Category: Uncategorized

Back to Blog

What is the Alternative Fund scenario in India?

April 13, 2022

In order to understand the Alternative Fund scenario (AIF) in India, we first need a clear understanding of what Alternative Investment Funds are. An AIF is  any financial asset that does not fall under regular investments categories, like debts, equities etc. Any funds that are established in India, and are privately pooled investments that collect their funds from high profile investors (national or international), with the purpose of investing the money in accordance with certain guidelines or policies can be classified as an AIF. Any privately held equity, a hedge fund, and even real estate can be considered to be a form of alternative investment.

Since an investment in AIFs is generally manifold higher than an investment in a regular Mutual Fund, they are mostly invested in by High Net work Individual (HNIs). The Stock Exchange Board of India (SEBI) has categorised AIFs into three broad categories, and understanding them should give us a better understanding of the Alternative Funds scenario in the country presently.

AIF scenario in the country

Since its inception in 2012, AIFs in India have seen unprecedented growth and investments in them have steadily gained a lot of traction, with the number of investors increasing year on year. Furthermore, hedging strategies are allowed to be incorporated into Alternative Funds, unlike mutual funds, where there is no scope for implementing similar strategies.

As of 2017, AIFs were regarded as the second most active sector in India. The reason for this high spur of activity within the industry was because of the Indian Government’s allocation of Rs 20,000 Crores to the National Infrastructure Investment Fund. By September of 2020, AIFs managed to raise investments worth a whopping figure of nearly $27 Billion, with a 74.4% compund annual growth rate (CAGR) between the years 2014-20.

However, in India, AIFs are not allowed to invite public investors for subscribing to their securities. Instead, they are privately pooled and raise funds specifically using private investment vehicles only. The minimum corpus for an AIF stands at a high $2.7 million, and the same for an angel fund corpus is at $1.4 million.

In it’s current state, AIFs can be broadly categorised into three sections, which also showcase their market size.

Category I AIF

Category I AIFs are funds that operate with the strategy of investing in a startup or venture in an early stage. SMEs or social ventures, which the government considers to be desirable by the society, are a part of category I AIFs. 

Category I AIFs generally tend to have a positive spillover effect on the economy of the country, due to which SEBI, and the Indian Government, along with other regulators sometimes consider providing concessions and incentives to these AIFs. 

Under the regulatory framework, Category I AIFs may be sub-categorised into venture capital funds, infrastructure funds, social venture funds and so on.

Category II AIF

Alternative Investment Funds that have a motive of investing in multiple securities, that comprise both equity and debt, can be put under Category II AIFs. These funds cannot be put under Category I or Category III by SEBI and other regulators, and are not given any particular concession or incentives by the Government for investing in these funds. However, Category II AIFs are the largest component of the Indian AIF industry, and alone makes up for nearly 77% of the same. Close ended funds like private equity funds, debt funds and fund of funds can be considered to be Category II AIFs.

Category III AIF

This category of Alternative Investment Funds undertake complex strategies and diverse trading methods to get short term returns on their capital. These can be open ended as well as close ended funds, which have the option of making an investment in both listed and unlisted derivatives. Unlike conventional investments, they are less regulated and hence do not have the requirement of publishing their information on a regular basis. However, like Category II AIFs, the AIFs in Category III are also exempt from all forms of incentives and concessions from the government and other authorities. Hedge funds can be said to be an example of a category III AIF.

While AIFs raise funds from high profile private investors, there are taxation rules that apply to these funds. Category I and II AIFs are exempt from taxes, and the fund itself does not have to bear taxes based on its earnings. However, the investors, on the other hand have to pay taxes based on their respective tax slabs. Investors have to pay a tax ranging from 10% to 15% based on the holding period, provided there has been capital gained from the stocks.

The Category III AIFs fall under the highest tax slab at the fund level, with the rate standing at 42.7%. The investors are given their returns post the deduction of relevant taxes.

Featured Posts

How Alternative Investment Funds Work in IndiaBeyond Mutual Funds: Understanding Alternative Investment FundsAlternative Investment Fund in 2026: How to Invest in AIFs in IndiaWhy Are More Investors Choosing AIFs for Smarter Wealth Building?The Role of Diversification and Risk Management in Alternative Investment Funds
Back to Blog

The different types of Mutual Funds

April 12, 2022

You may have heard of the term ‘Mutual Funds’ frequently over the last few years, but do you know exactly what they are? 

Mutual Funds are investment platforms that pool money from different investors, and provide these investors with returns on the collected corpus over a period of time. This accumulated money pool is invested into the equity market by investment professionals, who are known as portfolio managers or fund managers. Fund managers invest your money into various forms of securities, like stocks, gold, bonds and other similar assets, which have the potential to provide satisfactory returns. These returns are then shared amongst the investors proportionate to their investment in the mutual fund. 

While the crux of mutual fund investments is market returns, they can be classified into various segments, based on their investment goals, and other forms like structure and asset classes.

Classification on the basis of structure

Close-Ended Funds: Close ended funds are ones which are available for purchase only during an initial offer period. For the purpose of providing liquidity, these schemes are often listed for trade on the stock exchange. Close ended mutual funds need to be sold via the stock market at the prevailing price of the shares.

Open-Ended Funds: Open ended funds are those which can be purchased throughout the year. Open ended funds allow you to keep investing as long as you want, without any limits being imposed on the investment amount. Because of the active management these funds are subjected to, open ended funds charge a higher fee when compared to passively managed funds. Since they are not bound to a particular maturity date, open ended funds are the perfect choice if you are looking for liquidity.

Interval Funds: Interval funds are a combination of both open ended and close ended funds. These can be purchased at different time periods during the tenure of the fund. During this time, if you are a shareholder and wish to sell the shares, you can offload them to a fund management company that offers to repurchase the units from you.

Classification on the basis of asset class

Equity Funds: These are funds which provide high returns, but also come with high risk. Equity funds invest in company shares and are linked to the stock market, which is why returns may fluctuate.

Money Market Funds: Money Market funds invest in liquid instruments like Treasury Bills (T-Bills). They are moderately safe and good for you if you are looking to gain immediate returns. The risks associated with these kinds of funds are credit risks, reinvestment risks and interest risks.

Debt Funds: As implied by the name, Debt funds invest in company debt instruments like debentures, and other fixed income assets. They are safe investment platforms and deliver fixed returns.

Balanced or Hybrid Funds: These funds combine both equities and debts, however, the proportion invested in each varies between funds. Both the risk and returns are balanced out in a similar fashion. Investments are done in a mix of different asset classes.

Classification on the basis of investment goals

Income Funds: These funds are primarily used to invest in instruments providing a fixed income. The main motive of income funds is to provide you with a regular stream of income. 

Growth Funds: Growth Funds primarily invest in the equity market with the aim of gaining revenue from capital appreciation. These are subject to market risks, and are beneficial if you are looking to make high returns on your investments.

Liquid Funds: These are very short term investments that provide you with high liquidity. While they are low risk investments, the returns from liquid funds are moderate, and good for you if you have short timelines.

Capital Protection Funds: Capital protection funds are invested in a split between equity markets and income instruments with a fixed return. The motive of making the split investment is to protect the principal amount invested by you. 

Tax-Saving Funds: With high risk and high returns, these funds primarily invest the capital in equity shares, which qualify for deductions under the Income Tax Act.

Pension Funds: These funds have the aim of providing you with regular returns on your retirement after a long investment period. While they are mostly hybrid funds, they have low but stable future returns.

Fixed Maturity Funds: These funds invest in the debt market instruments which have a similar maturity period as the fund. 

While it is definitely beneficial to be aware of the forms of mutual funds and align these with your financial goals, you should also know about the risks associated with each and consult your financial advisor before making any financial decisions.

Featured Posts

How Technology Is Transforming Mutual Fund Management and Investment Solutions in IndiaHow are MFDs at the core of India’s investment ecosystem? Give it a read.What are the Challenges for MFDs, and How Mutual Fund Software Solves Them?How are the mutual fund solutions empowering MFDs? Read in the blog.  The Role of a Mutual Fund Advisor in Creating Financial Success
Back to Blog

What’s the deal with IPOs?

March 24, 2022

As the name suggests, an IPO, or an Initial Public Offering, can be considered to be a company’s debut on the stock market as a publicly traded company, changing from being a privately held entity. The company that is issuing the IPO raises the capital in the primary market, and after the completion of the IPO, all investors can trade its shares, which is then referred to as the secondary market. 

While from the perspective of an investor, an IPO presents an opportunity to attain shares of a company that showcases the potential to grow, to the company, it is an opportunity to raise capital from the public market and use the funds for purposes that will help them achieve their ambitions of growth.

Why does a company launch an IPO?

While it may seem to be a simple process to bring a company into the public market, the process is long and involves a lot of steps that need to be completed. Starting from making the choice of an investment bank to ensuring the regulatory filings, there are several stages before a business can offer the shares of their company to the public.

This may raise a question about why companies should trade their companies publicly, and dilute their shares. To answer this question, it is important to understand the following advantages of going public.

Increased Capital: By publicly trading their company, a business has the opportunity to raise a higher capital than they could have been able to as a privately held company. The other methods of raising capital, in the form of loans, are riskier and more expensive than launching an IPO. Furthermore, a loan limits the capital raised, while an IPO allows the company to raise capital from the public market.

Publicity gain: Offering an IPO allows a company to gain publicity by being listed on the stock exchange. This results in the company becoming more recognisable to the public, increasing consumer trust in the brand, its products and services. This increase in publicity also facilitates smoother acquisitions and mergers along with higher cash flow due to the publicly listed shares.

Credibility Formation: A result of being a publicly listed company after an IPO causes the company to have an increased visibility, which also increases the credibility of the company.

Assessment of Valuation: After a company is listed in the stock exchange, the valuation of the organisation is bsaically equal to the amount that investors are willing to pay for it. This allows investors to know and understand the valuation of the company. A proper valuation assessment also makes it easier to carry out mergers and acquisitions when needed.

What kind of companies are launching IPOs?

In the current scenario, a lot of companies, including new-age consumer tech companies and startups are pursuing an IPO. The year 2021 proved to be a record year for IPOs, witnessing investments worth over Rs 1.3 lakh crore across 65 IPOs. This record amount was more than four times the entire amount that was raised in 2020 by IPOs, which amounted to Rs 26,628 crore.

With the Indian IPO ecosystem growing at a rapid pace, it is expected that 2022 will also bear witness to a very active IPO market. For you as an investor, it is expected to be one of the best seasons to take part in the IPO boom, and secure your future.

While investors will see increased chances of investing in the market, it should be noted that in 2021, a lot of companies experienced a downturn after launching their IPO, which has resulted in investors becoming much more cognisant of current market situations. Companies likely to have an IPO in 2022 include the likes of the highly anticipated LIC, along with companies like Pharmeasy, MobiKwik and Ixigo. 

In 2021, new age digital firms like Zomato and Nykaa succeeded in gaining the highest amounts in fresh capital. However, PayTM, which raised Rs.18,300 crores through their IPO, surpassing Coal India in the amount of capital raised, saw a decline in their share prices.

Should you invest in an IPO directly?

Many investors buy the shares of an IPO with the intent of associating themselves with a company and earning long term gains for themselves in the process. However, there are also investors who invest in IPOs with the specific purpose of listing short-term gains. Depending on the demand of a company’s shares, the listing price (the price that you actually see for a stock on the stock market) of a company can be either higher or lower than the offer price. If the demand for a company’s shares is high, the listing price becomes higher than the offer price, and you stand to make significant returns on your investment. However, according to financial experts, when it comes to well-managed companies, it is usually advisable to stay invested for the long term after investing in their IPO to give yourself the best chance of maximising your returns.

Many investors are not fulfilling their maximum potential gains by exiting their investments too quickly after listing. In such cases, a thematic fund, or an equity mutual fund serves you well because they hold investments for a longer time after listing. With the IPO frenzy currently going on, it is also possible that many investors do not get shares allotted to them in the IPO. In such cases, you can also choose to take the mutual fund route to an IPO. However, it is always best to consult your financial advisor before you make an investment decision.

Featured Posts

How to Improve Your Chances of Getting IPO AllotmentIPO vs FPO: Understanding the Difference for Smarter InvestingHow to check your IPO Allotment Status: Key factors you need to know?IPO Investment: Strategies, Allotment Status, and Key Updates. Explained!5 Myths and Misconceptions of IPO Investments. Debunked in this blog.
Back to Blog

Why should NPS never be overlooked in tax planning?

February 17, 2022

For most of us, retirement may seem to be a long way off. It may look like we have a lot of time on our hands to plan for the retirement of our dreams, but more often than not, it arrives sooner than we anticipated. The key to a stress free retirement is having a great retirement plan, one that not only meets all your needs, but also gives you more than that. While there are many retirement plans that are at your disposal, not every plan suits your requirements. It is crucial that you take the time to sort out your priorities and decide a retirement plan before you proceed with it.

The National Pension System, introduced by the Government of India in 2004, is among one of the most beneficial retirement plans. Apart from the trust that comes with being associated with a government fund, it also provides substantial benefits and a healthy monthly compensation as pension after your retirement. The NPS is a great tool, not only for planning your retirement, but also to help with your taxes.

Tax Free Money on Maturity?

Yes, investing in the NPS effectively makes your accumulated corpus tax-free on maturity. According to the current rules on taxation, if you are a subscriber to the National Pension System, you are eligible to withdraw 60% of the corpus at maturity, completely tax-free. For the remaining 40% of the corpus, you are required to buy an annuity, which is also exempted from the taxation systems. This effectively means that the entire corpus we invest becomes tax-free.

However, the monthly payments that you receive as pension after your retirement will be taxable, which will qualify under the base tax exemption limit. This means that only a portion of that income will be taxed.

Since the National Pension System is a government retirement plan, the taxation rules are very investor friendly, which makes it an attractive venture for us all.

A true-blue retirement plan?

As young individuals, we all think retirement is far away, and that we have time to save up for it. While we are busy living our lives, our retirement age dawns upon us sooner than we realise. It is important to make savings that can help us lead our desired lifestyle even after retirement.

Moreover, starting early means that we can accumulate a higher corpus, which can lead to more payouts. The lock-in period of NPS until our retirement is a blessing in disguise because it prevents us from misusing our retirement funds for unnecessary expenses. We can still opt for a loan in case of emergencies, but we cannot get a loan for our expenses post retirement. It is important that we start saving early and restrict ourselves from using the amount for other miscellaneous expenses.

Highly regulated at super low costs?

The National Pension System is regulated by the Pension Fund Regulatory and Development Authority (PFRDA), which is a government body, assuring the protection of your rights and interests with utmost efficiency. This is a crucial aspect, taking into account the long term investments which concern your life after retirement. The financial goal in this scenario is to ensure a good, stable life after retirement, which is among the most important but vulnerable phases of your life.

A Diverse Portfolio?

The amount you invest into your NPS account is pooled together into a larger investment fund, which is then further invested into the market by fund managers vetted by the PFRDA. These investments are made in a diversified portfolio comprising government bonds, bills, corporate debentures, and shares. Over time, these investments multiply and form a substantial corpus, a part of which you can withdraw as lump sum post retirement.

Furthermore, NPS also allows you the provision to choose from multiple fund managers and different asset allocation options. Depending on your risk and return expectations, you can choose the options that best suit your needs. You can also switch between funds if the performance is not upto your expectations.

Investing from your home?

You can apply for a National Pension System account online, upon which you receive a Permanent Retirement Account Number (PRAN). A PRAN is a unique number that remains constant throughout your lifetime, even if you change cities or jobs. 

Upon opening the account, you are given access to an online portal which allows you to track and manage your NPS account. All updates, statements, fund performance details, and new investments can be done using the portal. It can also be used to switch between different funds. Not having to visit financial institutions, or stand in those long and tiring queues, is surely an advantage.

The advantages provided by the National Pension System are hard to ignore, and if you are an investor looking for a retirement plan, delay no more. Apply for NPS with KFintech here https://nps.kfintech.com/

Featured Posts

A Simple Guide to NPS Registration and Online Account OpeningNPS Vatsalya: Building Financial Security for the Next GenerationPlanning for Retirement with NPS: This Blog Might Be For You!NPS Returns and Retirement Planning: What Every Investor Should KnowWhy Starting Early with an NPS Account Can Strengthen Your Retirement Plan