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.
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.
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.
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.
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:
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.
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.
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.
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:
Exchange Traded Funds
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.
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.
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.
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.
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.
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.
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.
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 –
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.
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.
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.
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.
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
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.
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.
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.
Risk return dynamics: Structure product boosts the portfolio return by investing in growth assets and manages risk efficiently by investing in derivatives.
Hybrid exposure:Exposure to two or more asset classes and mix of traditional and non-traditional assets offer efficient diversification to your investment portfolio.
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.
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.
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.
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.
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.
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.
When it comes to housing, you have two options of picking a home – renting and buying. Which, of these two options, do you think is better?
Renting a home is feasible if you don’t have sufficient funds in your hand to invest in a house.
Moreover, if you relocate frequently, renting is a better bet. Owning a home, on the other hand, is beneficial since you can create an asset for yourself and your family. Even if you don’t have considerable funds, you can always opt for a home loan to buy your own dream home.
You should consider your current income, financial standing, existing debt, asset liability ratio and affordability before you decide to buy a house. Moreover, the following pros and cons of buying your own home should be considered –
Watch the video as we explain the basic concept of buying vs renting a home
Pros of buying a new home
Creation of an asset
Legacy for your family
No hassle of dealing with landlords or uncertainty of accommodation
No compromise on designing the home
Long term investment
Home loans give you tax benefits
Cons of buying a new home
Considerable upfront cost even if a home loan is availed
Recurring EMIs might prove to an added expense
Reduction in mobility
Lower disposable income if you have started your career
Additional maintenance costs
Even though buying a home has its drawbacks, it proves to be a wise decision in the long run.
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Tips for buying a home
When you decide to buy a house, it is an emotional decision and you should ensure that you have considered all relevant factors before choosing your dream home. These factors include the following –
Cost of the house
Area of the house
Shopping around for home loans
Checking the terms and conditions of the property
Buying a home might be a one-time decision and since it involves a considerable amount of money you should be careful when choosing a home.
Very few individuals can procure the entire cost of buying a home and this is where a home loan comes into the picture. Home loans give you funds to buy a house of your choice without putting a big dent into your savings. The benefits of home loans are as follows –
It is a good loan because it boosts your credit score, builds your credit history and gives tax benefits
It helps in funding your dream home easily
It is quick to avail and you can get the funds easily
The loan can be used to finance up to 90% of the cost of the home
The loan is available for buying a ready home, under construction home or even a plot of land
You can avail a home loan for reconstructing an existing home
Home loans are affordable with a low interest rate
One of the primary benefits of home loans is that it offers tax benefits. Let’s understand these benefits in details –
Income Tax Section
Principal repayment of the home loan is allowed as tax deduction from your taxable income up to Rs.1.5 lakhs
Registration charges and stamp duty paid on the loan are tax deductible
Interest paid on a home loan is available as an exemption up to Rs.2 lakhs
If you are a first time home buyer, interest paid on the loan would be allowed as a deduction up to Rs.50,000 in addition to Section 24(b)
If a home is bought up to 31st March 2020 by a first time home buyer and the stamp duty cost of the home is up to Rs.45 lakhs, additional deduction is available on the interest paid on home loan. The limit of deduction is Rs.1.5 lakhs over and above the limit under Section 24(b)
Watch the video as we explain the basic concept of how you can save tax on home loans
So, buy your own home with a home loan and get tax benefits as well as build your credit score. Understand how to choose a dream house and then invest in one.
For a complete guide on buying a house, you can take this course to understand the various aspects of buying and owning your home rather than renting it.
Tax is a type of federal revenue collected by the Government from individuals and companies. Tax can be a direct tax or an indirect tax. Direct tax is charged on the income of an individual and is also called income tax. Indirect tax, on the other hand, is charged on goods and services, like GST.
Income tax is a direct tax levied by the Government on your earnings. Whatever be your source of earnings, if you earn an income in a financial year, you are liable to pay tax on the same. If you have multiple sources of income, these sources are aggregated together to give you the total income on which you have to pay tax.
What are 5 Heads of income?
For the purpose of income tax calculation, there are five heads of income under which your income can be classified. These heads are as follows –
Heads of income
Income from salary
Income that you earn as salary from being employed
Income from business or profession
Income earned from your business or from profession
Income from house property
Rental income or income earned when selling a house
Income from capital gains
Income earned when a capital asset is transferred
Income from other sources
Income which does not fall in any of the above-mentioned heads
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Amount of tax payable
The amount of tax payable depends on your total income earned in a financial year. The Government has specified an income tax slab and your tax liability is calculated as per the tax slab. The tax slab for individuals below 60 years of age is as follows –
Up to Rs.250,000
Rs.250,001 to Rs.500,000
Rs.500,001 to Rs.10,00,000
Rs.10,00,001 and above
A new tax slab has also been proposed from the financial year 2020. This slab is optional, has lower tax rates but disallows deductions and exemptions. The new tax slab is as follows –
To reduce the tax liability of taxpayers, the Income Tax Act, 1961 has allowed a range of deductions which can be claimed from the taxable income. These deductions help in bringing down the tax liability and saving tax.
Income tax deductions are contained in Chapter VI A of the Income Tax Act, 1961 from Sections 80C to 80U. You can utilize any of these sections if you are eligible for the deductions and save taxes.
Tax saving investments
Investments which help in reducing your tax liability are called tax-saving investments. Investment into these avenues help you claim deductions from your taxable income and lower your tax liability. Some of the common and popular tax-saving investments include the following –
These tax saving investments are available under Section 80C of the Income Tax Act, 1961. Moreover, if you invest in health insurance, you can claim a deduction of up to Rs.1 lakh under Section 80D. The NPS scheme also helps you save additional tax of Rs.50, 000 under Section 80CCD (1B).
After registration, log into your account and choose the correct ITR
Download and fill up the ITR with the details of your income, applicable deductions and exemptions
Submit the filled ITR online and verify it and your income tax filing would be done
Important things to consider while filing income tax
While filing your income tax return is an easy process, here are some important things which you should consider –
N If TDS is deducted from your income, the same would reflect on the income tax website and you would also get a TDS certificate. Thus, when you pay your tax, deduct the TDS already paid and pay the remaining amount of tax.
If the TDS paid on your behalf is higher than your total tax liability, you are eligible for an income tax refund. Income tax refund is the refund of excess tax paid by you. It is refunded by the income tax department after you file your taxes. You just have to claim a refund when filing your ITR and the refund is credited within 3-4 working days directly in your bank account.
Form 16 is issued by the employer to its employees. It contains the details of TDS deducted from the salary and deposited with the Government on behalf of the employee. The form is issued in two parts, A and B and it contains the details of the employee, employer, salary paid and the TDS deducted thereon. Form 16 is needed at the time of filing your ITR
While Form 16 contains the TDS details of salary, Form 26AS is a consolidated statement which contains the details of TDS deducted from all sources of income. Thus, you can use Form 26AS to find out and match the total tax deducted from your income in a financial year.
Paying the correct amount of tax and filing your returns timely is your federal duty which you should not avoid. So, learn the basics of tax filing and the ways in which you can save tax. For a more informative guide to taxation you can refer to this course. It contains the in-depth understanding of tax and how to reduce it and would help you to calculate the correct tax liability.
Having a good education is the foundation stone for a bright career. Your education determines your success and that is why a good education is always stressed upon by parents. When it comes to education, international education is a dream which every parent has for their children. They want their kids to receive education from a reputed international institute to give them an edge in their career.
Education, whether domestic or international, proves to be quite expensive. Education inflation is steadily rising and pursuing higher education in any reputed institutes requires a considerable amount of money. While parents save money to educate their child, sometimes, the savings might not prove sufficient, especially given the increasing cost of education. In such cases, an education loan comes to the rescue.
An education loan is a loan which is allowed by banks and non-banking financial companies to fund higher education. You can avail a loan for yourself, your children and even for your dependent siblings for financing their education. Some of the features of education loan are as follows –
The loan funds the cost of tuition, admission, boarding expenses and other costs related to the course being financed
The loan is a good loan as it offers tax benefit on the interest paid for the loan under Section 80E of the Income Tax Act, 1961
The repayment usually starts a year after the completion of the course of getting a job, whichever is earlier
The repayment tenure allowed is between 7 to 10 years
How to apply for an education loan?
You can apply for an education loan either by visiting the branch of a bank or NBFC offering the loan or online. Online application can be done either through the website of the bank or NBFC or through the website of loan aggregators. Aggregators are better as they allow you to compare the loan offers of different lenders and then choose one which has the lowest interest rate. A collateral security might be needed to avail the loan when the loan quantum is high. You must also fulfil the eligibility criteria of the lender to avail the loan.
Benefits of education loan
An education loan is beneficial in the following respects –
Ease of financing quality education
Funding international education
Protect your financial savings from being drained
Affordable interest rates
Funding of all types of expenses incurred in higher education
Tax benefit on interest paid
Easy repayment which allows the student time to get a job before loan repayment starts
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Affording an education loan
An education loan has a long repayment cycle and also a low interest rate. These factors make it easy for parents to afford an education loan. Moreover, the tax benefit allowed at the time of repayment of the loan also helps you increase your disposable income therefore making the loan affordable.
Repayment of an education loan
Repayment of the education loan is done through EMIs. The EMIs depend on the rate of interest, principal amount of loan and the repayment tenure selected. The repayment starts a year after completion of the course and getting a job. This allows students to easily pay off the loan. As a parent, you should make your child repay the loan from his/her income. This makes your child financially responsible and also reduces your debt burden.
Estimating the amount of education loan
When planning for your child’s future, you need to estimate the cost of education which would incur when your child pursues higher education. Moreover, if you are availing an education loan, you need to assess the amount of loan needed to sufficiently cover your child’s education expenses.
When estimating the cost of the child’s higher education, inflation should be considered. Inflation would increase the cost of education in future and so you need to find out the actual funds needed. For instance, if a course today costs Rs.10 lakhs, in 10 years’ time, it might double to Rs.20 lakhs.
You, therefore, need to plan to accumulate Rs.20 lakhs by the time your child needs funds for education. Thereafter, when the time comes, you can finance the education of your child through your savings and also through an education loan if your savings fall insufficient.
Education is a very important thing for your child and being a parent, you would want the best for your children. To afford the best education, you can save and also avail an education loan to ensure that your child does not have to compromise on the education which he/she should receive. For complete details on education loan, take this course on financial planning and understand what the loan is all about and how it works.
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