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Financial News Archives - Shah Financial

Category: Financial News

Navigating Uncertainties: The Art of Value Creation and Protection in Mutual Funds
In a world full of uncertainties—from geopolitical tensions to economic fluctuations—investors must focus on both value creation and value protection. The wisdom of legendary investor Warren Buffett has never been more relevant:

“Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1.”
India’s vibrant economy offers numerous opportunities across sectors and market capitalizations. Whether you’re looking at the stability of large-cap stocks or the explosive potential of small caps, micro caps, and SMEs, the Indian market provides a dynamic landscape for wealth building. But when market volatility strikes, the emphasis often shifts from creating value to preserving wealth. Successful investing lies in balancing the pursuit of growth with safeguarding what you’ve built.

Value Creation: Tapping into India’s Growth Potential:
Value creation is all about identifying and investing in assets that have the potential to appreciate over time. A classic approach is value investing—buying securities that are temporarily undervalued by the market due to short-term issues or overreactions. This requires a keen understanding of market trends and economic indicators that signal growth opportunities.

The primary goal here is growth—finding stocks, bonds, or other investments that can increase in value based on strong business fundamentals, market positioning, or innovative offerings.

“The size anomaly” in the Indian market is particularly interesting. Smaller stocks tend to outperform larger ones over time. This is a phenomenon seen globally, but it’s especially persistent in India. Over the last five years, the Nifty MidSmallcap 400 and Nifty Microcap 250 indices have posted impressive returns of 32.45% and 44.62%, respectively. Factors like market inefficiencies and information asymmetry in smaller companies can work to the advantage of investors who do their homework.

That said, while smaller stocks may seem attractive now, some sectors may appear overvalued. It’s crucial to prioritize companies with strong earnings visibility and reasonable valuations. In volatile markets, sticking to long-term fundamentals will help you weather frequent sector rotations.

Investors keen on SMEs should be strategic. Rather than chasing momentum or short-term gains, focus on SMEs with solid fundamentals, resilient business models, and growth potential. Key factors include profitability, cash flow management, competitive positioning, and market potential.

In terms of sectors, fintech, e-commerce, renewable energy, and biotechnology represent the future of the Indian economy. While startups in India are promising, they’re often still expensive and speculative investments. For most investors, traditional avenues like mutual funds and equities offer more reliable paths to wealth creation. High fees in venture capital and private equity funds also make startup investments less accessible.

Value Protection: Safeguarding Your Wealth:
While creating value is important, protecting your wealth is equally crucial—especially during times of economic uncertainty and market volatility.
- Large-cap Stability: Focus on blue-chip companies with consistent earnings, strong balance sheets, and a history of increasing dividend payouts. These form the backbone of a stable portfolio. Prioritize companies with low debt-to-equity ratios and strong cash flows—they are better equipped to handle downturns. For instance, companies like Tata Consultancy Services (TCS), which have minimal debt, offer a solid foundation.
- Diversification: This remains a timeless strategy. By spreading your investments across asset classes, sectors, and geographies, you can mitigate risk. A well-balanced portfolio combining large-cap and small-cap investments can offer both growth and stability.
- Defensive Sectors: Investing in sectors like consumer staples, utilities, and healthcare can provide stability during downturns. These sectors are less affected by economic cycles and offer stable earnings and dividends, making them a safe choice for conservative investors or those nearing retirement.
- Commodities: In times of inflation and currency devaluation, gold has historically been a reliable hedge. Gold isn’t just a tradition in India; it’s a proven store of value during market turbulence. Options like physical gold, ETFs, or Sovereign Gold Bonds (SGBs) offer easy exposure.
- Global Market Exposure: Accessing global markets gives you exposure to industries and sectors not available domestically, reducing portfolio risk by diversifying geographically. It also allows for currency diversification, enhancing the potential for both value creation and protection. Through the Liberalized Remittance Scheme (LRS), Indian investors can easily access global markets.
Striking the Balance: Growth and Stability

The art of balancing value creation and protection is an ongoing process that requires regular review and adjustment. This approach ensures that your portfolio aligns with your risk tolerance and financial goals, especially in uncertain times.

As Warren Buffett wisely reminds us:

“The goal is not just to make money, but to never lose it.”

Your financial journey is a marathon, not a sprint. With the right blend of growth and stability, you are well-positioned to thrive not just in India’s growth story but in your financial future as well.

Here’s to your continued financial success!
September 23, 2024
The Rise of Large, Mid, and Small Cap Companies Since COVID-19

Introduction

The stock market has experienced significant changes since the onset of the COVID-19 pandemic. Market capitalizations (mcaps) of companies have surged, reflecting a broader economic recovery and investor optimism. Here, we delve into how the classifications of large, mid, and small-cap companies have evolved since 2019.

Large Cap Companies

Before the pandemic, the cutoff for large-cap companies was around Rs 27,454 crore. Fast forward to mid-2024, and this threshold has surged to over Rs 83,000 crore. This sharp increase signifies how the upper echelon of the stock market has expanded, with more companies achieving higher valuations.

Mid Cap Companies

Mid-cap companies have also seen a substantial rise in their cutoff, moving from Rs 8,801 crore in 2019 to approximately Rs 27,700 crore. This threefold increase highlights the growth and resilience of medium-sized enterprises, which are increasingly attracting investor interest.

Small Cap Companies

While the article doesn’t detail the specific figures for small-cap cutoffs, it’s clear that the bottom tier of the stock market has also expanded. As the market grows, smaller companies are pushing higher into the mid-cap range, reshaping the investment landscape.

Industry Insights

The Association of Mutual Funds in India (Amfi) revises the market cap classifications biannually. The adjustments reflect the previous six months’ average market caps, ensuring that the classifications stay relevant amidst dynamic market conditions. Analysts suggest that expanding the large and mid-cap universes could provide fund managers with more flexibility to outperform benchmarks.

Conclusion

The post-COVID era has seen a dramatic shift in market caps across the board. Large, mid, and small-cap companies are growing, reflecting broader economic trends and increased investor confidence. Keeping abreast of these changes is crucial for making informed investment decisions.

Source: Business Standard

June 25, 2024
Understanding Real Estate Investment Trust (REIT)
This is for education purpose and the story is made up to simplify the concept, don’t take it at face value.

Lets say I am a Real Estate developer, K Raheja. I like a land in Mumbai & Hyderabad for some commercial development. I decide to buy it. Where will I get the funds to buy & construct it?
- Self
- Bank, NBFC, MF – Debt
- Partner – someone else investing as Equity
So I invest some funds, got some from banks & MF’s & I also got Blackrock to invest to buy the land & make the business park called Mindspace. I constructed around 23-mn sq ft with multiple building & I started leasing them out to companies who wanted rented office premises.

There comes a point where I needed more funds to build new building (6.4 mn sq ft), pay off the loans etc., where do I get the funds? So I decide to do an IPO. Not of the entire company K Raheja but only this project called Mindspace. So I formed a trust or corporation.

I committed to payout 90% of my rent income to the shareholders proportionately as dividends & I will use this money to invest a minimum 80% in completed real estate, which is generating rent and will use 20% in constructing new Real Estate.

Is the IPO a win-win?
- K Raheja gets more money 2 pay off debt, investment in more commercial real estate.
- Investors will receive dividends semi annually (from the rent income) which is tax free + as its listed on the exchange the stock prices can go up.
Why will the stock price go up?
- Rents increase year after year
- The value of the land increases
- New construction means more business.
Why invest in a REIT?
- G-Sec is at 6% and the rent yield in commercial RE is 7.5%-8%
- Diversification – It’s a combination of Debt (rent income) & Equity (listed so prices can move)
- Investment in RE with just 50K.
Tax Structure?

There are 3 types of income,
- Rent–Tax-free
- Interest – REIT’s can also loan money to another developer (maximum 20%) & receive interest. If you receive interest from the REIT, It will be taxed at the slab rate. Practically this is very less or zero.
- Capital Gain on the stock exchange – 15% Short Term Capital Gains Tax if you sell the REIT before 3 years and 10% Long Term Capital Gains Tax if you sell the REIT units after 3 years.
- Capital Gain on the stock exchange – 15% Short Term Capital Gains Tax if you sell the REIT before 3 years and 10% Long Term Capital Gains Tax if you sell the REIT units after 3 years.
What to look for before investing in a REIT?
- Weighted Average Lease Expiry – Higher the better
- Vacancy Rate – Lower the better
- Concentration of top 10 tenants – Lower the better
- Sector Concentration – Lower the better.
REITs operate exactly like MF’s
- Sponsor – K Raheja and Blackstone
- Manager – K Raheja (receives AMC fees for managing the properties)
- Trustee
But

REITs and real estate mutual funds are not the same.

Disclaimer: This is not investment advice.
Source: Kirtan A Shah, you can reach him on his twitter handle @kirtan0810
October 6, 2020
New Form 26AS- Electricity Bills, Health Insurance, Hotel Bills, Share Transactions to be reported
In a move that will enhance the flow of information between taxpayers and tax authorities, the Income Taxn Department has launched a revised form 26AS or Annual Information Statement from this assessment year, which will reflect details of all high-value transactions.

Since the details of high-value transactions will now be reflected to the taxpayers in the new form as against the tax department earlier receiving information from financial institutions and then acting upon it, there would now be a greater onus on taxpayers to comply in a voluntary manner.

List of specified financial transactions to be available in Form 26AS

The additional SFTs that will now be reportable and will be visible in the Form 26AS are:
1. Payment of educational fees/donations above Rs 1 lakh in a year
2. Hotel bills exceeding Rs 20,000
3. Purchase of jewelry, white goods, marbles, paintings etc. exceeding Rs 1 lakh in a year
4. Life insurance premium payment over Rs 50,000 per annum
5. Payment of property tax above Rs 20,000 per annum
6. Electricity bill payment above Rs 1 lakh per annum
7. Health insurance premium payment above Rs 20,000
8. Domestic business class air travel/ foreign travel (threshold limit not yet specified)
9. Share transactions/ demat accounts/ bank lockers (threshold limit not yet specified
The SFT transactions already reportable are:
1. Purchase of bank drafts or pay orders in cash (if more than Rs 10 lakh in a year)
2. Purchase of pre-paid instruments in cash (if more than Rs 10 lakh in a year)
3. Cash deposit in the current account (if more than Rs 50 lakh in a year).
4. Cash deposit in account other than current account (if more than Rs 10 lakh in a year).
5. Time deposit (if more than Rs 10 lakh in a year).
6. Payment for credit card (if more than Rs 10 lakh in a year through non-cash methods. Limit is Rs 1 lakh for cash payments)
7. Purchase of debentures (if more than Rs 10 lakh in a year)
8. Purchase of shares (if more than Rs 10 lakh in a year)
9. Buyback of shares (if the tendered value is more than Rs 10 lakh in a year)
10. Purchase of mutual fund units (if more than Rs 10 lakh in a year)
11. Purchase of foreign currency (if more than Rs 10 lakh in a year)
12. Purchase or sale of immovable property (if more than Rs 30 lakh in a year).
13. Cash payment for goods and services (if more than Rs 2 lakh in a year)
14. Cash deposits during a specified period of 9th Nov to 30th Dec 2016 (if more than Rs 12.5 lakh in a current account or Rs 2.5 lakh in other accounts)
The aforesaid information will only be reported in Form 26AS if the transaction crosses certain threshold limits. It is worth noting that this information was also available with the tax authorities for earlier years and was used at the time of assessment proceedings. Providing this data to the taxpayers beforehand is hence likely to increase transparency in the tax proceedings.

Information relating to assessment proceedings, both pending and completed, has been included and it will show if assessment proceedings have been initiated and if yes, whether they are pending or completed.

The information will reflect in Form 26AS within three months from the end of the month in which the said information is received by the tax authorities.

In addition to the name, permanent account number (PAN ) and address of the taxpayer, the new form will also have the date of birth, mobile number, email address and Aadhaar number as per the tax department’s database.

Form 26AS will thus be an all-inclusive document for ease of reference for taxpayers both at the return filing stage and at the time of assessment proceedings.

Conclusion: New Form 26AS will increase the information flow to the tax authorities, especially the details of all high-value transactions which will help the government to widen the tax net and get more and more people to file their income tax returns. A total of about 55 lakh or 80 per cent of the total returns are filed by people having an income of up to Rs 5 lakh, as per the Central Board of Direct Tax’s numbers as of July 31, 2020. Only 5,066 individuals, who have an income above Rs 1 crore file returns, accounting for 0.73 per cent of the total individual tax returns.

Disclaimer: The information provided herein is based on publicly available information and other sources
believed to be reliable, but involve uncertainties that could cause actual events to differ materially from
those expressed or implied in such statements
August 19, 2020
5 Most Common Personal Financial Mistakes
For better or worse, money is a big part of most people’s lives and it’s easy to get caught up in financial mistakes that will hurt you in the long run if you’re not careful.

Certain financial mistakes can wreak havoc on your financial future, leaving both you and your loved ones under the shadow of uncertainty. If you are constantly putting off decisions relating to insurance and investment planning, you may be doing a disservice to your financial health.

Read on as we discuss 5 such common financial mistakes that can have dangerous ramifications.

1. Not buying insurance(Term/Medical)

If you think buying insurance is a waste of money, you’re probably making a costly mistake. Insurance comes to the rescue to bail us (or our dependents) out of a serious crisis like no one else. One must ensure that they’re adequately covered. So that their family members are not left in the lurch after their demise. As far as life insurance is concerned, you’ll be well-advised to go for a policy with a sum assured that’s at least 10 to 15 times your annual income. You may also consider to go for a no-frills term insurance plan. It can get you adequate coverage without steep premiums, especially if you start the policy at a young age.

Also, in the present times of high medical inflation, it’s always advisable to have a comprehensive medical insurance cover for the entire family.To prevent precious savings or investment returns from getting drained to fund hospitalisation expenses. And no, your office-provided group health insurance policy may not provide adequate coverage or complete protection in the absence of important add-ons (like critical illness cover, pre- and post-hospitalisation cover, etc.). You should consider going for a personal health insurance plan with sufficient coverage amount and choose a plan that meets the medical requirements of all the policy beneficiaries.

2. Not having in place an emergency fund

Well, you may have no control over life’s uncertainties (like a sudden job loss or a family emergency), but you can definitely try to immune your finances from their impact by being farsighted. And having in place an adequate emergency fund is perhaps your best bet to that end. Ideally, you should set aside at least 3-6 months’ worth your expenses in a separate savings account as your emergency fund. And, contrary to popular opinion, it’s okay even if you build your emergency fund in a fixed deposit account and let it earn more interest than a normal savings account. You can easily liquidate it in minutes through your mobile banking application in the face of an emergency by losing just 1% of the interest value.

3. Not budgeting

For most people the word budget evokes a negative feeling, something that restricts us from living life freely. However, truth be told, reckless spending can lead to depletion of savings, emergency fund or investment capital in no time. Worse, this may leave you in an avoidable debt situation (and sink your credit score) that can put breaks on your journey to attain financial freedom.

It’s very important that you have in place a proper budget for your expenses and avoid random overspending to ensure you meet your important financial goals in time, like raising down payment fund for your home or setting up a retirement corpus (more on this in the point below). And yes, it’s better if you plan out even for your “desire spends” like vacations, gadgets, etc.

Here are some helpful pointers:
- Allocate a realistic budget for your expenses (like groceries, conveyance, shopping, etc.) at the beginning of the month and try not to breach them
- Take help of a budgeting mobile app if need be
- Track all your expenses and look for ways to cut down on wasteful spends (like skip hefty gym memberships if you prefer to work out at home, ditch frequent cab rides if you can manage with public transport, start cooking at home if you spend a lot eating out, so on and so forth).
4. Investing without predefined financial goals

Setting precise short, medium and long-term financial goals provide direction to your investments. Once you have in place a specific goals, it becomes easier to channelize your savings and other investment returns to meet that goal within the time-frame. On the contrary, investing without proper goals may lead to confusion and you may have to struggle to arrange for funds to meet an important requirement at the last minute, something that could have easily been achieved if you had planned for it in advance.

One more thing: investing just to save taxes shouldn’t be your only financial goal.

5. Investing only in low-risk low-return instruments

It’s a fact that no one likes to lose money, but investing only in low-risk and low-returns instruments (like only fixed deposits or recurring deposits) can jeopardise your financial goals. In other words, not taking any risks is risky too. So, depending on your age and financial goals, one must look to intelligently spread out their investments in a number of low-risk, medium-risk and high-risk instruments so that one ensures they grow their wealth over time while keeping the overall risk factor under control.And avoid some financial mistakes.

This is important, especially to meet important goals like raising an adequate retirement fund. If you only invest in low-returns “guaranteed” instruments, you might find your fund inadequate to sustain your post-retirement life, especially when you consider inflation eating away value of returns and the rising cost of living. Things can complicate further as you might not have a regular source of income then.

As a result, it’s better that you add slightly riskier instruments in your investment mix too, like equity mutual fund SIPs and even real estate. That being said, it’s superlatively important that you have complete clarity on how different investment tools work, what’s the inflation-and-tax-adjusted returns and other exit loads, etc. before making any investment decision. Do thorough research, seek professional help if need be, but don’t take the plunge based on hearsay or assumptions.

These prudent strategies will go a long way to ensure you hold your ground in your journey to grow your wealth.

Source:financialexpress.com
September 17, 2019
Will Linking Floating rate Loans to External Benchmark really cut interest rates to your Home Loan or Car Loan?
RBI today announced that from 1st Oct 2019, all floating rate loans to individuals should be linked to an external benchmark.

We will try to decode what this actually means:

What is floating and fixed rate loans?
- In Floating rate loans are where the interest you pay to the bank changes over the tenor of the loan depending on what it is linked to.
- In Fixed rate loans your interest rate is fixed. You have both choices when u take a loan.
The current guideline of linking floating rate loans to an external benchmark is only for
- New loans taken by individuals from banks.
- As of now only for banks. effectively Housing Finance Cos like HDFC – as of now – are excluded.
Why was this needed?

Your floating rate loans till now have been linked to an internal benchmark.
Various internal benchmarks used over a period of time were:
- PLR – Prime Lending Rate.
- Base Rate since 2010.
- MCLR – Marginal Cost of Lending Rate.
Each of above internal benchmarks were set by the bank and gradually offered a more transparent mechanism.But they have proved inefficient in terms of transmission of rates.So rates increase at a faster rate when rates go up and go down slowly when rates move down.

Usually these internal benchmark rates move towards the benefit of the bank and lesser to the benefit of customers.That is the reason that transmission of rates don’t happen effectively.A customer usually gets the short end of the stick.

To solve this problem, RBI has been proposing to link floating rate loans to an external benchmark which is transparent and not in control of the banks or the customers

External benchmarks that can be used now are:
- RBI Repo Rate
- 3 or 6 month T-Bill rate
So from 1st Oct any new floating rate loan taken by you from a BANK will be linked to these external benchmarks

A bank can choose any one of these benchmarks.So the interest rate u pay will be

“External Benchmark + Spread”

Effectively….

If the External Benchmark moves down, you will pay lesser interest or vice versa.The Spread has to be fixed over the tenor of the loan.There is some freedom to Banks to change the spread under specific conditions.

What happens if u have an existing home loan with a Bank?
- You have the option from 1st Oct to move to the new regime of External benchmark.
- The bank can charge you a reasonable processing fee of one time to shift to this model.
- Once u shift, you can’t shift back.
Should you shift to an external benchmark linked model?
- Ideally Yes. This is a more transparent model of your interest rate and
- It frees you from the vagaries of the bank deciding in its own favor
Will interest rates reduce immediately for my existing home loan?
- Not really. It will primarily give u a benefit in future if interest rates fall
- If however u are currently at a higher rate (and many people are at 10% also), then bank has to shift u to a lower rate
What are other safe guards put by RBI so that bank does not fleece us:
- Bank cannot use diff benchmarks for same kind of loan. So if they use Repo rate for home loans then all new home loan customers, have to have the same benchmark.
- Reset atleast once in 3 mths.
Is it good for the banks?
- Obviously No. Banks NIMs (Net Interest Margins) may go down if many customers shift to this and interest rates move down as a trend.
- As a customer of the bank, it is good for you as it is more transparent.
Any Questions will be happy to answer.

Pic Courtesy:fundstiger.com
September 5, 2019