Stocks markets in India are experiencing a downward trend in December. On December 6, Monday, NIFTY 50 has fallen by 284.40 points and SENSEX has fallen by 949.32 points, which has worried investors today and for the upcoming weeks.
Omicron
The most important reason, because the stocks markets in India are falling, is the new Covid variant named Omicron. In India, a total of 21 cases have been detected that were infected from the Omicron Covid variant, and on Sunday, December 5, a total of 17 fresh cases were reported from Delhi, Maharashtra, and Rajasthan. So, Indian investors are much worried about the inception of another wave from the new variant. The earlier delta variant has already affected the Indian stocks markets largely. During the first two waves, major manufacturing activities were hampered, profits of the companies drowned. Sectors like automobile, real estate, constructions, infra have plunged.
On the other hand, pharma, and IT stocks have gained. In that situation, Indian investors are concerned that if a new Covid variant again surges in the country, affecting the companies.
So, the stock indexes fell significantly today. However, India has reported 8,306 new Covid cases yesterday, and the active cases are 98,416 now. This is the lowest contamination rate in the last 552 days, according to the health and family welfare ministry. So, equity investors are struggling for clarity, should they think the pandemic is under control, or will the Omicron rise as a big threat?
Inflation
The second reason behind this fall is inflation. Indian central bank, the RBI is having its Monetary Policy Committee (MPC) meeting today. The MPC on December 8, will declare its monetary policy, and how are they thinking about the high inflation rate in the country. Surging inflation will drag down customers’ purchasing capacity, which will be a stress for the companies. India’s present CPI inflation is 4.48%, and the headline inflation in the US is above 65, which is the highest in the last 30 years.
Hence, the rising inflation rate is concerning investors more, according to analysts. Commenting on inflationary pressures and bearish trend of the stock markets, Nikhil Kamath, co-founder of Zerodha told English news daily Mint, “Fear surrounding the new variant may lead to travel restrictions and lockdowns,
which can, in turn, reduce oil demand, thereby cooling off inflationary pressures to some extent. The biggest risk to the markets according to me isn’t this but inflation. I believe it’s best to stay defensive until a clear trend emerges.” He also believes that during the pandemic many stocks have gained significantly, and “Omicron alone can erase all those gains”.
History tells us that stocks tend to outperform all asset classes over the long term. But while paper returns from equities and equity mutual funds remain strikingly impressive, the unfortunate reality is that few investors end up reaping their rewards to the fullest possible extent.
More often than not, the reason for this dichotomy between published and actual returns is the lack of support of a qualified, competent, and unconflicted Financial Advisor acting on your behalf.
The need for support from a Financial Advisor becomes all the more pronounced during times like these. Gripped with COVID-19 induced panic, markets have turned fiercely volatile – and most portfolio values have sunk deep into the red.
Even the haven of debt funds has proved fickle. As an investor, your mind will undoubtedly be spinning with a hundred questions. Should you stay invested or redeem? Should you switch your money to less risky assets… or switch your money into more risky assets? Will markets continue to fall further? Should you rebalance your portfolio at this time? Should you stop your SIPs and restart them at a more opportune time? And, so on and so forth.
In testing times like these, a Financial Advisor can help you stay on the straight and narrow path to wealth creation. Here’s how.
Saves you from Yourself
Guess who is your worst enemy when it comes to creating wealth from your investments? The answer is – you, yourself! As markets oscillate between the depths of pessimism and the heady heights of euphoria, even the most seasoned investors fall prey to greed, fear, and a host of other behavioral traps.
By drawing upon their experience of past market cycles, seasoned Advisors can help you sidestep regrettable investment decisions such as bailing out at market bottoms or piling on investments near market tops.
Steers you clear of Avoidable Investments
It’s a sad truth that a poor investment is always lurking around the corner. From the ULIP saga of the 2000s to the YES Bank AT-1 bond write-off crisis this year, investors often tend to fall prey to bad investments – usually goaded by salespeople masquerading as Financial Planners.
Having a trusted Financial Advisor who can trawl through the fine print on your behalf can be a great source of strength for you, as you’ll be able to steer clear of getting locked into poor investments that can end up destroying a great deal of your hard-earned money over the long term.
Helps you see the Bigger Picture
By aligning your investments to your long-term and short-term goals, A Financial Advisor can help you see the bigger picture concerning your investments. In ensuring that you invest according to a fixed roadmap with pre-defined time-bound milestones, your Advisor can ensure that your investments are perfectly aligned to the tenor of your goals; hence, only long-term money flows into higher-risk assets.
As a result, you’ll be a lot more immune to the ups and downs of the markets, because your perspective on investing will be dramatically and positively altered.
Helps you pick the right investments
Left to their own devices, most investors tend to use short-term past returns as the barometer for choosing investments. However, this myopic tendency is the exact opposite of ideal, because what goes up comes down – and vice-versa!
Using their expertise and drawing upon concrete research that is generally not available in the public domain, a Financial Advisor can ensure that you select the right investments for your portfolio.
In doing so, your Advisor ensures that your portfolio is spread across investments that are poised to outperform in the future and deliver fantastic risk-adjusted returns to you over your defined investment timeframe.
Get in touch with us today to begin your journey to Financial Freedom!
You may weave countless financial goals in your lifetime. Then work out the math to build financial strategies around them. But life itself is unpredictable. An untimely death can not only jeopardize these goals but can leave your family high and dry.
In such difficult times, though no amount of money can replace the absence of a dear one, term life insurance financially protects your family in your absence.
1. Term Insurance Plans are very simple to understand
Simplicity is one of the reasons for the growing popularity of term insurance. Term life insurance is a pure life cover that focuses on offering your dependents the sum assured in case you were to die. All you need to ensure that the premium is paid on time.
2. Term insurance plans are supremely affordable
The premium for a term life insurance plan is as low as 0.1 percent of the total sum insured. Now consider this, we pay about 2 percent of the car’s present value as its premium. Moreover, online channels like ETMONEY provide an extra discount on your term insurance premiums as compared to offline channels.
3. Term Plans offer much higher coverage compared to traditional plans
The total sum insured for traditional, ULIP, or endowment policies is about 7 to 10 percent of the yearly premium. So for example, if you buy one of the plans mentioned above for a yearly premium of Rs 20,000, you get a coverage of Rs 2 lakh which will barely cover your family’s expenses for a few months.
Meanwhile, a term plan offers a much higher sum assured so that you can leave your family and dependents enough money that they don’t go through financial hardship in your absence. An average sum assured for a term life insurance policy is a little over Rs 1 crore which will cost you somewhere in the Rs 10,000 to Rs.17,00 range. That is, the coverage provided by term insurance is about 60 times higher as compared to traditional, ULIP, or endowment policies.
4. Term plans come with a host of tax benefits
While the primary reason for buying term insurance is securing your family’s future, you also get to save tax with them. Let’s look at its 3 term life insurance tax benefits.
Section 80C: Under this section, you can claim a deduction up to Rs 1.5 for certain investments and purchases, which includes the premium amount you pay towards the term life insurance plan.
Section 80D: This exemption is allowed on the premium paid towards health-related coverage like critical illness riders. You can claim deductions up to Rs 25,000 for the premium paid towards it.
Section 10 (10D): In the case of term life insurance, this benefit can be claimed while claiming the payout. The entire amount is completely exempt from taxes.
5. Premiums are locked for the duration of the plan
When you purchase a term insurance plan, you are effectively locking the premium you will be paying this year, next year, and every other year till the end of the plan. And this is where it becomes highly beneficial for you if you start your term plan as early as possible when premiums are lower at the younger ages.
Let’s illustrate this with an example. So if you are buying a term plan (let’s consider that the coverage is Rs 1 crore till the age of 75) at the age of 30, you would pay a premium of about Rs 10,000 every year.
That is, you would pay Rs 4.5 lakh in total. But, if you buy the same plan at 45, you would be paying a yearly premium of around Rs 30,000 The amount you pay toward the term plan in the next 30 years would be Rs 9 lakh.
Conclusion
As discussed in the article, term life insurance has several benefits. It provides higher coverage for a lower premium, it’s simple to understand, and comes with immense tax benefits. But before factoring in all the benefits, you should remember the core objective of insurance is protection and not savings.
Unlike most life insurance products, term insurance remains true to this objective.
When it comes to Retirement Planning, Mutual Funds Sahi Hai! No investment instrument’s as flexible and customizable as Mutual Funds can be adapted to optimize your Retirement Planning goal at its various stages. Here’s a simple guide to using Mutual Funds to achieve your Retirement Planning Goal effectively and efficiently.
The Early Stages: SIPs in Equity Funds
The best time to start planning for your retirement is when you take up your first job and receive your first paycheck.
After all, the money you put away at this stage of your life will have not years, but decades to compound and grow! During the early stages of your Retirement Planning, make sure you run SIP’s (Systematic Investment Plans) in aggressive funds such as small & mid-cap funds, without paying much heed to market volatility or even your risk tolerance.
The Mid Stages: Aggressive Step Ups
When you’ve spent a decade or so in your career, you’ll likely start witnessing some serious bump-ups in your income levels. This is the time that you should be stepping up your monthly SIP amounts aggressively.
Unfortunately, left to your own devices, you’ll probably keep putting off this well-intentioned step up for a ‘better time’. A solution to this procrastination is to issue a standing instruction to the Mutual Fund to increase or “Step Up” your monthly SIP installments every year automatically.
Pre-retirement: STP’s into Debt Funds
When you’re 3-5 years away from your retirement, you’ll likely have accumulated a sizeable corpus if you’ve been disciplined in running your Mutual Fund SIP. However, your priority right now will be to safeguard your hard-won capital and ensure no erosion in its value.
Therefore, this is the time that you should say “Debt Mutual Funds Sahi Hai” and start STP’s (Systematic Transfer Plans) from your Equity Mutual Fund investments to lower risk fixed income funds! By staggering your investment out of equity funds, you’ll end up averaging your exit cost, and ensuring that you get a fair value for your units and don’t risk cashing out at the bottom of a cycle.
Post Retirement: SWP’s from Debt Funds
Once you’ve retired, the lion’s share of your corpus will be parked into debt-oriented mutual funds, and your overarching objective will be to generate a reliable, constant income stream from it to meet your day-to-day expenditures.
For doing this, you should start an SWP (Systematic Withdrawal Plan) from your debt funds to the tune of your monthly requirement. SWP’s are a tax-efficient means of generating post-retirement income and are highly flexible. With proper planning, they should help you sail through your retirement years comfortably!
A lot of people complain of social media about being victims of insurance mis-selling, especially from their family members or friends. They want to continue buying from financial advisors but don’t know how to find a good one.
It is no secret that the insurance business runs on commissions. Whether you buy your policy through a financial advisor/ insurance agent or an online portal, in the end, the entity making the sale earns a hefty cut on your premium amount.
That is why it is easy to assume that anyone who’s selling you a policy works with a single motive of commissions. However, this might not be the case always.
No matter where you’re buying insurance from – you need to feel confident that the person advising you has your best interest in mind – and isn’t suggesting a poor-quality product just because it brings them a good commission. You must understand whether you’re dealing with an advisor who is on your side, or simply a salesperson, who cares for nothing except his commission.
Here’s a quick guide to how you could go about knowing the difference.
1. A good financial advisor will focus on your goals
Salesmen talk ‘products’. Advisors talk about ‘solutions’. If the person sitting across the table is pushing a product without even knowing about your financial background, needs and goals, it is very likely that the person is a salesperson – not a financial advisor. An advisor plays the role of a partner – someone who understands your requirements – and matches products from the market to fit those needs. (And not the other way around).
2. A good financial advisor will explain, give you time to decide
Salesmen are in a hurry. Advisors will give you time. An advisor advises. They help you with data, facts, and their experience – and enable you to decide on purchasing a product or skipping it. As a guide, it is their job to inform and empower you – not make decisions for you. A good advisor is conscious of not being seen as a salesman. If someone is pushing you to make a quick decision – that you’re not completely comfortable with – you might be looking at a salesperson.
3. A quality financial advisor will tell you if you don’t need a product.
Not every product is a great one. And not every product is right for you and your family. You need an advisor who will tell you when you don’t need a particular product – even if it means they don’t earn that commission.
Salesmen will jump into a ‘Sales’ mode as soon as there is an opportunity. They don’t exactly care whether you need a product or not. Unfortunately, their earnings (incentives and commissions) are directly linked to the sales they pull off – and so, they would be willing to sell you any product – whether you need it or not.
4. A good financial advisor will be there with you, throughout
Before you buy the policy, a good advisor will make you and your family understand the policy terms and conditions, inclusions, and exclusions clearly. They will resolve any queries you might have and guide you through the purchase journey.
Further, at the time of claim, it is the same financial advisor who will be on your side – help in filling up the claim form, documentation, and other things. They will also follow up with the insurer on your behalf, and ensure that you (or your family in the case of term insurance) have a seamless experience.
In the case of a salesman, things change as soon as the sale is made. The same person who was constantly chasing you to buy the policy might even start ignoring you. And they might not be accessible to you when you need them most – at the time of claim.
5. A good financial advisor will prioritize reputation over commissions
For an advisor, building a reputation is more important than earning a higher commission. This makes more business sense for them – as they are likely to build long-term relationships with families – and sell multiple products over years through your references. Hence, they will genuinely be interested in building a good relationship with you and inclined to provide a good service and earn your goodwill.
A salesman doesn’t care about building a reputation or a relationship with you. Once you purchase from them, your case will move from the ‘post-sales service team and you’ll likely never speak to the person who sold you your policy again. Even if the salesman calls you once in a while, it will mostly be for a new product offer or a deal that is valid for a ‘limited period’.
So, how should you find a good advisor?
An insurance plan is a long-term purchase and impacts your family’s financial security forever. It is important to have a partner who will work with you, guide you, and help you make informed decisions. Further, you need a support system to step in to be on your side, even fight on your behalf – to ensure the claim amount comes through.
When it comes to term insurance, you won’t even be around when the time of the claim comes. You need someone your family can rely on.
Here are five things you must remember while choosing a financial advisor:
-Work with an advisor who has at least five years of experience, and has taken up financial advice as a full-time job.
-The purpose of insurance is protection against financial risks. So, find someone who will discuss protection and risk management first – and not look at insurance as an investment instrument.
-Work with an advisor who begins with a need-analysis – and does not simply jump to a list of products they’re selling, or share brochures.
-Find an advisor who comes with good references and an excellent track record. If you’re meeting them for the first time, ask for references from previous clients to get a better picture.
-Work with someone who will support you from purchase to claim, and own the service experience throughout. You want a partner for the long-term and not just a salesperson.
One common inference emerges singularly in all Financial Planning surveys in India – planning for our kids’ education is always going to be a top priority for Indian parents! Although this aspiration hasn’t changed over the years, the way we save for this critical goal has undergone dramatic shifts.
Gone are the days when investors looked no further than “Child Education Insurance Plans” to fund their kids’ higher studies. With AMFI’s impactful “Mutual Funds Sahi hai” campaign, has come the awareness that a low cost, potentially high return, and transparent tool exists for Child Education Planning, in the form of Mutual Funds.
Here are the three stages of accumulating wealth for your Child’s Higher studies using Mutual Funds.
Stage 1: Accumulation
The accumulation stage must ideally commence as early as possible – smart investors start accumulating money via Mutual Fund SIP as soon as their children are born! During the accumulation phase, it would be wise to not pay too much attention to your risk profile and instead focus on making affordable monthly investments into mid-cap-oriented mutual funds that have high volatility.
If you can achieve a 14% return over 18 years (not uncommon for many top-performing mid-cap oriented mutual funds), even a small saving of Rs. 5,000 per month can yield Rs. 50 Lakhs by the time your child turns 18.
Stage 2: Aggressive Step Ups
When it comes to saving for your Child’s Education using Mutual Funds, it’s of critical importance to re-evaluate your financial situation now and then and step up your monthly outgo accordingly. Since education costs tend to inflate at supernormal rates, a college degree that costs Rs. 50 Lakhs today will most likely cost between Rs. 2.25 Cr – Rs. 2.50 Cr, 18 years hence.
But fret not – starting with Rs. 5000 per month; but stepping this monthly contribution up by just Rs. 3000 per month every year for 18 years, can help you accumulate nearly Rs. 2 Cr for your kid’s higher studies. Such is the magic of the power of compounding when coupled with regular and disciplined annual step-ups.
Stage 3: De-risking & Corpus Deployment
The final stage in planning for your child’s education using Mutual Funds would be to systematically de-risk your portfolio as the goal date approaches. A common mistake that savers make is to continue to have a 100% allocation to equities to the goal date.
This can prove to be catastrophic if market cycles turn unfavorable in the year that you need to redeem money. Imagine, for a moment, that a 2008-like situation was to arise in the year that you need to redeem funds to pay your child’s tuition fees or college seat booking amount.
You may need to take a loan at that stage to circumvent the horrifying prospect of booking a 50% loss on your hard-won savings! Instead, make sure you begin STP’s (Systematic Transfer Plans) from your high-risk equity funds to lower-risk debt funds a good 3 years before your goal date. This will help you safeguard your capital as well as your profits, making them easily redeemable when you need to write that hefty check!
If you are the only breadwinner of your family, then it becomes imperative to get a term insurance plan. A term insurance plan can render protection and coverage to your loved ones in case of any unexpected and unfortunate event.
Hence by buying term life insurance, you can secure your family financially that can help them in leading a protected and stable life even when you are not around.
Here are some of the benefits of purchasing term life insurance:
1. Complete life cover
One of the important benefits of term life insurance is that it extends complete life cover to the person taking the policy. These complete life cover extend overall protection, and the insured person will receive protection till 99 years of age or more.
Term plans can further assist in diminishing the monetary strain on the family members in case of the demise of the insured person.
2. Huge sum guaranteed with affordable premiums
A term insurance policy allows the highest sum assured. Furthermore, the best term insurance plans are the ones that charge the most affordable premium when compared with any other insurance policy. You must always keep in mind that the earlier you purchase term insurance, the less premium will be charged.
Hence, it is important to opt for a term plan at an early age to get added advantages like lower and affordable premiums.
3. Severe illness coverage
A person may get diagnosed with any severe disease at any phase in their life. Furthermore, the medication costs incurred towards these ailments could simply consume all the savings.
While term life insurance provides life coverage, a person can additionally select a severe illness coverage in form of an additional rider that can help you pay your medical expenses without fretting about your finances.
4. Extra rider benefits
Another advantage of term life insurance is that you can opt for additional rider perks that can further enhance your term plan. These supplementary rider advantages are easily obtainable and are granted by nearly every insurance firm in India. These rider benefits can be easily supplemented with your policy by paying a minimal extra premium.
5. Payout of the sum guaranteed
In case of the demise of the policyholder, the family members of the nominees will receive a guaranteed lump sum payment. The nominees further have the option of receiving the payment either in a lump sum or in fixed monthly installments.
These guaranteed payouts will assist the family members in taking care of their financial needs in a manageable way.
6. Return of premium
A term insurance policy does not render any maturity advantage. However, you can get a maturity advantage within the same policy if you have opted for a return of premium. You are required to pay a slightly higher premium that will be paid back to you if you outlive the policy maturity period. However, the price of the premium granted will not include any rider benefits or taxes.
7. Various mortality benefit payouts
You may have multiple liabilities and financial burdens like paying bills, EMI’s, and many more if you are the sole earning member in your family. So when something happens to you, then this entire burden is shifted towards your family. This is where term life insurance can be of utmost benefit.
It will play a significant role in uplifting the financial conditions of your family by providing them with either a lump sum payout or payouts in monthly installments so that they can manage all their money-related problems.
8. Income tax advantages
A term insurance policy further extends tax advantages falling under two different sections of the Income Tax Act. A person can get a tax benefit for the term life insurance policy premium paid under Section 80C of the Income Tax Act, 1961.
However, the amount of the paid premium shall not exceed Rs 1.5 lakhs. Furthermore, a maturity advantage in regards to Term Return of Premium (TROP) also gets exempted in certain term insurance policies under Section 10 (10D) of the Income Tax Act.
9. Maturity advantages
A conventional term life insurance policy solely extends mortality benefits to the person who took the policy as insurance coverage, and there are zero benefits offered on the maturity of the term plan.
However, nowadays, there are certain plans like a term Return of Premium (TROP) that renders multiple maturity advantages paid in the form of premium if the person who took the policy outlives the term period.
10. Accidental mortality benefit
Accidental Mortality Benefit means in case the insured person passes away due to an unfortunate event, the family gets double the amount than what they would have got in case of natural death. This is so because insurance companies understand that a sudden unfortunate incident can shuffle the entire life of their family.
Furthermore, the cost of medical treatments is also exorbitant if the person survives the accident. Thus, they contemplate that this huge sum of money can help in lessening the financial burden of the family.
The COVID 19 crisis has tested the mettle of investors like never before. From the heady highs of February to the dark depths of March, and to the sharp recovery that has followed since market movements of 2021 have been truly unprecedented.
However, smart investors continue to remain relatively unscathed through all this madness, while the less smart ones have seen their portfolios getting pulverized. Do you want to be a smart investor too? Start by cultivating these five traits that characterize them.
1. Don’t obsess over your portfolio
Someone wisely observed that a watched pot never boils. They may well have been talking about investing! While smart investors do check their portfolios periodically and make a sincere effort to stay on top of things, they also understand that obsessing over their investments will only serve to incite a host of behavioral biases in them that will work to their long-term detriment.
In short, smart investors review their investments periodically and then sit tight until something changes materially. They do not count their daily losses and profits.
2. Be goal-focused, not returns focused
Smart Investors seldom invest in an ad-hoc manner. They recognize money for what it is – that is, a means to an end. Resultantly, their portfolios tend to be segregated neatly into goal-based buckets. Long-term money being saved for retirement automatically flow into higher-risk funds, whereas emergency funds get set aside into safer, more liquid investments.
They understand that returns fluctuate, and so they measure their success by the more robust yardstick of the percentage of goal achievement instead. Retirement corpus down 30% due to COVID? So, what – there are still 25 long years left to cover lost ground!
3: Understand risks
Smart investors never commit money into an investment without total awareness of the risks (and potential rewards) involved. By doing so, they assume full responsibility for the fluctuations that may ensue during the investment life cycle.
Instead of turning a blind eye to risks, they study how a prospective investment has fluctuated previously during good times and bad before deciding whether it fits in with their objectives as well as their bounds of risk tolerance. And once they do – they stay committed through the ups and downs that follow, without breaking into a sweat every time markets fluctuate.
4. Follow a “Core & Satellite” approach
A “core and satellite” strategy is a proven strategy that smart investors have long employed. It entails investing the bulk of one’s assets into long-term and relatively passive assets while setting aside the rest to play sectors and themes that may outperform the rest of the pack in the medium term.
By doing this, smart investors effectively contain portfolio risks while cashing in on opportunistic trends in a controlled manner. Importantly, smart investors draw the line between their core assets and satellite plays with unflinching discipline.
5. Avoid “Heropanti”!
While heroics are fantastic for Bollywood movies, they simply do not work well in the investment world! Buying into every dip, exiting opportunistically at every bounce, and getting back in swiftly at the next correction – these are just fantasy moves that sound great in your head.
In reality, such mercurial actions will leave your portfolio bruised and battered. Smart Investors understand that successful investing is more like watching grass grow or watching paint dry. They mentally prepare themselves for a marathon, while leaving the sprints for the novices!
The support of a qualified Financial Advisor can make you a smarter investor! To get started on your journey towards smart investing, get in touch with us today.
Has the COVID conundrum left you wondering which Mutual Funds make sense right now? Here are three fund categories that are worth considering – in increasing order of risk tolerance!
Dynamic Asset Allocation Funds
Dynamic Asset Allocation funds present an ideal solution to the moderate risk taker’s quandary at the moment. Since they implement automatic portfolio rebalancing models that go against the grain of market movements.
They act as a safety mechanism against a host of behavioral biases that would otherwise plague any investor who’s endured the absurd roller-coaster ride that equity markets have witnessed since March! For multiple reasons, not all Dynamic Asset Allocation funds are worth considering right now; so be sure to seek the support of an expert Financial Advisor before you invest in one.
Value Funds
Traditionally, exogenous shocks such as COVID-19 have thrown the door wide open for value investing. When the going is good and hot money is in full flow, it is growth stocks that benefit the most. However, when a crisis results in severe market dislocations, sectoral leadership undergoes dramatic shifts.
In times like these, the high margin of safety in value stocks makes them lucrative as contrarians come cherry-picking. For this very reason, Value Funds have always outperformed Growth Funds during post-crisis revivals.
Risk-taking investors who have the patience to weather returns that are frustratingly uncorrelated with index movements, and have a time horizon of at least 3-5 years from today, should add value funds to their portfolios at this juncture. Invest in a staggered manner though.
Small-Cap Funds
Small-Cap Funds invest in stocks that lie beyond the top 250 companies by market capitalization. For the past three years, these stocks have received the drubbing of a lifetime – most of the companies in this space are now trading at bargain-basement discounts of 60%-80% to their January 2018 peaks.
While they may well correct further and will likely be the last to recover from this cycle, their lucrative valuations are hard to ignore at this point.
Small Caps tend to rally after Large and Mid-caps do; but when they take off, they switch on their afterburners and rocket ahead with such force that fence-sitters are left gasping in awe! If you’re a savvy investor who doesn’t break into a sweat every time markets move sideways, this is an excellent time as ever to accumulate units in a small-cap fund in a staggered manner. You’ll need to have a 5-year holding time horizon, though.
Confused about where to invest? Leave it to the experts! Get in touch with us today.
The long wait for Bitcoin futures exchange-traded fund (ETF) in the U.S. is finally over when the cryptocurrency officially hit the New York Stock Exchange (NYSE) during the week with the launch of the new Bitcoin-linked futures ETF.
The ProShares Bitcoin Strategy ETF (NYSE: BITO) started trading on the exchange with increased participation from the Wall Street investors.
ETF touches a $1 billion in trading volumes on the first day of trading
The ETF started trading on October 19, for $40 a share and posted a rise of 4.85% before closing on the first day with gains of 2.59%, at $41.94 per share. At the end of Day 1 of trading, the ETF surpassed the $1 billion in volumes and becomes the second most traded ETF on its first day.
The number one position is held by the BlackRock U.S. Carbon Transition Readiness ETF with $1.16 billion in trading volumes on its first day.
What are Bitcoin Futures?
Bitcoins and Bitcoin futures are two different assets. In the futures contract, as in the case of BITO, an investor will agree to buy or sell the asset in the future at some specified price (similar to other stock futures contracts).
Futures contracts here are derivatives of Bitcoins and are not directly backed by physical Bitcoins. Investors are not directly buying and selling the underlying asset (Bitcoin in this case).
How does this ETF work?
The ETF trading under the ticker symbol BITO, lets investors buy into bitcoins through the futures contract (F&O segment) without actually buying it on a crypto exchange. By investing in this new ETF fund, investors are likely to be betting on the potential of the shares of the ETF to be worth more in the future.
The underlying driver behind the value of the shares in this fund is Bitcoins. This works similar to other futures contracts like the commodities ETF or the gold futures ETF where the investors do not buy physical gold or gold bars.
How does a Bitcoin ETF impact the price of Bitcoins?
Bitcoin price surged to a record high of more than $60,000 on the news and touched $66,974 on Wednesday, crossing the previous high of $64,889 set in April. Since this ETF is a future-based ETF that tracks futures contracts as opposed to the current price of the asset, the price of the ProShares ETF won’t be the same as the price of the Bitcoin.
ProShares had to peg the future price to a listed exchange price and has picked the Chicago Mercantile Exchange (CME) as the benchmark. This may lead to a situation where the ProShares’ fund is likely to trade at a premium in a bull market and a discount in a bear market which might make the ETF a good short-term investment than for an investor who is looking at long-term investments.
What are the costs involved?
BITO has an expense ratio of 0.95% which looks quite high at the moment. In other words, if an investor invested $10,000 in this fund $95 will go towards the funds’ operating expenses.
The ideal low-cost index funds have an expense ratio of around 0.30%. Since this is a new asset class, there may be many middlemen and the price of the futures ETF is likely to be high until more competition brings down the fees and expenses of the ETF.
It also seems that in the coming months, it’s likely that more firms will follow in ProShares’ footsteps and offer their own futures-based crypto ETFs. Fund houses like Valkyrie Investments, VanEck, and Invesco are awaiting the SEC’s green signal.
Market hours
BITO will be trading at regular market hours like any other stock, unlike Bitcoin which can be bought, sold, or traded at any time. Investors can place orders for BITO during off-market hours, however, the orders will be executed during the market hours only unlike Bitcoins.
Regulation
Bitcoin-linked ETF comes with protection in line with other conventional investments. While only a cash balance in a traditional brokerage account is covered by FDIC insurance, brokerage accounts are protected by the Securities Investor Protection Corporation (SIPC).
This insurance covers accounts up to $500,000 in securities if a brokerage is closed due to bankruptcy or other financial difficulties and if customers’ assets are missing from accounts.
So, should you buy a Bitcoin-linked ETF?
Bitcoin is still very new compared to conventional stock market investing, which means it lacks the historical track record which investors can use to anticipate future performance.
While there may be a difference in the price of Bitcoin and the price of BITO, Bitcoin is highly volatile and the ETF is also likely to see similar volatility. Bitcoin prices saw an all-time high of over $60,000 in April before losing half of their value and trading below $30,000 and have now returned to $60,000 levels once again.
Investors can expose 5-10% of their portfolios in buying cryptos or investing in crypto-linked ETFs like BITO.
Also, investors should remember that investments in any speculative investment should never be at the expense of other financial goals like paying off high-interest debt or saving for retirement since these are high-risk-high-return assets in the portfolios.
Having said that, we are pleased to bring BITO, the first Bitcoin-linked ETF, on our platform for our investors to make use of this opportunity so that they can conveniently invest in Bitcoin ETF in their regular brokerage account.
This ETF is going to allow many investors who were looking to invest in Bitcoins and other Cryptos but did not know how to begin with. Also, BITO is safe for investors to gain access to the crypto world as it is regulated by the SEC, marking it the first regulated cryptocurrency investment vehicle in the U.S. to go mainstream.
ETFs allow investors to diversify their portfolios without having to own the assets themselves. We have seen some good participation from Indian investors in BITO after the ETF was available on our platform during the week.
