Why HNIs should consider Investing in AIF's

Why HNIs should consider Investing in AIF's

→ Driven by a high-performing market & low interest rates globally, India has increasingly become the preferred investment destination for global investors seeking double-digit returns. India attracted the highest ever FDI inflow of close to $70 billion during the first 9 months of FY 2020-21. It is, therefore, no surprise that millions of Indians are taking to more sophisticated investment vehicles & financial instruments as India continues to multiply wealth. This marks a paradigm shift from traditional physical assets, such as real estate, gold & bank deposits.

→ In addition to mutual funds & equities, Alternative Investment Funds (AIFs) have witnessed significant interest from domestic investors.

What are Alternative Investment Funds (AIFs)?
→ Alternative Investment Funds differ from regular conventional investments like public equities or debt securities. These funds are privately pooled funds which invest in venture capital, private equity, hedge funds, infrastructure, etc.
→ Currently, there are nearly 700 AIF's with over ₹ 4 trillion in investments, an impressive 15x growth since 2015.

What's driving AIFs in India
→ India is one of the fastest growing economies with a vibrant business ecosystem & the third largest startup ecosystem globally. Furthermore, Covid has resulted in major changes such as digitalization across industries, the rapid rise of health tech, widespread adoption of remote work, etc. The startup ecosystem, hence, is well poised to drive digital adoption in India and will be the real delta driving the economy in this decade. This is corroborated by the significant fundraising by India-focused funds in 2020, that raised $3 billion despite the pandemic.
→ In order to continue its fast-paced growth, however, infrastructure conforming to global standards is imperative for our country. AIF's have provided a viable route to make investments in public & private infrastructure much more accessible to investors who wish to capitalize on the opportunity presented by the development needs of India. This serves as a lucrative investment alternative for investors while contributing significantly to the overall economic growth.
→ To put things into perspective, India has already seen a record number of 12 Companies attain unicorn status to date in 2021. Additionally, more startups are getting public-market ready & set to launch their IPO's. These are strong indicators of the Indian market moving towards maturity. AIF's stand to benefit from the developments taking place in the venture ecosystem in addition to the overall infrastructure development drive by public & private players alike.

Growth of AIFs in India
→ The key growth enabler for AIF's has been the funds’ ability to customize & curate products across asset classes. These funds are managed by experienced fund managers who adopt sophisticated strategies. Therefore, these funds do not correlate to the stock market & help investors add diversification & reduce volatility in their portfolios. Proprietary investment techniques coupled with strategic diversification has led to higher returns compared to mutual funds, stocks & bonds.
→ The growth must also be attributed to growing investor awareness & flexibility in product offerings. More HNI's are setting up professionally-run family offices with specific investment mandates & allocation strategies. Investors can appropriate a portion of investable capital to different alternative products based on their risk appetite & target returns.
→ AIF's funds are generally subject to higher volatility, liquidity & credit risks than investments in traditional securities, which may act as a deterrent for investors. Investors today, however, have access to various products that offer high liquidity & low volatility. Most importantly, well-managed funds with a keen focus on comprehensive credit analysis & monitoring can greatly reduce the credit risk involved. For example, venture debt has the potential to yield high double-digit returns with reasonable certainty owing to the nature of the product. It also allows investors to participate in the equity upside, while earning a relatively predictable return on the debt component with regular payouts.
→ Although a long way to go, the investment narrative of India is changing as investors have started to embrace India’s growth story with domestic investors playing a pivotal role. This is driven by the belief that the country can build shared prosperity by transforming the way the economy creates value.

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Comparison : Safety of Savings Bank A/c, Fixed Deposits Vs Stocks & Mutual Fund Investments

Comparison : Safety of Savings Bank A/c, Fixed Deposits Vs Stocks & Mutual Fund Investments

→ In Fixed Deposits & Saving Account, your money doesn't grow but eventually die in fight against Inflation.
→ But In Stock market, your money will Grow & will transform into Wealth Creation.
→ If you don't much understand about Investing than Invest your Hard earned savings in Sector leaders in SIP mode or do SIP in ETF's (Niftybees, Juniorbees, N100 & GoldBees)
→ Real Investing is to be done for a time horizon 5-10-15-20 Years - Not for 3 months to 24 months period.
→ There is very big difference in Investor & Trader.
→ Lifestyle inflation is the biggest threat to our financial independence & retirement planning.
→ You are not truly Wealthy, until & unless you own your Time & Wisdom.
→ It might take months, years OR a Decade, but ultimately everything in Stock Market will revert back to you in More Meaningful & Fruitful Way if you truly desire.

→ "Try to be a master on PATIENCE". Only patience will makes your successful in stock market.
→ The journey will be very Long & Difficult.

→ When we Invest knowing all the facts in Mind & the Right Vision, Big Money Follows.

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Now - Perfect Time to invest in Gold : Sovereign Gold Bonds : 2021 Series (#SGB)

Now - Perfect Time to invest in Gold : Sovereign Gold Bonds 2021

Current Scenario when the pandemic has caused significant disruption with :
→ Falling interest rates: have reduced the returns from Fixed Income Instruments
→ Equity markets plunged significantly due to panic selling caused after spread of COVID-19 & thereafter have continued to be volatile
→ Gold gets attractive as an investment class when equity & debt markets are volatile
All of this leaves Gold in a sweet spot

Why invest in Sovereign Gold Bonds :
Returns: Interest of 2.5% on the Issue Price & which is payable of half yearly basis + Appreciation of Gold
Safety: Sovereign Guarantee on redemption of Money (Principal) as well as on the interest earned
Elimination of risk and hassle-free holding as it eliminates cost of Storage as in physical gold
Liquidity: Tenure of 8 years with exit options in fifth, sixth & seventh year
Tradeable on stock exchanges from the date to be notified by RBI
Taxation Benefit: Exemption from Capital Gains Tax on redemption. 

No TDS Applicable on Interest paid
Indexation Benefit: Will be provided on LTCG arising to any person on transfer of bond
Collateral: Accepted as collateral – Can be kept as collateral / security against Secured Loans
Disclaimer: Please consult your Tax consultant for Taxation purposes..

Risks associated with investing in Sovereign Gold Bonds :
→ Gold is traditionally a very safe investment & typically the risk associated with Sovereign gold bonds is very low
→ However, given the fact that gold rates depend on market performance, any drop in gold rates could put the capital at risk, which would be the case even if one owned physical gold
→ Regardless of market rates, an investor should take solace in the fact that the amount of gold he purchased doesn’t change

Eligibility for Investing in Sovereign Gold Bonds :
→ Resident Individuals, HUFs, trusts, universities & charitable institutions
→ Persons resident in India as defined under Foreign Exchange Management Act, 1999 are eligible to invest in SGB
→ Individual investors with subsequent change in residential status from resident to non-resident may continue to hold SGB till early redemption/maturity.

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Comparison & Difference between Index Funds v/s ETF's

Comparison & Difference between Index Funds v/s ETF's
While index funds and ETF’s look similar, there are multiple differences you need to keep in mind before investing in either of them.

Let me highlight the important ones :

1. NAV (Net Asset Value ): Index Funds can be bought/sold like any other open-ended MF at the day end NAV from the AMC where as ETF’s can be bought like a normal stock during trading hours at the real time NAV/Traded Price or iNAV.

2. Expense Ratio: Theoretically, expense ratio of ETF is less than Index Funds but it does not include the brokerage to be paid while buying/selling the ETF through a broker on the exchange & hence don’t compare expense ratios directly between Index & ETF’s.

3. SIP/SWP/STP's: Index fund allows SIP, SWP, STP & ETF’s don’t.

4. DEMAT Account: Demat is mandatory for ETF’s & optional for Index Funds.

5. Bid-Ask Spread: This is extremely important. It is possible that the traded ETF may not have enough volumes & hence the traded price may be different from the live NAV (iNAV/actual to be NAV) resulting in additional cost.

6. Index Funds Vs ETF's - Retails Investor's Choice: What should retail investors choose between Index & ETF? - Retail should stick to index funds over ETF’s.

7. What to look for in Index funds before investing?
a. Index you want to invest in – Sensex, Nifty, S&P 500, Nifty next 50 etc. – depending on the risk/return expectation & diversification requirement of the portfolio
b. Expense Ratio – Lower the better.
c. Tracking differences and Tracking errors of the funds – Lower the better.


How does the AMC make sure the Traded price is close to iNAV?
a. Creating awareness about the ETF where by having natural secondary market liquidity.
b. AMC’s appoint market makers, whose job is to create liquidity in the ETF by quoting buying/selling prices on the exchange & there by keeping the Traded price close to iNAV.
c. If a large investor wants to buy/sell large quantity (Pre defined, lets say ₹ 50 Lakh worth of investment for an example), then the investor can directly reach the AMC & AMC will buy & sell directly at the iNAV & the investor does not need to go through the exchange.

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Debt Funds Vs Bank FDs – Which is more tax-efficient in the long run?

Debt Funds Vs Bank FDs – Which is more tax-efficient in the long run?

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In India, fixed deposits (FD's) continue to dominate the terrain of ‘comfort investments’ for a sizable section of investors, to guaranteed returns & low risks associated with fixed deposit investments, they have been the go-to investment option in India.

However, the tide is slowly turning against fixed deposits, not that people are moving to other investment avenues en masse & ditching FD's completely, but the realization is slowly gaining ground among a section of investors that returns offered by FD's may not be enough to beat inflation in the long run. Interest rates have been slipping since the last few years & lower rates tend to bring down yields on bank FDs. Add taxes to the mix & the investor is left with little in the name of profit. The returns offered by any long term investment avenue can be significantly eroded because of taxation policies.

This is slowly pushing more investors, especially those who want to avoid the riskier equities route to tap into debt funds. Depending on the fund you have invested in, debt funds can offer more impressive annualized returns & what’s more besides coupon payments you can also earn capital gains when bond prices go up as a consequence of falling interest rates. In terms of long term benefits debt funds outscore FD's when it comes to taxation.

Taxation on FD interest earned & Dividends on Debt Funds :

The interest that you earn on bank FD's is considered as your income when it comes to tax compliances. Your FD interest will fall under the subhead ‘Income from Other Sources’ in your Income Tax return. For example, if you fall in the 30% tax bracket & invest ₹ 10,00,000 in an FD for a year that offers 8% interest, your total corpus on maturity will amount to ₹ 10,82,999 and your gains after taxes will be ₹ 10,57,104 which effectively means that your post tax yield is around 5-6% which may not be high enough to tackle inflation in the long run.

One can argue that when it comes to debt funds, the dividend taxation is a villain especially after an amendment was made in the Union Budget 2020 that mandated that dividends received by investors would be added to their taxable income & taxed at their respective income tax slab rates. Previously, dividends were tax-free in the hands of investors as the companies paid dividend distribution tax (DDT) before sharing their profits with investors in the form of dividends. But what makes the case stronger for debt funds despite the dividend taxation conundrum is the fact that the dividend payout is an option that you can choose as an investor & if the tax bite is too much, you can always opt for the growth option.

Taxation on Capital Gains :

The fundamental difference between how fixed deposits & debt mutual funds are taxed is based on when the returns are taxed. For holding period less than three years there is no difference in how FD's & debt funds taxation work – the gains will be added to your income & you will have to pay income tax according to your income.

However, when the holding period is more than 3 years, the FD taxation formula remains the same but the taxation on debt funds changes. After three years, debt fund gains are classified as capital gains & the tax slabs differs for varying holding periods. If your debt funds have been held for more than three years, the gains would be classified as Long Term Capital Gains which attracts taxes of 20% with indexation & 10% without indexation. Indexation adjusts the purchase price of an asset to account for rise in inflation in the period between the purchase & sale of the asset. In the long run, indexation reduces your capital gains & ultimately your tax liabilities.

Another difference comes into play when you factor in TDS (tax deducted at source). For FD's, TDS is applicable on the interest earned if it is more than ₹ 40,000 a year (general citizen) & ₹ 50,000 a year of you are a senior citizen. You can adjust TDS with your tax liability by submitting Form 15G/15H to the bank & later claim a refund but it is a tideous procedure, whereas, with debt funds, you do not have to worry about TDS being levied when you sell your units.

Besides higher returns & lower tax burdens in the long run which would give you an extra mileage in the race against inflation, debt funds are also highly liquid and you can redeem them at a very short notice.

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