Three important mutual fund rules will be effective from Jan 1 2021

Three important mutual fund rules will be effective from Jan 1 2021

👉New Risk-o-Meter

👉Uniformity of NAV (orders >2lk will get NAV when funds reach AMC)

👉New safeguards wrt Inter Scheme Transfers

Key Highlights: Risk-o-Meter

-New category of 'very high' risk added

-Duration funds to have credit criteria

-Credit funds to have duration criteria

-All schemes to have newly introduced liquidity criteria

-MFs to disclose no of times the risk level has changed over the yr

Key Highlights: Uniform NAV

- Orders below Rs 2 lk (except overnight & liquid) will get NAV on the day that money reaches the AMCs, NOT on the day investor places the order

- this is already in place for orders above 2 lk

Key Highlights: IST

- Close Ended Schemes: IST purchases allowed only within 3 biz days of allotment of NFO 

-Open Ended Schemes: IST allowed for meeting redemption-led liquidity requirement

- IST for liquidity mgmt only after other option exhausted

Penny Stocks

Penny stocks are a form of market traded security which attracts minimal pricing. These securities are mostly offered by companies with lower market capitalisation rates. Therefore, these are also called nano-cap stocks, micro-cap stocks, and small-cap stocks, depending on the company’s market capitalisation.

A company’s market capitalisation rate is determined based on the product of the current price of its shares or stocks and the number of outstanding shares i.e. NAV of shares x number of outstanding stocks.

Based on this factor, companies are indexed in recognised stock exchanges such as National Stock Exchange and Bombay Stock Exchange. Penny stock lists are often found in the lower sections of such stock exchanges or lesser-known stock exchanges.

*The features of penny stocks are listed below* – • *High-returns* : These stocks provide much higher returns compared to other forms of securities. As such shares are issued by small and micro-cap companies, they have vast potential for growth. Consequently, penny stocks are risky, given its intensity of response to market fluctuations.

• *Illiquid* : Penny stocks in India are illiquid in nature, given the fact that the companies issuing them are relatively unpopular. It becomes challenging to find individuals who are willing to purchase these stocks, thus offering little aid during emergencies.

• *Low-cost:* In India, penny stocks are usually priced lower than Rs. 10. Therefore, you could purchase a substantial amount of stock units from penny stock list with a small scale investment.

 • *Unpredictable pricing:* Penny stocks might not attract adequate pricing during the sale. It might result in a lower or non-existent profit margin. Similarly, these stocks could also attract a price significantly higher than your cost; therefore, resulting in a considerable profit.

*Example:* 

Mr A invested Rs. 5000 in penny stocks of G Ltd., an IT start-up. Each unit costs Rs. 5. The firm bid well at the market and their penny stock value stood at Rs. 50 at the end of the FY 18 – 19. Mr A then sold his 1000 shares at Rs. 50,000, thus gaining ten times the return. This stock is considered a ten-bagger.

•  *Risks Associated with Penny Stocks* 

Given the scale at which the companies offering such stocks operate, they are prone to huge risks. These stocks heavily rely on the market conditions for growth in their value.

Apart from the basic perils which come with any market-linked securities, there are other forms of risks associated with penny stocks. These are Limited information & Scams.

• *Alternative Options to Penny Stocks in India* 

Individuals can also decide to invest in other investment options which are better suited to their objectives and risk appetite. Mutual Funds are one such option which is increasingly gaining popularity in the market. MFs are investment pools which involve multiple individuals investing in a single fund which is then used to purchase securities.

Team

Bazarwiz

NIFTY

NIFTY is a market index introduced by the National Stock Exchange. It is a blended word – National Stock Exchange and Fifty coined by NSE on 21st April 1996. NIFTY 50 is a benchmark based index and also the flagship of NSE, which showcases the top 50 equity stocks traded in the stock exchange out of a total of 1600 stocks.

These stocks span across 12 sectors of the Indian economy which include – information technology, financial services, consumer goods, entertainment and media, financial services, metals, pharmaceuticals, telecommunications, cement and its products, automobiles, pesticides and fertilizers, energy, and other services.

NIFTY is one of the two national indices, the other being SENSEX, a product of the Bombay Stock Exchange. It is owned by the India Index Services and Products (IISL), which is a fully-owned subsidiary of the National Stock Exchange Strategic Investment Corporation Limited.

NIFTY 50 follows the trends and patterns of blue-chip companies, i.e. the most liquid and largest Indian securities.

NIFTY contains a host of indices – NIFTY 50, NIFTY IT, NIFTY Bank, and NIFTY Next 50; and is a part of the Futures and Options (F&O) segment of NSE which deals in derivatives.

The eligibility criteria for getting listed on the NIFTY Index are mentioned below –

• The company must be a domicile of India and registered with the National Stock Exchange.

• Stocks must possess high liquidity, which is measured by their average impact cost. It is the cost of security transaction execution in relation to the index weight as reckoned through market capitalisation. It should be 0.50% or lower than that for a period of 6 months while 90% of the observations are made on a portfolio of Rs. 10 Crore.

• The company should have a trading frequency of 100% during the previous six months.

• It should have an average free-floating market capitalisation, which is 1.5 times higher than the smallest constituent in the index.

• Shares which have Differential Voting Rights or DVR are also eligible for the index.

Team

Bazarwiz

Types of Trading

Primarily, there are five types of share trading. These are –

*Day Trading:* 

This form of trade involves purchasing and selling stocks in a single day. In the case of day trading, individuals hold stocks for a few minutes or hours. A trader involved in such trade needs to close his/her transactions prior to the day’s market closure. It is popular for capitalising on small-scale fluctuations in NAV of stocks.

Day trading requires proficiency in market matters, a thorough understanding of market volatility, and keen sense regarding the up and down in stock values. Therefore, it is performed mostly by experienced investors or traders. 

*Scalping:* 

It is also known as micro-trading. Scalping and day-trading are both subsets of intraday trading. Scalping involves reaping small profits repeatedly ranging from a dozen to a hundred profits in a single market day.

However, every transaction does not yield profits, and in some cases a trader’s gross losses might exceed the gains. The holding period of securities, in this case, is shorter compared to day-trading, i.e. individuals hold stocks spanning a maximum of a few minutes.

This feature allows for the frequency of transactions. Similar to day-trading, scalping requires market experience, proficiency, awareness of market fluctuations, and prompt transactions.

*Swing Trading:* 

This style of stock market trading is used to capitalise on the short-term stock trends and patterns. Swing trading is used to earn gains from stock within a few days of purchasing it; ideally one to seven days. Traders technically analyse the stocks to gauge the movement patterns they are following for proper execution of their investment objectives.

*Momentum Trading:* 

In case of momentum trading, a trader exploits a stock’s momentum, i.e. a substantial value movement of stock, either upwards or downwards. A trader tries to capitalise on such momentum by identifying the stocks that are either breaking out or will break out.

In case of upward momentum, the trader sells the stocks he/she is holding, thus yielding higher than average returns. In case of downward movement, the trader purchases a considerable volume of stocks to sell when its price increases.

 *Example:* 

Mr A holds 7000 shares of S Private Limited at Rs. 50 per share. On 1st April 2019, he sees the NAV of such shares showing upward momentum. He decides to sell 3000 shares at Rs. 60 on the first day. After that, He sells the remaining shares at a uniform rate of Rs. 65.

Therefore, his overall profit from the transactions is –

Rs. {(3000 * 60) + (4000 * 65)} – (7000 * 50) or, Rs. 90,000

 *Position Trading* : Position traders hold securities for months aiming to capitalise on the long-term potential of stocks rather than short-term price movements. This style of trade is ideal for individuals who are not market professionals or regular participants of the market.

Impact of Online Trading?

The internet has significantly contributed to elevating stock market trading. It has made securities more accessible and convenient to the layman. An individual can now easily trade in the stock market through online trading in India.

Team

Bazarwiz

Index

A stock index or stock market index is a measurement of a section of the stock market. From among the stocks listed on the exchange, some similar stocks are selected and grouped together to form an index.

The values of the grouped stocks are used to calculate the value of the index (typically a weighted average). Any change in the price of the stocks leads to a change in the index value. An index is thus indicative of the changes in the market and used by investors and financial managers to describe the market and to compare the return on specific investments.

Two of the primary criteria of an index are that it is invest-able and transparent. Many mutual funds and Exchange-traded funds attempt to “track” an index fund with varying degrees of success. The difference between an index fund’s performance and the index is called tracking error.

Team

Bazarwiz

NFO : ITI Banking and PSU Debt Fund I ITI Mutual Fund I Bazarwiz

How dividend income is taxed in India now

*How dividend income is taxed in India now –* 

The Finance Act 2020 has shifted back to the classical system of taxing dividend in the hands of shareholders/unit holders from 01 April 2020, and abolished dividend distribution tax (‘DDT’), wherein the incidence was on the company.

*With this amendment, the following corresponding changes have been made to reduce the tax burden on shareholders:* 

a) As per the amended section 57 of the Income Tax Act, 1961 (‘Act’), interest expense incurred for the purpose of earning the dividend income would be allowed as a deduction up to a maximum of 20% of such income.

b) Section 80M of the Act has been introduced in order to remove the cascading effect of tax on dividend income for corporate shareholders. Domestic holding companies receiving dividend income from subsidiaries will be allowed to set off such amounts from their total taxable income. This set off shall not exceed the amount of dividend further distributed by it up to one month prior to the due date of filing of return.

Further, by making dividend taxable in the hands of shareholders, the Finance Act 2020 has rendered section 14A of the Act inapplicable in computing such dividend income.

*Taxability in the hands of resident shareholders* 

 *Individual –* For an individual shareholder, dividend shall be taxable as per the applicable slab rates.

Moreover, the government has abolished additional tax of 10% on dividend income in excess of Rs 10 lakh per year for resident non-corporate taxpayers (section 115BBDA of the Act).

*Companies –* For corporate shareholders, dividend shall be taxable as per the effective tax rates, which would range from 25.17% to 34.94% (including surcharge and cess).

*Taxability in the hands of non-resident*

*shareholders* 

Indian companies shall be liable to withhold taxes at the rate of 20% on payment of dividend to a non-resident shareholder, as per the provisions of the Act. Non-resident shareholders can claim benefit of the lower tax rate under the relevant tax treaty, provided they are ‘beneficial owners’ of the dividend income. Various tax treaties provide for a lower withholding tax rate, typically ranging from 5% to 15%.

The term ‘beneficial owner’ has been neither defined in tax treaties nor in the domestic tax laws, and the determination of the same is a fact based exercise. The OECD commentary indicates certain criteria for ascertaining beneficial ownership. The criteria, such as agent, nominee, conduit company acting as a fiduciary etc., cannot be considered as ‘beneficial owner’ or company should not be bound by contractual/ legal obligation to pass on dividends received from another person.

Various Indian judicial precedents have also laid down certain principles to determine ‘beneficial ownership’, such as the principle that a taxpayer should make independent decisions vis-à-vis investment, expenditure, etc. or should enjoy unrestricted right to use the income, etc.

Further, the impact of Multilateral Instruments (‘MLI’) needs to be evaluated. MLI came into force in India from 01 October 2019, and the provisions of MLI were effective on the Indian tax treaties from 01 April 2020. Article 8 of the MLI, which deals with dividends, provides that the concessional rate of tax on dividend in case of beneficial ownership will be available only in a case where the shares are held by the shareholder for at least 365 days.

In addition to ‘beneficial ownership’ and MLI, the Most Favoured Nation (‘MFN’) clauses of tax treaties also need to be looked into. MFN clauses forge a link between taxation agreements by ensuring that the parties to one treaty provide each other with treatment no less favourable than the treatment they provide under other treaties in areas covered by the clause.

Separately, non-resident shareholders should also get credit of withholding tax against tax payable in their home country, subject to local regulations.

NFO : ICICI Prudential ESG Fund I ICICI Prudential Mutual Fund I Bazarwiz

Open Market Operation - OMO

*Open Market Operation - OMO* 

Open market operation is the sale and purchase of government securities and treasury bills by RBI or the central bank of the country.

The objective of OMO is to regulate the money supply in the economy.

When the RBI wants to increase the money supply in the economy, it purchases the government securities from the market and it sells government securities to suck out liquidity from the system.

RBI carries out the OMO through commercial banks and does not directly deal with the public.

OMO is one of the tools that RBI uses to smoothen the liquidity conditions through the year and minimise its impact on the interest rate and inflation rate levels.

Collateralized Borrowing and Lending Obligation - CBLO

 *Collateralized Borrowing and Lending Obligation - CBLO* 

 The Collateralized Borrowing and Lending Obligation (CBLO) market is a money market segment operated by the Clearing Corporation of India Ltd (CCIL). In the CBLO market, financial entities can avail short term loans by providing prescribed securities as collateral. In terms of functioning and objectives, the CBLO market is almost similar to the call money market.

The uniqueness of CBLO is that lenders and borrowers use collateral for their activities. For example, borrowers of fund have to provide collateral in the form of government securities and lenders will get it while giving loans.  There is no such need of a collateral under the call money market.

Institutions participating in CBLO are entities who have either no access or restricted access to the inter -bank call money market. Still, institutions active in the call money market can participate in the CBLO market. Nationalized Banks, Private Banks, Foreign Banks, Co-operative Banks, Insurance Companies, Mutual Funds, Primary Dealers, Bank cum Primary Dealers, NBFC, Corporate, Provident/ Pension Funds etc., are eligible for CBLO membership. These institutions have to avail a CBLO membership to do activities in the market.

Collateralized Borrowing and Lending Obligation (CBLO) is the instrument in the CBLO market. It is a discounted instrument available in electronic book entry form for the maturity period ranging from one day to one year.

The CCIL provides the Dealing System through Indian Financial Network (INFINET) and Negotiated Dealing System for participating in the market.

 In the CBLO market, members can borrow or lend funds against the collateral of eligible securities. Eligible securities are Central Government securities including Treasury Bills, and such other securities as specified by the CCIL. Borrowers in CBLO have to deposit the required amount of eligible securities with the CCIL. For trading, the CCIL matches the borrowing and lending orders (order matching) submitted by the members. Borrowers have to pay interest to the lenders in accordance with the bid.

AT1 Bonds

*AT1 Bonds* 

Additional Tier 1 bonds, also called AT1in market parlance, are a kind of perpetual bonds without any expiry date that banks are allowed to issue to meet their longterm capital requirement. That’s why these bonds are treated as quasi-equity instruments under the law. RBI is the regulator for these bonds.

• AT1 bonds are like any other bonds issued by banks and companies, which pay a fixed rate of interest at regular interval. Usually, these bonds pay a slightly higher rate of interest compared to similar, non-perpetual bonds. However, the issuing bank has no obligation to pay back the principal to investors.

• These bonds are listed and traded on the exchanges. So if an AT1 bond holder needs money, he can sell it in the market.

• Investors can not return these bonds to the issuing bank and get the money. This means there is no put option available to its holders. However, the issuing banks have the option to recall AT1 bonds issued by them (termed call option). They can go for a call option five years after these are issued and then every year at a pre-announced period. This way the issuing banks can give an exit option to AT1 bond holders.

• According to a report by rating agency ICRA, nearly Rs 94,000 crore worth of AT1 bonds are currently issued by various banks. Of this, Rs 55,000 crore is from PSU banks, while the balance Rs 39,000 crore is by private lenders.

NFO: Baroda Large and Mid Cap Fund | Baroda Mutual Fund | Bazarwiz

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Stamp duty for MF Transactions

Stamp duty for MF Transactions from July 1st 2020

In line with Finance Bill 2019 announcements, Government of India had notified the ‘Indian Stamp (Collection of Stamp-Duty through Stock Exchanges, Clearing Corporations and Depositories) Rules, 2019’ regarding application of a uniform stamp duty. This was supposed to be effective from 9th January 2020, but was later extended and is now effective from 1st July 2020. This implementation of the uniform stamp duty will be applicable on transfer of shares, debentures, futures, options, currency and other capital market instruments. This includes Mutual Funds as well. This move is expected to facilitate ease of doing business, bring in equitable sharing of tax revenue across the states and promote pan India development of securities market.

The applicable rates for different capital market instrument along with the responsibility of collecting and paying the stamp duty liability are mentioned below:

Rates applicable

Sr. No. Descrption Applicable new rate 1 Issue of security other than debenture (including mutual fund units) 0.005% 2 Transfer of security other than debenture on delivery basis (including transfer of mutual fund units) 0.015% 3 Transfer of security other than debenture on non-delivery basis 0.003% 4 Derivatives - Futures (equity and commodity) 0.002% 5 Derivatives - Options (equity and commodity) 0.03% 6 OTC Currency and interest rate derivatives 0.0001% 7 Other derivatives 0.002% 8 Government securities 0% 9 Repo on corporate bonds 0.00001%

Transactions where stamp duty will get applied are Purchase, Dividend reinvestment, Switch (both for units issued in Demat and Non-Demat mode). Kindly note that Stamp duty will be deducted from the net investment amount i.e. gross investment amount less any other deduction like transaction charge. Units will be created only for the balance amount (Net investment amount – Stamp duty deducted). Stamp duty will be computed @0.005% on an inclusive method using the formula - ((Investment amount – Transaction charge, if any) / 100.005) * 0.005. Let’s see an illustration below. For example, purchase amount = Rs.10,000/- ; transaction charge – Rs.100/- Stamp duty = (Rs.10,000 – Rs.100)/100.005 * 0.005 = 0.49

Headline : Stamp Duty on Mutual Funds

What is Arbitrage and difference between Cash price and Future Price

*What is Arbitrage and difference between Cash price and Future Price*

🎯 *What is Arbitrage*

📌Arbitrage describes the act of buying a security in one market and simultaneously selling it in another market at a higher price, thereby enabling investors to profit from the temporary difference in cost per share.

📌An arbitrage fund is a type of mutual fund that appeals to investors who want to profit from volatile markets without taking on too much risk. This schemes look to exploit the price difference between spot and futures market to earn risk  free returns.

🎯 *Why is there gap between cash price & future price*

📌Stock futures have a monthly expiry cycle and expire on the last Thursday of every month.

📌In stock-futures arbitrage you buy in the cash market and sell the same stock in the same quantity in the futures market. Since the futures price will expire at the same price as the spot price on the F&O expiry day, the difference becomes the risk-free spread for the arbitrageur. 

📌Futures price pertain to a contract that is 1 month down the line there is a cost of carry; also, roughly known as the interest cost. So, let assume,  if the annual risk-free rate of interest is 12% then the 1-month future's price must be at a 1% (12%/12) premium to the cash price. Of course, in reality the futures price is determined by a variety of other factors, but this is the key factor. Therefore, by buying in the cash market and selling in the futures you lock in that 1% returns per month.

📌For example of CYZ stocks Cash price 28th June 2020 100, while 28th July, Future price is 101. So,the Arbitrage spread is {(101-100)/100}, which is 1% that is return of 30 days. So annualised return in this case is 1% × (365/30) =12.16%.

"Mutual Fund investments are subject to market risk kindly read all scheme related documents carefully"

Collateralized Borrowing and Lending Obligation - CBLO

*Collateralized Borrowing and Lending Obligation - CBLO* 

The Collateralized Borrowing and Lending Obligation (CBLO) market is a money market segment operated by the Clearing Corporation of India Ltd (CCIL). In the CBLO market, financial entities can avail short term loans by providing prescribed securities as collateral. In terms of functioning and objectives, the CBLO market is almost similar to the call money market.

The uniqueness of CBLO is that lenders and borrowers use collateral for their activities. For example, borrowers of fund have to provide collateral in the form of government securities and lenders will get it while giving loans.  There is no such need of a collateral under the call money market.

*Participants in the CBLO market* 

Institutions participating in CBLO are entities who have either no access or restricted access to the inter -bank call money market. Still, institutions active in the call money market can participate in the CBLO market. Nationalized Banks, Private Banks, Foreign Banks, Co-operative Banks, Insurance Companies, Mutual Funds, Primary Dealers, Bank cum Primary Dealers, NBFC, Corporate, Provident/ Pension Funds etc., are eligible for CBLO membership. These institutions have to avail a CBLO membership to do activities in the market.

*Instrument under the CBLO market* 

Collateralized Borrowing and Lending Obligation (CBLO) is the instrument in the CBLO market. It is a discounted instrument available in electronic book entry form for the maturity period ranging from one day to one year.

The CCIL provides the Dealing System through Indian Financial Network (INFINET) and Negotiated Dealing System for participating in the market.

In the CBLO market, members can borrow or lend funds against the collateral of eligible securities. Eligible securities are Central Government securities including Treasury Bills, and such other securities as specified by the CCIL. Borrowers in CBLO have to deposit the required amount of eligible securities with the CCIL. For trading, the CCIL matches the borrowing and lending orders (order matching) submitted by the members. Borrowers have to pay interest to the lenders in accordance with the bid.

Certificate of Deposit -CD

*Certificate of Deposit -CD* 

A certificate of deposit (CD) is a short-term security with a fixed interest rate and maturity date issued by a bank that seeks to raise funds from the secondary money market. Certificates of deposit are a special form of term deposits, which are issued for a specific reference period, usually up to 12 months, for a certain amount and a certain interest rate, fixed or variable, traded in the secondary money market. Regardless of the duration of a CD, the issuing bank is bound to pay off the coupons to the holder.

Short-term CDs have no coupons, and the holder receives the principal and accrued interest at maturity. However, in the case of a long-term certificate of deposit, the coupons are paid at regular intervals like, for example, every six months. The trading price of a CD in the secondary market is determined by its yield to maturity.

Commercial Paper - CP

*Commercial Paper - CP* 

Commercial paper, also called CP, is a short-term debt instrument issued by companies to raise funds generally for a time period up to one year. It is an unsecured money market instrument issued in the form of a promissory note and was introduced in India for the first time in 1990.

Companies that enjoy high ratings from rating agencies often use CPs to diversify their sources of short-term borrowings. This gives investors an additional instrument. They are typically issued by large banks or corporations to cover short-term receivables and meet short-term financial obligations, such as funding for a new project.

CPs have a minimum maturity of seven days and a maximum of up to one year from the date of issue. However, the maturity date of the instrument should typically not go beyond the date up to which the credit rating of the issuer is valid. They can be issued in denominations of Rs 5 lakh or multiples thereof.

Since such instruments are not backed by collateral, only firms with high ratings from a recognised credit rating agency can sell such commercial papers at a reasonable price. CPs are usually sold at a discount to their face value, and carry higher interest rates than bonds.

Economic Recovery

Economic Recovery

Market economies experience ups and downs for several reasons.

 Economies can be impacted by all kinds of factors, including revolutions, financial crises, and global influences. Sometimes these shifts in markets can take on a pattern that can be thought of as a kind of wave or cycle, with distinct stages of an expansion or boom, a peak leading to some economic crisis, a recession, and a subsequent recovery.

🎯It is the process of reallocating resources and workers from failed businesses and investments to new jobs and uses after a recession. It follows after the recession and leads into a new expansionary business cycle phase.

🎯During a recovery, the economy undergoes a process of economic adaptation and adjustment to new conditions, including the factors that triggered the recession in the first place and the new policies and rules rolled out by governments and central banks in response to the recession.

*Indicators of Economic Recovery*

1. GDP is in consistent growth. 

2. Consumer sentiment and spending.

3. Manufacturing purchase managers index.

4. Unemployment and wage growth.

*Top 5 Stocks:*

▫️ Reliance Industries Ltd: 8.68%

▫️ HDFC Bank Ltd: 7.51%

▫️Infosys Ltd: 6.54%

▫️ICICI Bank Ltd: 6.5%

▫️Tata Consultancy Services Ltd :  4.44%

*Top 3 Underweight Sectors :*

▫️Financial services : _32.26% Vs. 36.2%_

▫️Energy : _13.78% Vs. 16.06%_

▫️IT : _12.32% Vs. 14.48%_

 

*Top 3 Overweight Sectors*:

▫️ Cement and Cement Products : 

      _4.11% Vs. 2.12%_

▫️ Construction : _4.02% Vs 2.7%_

▫️ Pharma : _3.66% Vs. 3.11%_

Corporate Bonds

*Corporate Bonds* 

Corporate bonds are debt securities issued by private and public corporations. Companies issue corporate bonds to raise money for a variety of purposes, such as building a new plant, purchasing equipment, or growing the business.

When a bond issuer redeems a bond at maturity, you receive the face value of the bond and any interest that has accrued since the last time an interest payment was made. If the interest was not paid out periodically, you receive all of the interest that has accrued since the bond was issued.

Callable or redeemable bonds are bonds that can be redeemed or paid off by the issuer prior to the bonds' maturity date. When an issuer calls its bonds, it pays investors the call price (usually the face value of the bonds) together with accrued interest to date and, at that point, stops making interest payments.

Benefits and Risks of Corporate Bonds

Corporate bonds, however, offer one of the best return prospects of any fixed-income option. ... As interest rates rise, the prices of preexisting bonds will drop. If rates fall, though, bond prices are likely to rise, causing investors to sell their holdings.

Corporate bonds are issued by companies that want to raise additional cash. You can buy corporate bonds on the primary market through a brokerage firm, bank, bond trader, or a broker. Some corporate bonds are traded on the over-the-counter market and offer good liquidity.

Bonds can be classified according to their maturity, which is the date when the company has to pay back the principal to investors. Maturities can be short term (less than three years), medium term (four to 10 years), or long term (more than 10 years)

The rate of return or yield required by investors for loaning their money to the government is determined by supply and demand. Treasuries are issued with a face value and a fixed interest rate and are sold at the initial auction or in the secondary market to the highest bidder.

Key Differences between Equity vs Commodity

*Key Differences between Equity vs Commodity* 

Both Equity vs Commodity Card are popular choices in the market; let us discuss some of the major Difference Between Equity vs Commodity

• Equity shares are generally listed and traded in stock exchanges like National Stock Exchange and Bombay Stock Exchange etc., while Commodities are getting listed and traded on the stock exchanges like Multi Commodity Exchange, National Commodity and Derivatives exchange etc.

• Equity Markets are less volatile as trades can be undertaken even in a single share, while commodity markets are highly volatile as trades are conducted in huge lot sizes.

• Equity markets are less risky as low volatility is there, the Commodity market is highly volatile as a result of the same these are highly risky.

• Equity contracts have no expiry dates, while commodity contracts have always fixed expiry date on which settlement must take place.

• Equity contracts require an investment of market price only, while commodity contracts require an investment of margin requirement which keeps on changing based on the changes in the price.

• Equity market comparatively has a high amount of liquidity as compared to commodity market as investment happens in the lot size

The holder of the equity instruments is considered as the owner of the company, hence it enjoys all the privileges like dividend, voting right etc. However, such privileges are not available with the holder of the commodity instruments.

Key differences between Debt funds and Liquid Funds

*Key differences between Debt funds and Liquid Funds* 

*Debt funds* 

Debt funds invest in a variety of fixed income instruments. These include treasury bills, government bonds, certificate of deposit, commercial paper, corporate bonds and money market instruments. There are various categories of debt funds. These funds are categorised on the basis of maturity profile. Thus, there are 16 categories of debt funds that include liquid funds, short duration funds, ultra-short duration funds, gilt funds and dynamic bond funds.

Debt funds are considered to be less risky as compared to equity funds. If you are investing with a short time horizon, where capital protection is your major objective, debt funds may be an ideal option. However, this is not to say that debt funds are free from risks. Debt funds carry the following risks, based on the fixed income instruments that they are investing in:

 *Interest rate risk:* Debt funds invest in fixed income securities that are interest bearing. Prices of these funds fall when interest rates rise and vice versa.

 *Credit risk* : Some debt funds invest in securities that carrying a low credit rating. This means that there is a risk of not receiving regular payments from their underlying securities.

 *Default risk:* Though these instances are rare, some funds can face a default risk when the issuer of the bond fails to make the stipulated payment.

*Liquid funds* 

Liquid funds are one among the category of debt funds. They invest in fixed income instruments with a maturity of no more than 91 days. Liquid funds are therefore considered an alternative to keeping your money idle in a savings account. You can also consider liquid funds for the purpose of maintaining a contingency or emergency fund.

*Difference between debt and liquid funds* 

Now that you are acquainted better with debt and liquid funds, let’s take a closer look at their differences based on certain parameters.

 *Maturity profile* 

The first and most obvious difference that can be made between liquid funds and debt funds is on the basis of maturity profile. Liquid funds invest in fixed income securities that have a maximum maturity profile of 91 days. Additionally, these securities are held up to maturity.

However, this restriction is not applicable in the case of other categories of debt funds. The maturity profile of underlying securities of debt fund varies greatly. While there are debt funds such as overnight funds that invest in overnight securities with a maturity of one day, there are gilt funds that invest in government securities with a maturity of 10 years.

*Liquidity* 

Liquid fund, as the name suggests, offer easy redemption facility. Some AMCs offer instant redemption facility on liquid funds. This means you can have the cash from liquidation of your units within 30 minutes into your account. Other categories of debt funds are not as liquid. Maturity proceeds may take up to two working days to come to your account after having placed a redemption request.

*Risk* 

The risk component is considered to be at their lowest in liquid funds. This is largely because the maturity tenure of the underlying securities is very low. As a result, the interest rate risk and credit risk attached to these funds is minimum. On the other hand, there are debt funds that carry a high degree of interest rate risk and credit risk and may offer the potential of corresponding returns.

Hedge fund

*Hedge fund* 

Hedge fund is a private investment partnership and funds pool that uses varied and complex proprietary strategies and invests or trades in complex products, including listed and unlisted derivatives.

Put simply, a hedge fund is a pool of money that takes both short and long positions, buys and sells equities, initiates arbitrage, and trades bonds, currencies, convertible securities, commodities and derivative products to generate returns at reduced risk. As the name suggests, the fund tries to hedge risks to investor’s capital against market volatility by employing alternative investment approaches.

Hedge fund investors typically include high net worth individuals (HNIs) and families, endowments and pension funds, insurance companies, and banks. These funds work either as private investment partnerships or offshore investment corporations. They are not required to be registered with the securities markets regulator and are not subject to the reporting requirements, including periodic disclosure of NAVs.

There are manyss strategies a hedge fund may use to generate returns. One such strategy is global macros, where the fund takes long and short positions in large financial markets based on the views influenced by economic trends. Then there are funds that work on market-neutral strategies. Here, the goal of the fund manager is to minimise market risks by investing in long/short equity funds, convertible bonds, arbitrage funds, and fixed income products.

Another type includes event-driven funds that invest in stocks to take advantage of price movements generated by corporate events. Merger arbitrage funds and distressed asset funds fall into this category.

Recessions come in many shapes and sizes

Recessions come in many shapes and sizes. However, economists tend to refer to the following four shapes the most:

– V-shaped recession

– U-shaped recession

– W-shaped recession

– L-shaped recession

V-Shaped Recessions: 

V-shaped recessions are recessions that begin with a steep fall but then quickly find a bottom, turn back around and move immediately higher. A V-shaped recession is a best-case scenario.

The recession of 1990 to 1991 and the recession of 2001—both of which only lasted eight months—are considered to be V-shaped recessions.

U-Shaped Recessions: 

U-shaped recessions are recessions that begin with a slightly slower decline but then remain at the bottom for an extended period of time before turning around and moving higher again.

The recession from 1971 through 1978—when both unemployment and inflation were high for years—is considered a U-shaped recession.

W-Shaped Recessions:

W-shaped recessions are recessions that begin like V-shaped recessions but then end up turning back down again after showing false signs of recovery. W-shaped recessions are also called “double-dip recessions” because the economy drops twice before a full recovery is achieved.

A W-shaped recession is painful because many investors who jump back into the markets after they believe the economy has found a bottom end up getting burned twice—once on the way down and then once again after the false recovery.

The recession of 1980 that double dipped in 1981 and 1982 is a great example of a W-shaped recession.

L-Shaped Recessions:

L-shaped recessions are recessions that fall quickly and fail to recover. An L-shaped recession is a worst-case scenario because they offer no hope of recovery.

The Japanese recession that began in the early 1990s is considered an L-shaped recession.

Domestic Institutional Investors - DIIs

*'Domestic Institutional Investors - DIIs* 

Domestic institutional investors are those institutional investors which undertake investment in securities and other financial assets of the country they are based in.

 Institutional investment is defined to be the investment done by institutions or organizations such as banks, insurance companies, mutual fund houses, etc in the financial or real assets of a country. Simply stated, domestic institutional investors use pooled funds to trade in securities and assets of their country.

These investment decisions are influenced by various domestic economic as well as political trends. In addition to the foreign institutional investors, the domestic institutional investors also affect the net investment flows into the economy.

*International Funds*

Today's term

International funds are schemes which invest in equities of a region, country or fixed income securities of companies located anywhere outside of the investor’s residence. Offshore funds or foreign funds are also called international funds. They, however, differ from global funds which seek equity to invest in companies from any country in the world.

As an investor, if you are seeking to diversify your risk and take advantage of the global markets, international funds may well be your answer. When investing overseas, developed markets offer you lesser risk because they have the world’s most advanced economies whereas emerging markets offer high returns with significant risk because the infrastructure and economy of these countries have a volatile growth. Underdeveloped countries have the highest risk with the potential for great returns. There are no subcategories of international funds but they are broadly country-specific, commodity-based or thematic international funds. The theme in an international fund can be consumption, energy, real estate or agriculture.

The returns on these funds would depend on the performance of the market they are investing and the currency movement. Retail investors are sometimes not able to factor in currency rates fluctuations in global markets.

*Advantages and Risks* 

The advantage here for an investor is there are many businesses which are not listed in India. So if you want to be a part of the growth story of such companies, you can choose international funds that allow you to diversify across geographies. Sometimes if a certain economy does not perform, other markets may give you higher returns on your portfolio.

This comes with certain risks like currency risk, political risk and liquidity risk. The currency risk here would be the value of the underlying currencies which can boost returns when the dollar is weak and have the opposite effect when the dollar is strong. Political risk means the government’s instability or other unforeseen troubles in the domain of a foreign country you are investing in. The US stock market is fairly liquid where a large volume of stocks is bought each trading day and international funds do stand a liquidity risk. While there are risks and some investors fear the unknown, international equity makes up a large part of the world’s market potential investment growth. Having said that, if you are a conservative investor you can pick a developed market and if you are willing to take some risk, you can choose the developing markets to grow your wealth.

Bazarwiz App

Free Investment App For Mutual Funds,SIP,ELSS,Liquid , Free Instant Digital KYC

Investing in mutual funds is now simple and free. No paperwork, no hassles. Invest in the best mutual funds using Bazarwiz. All mutual funds are available in one investment app. And the best part - invest in direct mutual funds, SIP with zero commission for free. Switch your regular investments to direct.

Investing at your fingertips

- Sign up in minutes, one time KYC process within the app

- Buy and sell mutual funds, or start SIP with few taps

Instant Digital KYC

Any Investor & Make Them Investment Ready with our Digital KYC in less than 3 minutes.

Invest in mutual funds online - free

- Zero Fees, No transaction charges

- All direct mutual funds 

- Sell anytime - money comes to your bank account directly

- Learn to invest in mutual funds with as low as Rs 500

Mutual fund investing for you

- Simple design, built with beginners and experts in mind

- Invest in the ready-made basket of mutual funds recommended by experts

- View beautifully designed charts, and historical performance of any mutual fund

- Top mutual funds list for different categories

- Latest finance news and insights

Mutual fund tracking and analysis

- Dashboard to track all your investments

- Track your annualized returns and total returns

- Check details of holdings and mutual fund NAV like Moneycontrol and Valueresearchonline

- Calculate returns through mutual fund SIP calculator

How to invest in mutual funds on Bazarwiz?

- Select any mutual fund

- Verify your KYC

- Start SIP or invest one time (lumpsum)

Investing for all your goals

Tax saving funds (ELSS mutual funds): Invest in tax saving mutual funds to get tax exemption under section 80c. The total exempt limit is 1.5 Lakhs

Get better than FD returns at low risk. Invest in liquid funds or ultra short-term debt funds. Invest in equity mutual funds - small cap, large cap, mid cap, multi-cap - for the long term and higher returns. Or invest in balanced funds, gold funds, sector funds or international funds - all in one mutual fund app.

Mutual funds help you get more returns on your money than fixed deposits or savings account. You can sell your investments anytime unlike real estate and gold. Check out SIP Calculator to know how much returns you can make.

Safe and secure:

We use the latest security standards to keep your data safe and encrypted.

Bazarwiz uses BSE (Bombay Stock Exchange) & NSE (National Stock Exchange) for transactions. We trust our app with our own money. We support all RTAs - CAMS, KFintech and Franklin. You can check your units on mutual fund apps in India like Mycams and KFintech. 

All mutual fund companies (AMCs) are supported on Bazarwiz Mutual Fund app including:

SBI Mutual Fund

Reliance Mutual Fund

ICICI Prudential Mutual Fund

HDFC Mutual Fund

Aditya Birla Sun Life Mutual Fund

Franklin Templeton Mutual Fund

DSP Blackrock Mutual Fund

Kotak Mutual Fund

Mirae Asset Mutual Fund

Axis Mutual Fund

Motilal Oswal Mutual Fund

L&T Mutual Fund

IDFC Mutual Fund

UTI Mutual Fund

Sundaram Mutual Fund

Tata Mutual Fund

All major banks are supported for paperless SIP

One time (lumpsum) investments in mutual funds can be done via net banking. SIP investments are done via bank mandate.

You can track your investments from mutual fund apps like Fisdom, ETMoney, Scripbox, Fundsindia, WealthTrust, Piggy, Paytm Money, Zerodha Coin, Investica, Angel Bee, Fund Easy, Asset Plus, Mycams ,Groww and MF Utility

We need the following permissions to provide the most seamless experience of investing in mutual funds

- CAMERA: to capture the image of the documents for KYC verification

- WRITE_EXTERNAL_STORAGE: to access the captured image and upload on our servers

- RECEIVE_SMS: to auto-fill the OTP sent by Bazarwiz

All these permission are prompted at runtime when needed, and users have the option to "Allow" or "Deny" access to these permissions.

Happy investing in direct mutual funds :)

Franklin Templeton today announced the winding down of SIX of its Debt Funds

*What just happened to Franklin Templeton Funds?*

First - Franklin Templeton today announced the winding down of SIX of its Debt Funds (which had credit risk)

This is effective tomorrow i.e. 24th April 2020

This is an unprecedented move

*Which are these Funds?*

These Funds are

•Franklin Low Duration

•Franklin  Dynamic Accrual

•Franklin Credit Risk Fund 

•Franklin Short Term Income

•Franklin Ultra Short Bond

•Franklin  Income Opps Fund

All these funds have been wind down with immediate effect

*What happens to my investments in this wind-down?* *They will return my money?*

Ans: This wind-down is similar to a lock-down

These schemes will not allow any further transactions, no purchases, no redemptions

It's like the entire scheme becomes a segregated portfolio

*Whoa! What do you mean?  Tell me more clearly*

These six schemes put together as of date have an AUM of Rs. 28,000 cr. This entire AUM is now stuck as it is. You cannot redeem

*What do u mean, I cannot redeem?*

Simply put, you cannot withdraw any monies

*Common don't joke, my money is stuck till how long?*

Ans: It's not a joke.  Here is the formal notice from Franklin Templeton👇

*So u mean, my money is gone? They will never open these schemes*

Ans: Yes, the schemes are wound down.  They will never open again

It will work like a segregated portfolio i.e. the day they get any interest,, maturity from any of the holdings it will distributed to all 

*So I will get my money back soon?*

Ans: As and when the underlying portfolio instruments mature or the scheme receives the money back (in case interest or defaults etc) they will pay it back to you.

Key Highlights of RBI Press Conference

•The LCR requirement of scheduled commercial banks being brought down from 100 percent to *80 percent* with immediate effect.

•Period of resolution plan for *NPAs* to be *extended by 90 days*

•Clashflow of households and businesses affected. We recognise that COVID-19 has challenged the ability of borrowers to repay. Thus the *NPA count shall not* include the 90-day moratorium.

•Reverse repo rate is being reduced by *25 bps from 4% to 3.75%* under Liquidity adjustment facility (LAF)

•RBI undertook three long-term repo operations (TLTRO) to ease liquidity constraints. The *TLTRO option of Rs 25000 crore* is to be conducted today (April 17). In response to these auctions, financial conditions have eased considerably and activity in *corporate bond market has picked up.*  *Redemption pressure faced by mutual funds* have also eased. RBI has been constantly monitoring situation and in our effort to see financial system is fully functional, we will announce additional measures.

​•Pre-monsoon kharif sowing has been aggressive. Paddy is up by 37 percent in April vs last year. On April 15, the Indian Meteorogical Department (IMD) has forecast a *Normal* southwest monsoon, Rainfall expected at 100 percent of long term average.

•RBI has injected *3.2 percent* of GDP into the economy to tackle liquidity situation since February 6 to March 27.

•India expected to show a *sharp turnaround post the COVID-19 crisis.* India expected to post a sharp turnaround in FY22 with 7.4 percent growth as per IMF.

Asset Allocation

Industry experts believe that 90 percent of the performance of a portfolio is linked to asset allocation. So only if you have allocated your assets in the right way depending on your risk appetite and goals would you be able to build a good mutual fund portfolio. Asset allocation acts like fuel towards your long-term investments and returns.

Allocating your assets is a simple process where you can spread your investments across various asset categories such as equity mutual funds, debt mutual funds and cash. The more you diversify across various assets the better you’d be able to cushion your capital against the markets when they fall. Allocating assets would depend on your age, lifestyle, goals and risk-taking appetite. Let’s say you are a young investor. Since you have time on your side, you should look to invest more than 70 percent of your capital in equity and leave the remaining 30 percent in debt. Also as you near your goal or retirement, you should gradually move your investments from equity to debt. This would ensure your capital is protected in case the markets are volatile at the time you decide to remove your money. It is advisable for young investors to put their capital in equity if they want big returns.

Sometimes the macros look weak and the stock market indices are seen at new highs, so it is important to spread across your investments in order to protect your capital from market risks. By allocating assets across various segments, you can minimise volatility and maximise profits. Allocating your assets helps you in simplifying both your long-term and short-term goals. It is advisable you should allocate your assets for short-term goals in investments which have fewer risks. Once you have allocated your assets across various sectors it is important you track it regularly. Here you can minimise volatility and maximise profits. Many well-known wealth managers believe asset allocation is important to the success of any financial plan. It is important you review it once a quarter and depending on how the market has performed if it moves up or down by 10 percent of the target then it is time you should rebalance your portfolio to ensure the risk is taken care of.

Market News

• OPEC – Russia Agree to Cut Down Crude Production

OPEC has finally agreed to reduce oil production to 9.7 million barrels a day. This will allow the crude oil price to stabilize.

Last month, the falling price of crude oil was a major reason for the markets to fall. The reducing demand of crude oil due to the spread of coronavirus caused a drop in the price of crude oil. 

This deal should stabilize the price of crude oil.

• China’s Central Bank Increases Stake in HDFC 

It came to light from shareholding disclosures that People’s Bank of China has increased its stake in HDFC to 1.01%.

The central bank of China already had a stake of 0.8% as of March 2019.

We know the times are tough and the situation tense. It is natural to be apprehensive about the state of your investments and confused about your finances. But we won’t let you struggle alone.

Lockdown & Health Ministry Updates

As we approach the end of India’s 21-day lockdown on 14th April, it is becoming clear that many states, if not all, will have to continue with the lockdown for some more time.

Many had voiced concerns that 21 days of lockdown isn’t enough for many states.

Odisha and Punjab have already announced an extension of their lockdown till the end of April.

In a press conference on Friday, the health ministry maintained that they still see no proof of community transmission in India.

The ministry also assured that India had 3.28 crores tablets of the key drug hydroxychloroquine in stock and that exporting to other nations like the US and other nations was not compromising our preparedness.

Hydroxychloroquine is a drug used against malaria which has shown great promise against SARS-Cov-2.

The markets, on the other hand, are going through very interesting times.

This week saw the markets gain nearly 9% in a single day - the highest single-day rise in Sensex since 2009.

HUL - Hindustan Unilever Ltd overtook HDFC Bank to become the 3rd largest company in India.

AMFI data seems to suggest SIP investors are continuing their SIPs - monthly SIP values throughout this fiscal year have been between Rs 8,100 crores and Rs 8,600 crores with March seeing inflows of Rs 8,641 crores.

The number of new SIP folios also jumped by 2.47 lakh in March totaling 3.12 crores.

Clarification: update on financial year : no change

Clarification: update on financial year : no change 

*Clarifications* :

*1) FY 2019-20 is not at all extended till 30th June, only the date is extended for some compliances.*

*Fact:* Financial year closure is not extended. Only the date of compliance which were required by 31stMarch 2020 either by the taxpayers or by the tax authorities has been deferred till 30thJune 2020.

*2) Belated returns or Revised returns for the FY 2018-19 can be filed till 30th June.*

*Fact:* All taxpayers who have not filed the return of income of FY 2018-19 can file or revise the return till 30th June 2020. In normal course, belated income tax return cannot be filed after the end of the relevant assessment year. However, due to lock down till 14th April, Government is allowing the filing of return of FY 2018-19 (AY 2020-21) till 30th June. Readers may noted that earlier there was a period of 2 years for filing or revising the return which is reduced to 1 years earlier.

*3) In the FY 2019-20, income is taxable till 31st March only and not upto 30th June, i.e. for taxability of income financial year is considered till 31st March only.*

*Fact:*  The income of the FY 2019-20 (i.e., till 31st March 2020) will be taxable for the FY 2019-20.

*4) Deductions under 80C, 80D, etc. can be claimed by investing till 30th June.*

*Fact:*  Investment in PPF/LIC etc which are eligible for deduction u/s 80C and mediclaim payment for claiming deduction u/s 80D can be done till 30.06.2020.

*5) New LIC, mediclaim, PPF, NPS, etc. policies taken till 30th June will be eligible for the deduction for the FY 2019-20.*

*Fact:*  There is a restriction of Rs. 1.50 Lakh for deposits in the PPF A/c in one year. If the person has not deposited any amount in the PPF Account till 31.03.2020 and if he deposits it in between April to June 2020 then surely he will be eligible for deduction u/s 80C in the FY 2018-19. However, as per the present PPF rule, such person may not be able to invest again Rs. 1.50 Lakh for the FY 2020-21 as there is an yearly ceiling of Rs. 1.50 for deposit in the PPF Account. To take care of this situation, the Government need to amend the PPF rules to provide that Rs. 3 Lakh in aggregate can be invested for the FY 2019-20 & 2020-21.

*6) Payment of Premium of old policies of LIC, mediclaim, PPF, NPS, etc. due upto 31st March can be claimed as deduction even if paid till 30th June.*

*Fact:*  If the person pays the premium which is due in April  – 2020 and if he makes the payment of the same before 30.06.2020 then he can get deduction in the FY 2019-20 (AY 2020-21). Only the payment of such policies which has become due before 31stMarch would be considered for deduction.

*7) Housing loan interest is eligible for deduction on accrual basis, so interest accrued till 31st March will be eligible for the deduction in FY 2019-20. However Installments due upto 31st March can be claimed as deduction even if paid till 30th June.*

*Fact:*  If a person deposits the amount in April to June 2020 in his housing loan account then he would be eligible for deduction u/s 80C subject to the condition that the amount is due till March  – 2020. It may be noted that interest on housing loan is eligible for deduction on accrual basis and not on payment basis. All interest which is due till 31st march 20 even if not paid(even till 30th June 20) is eligible for claiming in a.y.20-21 itself.thatvway this is not specific to current extension as it is there in section for all years

How to do E-KYC for mutual fund investments

How to do E-KYC for mutual fund investments

KYC formalities can now be completed online, which is a hassle-free and quicker approach to investing. 

Know Your Customer (KYC) compliance is a prerequisite for investments in mutual funds. Investors are required to fulfill KYC requirements with a KRA (KYC registration agency) once and this is applicable to all investments across funds. KYC formalities can now be completed online, a hassle-free and quicker approach to investing. E-KYC is based on the Aadhaar number.

The investor has to log into the KRA website and enter basic details such as PAN number, email id, AMC name, bank name, date of birth, mode of holding and tax status. On providing these details, the KYC compliance status of the investor will be displayed. If the investor is not KYC compliant, he is required to add his Aadhaar number and registered mobile number.

Aadhaar-based authentication

After providing the Aadhaar number and registered mobile number, the Aadhaar authentication screen is displayed. An OTP is sent to the registered mobile number. The same needs to be entered on the screen along with pin code.

Uploading documents

After Aadhaar authentication, the investor is required to upload a self attested copy of e-Aadhaar. Further, he will be required to select consent declaration displayed on the screen for further processing of the request. 

The Aadhaar and registered mobile number of the investor is verified with the Aadhaar database of the UIDAI. Upon successful verification, the screen displays that the investor is e-KYC verified and can carry out transactions in mutual funds.

Points to note

1. This facility is currently available only for individual investors with single mode of holding.

2. Sebi currently permits investment of Rs 50,000 each financial year per mutual fund for Aadhaar based e-KYC using OTP verification.

3. Once the investment value crosses Rs 50,000 in a financial year, the investor will have to undergo in-person verification.

Short Selling

*Short selling* 

Think of short selling as the opposite of a regular purchase – in a regular purchase, you first buy the shares at a price and sell them at a higher price. In short selling, the shares are first sold at a higher price and then bought back at a lower price.

More or less, it is a bet like any form of trading but in this method, investors gain by betting that the stock price will fall.

Generally, short selling happens when investors expect the prices of shares to fall. This means that there is a bearish sentiment in the market. Essentially, short sellers are bears – they try to drive the price down to make a profit.

*How does short selling work?* 

Let us understand short selling with an example.

Suppose the shares of a company XYZ are currently at ₹500. There is an investor in the market who expects the price to go down to ₹300 in the near future. This means that the investor thinks that the prices are currently high, so buying at this price is not an option.

So, to make a profit, the investor first sells 100 shares of XYZ at ₹500, so he has ₹50,000 from the sale.

When the price of XYZ’s shares come down to ₹300, the short seller buys XYZ shares by paying ₹30,000.

The difference of ₹20,000 is the investor’s profit.

 *A risky gamble* 

Short selling is a risky gamble – there is no limit on prices, so you can end up with unlimited losses. Shorting is where you guess the price of a stock on a date in the future, and agree to buy it. So one has to buy it even if the stock price is high!

If there is excessive short selling in the market, it also suggests that the bears have taken over and the share or the market could end up crashing, leading to losses for a lot of retail investors.

 *SEBI considering banning it* 

The National Stock Exchange and Sensex have crashed by more than 18% in March alone, wiping off crores of investor wealth in the process.

To keep the fall under control, the Securities Exchange Board of India (SEBI) is considering a ban on short selling, says a report by Business Standard. This would prevent bears from controlling the market and crashing it further.

Countries like the UK, Italy, Spain, South Korea have temporarily banned short selling in the wake of the coronavirus crisis.

Why Debt Mutual funds Fell Last Week along with equity funds

Debt fund investors should understand that the NAV of a debt fund can change in three primary ways:
 (a) To reflect the interest income the bond in the folio receive, the NAV will increase a little each business day.
(b) Longer the duration of the bond in the portfolio, the more sensitive it will be to demand and supply changes.
 (c) NAV can change when the credit rating of the fund changes.

What happened in the bond market last week was a change in demand and supply. Foreign Portfolio Investors started selling Indian bonds resulting in a sudden loss of demand. When demand goes down, bond prices go down, the NAV goes down.
Market demand and supply is measured with the Bond yield = interest income/ current price. When prices fall, the yield shoots up. Longer the duration of the bond, more will be the fall in price if demand falls, more will be the increase in yield, more will be the fall in NAV.

It does not matter if the bond is gilt or AAA-rated. A sudden mismatch of sellers and buyers (sellers > buyers) will lead to a fall in the NAV. The image above shows how the five-year gilt yield shot up in the last few days resulting in trailing one-week (one-month) negative debt fund returns. It would also affect hybrid funds to varying extents.
The corresponding picture for the ten-year gilt is shown below. A corresponding and proportional variation will be in seen in bonds of different duration and different credit rating.

Only funds holding short-term bonds like overnight funds, liquid funds, money market funds were largely spared. Notice how the fall in NAV increases as the average maturity increases.