currency fluctuation will directly impact its Net Asset Value (NAV).

Any bearish movement of the stock will adversely affect its returns.

Moreover, a huge investment is required to set up an offshore fund, which is also associated with higher risks both in the resident and foreign country.

Investments in these funds are usually done for the long term to earn higher returns, so the investor suffers from some liquidity risk too.

Measures to mitigate the offshore fund investment risk

Offshore fund investment is very risky and therefore, it’s essential to keep a few points in mind before you decide to invest in foreign stock.

First and foremost, you should do a deep dive research and analyse the current economic and political conditions of the offshore country in which the selected fund house has plans to invest in.

Most of these funds offer a competitive advantage, but few non-mainstream funds could be subject to fraudulent activities due to some lenient and relaxed regulations in the offshore locations.

Initial investment should be a smaller amount to start with to understand the market sentiments.

While selecting funds, you should choose funds that give better exposure to investments for global opportunities, rather than being a country or region-specific.

Since the financial market is flooded with different types of funds, you should select those funds which are financially stable and have a transparent trading mechanism.

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The current state of India focussed Offshore Funds and Exchange Traded Funds (ETFs)

Investments into India-focussed offshore funds are considered to be long term in nature vis-à-vis investments in ETFs, which are short term in nature. 

India-focussed offshore funds and ETFs are some of the prominent investment vehicles through which foreign investors invest in Indian equity markets.

 

Research by Morningstar Direct, an investment analysis platform, states that India-focussed offshore funds and exchange-traded funds (ETFs) registered a whopping figure of $1.5 bn during April to June 2020. Despite the global pandemic, the offshore funds witnessed a bigger net outflow of $14.5 bn from February 2018 to June 2020, as compared to a lesser outflow of $4.2 bn from the offshore Exchange Traded Funds.

The higher net outflow from India-centric offshore funds indicates that foreign investors with long-term investment horizons have been adopting a cautious stance towards the country due to the current economic circumstances and the global crisis due to the pandemic.  

To study the future trend of these offshore funds, you need to keep a track of how India would fare in its fight against the coronavirus pandemic versus its peer countries, and how successful is the government in restoring the country’s dwindling economy on track amidst a global crisis.

Though there’s a net outflow of $1.5 bn, an upsurge in the domestic equity market in large-cap, mid-cap and small-cap, impacted the asset base of the India-focussed offshore funds and ETFs category on a positive note by Q22020.

So, if you plan to invest in offshore funds, please ensure to evaluate the pros and cons of such an investment for better returns.

 

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Consolidated Account Statement – Everything You Need to Know About CAS

Consolidated Account Statement – Everything You Need to Know About CAS

1. What is Consolidated Account Statement (CAS)?

CAS is a statement consisting of transactions and holdings in investor’s Demat account(s) held with CDSL and NSDL as well as in units of Mutual Funds. CAS includes

  • All stock transactions(sell, buy)across Demat accounts which changes the number of shares in Demat account,
  • All mutual fund transactionssuch as New Fund Offer, fresh purchase, additional purchase, redemption, switch in and out, dividend reinvestment, dividend accrued, systemic transactions such as SIP / SWP / STP, bonus, merger, etc.

The image below shows an excerpt of the NSDL CAS statement for Demat accounts and Mutual Fund Folios.

NSDL CAS statement for Demat accounts and Mutual Fund Folios

 

NSDL CAS is part of the overall vision to enable all financial assets to be held electronically in a single demat account, which was articulated by Finance Minister in his budget speech of July 2014.

As a step in this direction, SEBI has introduced this Consolidated Account Statement for all securities assets by consolidating demat accounts and mutual fund folios. NSDL Circular No. NSDL/POLICY/2014/0079 dated July 3, 2014 (Ref. SEBI Circular No. CIR/MRD/DP/21/2014 dated July 1, 2014).

 

2. Why does one need CAS?

Investors find it difficult to have a complete picture of their portfolio. Most investors do not readily know the total value of their portfolio or its composition.

If you contact your Stockbroker/Mutual Fund AMC then you would receive statement pertaining to just the Demat account or Mutual Fund folio’s maintained by that DP/MF.

Unless an investor is well-organised and keeps proper records, he cannot easily compile a list of all his investments.

When you open a Demat account and buy any shares, your shares are held by depositories.

The depository is similar to a bank, but while a bank holds your money, they hold stocks, shares, bonds etc. There are only two depositories in India – NSDL and CDSL. 

If you’re an Investor or Trader who holds positions for more than a day, then it’s a good idea to keep track of your holdings directly in NSDL and CDSL, apart from tracking them Broker’s trading platform.

 

3. When does one receive CAS?

As per SEBI circular no. CIR/MRD/DP/31/2014 dated November 12, 2014, if there is any transaction in any of the Demat accounts of an investor or in any of his mutual fund folios, then CAS shall be sent to that investor for that month.

The image below shows the CDSL CAS statement showing monthly transactions.

If there is no transaction in any of the mutual fund folios and Demat accounts then CAS shall be sent to the investor on half-yearly basis i.e holdings of March and September end will be sent in April and October respectively.

CDSL CAS

CDSL CAS showing Transactions in the month

 

4. Which Demat accounts and Mutual Funds are in CAS?

All investments held in single or joint names with you as the sole/first holder are a part of your CAS as shown in the image below.

As per SEBI guidelines, the consolidation of account statement is done on the basis of Permanent Account Number (PAN).

In the case of joint holders, it is based on the PAN of the first holder and pattern of holding. Based on the PANs provided by the AMCs/MF-RTAs, the Depositories match the PANs available in the Demat account of the clients to determine the common PANs and allocate the PANs among themselves for the purpose of sending CAS.

For PANs which are common between Depositories and AMCs, the Depositories send the CAS. In other cases (i.e PANs with no Demat account and only MF units holding), the AMCs/MF-RTAs CAMS/Karvy/FTAMIL/SBFS’ shall continue to send the CAS.

NSDL CAS statement with all demat accounts and Mutual fund folios

NSDL CAS statement with all demat accounts and Mutual fund folios

 

5. If an investor has multiple Demat accounts across the depositories which depository will send the CAS to investor?

In case investors have multiple Demat accounts across the two depositories, the depository having the Demat account which has been opened earlier shall be the default depository which will consolidate details across depositories and MF investments and dispatch the CAS to the investor.

For example, first I opened Demat account in ICICIDirect.com which is associated with NSDL and later opened an account with Zerodha which is associated with CDSL. So I get CAS statement from NSDL and not from CDSL.

To ensure receipt of CAS by email the investor should update his email id with his Depository Participant (DP) along with consent for receiving transaction statements by email.

The investor can request for change of default depository to receive the CAS by informing the Depository Participant (DP) of the default depository from whom he is receiving the CAS. NSDL CAS statement is better than CDSL.

 

6. What is a depository? What are NSDL and CDSL?

The depository is an organization which holds financial securities with it in DeMat form i.e electronic form. The depository is similar to a bank, but while a bank holds your money, they hold stocks, shares, bonds etc.

It is responsible for maintenance of ownership records and facilitation of trading in dematerialised securities. There are only two depositories in India – NSDL and CDSL. When you open a Demat account and buy any shares, your shares are held by these depositories.

Moreover, when a company needs to know its shareholder detail to send dividend, rights or for any other notification, it can ask for the information from these two depositories in India. Even you can open an account with two DP’s and you can transfer the share from NSDL to CSDL and vice versa

  • National Securities Depository Limited (NSDL) which is promoted by the National Stock Exchange, Industrial Development Bank of India and Unit Trust of India among others. For CAS NSDL website is https://nsdlcas.nsdl.com/
  • Central Depository Services Limited (CDSL) which is promoted by the Bombay Stock Exchange, State Bank of India, Bank of India among others. Its website is https://www.cdslindia.com/

Depository interacts with its clients or investors through its agents, called Depository Participants popularly called DPs. For any investor to avail, the services provided by the Depository has to open Depository account, known as Demat Account, with any of the DPs.

A DP can be a bank, financial institution, brokerage house, or similar entity. To be eligible, it must be registered with the Securities and Exchange Board of India (SEBI) and comply with its norms and guidelines. The image below shows the interaction between investors(buying/selling stocks), Exchange, Depository and Depository Participant(DP)

You can’t directly choose which depository to open an account. It is the broker or the Depository Participant (DP) how decides on it.

 

Relation between Stock exchange, depository and DP

Relation between Stock exchange, depository and DP

Demat Account Number, DP Id and Customer Id

A Demat account number is a combination of the DP ID and the customer ID of the Demat account holder. Usually, the first 8-digits of your Demat account number is your DP ID where the last 8-digits of your Demat account number is the Customer ID of the account holder.

For NSDL, the Demat account number starts with “IN” followed by a 14-digit numeric code.

For example,

  • For CDSL, if your Demat account number is 0101010102020202, in such a case 01010101 is the DP ID and 0202020202 is the Demat account holder’s customer ID. The Demat account number is also known as Beneficiary Owner ID or BO IDin the case of the CDSL
  • For NSDL, if a Demat account number is IN12345698765432, in that case, IN123456 is the DP ID and 98765432 is the customer ID of the Demat account holder.

Know more about NSDL and CDSL

To know more & for any further query regarding NSDL CAS, visit https://nsdlcas.nsdl.com. You can also call at 1800222990 (Toll Free Number) or write at NSDL, 4th Floor, ‘A’ Wing, Trade World, Kamala Mills Compound, Senapati Bapat Marg, Lower Parel, Mumbai – 400 013.

If you’re an Investor or Trader who hold positions for more than a day, then it’s a good idea to keep track of your holdings directly in NSDL and CDSL, apart from tracking them Broker’s trading platform.

 

7. How to register for/download NSDL e-CAS?

Step 1: Visit: https://nsdlcas.nsdl.com/

Step 2: Click on NSDL e-CAS on the top menu bar. You can subscribe to regular e-CAS by putting in your CAS ID and PAN details. You will receive your e-CAS on your registered E-mail ID regularly. In case you don’t know your CAS ID click on ‘Know your CAS ID’

Know your CAS ID

Step 3: By clicking on ‘Know your CAS ID’ a pop will appear, put in your PAN details, DP name and ID (Company you hold account with) and your client ID. Then click on submit to know your CAS ID.

submit to know your CAS ID

Step 4: If you know your CAS ID and want to access an e-CAS of a particular month & year. Click on ‘Track Your CAS’ from top menu bar. You will be scrolled down to the section there click on the ‘Click here button’ a pop up will appear.

Put in your CAS ID, PAN, registered E-mail ID and the month/year e-CAS you want. Click on submit and e-CAS will be mailed.

track your CAS

 

8. What does NSDL CAS look like?

NSDL CAS enriches investor experience of managing his portfolio effectively because of

  • Graphical representation
  • A complete summary of all the holdings in Demat and Mutual Funds
  • Portfolio classification as per different asset class

 

 

9. How to Register for/Download CDSL e-CAS ?

Step 1: Visit: https://www.cdslindia.com/cas/logincas.aspx

Step 2: Put in your PAN Card detail, BO ID (Beneficiary owner identification number it is the Demat account number allotted to the beneficiary holder(s) by DP. In CDSL it is 16 digits number. Then put in your DOB. Click on Submit.

step 2 CAS id

Step 3: By clicking on submit automatically a One Time Password (OTP) is send to your registered mobile number. Put in the OTP and submit.

step 3 CAS id

Step 4: You can select the year and month click on search to download the e-CAS statement. The e-CAS statement is password protected and to open the same you need to put in your PAN details in ALL CAPS.

step 4 CAS id

 

10. What does CDSL CAS look like?

CDSL does not look flashy as NSDL and it provides information on all the holdings in Demat and Mutual Funds.

The image below shows the CDSL CAS statement showing Mutual Funds Holdings.

It does not show Folio Number which is available in NSDL CAS. Our article What is Folio Number in Mutual Funds? explains the Folio number.

An ISIN code is a 12-digit alphanumeric number that is used to identify specific securities ex: share or mutual fund.

CDSL CAS showing Mutual Fund Holdings

CDSL CAS showing Mutual Fund Holdings

 

 

 11. What is ISIN Code?

 

In CAS statements details about Mutual fund or stock are in terms of ISIN number.

 

An ISIN code is a 12-digit alphanumeric number that is used to identify specific securities ex: share or mutual fund. 

For example, ISIN number of Reliance is INE002A01018 while ISIN of Microsoft which is a US-based company is US594918104. ISIN number is broken down:

  • First two letters of the ISIN code refer to the country in which the issuing company is based out of. Ex for India it will be IN.
  • The next nine digits identify specific security and act as a unique identifier.
  • The final character also referred to as the ‘check digit’ checks forgery.

Overview of ISIN number

  • An ISIN is a code that uniquely identifies a specific securities issue.
  • The numbers are allocated by a country’s respective national numbering agency (NNA).
  • An ISIN is not the same as the ticker symbol, which identifies the stock at the exchange level. The ISIN is a number assigned to a security that is universally recognizable.
  • ISINs are used for numerous reasons including clearing and settlement. The numbers ensure a consistent format so that holdings of institutional investors can be tracked consistent across markets worldwide.

In India, the task of issuing ISIN for various securities has been assigned by the Securities and Exchange Board of India (SEBI) to the National Securities Depository Limited (NSDL). For the government securities, the allotment of the ISIN code is regulated by the Reserve Bank of India (RBI).

The NSDL was established in August 1996, under the aegis of the Depositories Act, 1996. You can use the NSDL website to look up and verify ISIN codes.

 

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