Just like any other income, gains made on your investments are taxable and mutual funds are no exception. However, taxation policy can change depending on the type of mutual fund you hold. Similarly, tax consequences change depending on when you decide to sell your mutual fund.
But worry not because this article will help you understand the different tax implications of mutual fund investments.
Tax arises only when you book a profit
Unlike fixed deposits (FD), where the accrued interest is taxed every year, mutual fund gains are taxable only when they are realised, i.e., at the time of redemption. For example, if you invest in an FD for three years and earn Rs 5,000 interest every year, this amount is added to the taxable income of that year even if you do not realise the interest.
However, in case of mutual funds, if the value of your investment increases by Rs 15,000 by the end of the first year and you remain invested, you don’t have to pay any tax. Only when you redeem your mutual investment do you need to pay tax.
How tax liability is determined on mutual fund gains?
How much tax you need to pay on your mutual fund gains depends on three factors:
The type of fund you have invested in: From a taxation point of view, mutual funds can either be equity-oriented or non-equity-oriented.
Equity-oriented funds are those that invest at least 65 per cent of your money in equities. The others are termed as non-equity-oriented mutual funds.
The amount of time you have held on to your mutual fund: Your holding period can either be short-term or long-term. The duration to define this is different for equity-oriented mutual funds and non-equity mutual funds
Your tax slab: This is only applicable if you invest in a non-equity mutual fund. Tax slabs also apply to Income Distribution cum Capital Withdrawal (IDCW) plans of mutual funds too. But more on this later.
Tax implications on equity-oriented funds
If your holding period is more than a year, the gains are termed as long-term capital gains. In this case, gains up to Rs 1 lakh in a financial year are tax-free, but anything above that is subject to a 10 per cent tax.
If your holding period is less than a year, the gains are termed as short-term capital gains and are taxed at 15 per cent.
Tax implications on non-equity funds
If you invest in a non-equity mutual fund, and your holding period is less than three years, the gains are termed as short-term capital gains and are added to your income. They is taxed as per your income tax slab rate.
If your holding period is longer than three years, then the gains are termed as long-term capital gains and are taxable at 20 per cent after indexation.
The first-in-first-out principle
Another important thing you should know is that the redemption of mutual fund units is based on the first-in-first-out (FIFO) method. That is, the units that you bought first are assumed to be redeemed first.
For example, let’s say you bought 100 units of a non-equity fund in September 2017, and 150 units of the same fund again in September 2021. In total, you would have 250 units. Now suppose you wish to sell 120 units in August 2022, here is how your tax liability would look like. For the first 100 units, gains made will be considered as long-term as they were acquired in September 2017, i.e., more than three years ago. And the gains on the remaining 20 units will be treated as short-term as they were purchased less than a year back. So, keep this in mind while evaluating your tax liability.
Tax on income distributed by mutual funds
If you opt for the Income Distribution cum Capital Withdrawal plan (IDCW) of any mutual fund scheme, the fund house might give you some portion of the gains/capital from time to time. Such distributions are added to your total income and taxed as per your income tax slab rates.
Benjamin Franklin famously said, ‘There are only two things certain in life, death and taxes.’ Despite death not being in our hands, we often worry about it but when it comes to taxes which are very much controllable, we tend to put in only last minute efforts. Every year, in the month of March, many of us hastily invest in various tax-saving schemes that offer 80C deduction without proper consideration, resulting in poor financial decisions. However, are 80C investments the only option for tax savings? Many taxpayers are unaware of options such as 80D, 80E, and others. By treating these investments as tools for building long-term wealth, taxpayers can benefit even more.
Here are some handy last-minute tax-saving investment tips that can help you reduce your tax liability. By taking advantage of these tips, you can simplify the investment process and potentially save yourself some money come tax season.
Using Section 80C for last minute investment planning
Section 80C of the Income Tax Act is one of the most popular widely explored options for tax saving investments. With a host of financial investments options ranging from PPF, EPF, ELSS, Life Insurance Policy premiums, Bank FDs, Post Office Schemes etc. There is some or the other investment option available for all types of investors. Investments up to Rs 1.5 lakh in one or more of these are exempt from tax. Here is a quick review of some of the best last minute investment options in Section 80C.
PPF: If you unsure about where to invest and don’t want to take risks for your investments, invest in PPF. PPF investments are backed by government and offer fixed interest rate each year. If you do not have a PPF account, you can open one online and if you have an account then you can just invest the remaining amount to utilize your 80C limit. However, the current rate of interest is low at 7.6% p.a.
ELSS: ELSS is one of the best investment options in the list of financial products as it provides you the opportunity to invest in markets and enjoy tax deductions for the same. If you are a salaried employee, a sizeable amount of your investments go into your EPF account and you can look at investing in ELSS to diversify your portfolio into equities. Even for non-salaried taxpayers, ELSS is the ideal option for equity investment as most of the investments in 80C are debt investments. Another advantage of ELSS is that it has the shortest lock-in period of 3 years. Among all investment options, ELSS mutual funds offer the lowest lock-in with almost the highest returns.
Life insurance policy: Having a life insurance policy is extremely essential and if you do not have insurance policy with adequate coverage then you should look at buying a good term insurance policy. One should have term insurance policy in the portfolio to protect family for uncertainties.
NPS: You should start your retirement planning as soon as you can and NPS can be a great investment avenue for the same. Your investments in NPS enjoy additional deduction of Rs 50,000 under Section 80 CCD(1b) thus taking the total limit of tax deductible u/s 80C income to Rs 2,00,000 for the financial year.
Unit Linked Insurance Plan (ULIP): A Unit Linked Insurance Plan (ULIP) is a financial product that combines both investment and insurance in one package. ULIPs offer the opportunity to build wealth while also providing life insurance coverage.
With a ULIP, a portion of the invested amount is allocated towards life insurance, while the remaining amount is invested in a mix of equities, debt, or a combination of both. This type of investment is suitable for long-term financial goals such as saving for your child’s college education, retirement, or other significant financial milestones.
ULIP premiums are eligible for a tax deduction under Section 80C of the Income Tax Act, up to a maximum of Rs. 1.5 lakh per year. Additionally, the returns earned on a ULIP policy are exempt from income tax under Section 10(10D) upon maturity.
Deduction on your Housing Loans: You can claim repayment of principal amount of your home under Section 80C upto Rs 1.5 lakh. Apart from this, you can also claim additional deduction of Rs. 2 lakhs on the interest component of your home loan for fully constructed self-occupied property under Section 24(b).
Sukanya Samriddhi Yojana (SSY): This is a savings scheme initiated by the government to promote the development of the girl child. Parents can open an account with a minimum investment of Rs. 250 and a maximum of Rs. 1.5 lakh per financial year. The government announces the interest rate every quarter. The scheme offers tax benefits, including a tax exemption of up to Rs. 1.5 lakh per year under Section 80C, exemption from tax on interest earned, and tax exemption on the total amount at maturity. It is an EEE (Exempt-Exempt-Exempt) scheme, which means the investment, interest earned, and maturity amount are all tax-exempt.
National Savings Certificate (NSC): This is a savings scheme supported by the Indian Government. You can open an account at any post office in India, and the investment is locked for five years. After five years, you get the full amount. You can invest up to Rs. 1.5 lakh per year, and you can also avail tax deductions on investments under Section 80C. The NSC can be a good option for those who want guaranteed returns and save tax at the same time.
Tax-saving FDs: These are similar to regular FDs, but offer a tax break on investments up to Rs. 1.5 lakh under Section 80C of the Income Tax Act. They have a lock-in period of 5 years, and cannot be redeemed before maturity without penalty. Any Indian resident can open a tax-saving FD with a minimum investment of Rs. 1,000. This is a low-risk investment option suitable for long-term investment with guaranteed returns. The interest earned on tax-saving FDs is taxable.
Tax saving beyond Section 80C
Section 80C is not the only option available for tax saving in India. There are other sections under the Income Tax Act that provide tax benefits and can be used for tax-saving purposes. Some of the popular tax-saving options apart from Section 80C are:
Medical policy premiums: With healthcare costs on the rise, having a medical insurance policy is crucial. You can claim a tax deduction on the premium paid for such policies for yourself, your spouse, children, or parents under Section 80D.
Interest on education loan: If you have taken an education loan for higher studies for yourself, your spouse or children, you can claim a tax deduction on the interest paid on such loans each year under Section 80E.
Donations made to funds and charitable organizations: Donations made to charitable trusts, organizations, or relief funds can be claimed as tax deductions under Section 80G.
Interest earned on your savings account: You can claim a tax deduction of up to Rs. 10,000 for interest earned on your savings account under Section 80TTA. For senior citizens, the limit is Rs. 50,000 per year.
Practical guide for effective tax-saving investments
Many people wait until the last quarter of the financial year to start thinking about their taxes. But this can lead to poor investment decisions. The best strategy is to start planning at the beginning of the financial year. This gives you more time to make informed investment choices and stay invested for a longer period, which can help you reach your financial goals quickly.
Here are some practical steps to help you plan your tax-saving investments:
1- Check if any of your investments or expenses during the year are eligible for tax deductions. For example, contributions to EPF, home loan repayments, and school fees can be tax-deductible.
2- Identify your investment goals and your risk profile to help you select the best investment options.
3- Invest the appropriate amount to reach your financial goals while also taking advantage of tax-saving opportunities.
Conclusion
In conclusion, many taxpayers tend to make hasty investment decisions by only relying on 80C tax-saving options, resulting in poor financial decisions. However, by exploring other options such as 80D, 80E, and others, taxpayers can benefit from long-term wealth creation. The article highlights some of the last-minute tax-saving investment tips that can help individuals reduce their tax liability. Taxpayers can take advantage of options such as PPF, ELSS, NPS, ULIPs, housing loan deductions, Sukanya Samriddhi Yojana, National Savings Certificate, and tax-saving FDs. By utilizing these investment options, individuals can simplify the investment process and potentially save money during tax season. Therefore, taxpayers must carefully evaluate their financial needs and goals before making any investment decisions.
My husband and I were contemplating a laid-back retired life when the tables suddenly turned. My partner and dear friend suffered a paralytic stroke just a few months before he was to retire.
Here’s how I tackled it and my advice to younger women.
Don’t minimize your role as a wife or as a woman.
Don’t assume that finances are only your husband’s problem, even if you are not earning. It is a partnership. You both are in the marriage together. Money decisions affect everyone in the house.
Society is always feeding us a narrative. You don’t have the mind for finances. You are too young. You are too old. Who is to make that decision for you? Why must age be a barrier? Why must gender be a barrier?
Take an interest. Question. Do your research. Offer solutions. Discuss. Start investing, whatever be your age or social status. If you husband gives you a monthly budget to run the house, you can even take as little as Rs 1,000 and start a systematic investment plan (SIP) into a mutual fund or a bank recurring deposit.
Never assume that good times are a given.
Besides the emotional and physical impact of me taking on the role of a caregiver, I was forced to take charge of the finances, something he had looked after all our married life.
The best time to educate yourself is when the going is good. I sometimes regret that I wasn’t this financially aware while we had a regular monthly income. I could have done so much more. Now, I even have an emergency fund in case I require it for a sudden medical expense. That way, I do not have to touch my investments.
Be clear on what you want.
When the final settlement cheque of my husband’s company was handed over to me, I realized that it was not the amount I envisaged. We had taken a loan on his provident fund to purchase a 2-bedroom apartment Bangalore.
The remaining amount would rapidly disappear if I did not take charge instantly and invest it.
I had one goal: Be financially independent and not ask my daughter for monetary support. All my actions stemmed from this decisions.
Approach problems from multiple angles.
I was brutally honest and aware of my complete lack of knowledge when it came to stock market. I did not understand chit funds.
This was in the mid-1990s when government undertakings were issuing bonds to the public at around 15% per annum. And, non-banking financial companies, or NBFCs, were passing on huge commissions to investors who invested in their debt instruments.
I began investing in these bonds and lived off the interest. By living frugally, I also was able to reinvest the interest too, and gradually increased the principle. When interest rates began to dip, I started to look at mutual funds.
I scheduled my investments to ensure that cash flow comes from a Systematic Withdrawal Plan (SWP), dividends or interest payments. With these inflows, I managed my daily expenses, outings and pampered my two grandsons. Larger purchases and expenses are put off till an investment matures.
When I was handed the cheque, I realized that I needed to attack the problem from various aspects. For one, I had to cut down on wasteful expenditure and adopt a frugal lifestyle. This would help save my corpus from getting depleted. But simultaneously, I had to grow the corpus. Because the erosion of the value of money due to inflation would continue, irrespective of my circumstances. Hence, I had to invest the money and take a call not to touch the principal, and instead add to it when possible.
Approach a problem from different angles. To be financially independent, I had to do various things – cut down on frivolous expenditure, increase my corpus and ensure inflows. Good investing is not just about knowing where to invest, but what to avoid.
Don’t blindly follow what another is doing. You need to take a hard look at your circumstances, and knowledge and what you are comfortable with.
Never be afraid to ask questions. Never be too arrogant to not reach out for help. Where I am today is because of the sound advice from well-meaning individuals.
Just because I avoided an investment at one time (equity), doesn’t mean I should continue. Allow yourself to evolve, as an investor and as a woman.
Padma Ramarathnam’s husband passed away. Thanks to her decisions, she is financially independent even in her 80s.
SME Exchange provides a great opportunity to small and medium enterprises to raise equity capital for the growth and expansion of their business. SME exchange is a stock exchange for trading the shares of small and medium enterprises who otherwise would find it difficult and costly to get listed in the main board of a recognised stock exchange.
“SME exchange” means a trading platform of a recognised stock exchange having nationwide trading terminals permitted by SEBI to list the specified securities issued in accordance with Chapter IX of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 and includes a stock exchange granted recognition for this purpose but does not include the Main Board. Currently there are 2 stock exchanges providing SME exchange in the country, they are:
NSE’s SME Exchange i.e., NSE EMERGE.
BSE’s SME Exchange i.e., BSE SME.
SME Exchange is growing at a very fast pace which can be seen from the data available with the BSE SME website which states that there currently around 336 companies which have listed their share on SME Exchange with a total market capital of Rs. 27,318.64 Crore till date. Additionally, Rs. 3,492.54 Crore have been raised via various means on the BSE SME Exchange till date.
BENEFITS OF LISTING UNDER SME BOARD
Higher visibility and Recognition.
Higher credibility with stakeholders like customers, vendors, employees, etc.
Equity financing provides growth opportunities like expansion, mergers and acquisitions thus being a cost effective and tax efficient mode.
Higher valuation of the company.
Enables Liquidity for Shareholders.
PROCEDURE FOR LISTING IN SME EXCHANGE
1. Appointment of Intermediaries – This stage includes appointment of various intermediaries required for listing under SME Exchange such as Merchant Bankers registered with SEBI to act as Lead Manager to the Issue, Underwriters and Legal Advisors.
2. Pre- IPO Stage- This refers to the procedural aspects for listing under SME Exchange which includes Increase of Authorised Share Capital, passing of resolution for further issue of share capital under section 62(1)(c) of the Companies Act, 2013, Re-Structuring of Boarde., Appointment of Directors to satisfy the conditions prescribed under the Companies Act as well as the SEBI Regulations.
3. Preparation Stage – This stage includes conducting of Due diligence by the Lead Manager to the Issue i.e., the Merchant bankers who would check all the documentation including all the financial documents, material contracts, Government Approvals, Promoter details etc. This exercise would also help in preparing Offer Document appropriately.
4. In-principal approval of draft prospectus – The Issuer shall file the draft prospectus along with the documents in accordance with the SEBI (ICDR) Regulations, other statutes, notifications, circulars, etc. governing preparation and issue of prospectus prevailing at the relevant time. The Issuers may particularly bear in mind the provisions of Companies Act, Securities Contracts (Regulation) Act, the SEBI Act and the relevant subordinate legislations thereto.
5. Application to BSE SME Exchange – On completion of Due diligence by the merchant Banker along with approval of the Draft prospectus, an application shall be filed with the stock exchange for admission of their securities to dealings in their respective exchange, i.e., taking in-principal approval from the stock exchange.
6. Filing of RHP/Prospectus – Merchant Banker then files these documents with the ROC indicating the opening and closing date of the issue. Once approval is received from the ROC, they intimate the Exchange regarding the opening dates of the issue along with the required documents.
7. Post Listing – Stock Exchange then finalizes the basis of allotment and issues the Notice regarding Listing and Trading.
SOME POST LISTING COMPLIANCE UNDER SEBI(LODR) REGULATION, 2015
1. Regulation 33: Financial Results: -The listed entity shall submit financial results to the stock exchange within forty-five days of end of each half year as compared to quarterly submission prescribed for companies listed on Main Board of the Exchanges.
2. Regulation 47: Advertisements in Newspapers: – The requirements of this regulation shall not be applicable in case of listed entities which have listed their specified securities on SME Exchange.
3. Regulation 31: Holding of specified securities and shareholding pattern: – The listed entities which have listed their specified securities on SME Exchange shall submit to the stock exchange(s) a statement showing holding of securities and shareholding pattern separately for each class of securities on a half yearly basis within twenty-one days from the end of each half year as compared to quarterly submission prescribed for companies listed on Main Board of the Exchanges.
Stock market investing involves a wide array of options. It is not just about buying and selling shares in the secondary market. There are so many different strategies out there. Not to mention, different markets. You have the Initial Public Offer (IPO) or primary market, the derivatives segment, and now the latest Small-Medium Enterprises (SME) exchange.
For savvy investors looking for newer, more profitable options, the SME exchange can be a great platform.
What is SME?
Usually, companies listed their shares on the exchange in the primary market through an Initial Public Offer (IPO). This included firms of all sizes – small, medium and large. However, small and medium enterprises had a greater scope of risk than larger companies. Investors needed a high degree of stock market knowledge to sift through the companies and find companies that matched their risk appetite. This is not possible for every investor. As a result, many small investors made losses. To avoid this, both NSE and BSE created separate exchanges in India catering only to small and medium-sized firms. The BSE calls it SME exchange, while NSE’s exchange is called ‘Emerge.’
Why should you trade SMEs?
There are so many small and medium-sized companies listed on the regular stock market segment. It is difficult for the interested investor to sift through the thousands of smallcap and midcap stocks to identify value-making companies. This is not so in the SME exchange. It is a niche segment for small and medium enterprises, which have the potential to give higher returns. Moreover, the exchanges have entry restrictions like positive net worth and cash flows for two years before listing. Also, companies, which had once applied for winding up or restructuring, are not allowed to list on the exchange. These restrictions help insulate investors from additional risk.
How do you trade SMEs?
Trading on the SME exchanges is almost like the normal buy and sell procedure. It does not require any extra procedures. However, some trading rules differ. For one, the SME exchange has a larger-than-normal lot size – the minimum number of shares you can buy or sell in each transaction. You cannot trade amounts lower than Rs 1 lakh. Also, the lot size varies with the price of the stocks. For example, on the NSE Emerge, if the stock price is lower than Rs 14, then the lot size is 10,000. However, if the stock price is between Rs 120 and Rs 150, then the lot size falls to 1,000.
Other trading guidelines
These stocks are traded in the cash segment. They can be bought and sold either in the continuous market or specifically in the call auction market. Just like the normal cash segment, these shares fall into different series like the ‘rolling settlement,’ ‘block trading window,’ ‘ odd lot trading,’ and so on. Moreover, you can place both market as well as limit orders just like a normal trade. These can be modified and cancelled until processed. Once settled, the shares will be delivered in T+2 days.
Liquidity
Some care should be taken while trading on the SME exchanges in India. First of all, investors should know that the risk factor is quite high while investing in small and medium sized companies. Yes, they are capable of giving really great returns, but they also have a higher than average probability of turning bust. Ensure you get your research correct. Also, liquidity is lower on the SME exchanges. Unlike the regular exchange, your order may not find a matching buyer/seller immediately. In such a case, the exchange may also cancel order, especially in the call auction market.
Since the launch of BSE SME Exchange on March 13, 2012, a total of 359 small and medium enterprises (SMEs) have been listed so far at the exchange, raising funds to the tune of around ₹3,800 crore. Their net market capital today is around ₹52,000 crore. In a decade, the gross level estimated return by the SME Exchange has been around 3.4, which means that an investor has got return of ₹3.4 on one’s Re 1 investment in these 10 years. In fact, majority of the SMEs got listed at the BSE SME Exchange in last 5 years, so the actual return would come much higher if the return is seen through this angle.
BSE Ltd set up the BSE SME Platform to enable the listing of SMEs from the unorganized sector scattered throughout India, into a regulated and organized sector.
On nearing 10 years of BSE SME Exchange, Ajay Thakur, Head at BSE SME in a conversation with Livemint said, “In this one decade time, 359 BSE SMEs have raised around ₹3,800 crore. The average gross level estimated return is around 3.4, which could become possible because of the emergence of new set of merchant bankers who are ready to aid small ticket sized companies with their network. Apart from this, in the last one decade, the Exchange has been able to attract small and micro ace investors who are ready to invest in a small company and wait for two to three years after listing.”
The exchange has become a relevant platform for the SMEs to raise fund through Initial Public Offering (IPO), helping good number of merchant bankers and small ticket sized ace investors.
After the launch of BSE SME Exchange, a good number of MSMEx cohorts have emerged. “These MSMEx cohorts motivate quality SMEs to go for listing and raise fund through IPOs. Since ticket size of these SME IPOs are very small, targeting ace investors like Rakesh Jhunjhunwala, Dolly Khanna, Vijay Kedia, Ashish Kacholia, etc. is not viable,” highlighted Amit Kumar, CEO & Co-founder at MSMEx.
But, Kumar said that there is huge number of micro ace investors, who got attracted to these BSE SME listed companies. “Their ₹1 crore to ₹5 crore investments in SME stocks have helped the listed SME to grow at a faster rate delivering stellar returns to its shareholders. This is getting reflected in the number of SME stocks entering in the list multibagger stocks in 2021 in India.”
So, one can say that BSE SME Exchange has produced new set of merchant bankers and a huge number of micro ace investors such as Rakesh Jhunjhunwala, Dolly Khanna, Vijay Kedia, Ashish Kacholia, he added.
Small medium enterprises and Family-run businesses are the backbone of the Indian economy and employers to millions of people, have a huge potential to grow. The SME Exchange is an appropriate platform of raise capital for such high growth potential businesses.
With the immense potential of growth that most SME and family run businesses have in the coming decade, the biggest problem faced is access to appropriate timely availability of capital. With the emphasis of banks on collateral based lending, capital in form of equity is of essence for growth. The SME exchanges in India are an appropriate platform to raise this much needed equity growth capital.
The BSE SME exchange is leading the way in India in unleashing the growth potential for family-run businesses and SMEs in the last 10 years. With 400 companies listed on the BSE SME exchange of which 150 companies migrated to the Main Board of the stock exchange. With a market capitalization in excess of INR 58,000 crores and total amount raised in excess of INR 4,000 crores, family business should explore the listing option to raise growth capital to tap the appropriate growth opportunities.
The first step that a company needs to undertake is to appoint a Merchant Banker who helps and guides the company in the complete listing process. A Merchant Banker is an intermediary approved by SEBI that helps companies tap the capital market. The process starts with conducting a due diligence by the Merchant Banker, post which a DRHP (Draft Red Herring Prospectus) is prepared after conducting due diligence regarding the company i.e. checking the documentation including all the financial documents, material contracts, Government approvals, promoter details etc. and planning the IPO structure, share issuances and financial requirements.
An SME Exchange is a stock exchange dedicated for trading the shares/ securities of SMEs who otherwise find it difficult to get listed on the Main Board. The concept originated from the difficulties faced by SMEs in gaining visibility and attracting sufficient trading volumes when listed alongwith other stocks on the Main Board of Stock Exchanges. World over dedicated SME trading platforms or exchanges are prevalent, which are known by different names such as ‘Alternative Investment Markets’ or ‘Growth Enterprise Market’, ‘SME Board’ etc. Some of the known markets for SMEs are AIM (Alternative Investment Market) in UK, TSX Venture Exchange in Canada, GEM (Growth Enterprise Market) in Hong Kong, MOTHERS (Market of the high-growth and emerging stocks) in Japan, Catalist in Singapore and the latest initiative in China-ChiNext. As a matter of fact, NASDAQ also started as an SME exchange.
Eligibility Criteria
The Company shall be incorporated under the Companies Act, 1956 / 2013.
Financials
· Post Issue Paid-up Capital
The post issue paid up capital of the company (face value) shall not be more than INR 25 crores.
· Net worth
Positive net worth
· Tangible Asset
Net Tangible Assets should be of INR 1.5 crores.
· Track Record
The company or the partnership/proprietorship/LLP Firm or the firm which have been converted into the company should have combined track record of atleast 3 years.
Or
In case it has not completed its operation for three years then the company/partnership/proprietorship/LLP should have been funded by Banks or financial institutions or Central or State Government or the group company should be listed for atleast two years either on the Main Board or SME board of the Exchange.
The company or the firm which have been converted into the company should have combined positive cash accruals (earnings before depreciation and tax) in any of the year out of last three years and its net worth should be positive.
Benefits of SME Listing
· Access to Capital
With the Indian economy poised to grow at double digits in years to come and marching towards a USD 5 trillion economy and focus of the Government on helping and growing SME companies, the opportunities for growth for SME and family-run businesses is very high. The only constrain to super normal growth that most small business face is timely access to capital. With the constrains faced in terms of the collateral based system of lending of the banking system in India, access to equity funding is a must for overall growth of the company. The SME exchange provides a platform for appropriate funding.
· Enhanced Visibility and Prestige
The biggest aspect of a family-run business is the reputation, prestige and pride of the family members running the business across generations. In most cases the business is known in the city in which they operate or the state in which they are present depending upon the overall size of the business. Once listed on the stock exchange, which has a nationwide reach in terms of investors as well as brokers, the company is known at a national scale and thereby enhancing the overall visibility of the promoter family.
· Attain Appropriate Business Valuation
Valuation for most family-run businesses is valuation of the land and building. This is mainly for getting appropriate credit from the banks in India, wherein the loan amount depends upon valuation of the asset given as a security and as a secondary collateral. Once listed the share is traded on the SME exchange and thereby the valuation of the company will depend upon the financial performance of the company. If the company is doing very well and has a healthy order book and outlook, the share prices will go up. Over the last 10 years many companies listed in the SME exchange have given multifold returns due to the strong performance of the company.
· Liquidity and Exit for Friends and Family
Most family business is built of capital that is taken from close friends and family; the people that have trusted the promoters at a very early stage. When the company grows and becomes large, when the company is unlisted it becomes extremely difficult for the promoters to provide an exit to such investors. Once listed a partial or complete exit can be provided to such friends and family that have invested at a very early stage.
· Attract Talent
One of the biggest problems faced by most family business is attracting the right kind of talent. Once listed on the stock exchange, it gives the company appropriate visibility and growth prospects, wherein an appropriate ESOP scheme can be structured for the present and future employees to attract the right kind of talent.
· Appropriate Corporate Governance Standards
One of the biggest change that is required in a family business when it attains growth, is the standard of corporate governance. The attitude of owner knows it all and whatever he/she says is correct leads to an environment which is not congenial for growth. Once listed when the company has an appropriate Board of Directors and possibly a family council, it leads to a far better level of corporate governance resulting in growth for the company.
The SME exchange is the apt platform for most family-run business to raise capital, with relaxed listing norms and disclosers on getting listed. In these turbulent times the SME exchange is an apt platform to raise growth capital.
Imagine if you had started preparing for exams early? If you had started reading early, learning early, started exercising early… you’d be at a much better place, wouldn’t you? So is the case with saving and investing your money. The sooner you start, the better off you’ll be down the road.
Though many people feel one should wait until they are older (in their 30s and 40s) to start investing, it’s not the best course of action. Here are five reasons why:
1. Take advantage of the magic of compounding
Albert Einstein, one of the most brilliant minds, knew the immense power of compounding. He had remarked: “Compound interest is the eighth wonder of the world. He who understands it earns it, he who doesn’t, pays it.”
One of the biggest reasons to start investing early is the power of compounding. Compounding happens when you earn interest on your interest, which also includes your original investment. This has a snowball effect.
You’ll be shocked at how much money you will manage to save, even if you start investing a small amount each month.
Consider you started investing Rs 2,000 each month at the age of 25. If your investment earned 12 per cent annually, your investment of Rs 6 lakh would grow to Rs 37.95 lakh by the time you are 50.
If you keep investing the same amount for another ten years, your total investment of Rs 8.4 lakh will become a massive Rs 1.3 crore. You read that right, we haven’t added a zero by mistake.
That’s compounding working its miracle.
As you can see, the more time your money has to grow, the faster it will compound – and the more money you will ultimately have. By investing early, you can increase returns in the long run.
2. Even small amount of money can work wonders
Don’t worry if you’re just getting started and don’t have enough money to invest. You can start an SIP for as little as Rs 500 every month.
Investing a small amount slowly but steadily can lead to a bigger corpus over time, as you saw in the example provided in the first point.
You can always increase your contributions when your income increases over time.
The secret is to begin investing early and to do it diligently. However, if you continue to wait until you have amassed a substantial sum before investing, it might already be too late.
3. You’ll have more time to make up for any mistakes
One benefit of getting started early is that you will have plenty of time to correct any beginner’s mistakes. It can give you more time to educate yourself, experiment and find strategies that work best for you.
Assume something bad happens that causes you to lose money. You still have time to recover. You will learn to handle the risks of investing better.
However, if you wait until later in life to begin, you will need to be more cautious, and your ability to take risks will likely be more constrained due to increased life responsibilities.
Your twenties are the time to experiment and learn because time is on your side.
4. You can meet your financial goals sooner
When you start investing early, you reach your financial goals early, which can also include early retirement.
Early investing can assist you in achieving your goals quickly, whether you want to buy a home or a car.
Additionally, you’ll have more time to enjoy your money. If you wait until your thirties or forties to begin investing, you’ll be less likely to have enough time to let your money grow.
However, by starting young, you might not want to keep all your money in investments after retirement. Instead, you can use it to enjoy your golden years.
5. You’ll be better prepared for adversities
At some point, your finances may become unstable, but by investing early you’ll be prepared to face such low phases. Early investing can help you overcome such tough periods as you would have enough money to tackle tough phases.
As former US president John F Kennedy once said: “The time to repair the roof is when the sun is shining.” The same is true in the case of investing. So, start early and hit the road of financial freedom.
As yields on 3-month treasury bills have increased to about 6.5%, popular fund manager Rajeev Thakkar of PPFAS Mutual Fund has suggested investors to shift idle funds from bank accounts to a liquid fund.
“In case you have not noticed, central banks the world over have been increasing their interest rates. In India, yields on 3-month treasury bills have increased from a low of about 2.7% in May 2020 to about 6.5% now,” Rajeev Thakkar, CIO & Director of PPFAS, said in a letter to unitholders.
“There was a time when it seemed futile to bother to move money out of the savings account to a liquid fund. In some cases, savings bank account interest rates were higher than the prevailing interest rates for treasury bills and commercial paper,” Thakkar said.
“It may no longer be profitable to be lethargic and let money lie idle in the savings bank account. You may consider shifting your idle funds in the savings and current account to a liquid fund,” he added.
India’s largest public sector lender SBI or State Bank of India offers a 2.70% interest rate on savings account deposits while small finance banks like Fincare Small Finance Bank and Jana Small Finance Bank offer the highest savings account deposit interest rate of 4.50%.
Debt funds are a type of mutual funds that invest in fixed income-generating securities such as treasury bills (short-term debt instruments issued by the Government of India), government bonds, corporate bonds, other money market instruments, etc.
What are bonds, you might wonder? Let’s start with the basics. Just like you go to a bank for a loan, governments and companies can borrow money from the financial market (think institutional investors and people like you and me). When they take the loan from the market, they issue a certificate of deposit called bonds.
And just like you need to pay an EMI to repay your bank loan, governments and companies pay an interest on the loan they have taken from the financial market. These instruments have a fixed maturity date and help you earn an interest till maturity.
Why do people invest in debt mutual funds?
We know that for wealth creation, equity funds are the most suitable investment. In fact, you can check the best equity mutual funds handpicked by our research team. However, they are not an ideal short-term investment option. By short-term, we mean one to three years.
So, where do you invest your money to meet your near-term goals? Enter debt mutual funds (debt funds in short).
Debt funds invest in fixed-income instruments, such as bonds. As explained earlier, investing in fixed-income securities is like giving out a loan and receiving a fixed interest on it. The interest you earn can be paid monthly, quarterly, semi-annually or annually. Because of this, debt funds are pretty stable compared to equity funds.
Another reason for people to invest in debt funds is diversification. Investing in them helps balance out the risk. Let’s say you want to invest Rs 5 lakh. Putting all your money in equity funds can be risky. In order to reduce the risk, some portion of the money can be put in the relatively-safer debt funds.
The third reason is convenience. While you can directly invest in corporate bonds and government securities, it is a hassle. Also, there are several instruments that are not available to individual investors. Hence, it is much easier to invest through debt funds. They have the access to buy different types of fixed income securities. What’s more, you can start investing in debt funds with just Rs 500 to Rs 1,000.
What else should you know before investing in debt funds?
• Liquidity: You can exit your investment whenever you want and receive the money in two to three days’ time. And unlike traditional avenues, debt funds don’t have a lock-in period or a tedious withdrawal process.
• Steady, yet moderate, returns: As debt funds invest in fixed-income securities, their returns are stable. However, since they are less risky, they yield a lower return than equity-oriented mutual funds.
• Risks involved: Debt funds are not completely risk-free. Rise in the interest rate and credit default can be bad news for debt funds. Let’s understand these one by one.
Let’s say the interest rates are going up or there is an expectation of the rates going up. When this happens, the newly-issued bonds start offering higher interest rates. As a result, the demand for existing bonds – those that might be a part of your debt fund – falls. And with it falls the price of the existing bonds and the value of the debt fund.
The other kind of risk is credit risk. If any underlying bond issuer defaults and fails to honour the payments, it will affect the portfolio value of the debt fund. Hence, diversification is important in debt investments too.
Tax efficient: Unlike fixed deposits, where the accrued interest is taxed every year, mutual fund gains are taxable only when they are realised, i.e., at the time of selling the debt fund investment.
For example, if you invest in an FD and earn Rs 5,000 interest every year, this amount is added to your taxable income for that year even if you do not realise the interest. However, in case of debt funds, if the value of your investment increases by Rs 15,000 by the end of the first year and you remain invested, you don’t have to pay any tax. Only when you redeem your mutual investment are you required to pay tax.
Better returns compared to its peers: These funds have the ability to generate reasonably better returns than a savings bank account and even bank fixed deposits, especially after you calculate the tax. Hence, they are ideal for investors who are risk-averse and looking for short-term investments.
