Anjana Dhand

A fund is a pool of money set aside for specific purposes. For example, retirement fund, pension fund, emergency fund or college fund. Both institutions and individuals set aside money. Most people take the help of professionals to manage their funds. These professionals are fund managers, and they charge a certain fee for the same. Mutual funds are funds that pool money from various investors. Professionals manage these funds. They are the most popular investment avenues for investors to fulfil their financial goals.

What is a fund?

A fund is formed by pooling money from multiple investors. The fund is a pool of money set aside for a specific purpose. Professionals manage funds and invest the money in financial securities. A fund manager manages the fund and uses multiple strategies to invest the money effectively. Few examples of funds are mutual funds, hedge funds, pension funds, scholarship funds and endowment funds.

Both individuals and institutions set aside money for specific goals. For example, an emergency fund, or savings fund for a vacation. Alternatively, individuals invest in mutual funds or hedge funds to earn enough to achieve their goals.

How do funds work?

Funds are collective investments from multiple investors. The money collected is invested across various assets spreading the risk. A fund manager is a person who manages the fund’s money. Fund managers buy and sell securities on behalf of all the investors. Fund managers formulate strategies with their knowledge. They perform extensive market research and invest in securities for maximizing returns.

A fund can either be one single asset or multi-asset fund. The most common asset for investing in equities, followed by debt securities. There are also funds with alternative investments like real estate, gold, commodities etc. Multi-asset funds invest in various assets to diversify a portfolio.

One of the primary advantages of a fund is that with a minimum investment, an investor can invest in a diversified portfolio of securities.

What are the types of funds?

There are three broad categories of funds, namely Equity Funds, Debt Funds, and Hybrid Funds.

Equity Mutual Funds

Equity Funds invest in stocks or shares of listed companies. Therefore, returns from these funds are related to the stock market. Hence equity mutual funds have a higher risk associated with them when compared to other types. However, these have higher growth potential. Also, equity funds objective is capital appreciation in the long term. The different types of equity funds are large-cap, mid-cap, small-cap, multi-cap, value funds, tax-saving funds (ELSS), and thematic or sectoral funds. Moreover, Equity funds are ideal for long term investments.

Debt Mutual Funds

Debt Mutual Funds invest in fixed income instruments or debt securities. These securities are State, and Central government-issued instruments, money market securities, corporate bonds, debentures, and commercial papers. The risk with these types of funds is lesser in comparison to equity funds. Therefore, debt mutual funds are suitable for short term investments.

Hybrid Mutual Funds

Hybrid Mutual Funds invest in both debt and equity instruments. Therefore, these are suitable for moderate risk-takers who are willing to undertake some risk from equity investments.

Which mutual fund is best for beginners?

Investing in mutual funds is an easy way to gain exposure to the equity and debt market. Entering the market with low-risk investments is the best way to begin mutual fund investing.

However, it is always best to take the advice of professionals to understand what types of investment options are available and what best suits them. A professional will also help an investor in understanding how much risk they can absorb.

Also, beginners can invest in mutual funds through the SIP route. This will help them to bring down the average cost of investing over a period of time and boost SIP returns. Beginners need to understand that what is considered best by the market might not be suitable for them. Hence it is always better to pick funds based on one’s financial goals, investment tenure and  cash flow.

What is the best investment?

What is best for one investor may not be best for the other. Therefore, the best investment plan is always based on the investor’s investment goal, tenure, financial and family position, risk-taking capacity and other factors. Primarily, investments can be bifurcated as market-linked and fixed-income. The top 10 investment avenues are:

• Direct Equity
• Equity Mutual Funds
• Debt Mutual Funds
• Bank Fixed Deposits
• Public Provident Fund
• National Pension Scheme
• Senior Citizens Savings Scheme
• Gold
• Real Estate
• Post Office Schemes

How do debt funds work?

Debt funds primarily invest in debt and fixed income securities. Debt mutual funds invest across various bonds that an individual investor may not be able to invest otherwise. Government, large and mid companies issue these bonds.

Also, debt funds invest in instruments with high credit ratings. High or good credit rating implies that the default risk associated with the instrument is low. Therefore, the debt fund manager carefully picks instruments with high credit ratings. Also, funds that invest in high rated instruments are less volatile when compared to low rated instruments.

The bonds in which debt mutual funds invest in are tradable just like shares. Therefore, the bond prices witness rise and fall in prices. The rise or fall in bond prices is primarily due to the change in interest rates. Also, the maturity of the fund depends on the fund manager’s investment strategy and the prevailing interest rate scenario. In a falling interest rate scenario, the fund manager invests in long term securities. On the other hand, in a rising interest rate scenario, the manager invests in short term securities.

Financial advisors are experts in managing the money of an individual. Right from devising an emergency fund plan to constructing complex investment portfolios, they do it all. They also play the role of educators by educating their clients about the financial products available in the market. Moreover, financial advisors charge a small fee for their services. For individuals who do not have market knowledge or enough time to manage their investments, can take help of financial advisors.

Who is a financial advisor?

A financial advisor plays multiple roles from planning and constructing a portfolio to monitoring it continuously. Also, financial advisors use their market knowledge to device a proper portfolio that fits their client’s requirements and goals. From planning savings and insurance to investments and tax planning, they do it all. They also keep a tab on clients’ investments to revisit the portfolio regularly.

Financial advisors educate their clients about the market and the financial products available in the market. Firstly, they tend to talk about lighter topics like savings and budget. Later on move to complex topics like insurance, taxes and investments. Financial advisors also tend to understand their client’s financial health, their requirements and financial goals before suggesting them investments. Financial advisors often take help of financial questionnaires. This is to know what are the assets, liabilities, financial responsibilities, incomes and expenses of their clients. Therefore, using the questionnaire, they infer the risk taking capacity of a client. Based on this, financial advisors advise their clients.

What does a financial advisor do?

A financial advisor helps in strategizing investments by managing and minimizing risk and building wealth in the long term. Financial advisors curate a plan that is personalized to meet the financial goals of the investor.

Moreover, they are qualified and certified advisors with a diverse background. Hence, they help investors in understanding where their investments are directed and why.

In other words, a financial advisor can do complete financial planning. Financial planning includes everything from budgeting, investing, and saving for retirement. 

What are the types of financial advisors?

Following are the different types of financial advisors

• Investment advisors
• Investment representatives
• Mutual fund representatives
• Financial planner
• Personal banker
• Insurance advisor
• Customer service representative

Investment Advisor

An investment advisor is a person who is capable of managing all your investments. He can also provide investment suggestions on any financial instrument. Investment advisors are part of registered Portfolio Management companies. Also, investment advisors either charge a flat fee for their service. Or an annual fee depending on the size of the portfolio.

Investment Representative

Investment representatives are popularly known as stockbrokers. They help investors in buying and selling different investments. For example, stock, mutual funds, bonds, etc. Investment representatives are part of brokerage firms and are registered investment dealers. They earn a percentage commission on every buy and sell transaction.

Mutual Fund Representative

Mutual fund representatives are certified agents that help you in buying and selling mutual fund units. The dealers earn a commission from the asset management company for every sale.

Financial Planner

A financial planner works closely with you to identify your financial goals and help you realize them over the long term. The financial planners also help you in financial planning, investment planning, retirement planning, tax planning, risk management and many more. They try to strike the right asset allocation to help you reach your goals.

Financial planners earn by charging service fees or asset-based fees or sales fees and commissions.

Personal Banker

Personal bankers are agents that are employed by trusts and banks. These bankers help you in buying and selling savings schemes such as bonds and some government offerings. Some personal bankers sell mutual funds too.

Personal bankers get a salary from their employers. The cost of advice is absorbed by the service fee that the bank or trust charges you.

Insurance Advisor

Insurance advisors are licensed representatives that advise on insurance products. They specialise in selling certain insurance products like life or property insurance. Or sell a range of all insurance products.

Insurance advisors earn money each time they make a sale on an insurance product.

Customer Service Representative

Customer Service Representatives often offer one-time service. They help you in opening a bank account or choosing a loan or credit card. They also help in comparing various mortgage and loan options. Additionally, they may advise on saving bonds and some government offerings.

They get a salary from the financial institution (employer). Also, these representatives recommend only the products that are sold by the financial institution they are employed by.

Is it worth it to get a financial advisor?

Yes, in case you do not have the knowledge about all the financial products. Typically, a financial advisor charges around 0.5% to 1% of the portfolio value. For investors who do not understand the range of financial products and want to invest, opting for a financial advisor is the best option.

However, investors who know about the products and do not have time to monitor them regularly can also appoint a financial advisor. They will help in periodic monitoring and portfolio revisions to keep up with the changing market scenarios.

What is the difference between a financial planner and a financial advisor?

Financial advisors are those who help their clients manage their money, including their investments and any other accounts. At the same time, financial planners are professionals who focus on devising a financial plan to meet financial goals.

Financial advisors manage investments, also help in the sale or purchase of securities by acting as a broker for the transaction, or they can even create a complete plan to meet financial goals.

Financial planners help companies or individuals to construct a strategy to meet financial goals. Also, these planners assess their client’s current situations and recommend how to improve it. A financial planner can have certain areas of expertise, like tax planning, retirement planning, or investment planning. There are various certifications to become financial planners. Therefore, to become a financial planner, one has to pass each of these certifications and obtain their licences.

What do you mean by the underwriter?

An underwriter is a party or a risk expert who evaluates the risk or creditworthiness of another party. He also assumes or guarantees the creditworthiness of the other party in exchange for a fee. This fee is the commission, premium, or interest. The underwriters are critical to the financial market being risk experts. They are critical to the mortgage industry, insurance sector, equity, and debt markets, etc. 

What are the types of underwriting?

There are different types of underwriting:

1. Firm Underwriting: The underwriter agrees to buy a definite number of shares. These shares are in addition to the number of shares, the underwriter promised to subscribe for. 
2. Complete Underwriting: The underwriter agrees to underwrite the entire issue of equity or debt. 
3. Partial Underwriting: Here only a part of the entire issue of shares or debentures forms a part of underwriting.
4. Syndicate Underwriting: This is the case when an issue is too huge. Here two or more underwriters jointly undertake and underwrite the issue
5. Joint Underwriting: Similar to syndicate underwriting, here as well the size of an issue too huge for a single underwriter to underwrite. The underwriter appoints others to jointly underwrite the issue
6. Sub-Underwriting: If at any given point, an underwriter feels the issue is beyond his/her capacity, appoints a sub-underwriter. Here the contractual relationship between both is that of a principal and an agent

Is underwriting mandatory?

As per the earlier guideline of SEBI, it was mandatory to underwrite the entire issue with a minimum 90% subscription. Later on, the revised guideline made it clear that underwriting is not mandatory. The option of underwriting lies with the issuer. 

What is the complete underwriting?

Under complete underwriting, the entire issue is underwritten. In this case, either an individual underwriter undertakes the entire issue or clubs or joins hands with others. They then agree to take the risk to an agreed extent.

What is equity underwriting?

Just like debt underwriting, equity underwriting also involves buying of the shares and distributing it to the dealers or buyers directly by the underwriter. In addition, in case of an IPO, the underwriters also help the company in setting up the public offering. This will involve strategies like how much capital to raise, at what share price with how many shares. 

What is debt underwriting?

The underwriter purchases the agreed securities from the issuer with the intention of selling at a profit. They can sell these securities either in the marketplace or to the dealers. In turn, these dealers would distribute these securities to the buyers. 

Can an underwriter deny a loan?

Yes, an underwriter can reject your loan application. The rejection can be on grounds of the application, financial documents, credit score, risk factors that he/ she might find unsuitable. Basically, he/ she wants to know whether you can pay back the loan or not i.e. your creditworthiness.

Dividend is the amount distributed to shareholders of a company. Companies use it as a mode to distribute the company’s profits to its shareholders. Mature companies with consistent earnings over the past few years pay dividends to their shareholders. Also, investor’s confidence in the company increases with regular dividend payments. Moreover, the share price of these companies tends to be higher. It is paid out per share in the form of cash or additional stock. Also, dividends are taxable in India.

What is a dividend example?

Dividends are returns distributed to shareholders from the company earnings or profits. They are a way to earn money from owned shares. In other words, it is a reward that a company pays to its shareholders.

Dividends can either be in cash or stock. Let us understand the types with an example.

Cash Dividend

Let us assume you own 1,000 shares of ABC Ltd. The company at the end of the quarter calculates its earnings and the board of directors declares dividends. ABC Ltd. announces the dividend payment of INR 5. Therefore, you receive:

1,000 (shares) x INR 5 = INR 5,000

Stock Dividend

From the above example, ABC Ltd. announces a stock dividend of 10%. In this case, every shareholder receives 10 additional shares for every 100 shares they hold or own. Therefore, for the 1,000 shares you hold, you receive 100 shares as a dividend.

Companies opt for this option in a scenario where there aren’t sufficient cash reserves to pay investors or to use the cash for reinvestments.

Why are dividends paid?

Dividends are paid out to investors by mature companies with stable earnings over several years. They do this to attract investors and increase the value of their stock. Companies also pay dividends to reassure  investors about the company’s financial health.

Companies pay dividends as investors see it as a positive sign of management’s expectations. Investors’ confidence often increases with regular dividend payments. It gives them a message about the company’s future prospects. Investors seeking regular income often opt for such companies. Hence, increasing the demand for that stock. Hence this also increases the share price of the company.

How are dividends paid?

Dividends are payable to the investors in the form of cash or additional stock. Investors receive the amount in their bank account. Also, they are payable in the form of stock.

Dividend payments are made to shareholders holding shares on a particular day. There are a few dates that are important for dividend payments.

• Announcement date: Companies announce dividend payments on this date.
• Record date: Date on which the company makes a list of shareholders who are eligible to receive the dividend.
• Ex-dividend date: Date on which the dividend eligibility date expires. All investors buying the share on that day or after this day will not qualify for dividend payments.
• Payment date: Date on which the dividend is credited to the shareholder’s accounts.

Are dividends taxed as income?

Yes, dividends are taxable as income. This income is taxable as per the applicable income tax slab rate of the shareholder. Also, the they are subject to TDS of 7.5% in case the dividend receivable is greater than INR 5,000. The rate has been cut from 10% to 7.5%, due to the pandemic outbreak and the new rate is only till March 2021. For non-individual shareholders (Company, Firm, HUF, etc.), this income is subject to TDS without any limit. 

What is a good dividend yield?

A good dividend yield is anywhere between 4% to 6%. It depends on market conditions and interest rates. However, the yield alone cannot be a good indicator to buy a company’s share.

For example, an investor holds shares of company XYZ Ltd. XYZ Ltd., share price falls by 20% in a year, and the company announces a 5% dividend. The fall in the price of the share is much higher in comparison to the dividend announced. Therefore, it doesn’t matter how much the dividend is or whether it is good.

Also, a high dividend yield may indicate that it is not safe and that the rate might be cut in the future. Hence, it is always advisable to proceed with cautions when investing for dividend income.

What is a balance sheet?

A balance sheet is a statement of assets, liabilities and capital of an organisation as on a particular date. In short, it shows what a company owns and owes. Additionally, it shows the amount invested in the business. A balance sheet along with other financial statements helps to calculate the profitability, liquidity, leverage and efficiency of a business.

A balance sheet has assets on one side and liabilities and capital on the other side. Both the sides are always equal. Therefore, Assets = Liabilities + Capital.

Assets are what the company owns.

Liabilities are what the company owes.

And, capital is what has been invested in the business.

Why is the balance sheet important?

A balance sheet is important because it helps in understanding the performance of a company. Following are the reasons why the balance sheet is important:

• To understand the financial health of a company.
• Stakeholders can study the balance sheet to understand the liquidity position and business performance of the company.
• Comparing balance sheets over the years helps in determining the growth of the company.
• A balance sheet is an essential document to obtain a business loan.
• Analysing the company’s balance sheet helps in understanding the ability of the firm to undertake expansions projects and unforeseen expenses.
• A Balance sheet helps in identifying the source of company funding, for example, equity funding or debt funding.

What are the purposes of a balance sheet?

The primary purpose of a balance sheet is to provide the financial position of a company as on a particular date. A balance sheet provides a snapshot of the company’s equity, assets and liabilities for a financial year. Analysing the three categories helps in understanding the financial standing, liabilities, liquidity position and growth of the company. Analysts use balance sheets to analyse a company to understand its profitability, liquidity, leverage and efficiency of a business. Also, a balance sheet, along with the profit and loss statement helps in analysing the company’s financials.

What are the two components of a balance sheet?

The two components of a balance sheet are Assets and Liabilities.

Assets: All the items that a company owns having a tangible value fall under assets. Assets are further classified as current assets and non-current assets based on liquidity. Current assets include cash in hand, account receivables and inventory. In comparison, non-current assets do not have high liquidity. Also, these cannot be converted to cash within the next year.

Liabilities: It is what the company owes to its debtors. Similar to assets, liabilities have current liabilities and non-current liabilities. Current liabilities are the obligations that the company has to fulfil in the next year. While non-current liability is long term debt. For examples, these are loans the company takes.

A balance sheet also has a shareholder’s equity. It is the capital contributed to the business by the shareholders.

What is a balance sheet reconciliation?

Balance sheet reconciliation is a process of comparing balance sheet item with the accounts that make up the balances. Therefore, balance sheet reconciliation confirms that each account is accurate, consistent and complete. Reconciliation helps in identifying transactions that have not been recorded or that have been recorded twice. It also helps in tracking expenses, revenue and reserves. Furthermore, it is suggested that reconciliations should be done at regular intervals. This ensures accuracy in accounts from time to time.

What is the balance sheet equation?

The balance sheet equation or account equation is the primary principle of accounting. It is the base of the double-entry system.

The accounting equation is Assets = Liabilities + Capital. 

The assets are what the company owns. The liabilities are what the company owes. Liabilities and assets together represent how the assets are financed. Therefore, any business transaction that occurs will have a dual effect, automatically balancing the accounting equation.

How to prepare a balance sheet?

A balance sheet is one of the most important financial statements for a business. A balance sheet shows the financial position of a business as on a particular date. Hence preparing a balance sheet thus becomes vital for the business to know what it owns and owes. The following steps will help one to prepare a balance sheet:

• Determine the frequency of preparing a balance sheet (It’s usually done quarterly, and annually)
• Identify and estimate the assets and liabilities.
• Calculate the capital or shareholders’ equity
• Prepare the balance sheet by listing out shareholder’s equity, liabilities and finally the assets. The assets should be equal to the sum of the shareholder’s equity and liabilities.