The purpose of life insurance is to make good the financial loss that a person would suffer if the earning member of the family passes away. 

We could bucket this financial loss into three major categories. 

• Any loans that would have been taken for which the EMIs for the loan are being funded by the salary of the individual.
• The household expenses that the family was dependent on.
• The goals of the family, for e.g., kids’ education, the retirement of surviving spouse or parents, etc.

All three needs would be compromised if the earning member of the family passes away. The house could get repossessed for non-payment of EMIs, the lifestyle of the family would have to be drastically lowered, and other goals would also need to be amended or scaled down. 

Normally, as you earn more, lifestyle changes push up expenses. Hence, if an earning member passes, not only will his current income stop, but also the potential to earn more in the future ceases. 

Keeping these in mind, it is firstly important to assess if the life cover you chose is sufficient today. If it is, you should next assess whether the cover is sufficient 8 or 10 years from now. You will notice that the value of, say, ₹1 crore would have fallen because of inflation. 

It is similar to health insurance. Though in today’s value, ₹15 – 20 lakh cover may look reasonable, we are talking about being covered for a lifetime, and the cover could be meager a few years later.

Considering these, our suggestion would be first to assess one’s current insurance needs. Take additional cover if required. This is also important because as one ages, there could be some diseases or ailments that one may have to deal with, which may render the individual uninsurable. For example, a healthy person today, having a cardiac arrest tomorrow, may become uninsurable, even if there is a willingness to pay a higher premium.  Otherwise, the insurance company may exclude that ailment from being covered.

It is, therefore, very important to carefully assess the requirements before stopping to pay existing premiums. The cost of insurance is insignificant in comparison with the benefit the beneficiary of a life insurance policy will get. My estimate is that the sum total of all premiums over the tenure of the life insurance policy is less than 10% of the sum assured.  

It is not advisable to stop paying premiums for either of their policies just because your investment corpus has crossed the cover amount. What is certainly required is an ongoing review of your goals, your savings and investments, and the risks that you should transfer by way of insurance along with your trusted financial advisor.

The query has been answered by Lovaii Navlakhi, CEO of International Money Matters, SEBI Registered Investment Adviser (RIA).

The post Can I stop paying for insurance if I have saved enough? appeared first on Varsity by Zerodha.

The Indian Succession Act of 1925 defines a “Will” as a legal declaration of a person’s wishes regarding their property after death. In effect, a Will is like a detailed letter where a person declares how their belongings would be distributed amongst whom and in what manner on their demise.

They can decide which specific assets, be it real estate, personal items, or financial holdings, go to designated recipients, who may or may not be their relatives. So, a Will offers flexibility by allowing the planner to provide for his/ her dependents or contribute to charitable causes in advance. So, as an owner of a property, one has the liberty to direct the sale of a particular asset, and the proceeds could be directed to be used for the financial support of one’s children. Alternatively, they may want the asset placed in a trust, ensuring its use benefits a chosen beneficiary until they reach a specified age.

On the other hand, nomination is the process of naming the individual who would immediately be entitled to hold the assets after the owner’s death. This commonly applies to financial holdings like stocks, bank accounts, insurance policies, etc. A significant perk of naming a nominee is to avoid stagnation of the assets of a person, subject to the process of will being executed/ intestate succession being undertaken (process to be followed when the deceased has not left a valid will). Nominations thus pave the way for a quicker and less complicated asset transfer, enabling ease of release of the asset and immediate enjoyment of the same.

In the unfortunate event of the account holder’s demise, the nominee acts as a custodian who takes care of and manages something on behalf of someone else in the event of his death. However, it’s crucial to grasp that the nominee doesn’t become the account owner. Their role is to facilitate the transfer of funds to the legal heirs (the people who inherit) of the deceased depositor.

Nomination is not mandatory with respect to most of the financial assets, but its significance should not be underestimated. In the absence of a nominee being named in the contract (which is the basis of the holding of the asset), the asset would remain stuck with the holder (like the bank, insurance company, demat account holder, etc.).

Imagine Person A owning a demat account where his brother is named the nominee. Furthermore, Person A’s Will reveals his wish for the shares and stocks held in this demat account to be passed on to his wife. In the event of the death of Person A, despite the brother receiving the funds as the nominee, he would function merely as a trustee rather than the rightful owner and would be obliged to act as per the mandate in the will and transfer the funds to Person A’s wife, who has the rightful ownership. Taking leave from this example, it is thus advisable that the beneficiary named in the will, being the same person named as the nominee as well, would enable further reduction of the possibility of disputes about the person’s assets.

For completeness, the law also provides for the situation in which a person does not execute a will during their lifetime in which case the principles governing the religion of the person apply for identification of the legal heirs and their respective share. However, that is a subject containing its own details.

In essence, while having a nominee is crucial, writing a Will is equally significant. A Will ensures the planner’s wishes are honored precisely when they’re no longer around, enabling them to ensure their assets bring joy to the right people on the terms they envisage.

Understanding these concepts is like untangling threads, making sure your legacy is left in capable hands to ensure one’s near and dear ones are provided for even after their own passing on. Whether it’s leaving one’s vintage guitar for their own musically inclined niece or nominating one’s financially savvy friend to handle one’s bank account, these decisions ensure your wishes are carried out seamlessly by those whom one trusts and for those whom one cares for.

Aakanksha Nehra is a partner, and Preeti Singh is an associate at PSL Advocates & Solicitors.

The post Writing a Will Vs Nomination appeared first on Varsity by Zerodha.

In this story, I want to narrate a story to explain how misaligned incentives nudge people to sell financial products that investors are not looking for or those that may not be a right fit.

This is a mutual fund buying experience of my neighbour. Let’s say her name is Sunita.  

Sunita, a 40-year-old woman in a tier-2 city, wanted to invest in mutual funds for the first time.

Sunita had been hearing about MFs for some time and that it is a good long-term product to earn better returns. She went to a nearby bank to enquire about the product.

If you are someone who invested in mutual funds through a mobile app in the comfort of your home, you must be wondering why Sunita had to go to a bank. Remember, for most people from tier 2 & 3 cities, a bank is the only trusted place to know about financial investments.

The bank manager started selling a life insurance product to Sunita. It is that savings-linked insurance product that promises to return your premiums with some return along with a life cover. Read more about these insurance products here.

Confused about the suggestion, Sunita returned home, did some research, and decided to invest in mutual funds only.

She went back to the bank. The manager started pushing the insurance product again. When Sunita interrupted to express her disinterest in insurance, the manager frowned instantly.

Here comes the first question – why does the manager want to sell an insurance product to Sunita when she wants to save in mutual funds?

The commission one can earn on selling insurance products is much higher than selling a mutual fund. The commission on selling mutual funds (regular) ranges between 0.1%- 2% of the value of your investment and remains the same throughout the investment tenure. On the other hand, in most cases, the insurance agents get a hefty percentage of the premium in the first year of selling, which eventually drops from the second year onwards. The higher commission structure for insurance would lead some financial product sellers to push this over mutual funds.

Note that insurance is not a bad product. Ideally, everyone should have term insurance (not a money-back policy) and health insurance. Also, this is not to paint everyone with the same brush. There are some bad apples out there, and you must be careful not to get one.

Back to the story, when Sunita insisted on investing in mutual funds, the bank manager proposed active funds. When asked about low-cost index funds, the response is that they are not available to invest.

Ideally, the process of investing in passive funds shouldn’t be any different from investing in active funds. If a seller desists you from investing in the former, ask why.

If the response is not satisfying, there could be a chance that passive funds are not preferred because of their low commission structure compared to active funds.

After much back and forth, the bank manager finally found a way for Sunita to invest in index funds. However, the processing time for investing in these funds took two days longer.

This story of Sunita highlights why it is important to know the incentives of a person selling you a financial product. Inquire about how they earn through the sale. It might feel awkward, especially if the person is someone you know. However, keep in mind that transparency is crucial in all financial transactions.

Remember, receiving a commission isn’t inherently negative, but staying informed about their incentives helps us remain cautious if someone attempts to influence our decisions.

There’s no such thing as a free lunch. Even if you’re paying for it, it is your responsibility to select the place that provides the food you like and that satisfies your hunger.

The post Know the incentives of those selling you a financial product appeared first on Varsity by Zerodha.

It is the year of General Elections. Whether or not the ruling party changes, by structure, a new government will take charge after the elections. The budget to be presented on 01 February will be applicable for only 2-4 months. Therefore, it is an interim budget.

The interim budget’s primary focus is on the income and expenditure of the previous year. While the government might present a roadmap of income and expenses for the next year, it will be of little use if the ruling party changes.

Nevertheless, if you are a newbie looking at the budget for the first time, you can use this checklist as your reference for the announcements to look out for in the budget.

• Information highlights of the previous years
  • Nominal and real GDP growth – to judge how much the country’s income grew
  • Per capita GDP growth – to judge how much an average citizen’s income grew
  • EPFO membership – to get an idea of employment growth
  • Number of bank accounts – indicates the level of financial inclusion in the population
  • Insurance cover – shows the level of life and health insurance cushion for the public
• Updates or changes in taxes 
  • Direct taxes on
    • Income from profession/business
    • Income (dividends and interest) from investments
    • Capital gains from selling investments
  • Indirect taxes in the form of
    • GST on products
    • Excise and VAT special products such as liquor and petroleum
• Spends on
  • Education
  • Healthcare
  • Infrastructure
  • Digitalization / Internet access
  • Providing Housing 
  • Eradicating Hunger
  • Improving sanitation
  • Defense
    Expenditure can be current or capital. Building a highway, school, or hospital is a capital expenditure. Maintaining the highway and the salaries of nurses and teachers are current expenditures.
    Expenditures such as building infrastructure and infusing capital in PSUs are meant to generate revenues. Expenditures towards subsidies and direct cash transfers are consumption activities that do not generate any income.

• Incentives for businesses/industries
  • Production linked incentives
  • Tax breaks
  • Free trade zones/trade parks
• Financing support for small businesses, farmers, and the rural population
  This could be in the form of discount loans, interest-free loans, or government guarantees for loans taken by farmers from the banks or NBFCs.
• Capital infusion into or divestment from PSUs
• Fiscal deficit targets
  A fiscal deficit suggests that the expenditure is more than revenues. This difference is funded by borrowing.
• Borrowing plans
  • Amount to be borrowed
  • Sources (INR/USD denominated)
• Sops for transition to a net-zero carbon economy (high-yield green bonds, tax breaks, or financing support for green infrastructure)

As the bread-earner of your family, you want to know the taxes applicable to you and the government spending on education, healthcare, insurance, and housing.

If you are an investor, taxes on investment income and capital gains can influence the market price of your assets. Reports on GDP, bank account numbers, electrification, and internet access could indicate the strength of the economy and, hence, the growth potential of your investments.

As a business owner, you would be interested to know the financing options available and the incentives or levies announced for your and allied sectors/industries.

The budget is a financial plan for the whole spectrum of activities that a government intends to do for the whole country. Its application and implications are multi-layered and often a point of contention between political parties. Attempting to know the entire budget can be overwhelming. Several parts of it may not even impact you or be of interest to you. A checklist like this could, therefore, come in handy.

The post Things to look for in the (Interim) Budget appeared first on Varsity by Zerodha.

That begs a question – why can’t MRF consider a split? After all, a single MRF share is trading at around ₹1.3 lakh. Let’s explore.

Splits are usually announced in the ratio of 1:5, 1:10, or 1:20. Given the size of each share, MRF will need a big split. Could that be 1:10 or 1:20?

MRF shares have a face value of ₹10. A split of 1:20 would bring the face value down to ₹0.5. That is not a whole number, and the face value cannot go below 1. So, let’s say they split in the ratio of 1:10, just like Nestle India did.

A 1:10 split would result in a face value of ₹1. No problem there. However, the market value of each share would be ~₹13,000. It could be higher as the share price generally rallies when a split is announced. At ₹13,000, It will still be an expensive share for most, defeating the purpose.

How about a bonus of 19 shares for every MRF share? It will increase the base equity share capital from ₹4.2 Cr to ₹84.8 Cr. MRF has enough free reserves for this. The bonus would divide the share price by 20. It would still be around ₹5,500. That, again, is a very high price.

Could there be a 1:39 or 1:49 bonus? Meaning, 40 or 50 shares for every share held. That level of dilution is unheard of. But why would MRF want to do a split or bonus? And why haven’t they already done it?

Splits or bonuses are said to improve liquidity. The number of outstanding shares increases, and the share price becomes more accessible to retail investors. It enables a higher trading activity. Therefore, price discovery is believed to become more efficient.

What if the company does not want a higher trading activity? It might want only long-term investors. A high price point could ensure that only serious investors buy the stock and that haphazard trading does not drive market value far away from the business’s intrinsic value.

This is why Warren Buffet resisted diluting Berkshire Hathaway’s shares for the longest time. Berkshire’s Class A shares are worth around $550,000 or ₹5 Cr/share. There have been calls for a split in Berkshire’s shares since 1990 when the per-share price breached the $10,000 mark.

Around the mid-1990s in the US, unit trust funds cropped up. The per unit price of these funds was far lower than Berkshire’s shares. They would either mimic Berkshire’s portfolio or invest in only Berkshire’s shares and sell their own units against it. It is like a mutual fund that will invest only in Berkshire’s shares. Investors were led to believe that these funds could deliver a performance similar to Berkshire’s. 

Warren Buffett knew that mimicking portfolios does not result in mimicking performance. To avoid the creation of such structures, Berkshire introduced the lower-priced Class B shares that carried 1/30th of the voting rights. The Class B shares have subsequently been split further, but Class A shares have never been split.

What if MRF was put in a similar situation? Could there be a fund investing only in MRF? In that case, would MRF split or introduce a newer class of shares?

The post Nestle India split its shares. Will MRF ever split? appeared first on Varsity by Zerodha.

Check out the following snip!

Have you seen these kinds of phrases in the news before? 

If you are someone who has pressed the remote button to switch to CNBC News or clicked your mouse to a MoneyControl article, I am sure you are no stranger to it! 

The keyword I want you to look at above is “initiate.”

Millions of shares trigger the market moves over an undefined period, just based on the solid reasoning of an analyst put behind this word!

Just like a top-tier spy/thrill movie keeps its audience bound until the end for its climax plot, the opportunity to reveal the climax for us, sell-side analysts, comes at the very start of the movie! Because the initial few minutes of the investors we borrow while pitching a stock idea entails revealing the entire plot there itself!

Bang on!

A bit confusing?

Let me be utterly simple and direct, unlike some company’s management commentary.

Among many day-to-day tasks that an equity research analyst carries out on the sell side, one of the most crucial tasks is to expand the existing coverage of a sector’s stocks! 

For example, say, under the consumer durables sector, which I currently also cover, we cover stocks like Havells, Voltas, Crompton Greaves, etc. So, to expand the universe, we have ample more names in the universe like Symphony, Orient Electric, etc., which we shall decide to cover fully! Here comes the role of an IC or Initiating Coverage Report! 

Why do we need IC?

Firstly, it’s needed to fulfill the clients’ demand and respect the investors’ interest in and attraction to that particular stock. Secondly, an analyst initiating new stocks/sectors to garner more votes from the buy-side fund managers and build overall reputational value (a topic for some other blog!).

Ways to bring a new stock?

1. An individual initiating reports on any stock
2. An Anchor report, wherein 3-5 stocks are usually initiated together to bring coverage for an entirely new sector! Say, if you wish to initiate the QSR Industry, you can release a report together on Sapphire Foods, Devyani International, Westlife, etc.

Coming to the main & lengthy part of the reading!

How is the research conducted, and how does it lead to the final Target Price (TP) of the stock?

Let’s do it for one of our recent companies that we initiated in the Consumer Durables space, Eureka Forbes! 

Drink filtered water at your home from ‘Aquaguard?’ This is the company that owns this brand name! GO and fetch yourself some water because here we begin

1. At the junior analyst level, your lead analyst discusses with you the initiation plans as per the client’s request/interests, i.e., the deadline for initiation, company know-how, etc.

2. We, here, use external software to build our reports, so the initial base format for the report is already set; one has to punch in the text, upload the chart, tables, images, etc., inside the report using the software’s functions

3. Various sections to be included in a report are (Front Page Commentary, Industry Analysis, Market Sizing, Key Investment Risks, Company Analysis, Valuation Summary, Charts, Tables, Images, Appendix, Ratios, etc.)

4. The initial model is made by the junior analyst. In my case, it was me (Putting historicals, linking statements, making quarterly and annual forecasts, building operating metrics and DCF, formulating ratios, etc.)

5. The assumptions for major growth drivers (Revenue, Operating & and non-operating expenses) are left at the end to be molded by your senior analyst! For that, we keep meeting with the company management to get certain queries answered, especially regarding the plans of the company, and get a broader understanding of the company!

6. The interesting part comes from the industry & competitor analysis. Let’s deep dive here- 

Eureka Forbes operates in majorly three segments

• Water Purifier 
• Vacuum Cleaners
• Air Purifiers 

The company is a leader in water purifiers, with its most famous brand ‘Aquaguard.’.  So, how do you go about studying the industry and competition?

Industry Analysis:-

• Tap Water Connections (Rural & Urban)
• Methods of Treatment of Drinking Water
• Market Share by players across channels
• Stages and Methods of Filtration
• Parameters to choose the right water purifier

Competitor Analysis:-

I did a lot of primary research by calling various dealers and salesmen from Croma, Vijay Sales, etc, to gauge the

• Category Pricing for Kent, Aquaguard, Pureit, etc 
• Key Brands under each segment
• AMC renewal charges for various categories i.e. servicing costs for your RO 
• New Innovations in the market
• Qualitative and Brand appeal among consumers
• Various Model Ranges under different Brands
• Financial snapshot for competitors

7. We finalized the report with a “Neutral” rating after considering all the qualitative and quantitative factors!

8. Once the entire report’s first draft is finalized by the sector analysts, the report is sent to the SA (Supervisory Analyst) for review, wherein he highlights 

• Major/minor grammatical errors
• Target Price errors, if any 
• Any source confirmation, etc.

 Every single equity research report needs to be approved by an SA before it’s published and disseminated to clients.

 9. Internal review by the senior mgt (Head of Research) to understand the rationale for the buy, neutral, and sell rating of the stock! A Q&A round is carried out after the initial presentation! Once the head flags off a green light, the report gets published in the next few days, in the nonmarket hours!  Yes, i.e., not anytime between 9:30 am and 3:30 pm, before the market hours or after the market hours as per the SEBI guidelines! 

10. The report gets published on the Nomura portal and individually sent to the clients, buy-side fund managers, and other institutional investors!  The sales guys do all these tasks proficiently! 

Some of you might be wondering: 

If the notes are disseminated to clients’ inboxes directly, why is there a need for salespeople? The reason: Clients have access to 30+ sell-side firms who all send research reports to them every morning. Do you think they saw your analyst’s note? Equity salespeople add value by amplifying the research reports by calling the clients personally and pitch the stock to the best of their abilities!

How are the bucks earned through these time-consuming reports?

• Whichever buy-side fund is impressed by the story after his fund’s own due diligence and wishes to invest in the stock could do so through their registered broker account with Nomura.
• If the stock hits the target price, the analyst’s rating and reputation flourishes in the market, and he earns more votes and gets new clientele requests on top of that!

The way the votes are distributed is a talk for some other blog! 

So, Yes, I understand that was too much to grab! In a nutshell, the work doesn’t end till the price of the stock is finalized! That’s honestly just half the work done. Equity research is not an “if you write it, they will read” profession! What happens after that w.r.t report completion, review, pitching, marketing, etc., is a tedious and long process, which makes the entire process exhaustive.

That’s it for now, folks!

Have a great day. Leave your comments for any kind of doubts. I would be happy to answer

This is a guest post by Raghav Gupta, an equity research analyst at Nomura.

The post How equity analysts rate a stock? appeared first on Varsity by Zerodha.

How can an investor block an amount to fund their trades?

Investors can initiate a request to block funds in their bank account through the trading app they use. Once the request is placed on the trading app, the investor has to accept the UPI mandate confirming the block. Banks then relay this confirmation to the clearing corporation, which, in turn, confirms to the stockbroker that the investor can trade.

Here is a diagram to visualize the transaction flow:

Interest on the blocked amount

While the funds remain in the investor’s account, the block ensures that the money cannot be used for any other purpose. The funds are directly deducted from the investor’s bank account by the clearing corporation of the stock exchange when one invests. The blocked funds also earn interest in the savings account, just like funds blocked for IPOs.

However, there is no interest benefit if one invests the entire block amount on the same day since funds are debited by 8 pm. The bank pays interest if the funds stay in your account overnight.

Investors can set a preference.

Once the framework is live for the public, investors can choose between the

1. 1. Present pooling method – This is the existing flow where stockbrokers collect and send funds to the clearing corporation.
   2. Amount block method – This is the new framework where investors place a block and are subsequently debited by the clearing corporation. 

Investors can switch between the two methods by placing a request with their stockbroker, but they cannot use both methods simultaneously. 

Why is the framework not yet live for the public?

Although the UPI block framework has been launched, stockbrokers need to implement the required system changes, as this deviates from the current funds module. A period of development, along with testing the systems with a closed user group, will precede the public launch.

At present, this appears to be a couple of months away.

This guest post is by Mohit Mehra. Mohit splits his time between Zerodha & Rainmatter, sharing his experiences on this blog.

The post Trading stocks with the new amount block framework appeared first on Varsity by Zerodha.

Compulsorily Convertible Preference Shares (CCPS) are a type of preference shares issued by a company with a mandatory conversion feature. These shares are a hybrid financial instrument that combines elements of both preference shares and convertible debentures. CCPS has precedence over common equity shareholders in two ways – before paying any dividends to equity shareholders, CCPS holders receive dividends, and if the company goes bankrupt and has to sell its assets, CCPS holders will receive a return on their capital on a priority basis when compared to the other shareholders.

In comparison to common equity holders, who get to vote on all resolutions, CCPS holders are generally limited to voting on matters affecting their rights as shareholders or matters affecting the rights of the class of shares that they hold, all of which are detailed in the shareholder agreements. 

What are some of the rights that come along with CCPS? 

1. 1. Conversion Conditions: Shareholders can define the conversion ratio (usually 1:1)  and trigger events for conversion, including a specific timeframe, the achievement of milestones, or the occurrence of a predetermined event like a financing round.
      
   2. Anti-Dilution Protection: CCPS agreements may include anti-dilution provisions to protect investors from dilution in the event of future equity issuances at a lower valuation.
      
   3. Liquidation Preferences: While it’s commonly known that preference shareholders have priority in receiving their capital back during liquidation, the exact terms of the liquidation preference can vary.
      
   4. Down Rounds Impact: In the case of a down round (where the company’s valuation decreases), the conversion terms can lead to a higher number of equity shares being issued to CCPS holders, potentially diluting existing shareholders more than anticipated.
      
   5. Board Representation and Voting Rights: CCPS agreements may grant investors certain governance rights, such as the ability to appoint a board member or special voting rights. These provisions can impact the decision-making process and should be clearly understood.
      
   6. Redemption Rights: While less common, some CCPS agreements may include provisions allowing the investor to demand redemption of the shares under certain conditions. 

What are some of the challenges with CCPS? 

1. 1. Limited Control for Preference Shareholders: While CCPS holders have preference rights, they may have limited or no voting rights until conversion. This means that, until conversion occurs, preference shareholders may not actively participate in certain key company decisions.
      
   2. Complex Structuring: The structuring of CCPS agreements can be complex, and the terms may include various provisions such as anti-dilution mechanisms, liquidation preferences, and conversion conditions. Navigating these complexities requires careful negotiation and legal expertise.
      
   3. Uncertain Future Capital Structure: Until conversion occurs, the company operates with a hybrid capital structure that includes both preference and equity shares. This can complicate financial reporting and impact the company’s ability to attract additional investors.
      
   4. Limited Exit Options: In some cases, CCPS agreements may restrict exit options for investors, making it challenging for them to sell their shares before conversion.

Here are a couple of further reads on this topic, 

1. From Cyril Amarchand Mangaldas 
2. From ICAI

This is Dinesh Pai’s eighth post in the Venture Capital category. Dinesh heads investments for Rainmatter and is an avid blogger. 

The post Why VCs get Compulsorily Convertible Preference Shares and not Equity shares? appeared first on Varsity by Zerodha.

Firstly, at the beginning of a financial year, when the HR (human resources) department in the company asks you to declare your investments. Secondly, towards the end of the year, when the same HR comes back with an email requesting you to submit the investment proofs. Lastly, when you have to file your income tax return.

For starters, in the year 2020, the government introduced a new tax regime under which taxpayers can choose to pay tax at lower rates. However, the twist is that he/she has to forego most of the deductions and exemptions that would have lowered the taxable income.

You can check the tax rates under both regimes here

So, taxpayers now have the option to choose between:

1. A lower tax rate on higher taxable income under the new regime or
2. A higher tax rate on lower taxable income under the old regime.

The government introduced this system to make the life of the taxpayer easier when filing tax returns, without worrying much about different sections of the Income Tax Act that govern deductions and exemptions. The idea is to phase out the old tax regime entirely and transition to a simpler new tax regime.

But until then, we need to decide which one is better by comparing the tax outgo between the old and the new tax regime. Starting from this financial year (FY23-24), the new income tax regime is set to become the default regime if you don’t opt for any. However, individual taxpayers (without any business income) have the option to switch from one tax regime to another every year. 

The income tax department has come up with a calculator that tells us which tax regime is better. In this blog, we will delve into how salaried individuals can use this tax calculator and the key points to note.

Comparison

You can access the said income tax calculator here.

As you open the link, you will see the following page where you need to input a few basic details – assessment year, age, residential status and taxpayer category.

For the financial year FY 23-24, the relevant assessment year is AY 24-25.

When you fill in the ‘total annual income’ and ‘total deductions’ boxes, you will see the comparison of tax amounts between the old and new tax regimes on the right-hand side. As shown in the image, when you fill in income and deduction boxes with, say, ‘Rs 11.5 lakh’ and ‘Rs 2.5 lakh’ respectively, the output is ‘you will save Rs 13,000 if you opt for the old tax regime’.

What is total annual income?

Before you learn what comprises total annual income, remember this: Every salaried individual is eligible for a standard deduction of Rs 50,000 per annum. So, if your total annual income is Rs 12 lakh, you need to input Rs 11,50,000 (Rs 12 lakh – Rs 50,000) in the ‘total income’ cell.

Regarding the definition of annual income, every penny you earn in a financial year that is chargeable to tax at your income slab rate should be considered. Let’s start with the salary income.

Take ‘gross salary’ per annum. This includes income you receive from your company before deductions such as tax and contributions to the provident fund. 

Where to find this number? If you are reading this blog after the financial year ends, you can check this number in Form 16 that the company gives you.

If not, check your latest pay slip. You will most likely find ‘gross earnings’ on the left side of the table. 

Consider the fixed component in the ‘gross earnings’ that you would receive every month irrespective of your performance or the company’s. Now, multiply that amount by 12 to get the annual gross income. To that, add one-time/periodical incentives like bonuses that depend on performance and other allowances you received or expect to receive in that financial year.

This gives the annual salary income. 

Now, if you have or expect to have any other income chargeable to tax at the income slab rate, such as –  rental income (after municipal taxes, interest on a home loan, and a standard deduction of 30%), interest on fixed deposits, or short-term capital gains on physical gold or property – in that case, that amount needs to be added to the ‘total income’ as well.

In summary, you need to add your salary income, rental income (after deductions), income from other sources, and any other income on which tax is chargeable at the slab rate.

Remember, the old or new tax regime you choose when filing your return decides your tax liability for the year. For the financial year 2023-2024, the deadline to file the return for individuals would be July 31st, 2024. 

By then, you will have Form 16 to figure out salary income and an annual information statement (AIS from the tax dept.) to get a clear idea of the total income earned.

What about deductions?

In the ‘Deductions’ box, you need to enter all the exemptions and deductions available in the old tax regime but not in the new tax regime. This includes exemptions on HRA (House Rent Allowance), leave travel allowance, and deductions for the payment of professional tax. 

Additionally, it covers Section 80C deductions, which encompass investments in tax-saving instruments like provident funds, equity-linked mutual funds, payment of life insurance premiums, repayment of a housing loan, additional contributions to NPS (National Pension Scheme), deduction under Section 80D for health insurance, donations under Section 80G, and payment of interest on a loan for higher education under Section 80E, etc.

Ensure that the amount of deductions and exemptions you enter are within the permissible limits as per the law. For example, Section 80C deductions have a limit of Rs 1.5 lakh per annum.

Conclusion

Once you provide both the ‘total annual income’ and ‘total deductions’ figures, the calculator lets you know which tax regime is more beneficial for you. 

For those earning less than 7.5 lakh per annum, tax under the new tax regime is zero. For those earning more than Rs 5 crore per annum, the new tax regime is better because the surcharge has been slashed from 37% to 25% from this year on.

There is a possibility that we might initially consider one tax regime to be beneficial but later change our minds and choose another. After all, we will have a clear idea of our total income only after the end of the year.

Thus, the regime you choose at the time of investment declaration in your company is not final. HR seeks this information only to decide how much TDS (tax deducted at source) to deduct from your monthly salary. 

Say, you opted for a ‘new tax regime’ for FY 23-24 and did not submit any investment proofs to your company. When filing IT return for the year, if you realize that opting ‘old tax regime’ will save you a few bucks, you can go ahead with this option and claim deductions and exemptions. 

But remember, there is a higher possibility of the income tax department sending you a notice in this case to submit your investment proofs. Nothing to worry! Just a reminder to document and save your investment proofs. 

The post Old vs New tax regime: Which one is better for you? appeared first on Varsity by Zerodha.

An IC in a VC fund is a group of individuals, usually partners in the VC fund, responsible for signing off on an investment opportunity. IC is typically composed of experienced professionals with diverse skills and backgrounds. 

While the investments within the VC funds are fronted by several members, the eventual decision on the go or no-go on the investment lies with the IC. Usually, the analyst leading the investment conversations does a few things before an IC meeting –

1. Prepare a detailed memo listing out the opportunity, risks, and details of the investment opportunity;
2. Predict questions that might be asked in an IC meeting by the IC members;
3. List out the exact ask for the IC – essentially the investment amount and why it makes sense to take the bet; and
4. Prepare a report on the Due Diligence (DD) that was conducted for the investment to be shared with the IC.

Image credit: The VC Factory

While all of this seems quite simple, there are several nuances with an IC. Ask any VC fund, and you will hear about how critical IC is to their decision-making. A well-rounded and experienced IC will help the VC fund avoid being blindsided by biases and a lack of understanding of the market. For an IC, the key role involves asking difficult questions that investment analysts who present the opportunity might have to answer or go back from the meeting and prepare for the answers. IC also reviews all the materials, including the DD that was conducted for the investment opportunity. 

This is how the discussions are structured within an IC meeting. As the IC gathers, they have a list of investments to discuss. Each analyst or team member fronting the investment opportunity presents details of the business along with the memo that was drafted. The IC then discusses the opportunity, asks any questions, and then makes a decision. The IC spends a lot of time assessing the risks associated with each investment opportunity and making informed decisions to maximize returns while minimizing potential downsides. All decisions are made keeping in mind the fund’s goals, target industries, and investment thesis.

For some IC meetings, even founders are invited to present the investment opportunity and answer questions the IC might have. And in most cases, debates and disagreements are common. While every IC has a different way of making decisions, the most common method of deciding on an investment is consensus – not necessarily unanimous. 

While we are on this topic, here is some more context around how IC helps long-term fund performance for VC. Taken from a  blog I read on IC – 

The first reason is that ICs allow for sharing expertise, networks, and points of view on the opportunity presented. Since Venture Capital is mostly about interpreting signals, it helps to have several people around the table who can bring a fresh perspective from their experiences. It’s also why diversity, in many forms, is important: it ensures as broad a point of view as possible.

The other reason why ICs matter is that they are more subtle yet as significant as all the other ones. They are an effective tool to fight off confirmation bias. A useful but sometimes pernicious effect of working on an investment opportunity is that Investors build bonds with the startup’s Founders. It’s useful because they will sit on the Board for years to come and hopefully provide advice in dire times. Trust is a critical parameter.

The unwanted effect is the risk for the deal team to lose objectivity and become biased supporters of the startup, disregarding obvious perils or putting them aside by focusing only on positive aspects. The deal team falls into confirmation bias territory, the main reason why VC due diligence fails. By basing the discussion on hard data – insofar as it is possible in VC – IC meetings force the deal team to question their judgment.

This is the seventh post by Dinesh Pai in the Venture Capital category. Dinesh heads investments for Rainmatter and is an avid blogger. 

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Here is a template term sheet from the StartupIndia website for your reference. 

While I could go through each of the various parts of the term sheet, we will look at some of the important critical terms from it, and we will list out a few points that make up an ideal term sheet from a founder’s perspective. Other aspects are mostly self-explanatory. But if you have specific questions apart from the points we discuss, do let us know in the comments section. 

Firstly, pre-emptive rights are the rights of the investor to maintain the holding in the company by participating in any further investment rounds the company is undergoing. An investor will want to do this to ensure their stake in the company is not diluted. In almost all the VC investment rounds, the pre-emptive rights are a given. But as a founder, to ensure that their dilution is minimal across several rounds of funding, a fallaway threshold should be set up – say 5% – to ensure that any investor below 5% may not be able to have the pre-emptive rights. 

Secondly, the anti-dilution clause. This clause is quite technical and will not go into the details. But put simply, most VCs will want to maintain their holding in the best of the startups so that they can get the maximum returns when they exit the investment. And VCs bake in the right to have this option not to dilute holdings in the agreements while the investment is being completed. This is called Anti-dilution. There are two types of anti-dilution – the weighted average method and the full-ratchet method. The less aggressive and founder-friendly option is the weighted average method. So watch out for this clause. 

Thirdly, affirmative voting matters. This section details the various finer points of company operations that the investors will want visibility on and want to have the final say. In most cases, to enable companies to run smoothly, investors keep this list to critical points like taking on liability or changes in business operations or aspects of the business like those. Founders need to go through these matters in detail and ensure they speak to investors about any reservations and the reasons for that. In all likelihood, investors will understand and allow for relaxation from standard terms. 

The other term to watch out for is the liquidation preference. The common request from investors here would be to have a 1x liquidation preference. This means that if the company liquidates, the investors will first get the entire investment amount before any other promoters and common shareholders see any capital being returned. Watch out for participating liquidation preference rights asked by investors – which works like this – say a company is liquidating and the investors have 1x participating liquidation preference, then the investors will get the investment amount back. And then, from the capital that is left over, the investors will again get pro-rata allocation. This is quite an aggressive right. So always ensure you have non-participating 1x liquidation preference – which is fair for the investors and the founders. Will try to have a separate blog on liquidation preference. But here is a short blog by Nithin on liquidation preference. 

For any first-time founder, I can only imagine their feeling about receiving their first term sheet. All the hard work, blood, and sweat finally make sense, and a euphoric feeling sets in, I suppose. But while it is time to celebrate, the critical thing to do is to go through the term sheet in detail and watch out for terms that might not be favorable.

Will cover what an Investment Committee is in the next blog. Until then!

This is the sixth post by Dinesh Pai in the Venture Capital category. Dinesh heads investments for Rainmatter and is an avid blogger. 

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There will be many bull case scenarios suggesting a rally higher up. But let’s look at the bear case and figure out the factors that can potentially drag the markets down.

1. 1. General elections are due in the first half of 2024. A hung parliament with no national party having a majority could depress the sentiment. Markets are usually not happy with a coalition government. Coalition governments often find it difficult to introduce or pass new bills. This impedes economic progress and development.
   2. The Russia-Ukraine war has been going on for almost two years. Israel has been at war with Hamas for two months now. The fear of China annexing Taiwan always lurks. Any of these conflicts escalating to a regional or global level could have a devastating impact. Supply chains will be adversely impacted. Commodity prices could soar. Gold will become expensive.
   3. India primarily depends on imports for all its crude oil needs. A war, pandemic, natural calamity, or manmade disaster sends oil prices skyrocketing. Higher oil prices culminate in higher input costs and consumer inflation. Other fuel prices also shoot up. Businesses suffer.
   4. Continued high interest rates in the West could lead to a recession. An economic slowdown is likely, if not a recession. Slower consumption in foreign countries could hurt the demand for India’s exports. The Indian IT has been feeling the heat for some time now. This became evident when TCS and Infosys significantly scaled down their hiring plans.
   5. India’s GDP grew at 7.7% in the first half of FY2024. It is poised to be the fastest-growing economy, with an expected growth of 6.5% this year. A sudden, unexpected shock to growth could derail the prospects. Such a shock could be from within or outside India.

These are known risks that can be factored in. But risk can originate from anywhere, at any time, and in any form. The degree of impact of such risks on the economy and markets cannot be forecasted. Your best bet is to allocate across asset classes mindfully. When you spread risks across asset classes, each asset class becomes a hedge for the other.

Do note that these bear-case scenarios are possibilities, not forecasts. Forecasts must be backed with data, statistical probabilities, and adequate reasoning. There is a good chance that India’s GDP will be at least as much as is forecasted. 

I hope this note acts as a reminder of sanity, at least to myself, in times when euphoria has taken over.

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The day I can finally pull off a perfect headstand might not even be as thrilling as what I felt last week. Sometimes, realizing your ability to do something can be more fulfilling than the feeling of accomplishment itself. Don’t you think so?

As I began my work this week analysing the impact of missing some of the best days in the market on our investment, I couldn’t help but draw parallels between market returns and my experience with a headstand. In both cases, the best days of progress come after the days when we stumble the most.

In the last 20 years, some of the market’s best days (in terms of daily returns) occurred either during a correction phase or shortly after that. Well, it’s intuitive to think that markets bounce back stronger after a downturn. But what surprised me was that almost 8 of the 10 best days in the last 20 years were after the market correction.

Six of those best days fell within the Global Financial Crisis (GFC) period between January 2008 and March 2009. The other two days happened during the recovery phases of market correction in 2008 and 2020.

We expanded our analysis to the top 60 best market days over the past 20 years. Even in this scenario, nearly 40 out of the 60 best days occurred during or shortly after a correction phase in India.

You might wonder if it truly matters to miss just a handful of those great days in the long run. The answer is a resounding ‘yes’.

Let’s break it down. Suppose you invested Rs 1 lakh in October 2003 in a Nifty 500 index. If you stuck to your investment through the ups and downs for the entire 20-year period, it would have grown to Rs 18.6 lakh. However, if you missed just ten days in the last two decades (I repeat -just 10 days in almost 5,000 trading days), your investment would be worth only Rs 9 lakh. That’s a significant 52% lower than what you’d have had if you had stayed the course the whole time.

Source: Nifty Indices; Past performance is no guarantee of future results

And it’s not just here in India. JP Morgan Asset Management and other entities conducted this study on US markets (S&P 500 index), and guess what? The results are almost similar – https://tinyurl.com/5x6cejhx

You see, compounding has a certain magic to it. When you miss out on one of those big gain days in the market, it may not seem like a big deal at the moment. But every rupee you miss out on that day becomes a missed opportunity for future growth. 

Now, contrast this with missing the big correction days. Tweak the above analysis by missing just 10 worst days (in terms of daily returns) in the last 20 years. You will be surprised to know the outcome. Your Rs 1 lakh invested in 2003 would have become a whopping Rs 48 lakh in 2023. In CAGR (compounded annual growth rate) terms, it would be 21.4% per annum. By missing out on market losses, you allow your investments to continue growing uninterrupted, maximizing the compounding effect.

Having said that, attempting to time the market can be tricky- not just the best days but also the worst days. The only thing that is in our control is not to succumb to loss aversion when markets correct. Staying away from the market due to the fear of losses could mean missing out on some of the best days. In equity investing, long-term commitment is often the key to building wealth over time. 

It’s worth reminding ourselves that in markets, it is often our behaviour that determines the returns rather than the art of timing or picking that elusive multi-bagger stock. I can’t help but point out what my yoga teacher taught me about the headstand – it’s more about balance and focus (engaging the core) than the level of expertise in yoga.

Asset allocation 

When life savings are exposed to market vagaries, staying calm is easier said than done. I mean, even the seasoned fund managers were playing it safe by holding more cash during that major market plunge in March 2020. 

But if there’s one thing that could ease getting panicked is ‘asset allocation’. As cliche as it sounds, asset allocation has been a time-tested method to contain losses when markets go south. Think about it – having a diversified portfolio, having exposure to debt products to provide cushion and to meet short-term needs, and moving from equities to other stable assets a year or two before your financial goal timeline – can help you ride out market ups and downs.

When our life savings are not hanging on a single event, and we’ve got that cushion, we’re less likely to make impulsive and irrational decisions.

Of course, asset allocation may not give you the highest returns on your portfolio, but it does something even more important – it lets you have a sound sleep at night while your money keeps working for you.

The post What happens if you miss some of the best or worst days in the market? appeared first on Varsity by Zerodha.

Was this not already happening?

An optional window was launched from September 1st to December 1st, 2023. In this window, the companies going public could choose to indicate a T+6 timeline on the prospectus or a shorter one. However, most companies were attempting to list within 3 days even if a longer timeline was indicated on the prospectus.

Were any redundant processes dropped to reduce the timeline?

No, the process steps remain the same. However, different organizations involved, like banks, exchanges, and registrars, will complete their tasks faster. Thus, the T+6 timeline has shortened to T+3, even though process complexity hasn’t decreased.

Remarkably, many IPOs have listed in 3 days in recent months during the optional period.

How have we improved market-wide efficiency so quickly?

We have been smartly planning IPO dates. With a 3-day working timeline, IPOs closing on Wednesday or later benefit from extra weekend days. This eases the workload for exchanges, registrars, and banks.

For example, the Tata Technologies IPO closed on November 24th and is listing on November 30th. Excluding the three holidays from November 25th-27th, it meets the T+3 requirement.

Hopefully, over the next few months, all market intermediaries will gain confidence to close an issue on a Monday or a Tuesday. This could enable same-week listings. In any case, this is still a feather in our caps.

This guest post is by Mohit Mehra. Mohit splits his time between Zerodha & Rainmatter, sharing his experiences on this blog.

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The company launching an IPO can pay the underwriters a fee to ensure the IPO does not fail. In case of inadequate subscription, the underwriter buys the shares.

Who is an underwriter?

SEBI defines merchant banks and stockbrokers as entities that can underwrite an IPO. Here is an extract from the SEBI notification:

What does underwriting mean in an IPO?

The IPO issuer enters into an agreement with its merchant banks to guarantee that the IPO will not fail. There are two forms of underwriting – soft & hard.

In the case of soft underwriting, the risks guaranteed are lower. The SEBI consultation paper mentions this form of underwriting is presently used in India for covering payment risk in an IPO. Here, the underwriting agreement ensures the IPO does not fail if the minimum subscription is received, but payment could not be collected.

What is the minimum subscription?

In case a company is raising ₹100 in an IPO, it should at least get subscriptions of ₹90. If it fails to get a 90% subscription, the IPO will have to be forfeited. Here is an extract of SEBI’s ICDR Regulations:

However, if the company is raising ₹100 where ₹80 is in the form of new shares, and the balance is in the form of shares sold by existing investors/promoters, the offer size to be considered is ₹80. Therefore, the minimum subscription becomes ₹72 [i.e., 90% of ₹80].

The balance, i.e., ₹20, is called the offer for sale portion of the IPO.

Example of a soft underwriting arrangement

Suppose a company is raising ₹100, which is completely in the form of new shares. Now, the subscription needs to be at least ₹90 for the IPO to sail through. The company collects bids of ₹92.

In the above scenario, the IPO will be deemed successful. However, during allotment, the registrar of the company finds that 5% of the applications cannot be processed due to technical failures. Check out this post for the list of entities involved in the IPO process.

The net payment the company is able to collect after the failed applications is ₹87. The underwriter will buy shares worth ₹3, to ensure the minimum subscription requirement is fulfilled.

What is hard underwriting?

In the above example, the IPO would have failed if the subscription collected initially was for ₹80 instead of ₹92. The merchant banker’s obligation to underwrite would not be triggered. This is where hard underwriting can help the issuing company.

If an IPO is hard underwritten and is able to collect only ₹80 worth of subscriptions, the IPO will still sail through. The merchant banker will have to buy ₹10 worth of shares to bring the IPO collections up to the minimum subscription mark. The underwriting agreement could also be structured such that the underwriter has to buy shares worth ₹20, i.e., to ensure the entire ₹100 IPO collections are done by the company.

What are the benefits?

The company launching the IPO will benefit from the increased assurance of their IPO sailing through. The uncertainty from the viewpoint of an IPO investor also reduces since the merchant bank guarantees the success of the IPO. Both of these benefits come at a cost, i.e., a higher fee for the merchant bank.

Important – Just because the IPO process becomes guaranteed, it may not translate into better stock performance. The factors at play, once the stock lists, are the same.

This guest post is by Mohit Mehra. Mohit splits his time between Zerodha & Rainmatter, sharing his experiences on this blog.

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