Why should you stop timing the market?

  

Predicting the Market Timings is Bad Practice

Predicting the market is far more difficult than forecasting weather. But most of the time we forget this fact and are carried by our emotions. We tend to be the most brilliant of the lot. But, unfortunately, we end up doing something that is exactly the opposite. Even the greatest investors who have mastered A-Z of investing quit performing such things. Investors like Warren Buffet and other professionals believe that it is one of the most foolish acts an investor can perform. This is simply because there is a 100 percent chance that your predictions are going to go wrong. Say you are predicting that the price of a stock is going to increase by 5%. But overnight, there was an issue, and the markets crash instead of rising, making your predictions wrong ultimately. 

As the smallest of smallest things influence the market, you cannot predict the right time as to when the price would rise or fall. 

1. You are losing a lot than you think 

Every time you wait for the best opportunity to come or knock on your door, you fail to see one thing. The one that is already in your hand. Say you want to buy the stock of XYZ. You are looking forward to a correction in order to invest. But unfortunately, there wasn't one for the successive five years. But the price rose to 150 at the end of 5 years from 50. To add on, an earlier investment would have made you eligible for the dividend payouts as well. In the end, you lost the chance to make a profit and an opportunity to increase your income yield. 

It is extremely difficult to calculate market highs or falls. No amount of math can help you with this. Even if you were lucky the first time, it might not occur twice. Further, you might be making a number of wrong decisions and will end up in a rampage of buying and selling. This ultimately makes your broker the winner and not you.  

2. Gives place to emotions  

Emotions are what make us human. But it is something which, as an investor, you must keep away from. Or otherwise, you will be witnessing a lot of trouble. It will drive you to make decisions which you will most probably regret about. If you are looking for a hike in price in order to sell your stocks and say the market crash, you might easily give place to fear. This may cause you to sell off immediately or at the wrong time, causing you to grieve over permanent losses. Your constant efforts to time the market will make you weak emotionally. Consequently, you will end up speculating rather than investing. 

3. You can never eliminate this from the market 

Humans are the most difficult subjects for any expert. And no amount of Ph.D. or M.phils will help you anticipate the way they behave. Even experts and professionals find it difficult to interpret their mindsets in different situations. Though numbers that rule the market, you can never eliminate the human element that co-exists with it. The market always reacts differently to different situations. 

Say, for example, a company is incurring huge losses. As a rational investor, you would expect the prices of its shares to fall. But there is a high chance that the price may increase. It might be because of the optimistic view of the company's shares, trust upon the board of directors, illegal trading, etc. Likewise, vice versa is also possible. Pulling a correct prediction about the market is something impossible unless you crack this subject. And that is no-where near to a possibility. 

I hope all this would have made you fear the act of timing the market. Above all, why even try something that will cause you a loss and offers no scope for success? 

What you should do instead

• Have a strategy. Ensure that the strategy is aligned perfectly with your goals and risk profile. And always stick onto it. Don't deviate from this action plan just because your friend found a new way of making money. 
• Further, there is no shortcut to becoming rich or financially stable. So you will have to hold to your patience. So use the opportunities thrown up at you in fulfilling the financial goals rather than trying to break through the code of predicting. 
• Allocate and diversify the assets. Make sure that you have allocated your assets in such a way that all your money isn't invested in a single sector or asset or stock. You might have strong hopes on the asset or the company. But make sure it's diversified. Hence, your risk is minimized. 

• Choose and pick the right stocks and stay invested. Try to be patient and make decisions based on the logical derivation rather than on your predictions. This is especially so during times of crises that ensure all your predictions and emotions are well intact without interfering with your decisions. 

What is a CIBIL score? How can you improve your CIBIL score?

 

Credit Score

A credit score is a three-digit numerical value that suggests an individual's creditworthiness. It plays a key role for lenders to decide their potential borrowers. Lenders tend to use an individual's credit score to determine if they will repay the loan on time or not. The higher the score, the better is an individual's chance to get money from a lender. A credit score is based on a person's credit history, which includes factors such as the number of open accounts, total levels of debt, repayment history, and other factors.

In India, there are several credit bureaus that can provide credit scores to people and companies. These bureaus are known as credit-rating agencies that calculate people's credit scores and are regulated by the Securities and Exchanges Board of India (SEBI). Some of India's major rating agencies include Experian, CRIF High Mark, Equifax, Credit Rating Information Services of India Limited (CRISIL), ICRA Limited, Credit Analysis and Research Limited (CARE) the TransUnion CIBIL, etc.

TransUnion CIBIL Limited, formerly known as Credit Information Bureau (India) Limited (CIBIL), is a credit bureau or a credit rating agency that maintains the records of all the credit-related activities of companies as well as individuals, including credit cards and loans. 

What is a CIBIL Score?

The CIBIL score is the credit score that is provided by TransUnion CIBIL. It is a numeric, three-digit credit summary that reflects a person or a company's credit profile and history, and it ranges from 300 to 900. 

Although all credit agencies are licensed by the Reserve Bank of India to calculate the credit score, the CIBIL score is the most commonly used and preferred credit score by banks and other financial institutions. The difference between the CIBIL score and a credit score is that any credit agencies can provide a credit score, but only CIBIL can give a CIBIL score.

According to the CIBIL, any score that is greater than 750 is a good CIBIL score and helps the lenders to assess and approve loan applications. The CIBIL score of an individual is derived from their CIBIL report, which includes data such as borrowing and repayment habits, which is submitted by banks and other lenders with CIBIL on a regular basis.

The past behavior of a borrower is considered as an indicator of his future behavior as a borrower. Examining and studying the CIBIL score and report is usually the first thing any lender would check before approving any loan.

But why is it so important to have a good CIBIL score or why is it so important to improve the CIBIL score?

Advantages of having a good CIBIL score

CIBIL is the most trusted credit agency of India, as its results are considered as the most accurate among all credit rating agencies. A good or high CIBIL score is suggestive of good and responsible management of a company's finances and a person. Hence, it is important to improve your CIBIL score and maintain it at a high value.

Apart from easy approval of loans, having a good CIBIL score entitles a borrower to a number of perks. Some of the advantages are as follows:

1. Lower interest rates: People with a good CIBIL score get loans at lower interest rates. Those with lower CIBIL scores are generally charged with high rates of interest.
2. Fast loan approvals: Good CIBIL score reflects you as a good borrower in a lender's eyes. Hence, banks try to approve loans as fast as possible. People with lower CIBIL scores have to submit a number of documents and have to go through a long process to get their loans approved.
3. Easy credit: As mentioned, a high CIBIL score is an indicator of good financial management by a person or a company, and thus lenders tend to be more trustworthy towards such people.
4. Negotiation authority: People with high CIBIL scores get the authority to negotiate with banks/financial institutions to negotiate for a lower rate of interest.
5. Higher loan limit: A high CIBIL score can help you get get a higher limit on the amount of loan that you can borrow, that too at a low-interest rate.
6. The credit card offers: Banks generally tend to provide exciting offers and schemes to people that have a good CIBIL score.

How can you improve your CIBIL score?

Now that you know what a good and high CIBIL score can get for you, you must be wondering how you can improve your CIBIL score. If you have a low score, below are some measures that can help you improve your CIBIL score:

1. Check your credit report regularly.

You must have a habit of checking your credit or CIBIL reports regularly. A CIBIL report will help you identify the factors which have brought down your CIBIL score. These factors usually include unpaid or delayed loans. This identification makes you evaluate your personal CIBIL report and helps you spot errors in it. In case you need to correct information, you can contact the mentioned bank or financial institution and get that error rectified.

2. Clear credit card balances.

Another thing to improvise a CIBIL score is to clear out the balance in your credit cards. Balances also include unpaid dues on loans and EMIs, which can bring the CIBIL score down. Contact the lenders/banks and pay off any outstanding dues. This way, one can improve their CIBIL score.

3. Clear out inaccuracies in the CIBIL report.

It is important to keep reviewing your CIBIL report from time to time in order to keep a check on the information that is being put on there. In case you see any inaccurate detail, it is important to get it rectified immediately, so as to avoid getting your CIBIL score hampered.

4. Keep a check on your credit utilization ratio.

Avoid using your credit cards for every transaction you make. It is important to keep your credit card utilization ratio below 30%, as keeping your monthly balances low can reflect a healthy CIBIL score.

5. Increase your credit card limit.

You can ask your banks to increase your credit limit, usually for credit cards, to have more credit available for your use. This does not mean having to spend it all beyond your capacity. Having a high credit card limit and a low credit utilization ratio can be reflective of a responsible borrowing behavior and can thus lead to a positive CIBIL score.

6. Keep a check on joint credit terms.

If you are the joint application for a loan that has been taken by someone else, you should keep a regular check on the repayment of that loan. In case they have missed on payments, then you will also end up lowering your CIBIL or credit score, as this will reflect in your report as well. The best way to avoid this is to ensure that the loans and cards are being paid off on time. It is usually advised that one should limit themselves from applying for joint credit terms.

Conclusion

The CIBIL score is a value that should always be high, and the CIBIL report is like a report card that is a reflection of your past performance and behavior as a borrower. It is the parameter that establishes trust between you and your lender by ensuring that you will repay their lent money on time.

Getting a loan in today's times is like a boon as it enables you to get a step closer to monetary happiness. But, getting a loan approved in the current times can be difficult if you don't have a good credit history. The CIBIL score puts a numeric value to your credit behavior and is reflective of your trustworthiness. Thus, it is important to improve your CIBIL score in case it is low and retain its value, in case it is high.

Some basic measures and simple responsibilities can help you put on a healthy image in front of the market and get you closer to getting what you desire; be it a car you want, a house you wish for, wanting to study abroad, or a business you want to start.

SEBI Issues New Rules For Multi-cap Funds. What Should The Investors Do?

  

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 First, let’s understand what were the SEBI rules for Multi cap funds before the new changes were announced.

Multi-cap funds are not complicated structures. In fact, there was only one condition.

Multicap funds needed to have a minimum of 65% of their assets invested in equities at any given time. This means the fund manager was free to decide how much of the scheme assets were going to large-cap companies, mid-cap, and small-cap companies.

Now, SEBI defines a large-cap company as those listed companies which are ranked from 1st to 100th company in the Indian stock exchanges in the terms of market capitalization. Mid-cap companies are ranked from 101 to 250 in terms of market capitalization and small-cap companies start from the 251st ranked company. A list of these companies is available on the Association of Mutual Funds in India (AMFI) website.

Now, this flexibility of choosing how much money was going to which company and which type of company i.e. a large, mid or small-cap is what fund managers love as it allows them to take the most optimum investing decisions on behalf of the investors. 

So, what are these changes that SEBI has introduced?

Here are the 2 New SEBI Rules For Multicap Fund

Number 1: Minimum allocation to equities was increased from 65% to 75%

As we mentioned earlier,  that there was only one condition for Multi cap funds and that was 65% of their money should be invested in equities. Well, that’s changed and now at least 75% of the assets in a Multi cap fund need to be invested in equities at all times.

This change won’t have a major issue, because Multi cap funds are generally invested in equities most time. For example, the biggest fund in the category, Kotak Standard Multi cap Fund, which has over 97% of its assets invested in equities. So this is not the problem.

Number 2: Defined minimum allocation in each market capitalization

The change in the SEBI circular regarding allocation is making everyone’s head spin.

Earlier, the fund managers were free to choose in which companies they’d like to invest in without any restriction on whether they are large, mid, or small-cap companies. 

However, as per the September 11 circular, all Multi cap funds are to necessarily invest at least 25% of their portfolio in each capitalization category. This means at least 25% each in large-cap companies, mid-caps, and small-cap companies. 

So why has the SEBI come out with these modified scheme characteristics?

So, these are the three areas of concern that SEBI has raised in their clarification. 

#1: The lack of noteworthy diversification in most Multi-Cap Funds

SEBI says that they have enforced this 25:25:25 allocation upon the observation that many Multi-Cap Funds have over 80% of their investment in large-cap stocks which makes them more like large-cap funds rather than Multi cap funds. They further added in the clarification that the share of small-cap companies is in the lower single digits in some of these schemes.

We looked at the top 5 Multi cap funds per their assets under management to understand whether it is true. 

Composition of large, mid and small cap stocks in the top 5 Multi cap funds (by AUM)
	Large Cap Stocks	Mid Cap Stocks	Small Cap Stocks
Kotak Standard Multicap Fund	76%	22%	2%
HDFC Equity Fund	88%	8%	4%
Motilal Oswal Multicap 35 Fund	86%	10%	4%
Aditya Birla Sun Life Equity Fund	70%	24%	6%
UTI Equity Fund	60%	32%	8%

SEBI has a point with none of the top 5 schemes having more than 8% of their portfolio in small-caps. 

#2:  Divergence in the name and the nature of the scheme

HDFC Equity Fund and the Motilal Oswal Multi cap 35 fund has over 85% of their portfolio in large-cap companies with little or no diversification into mid and small-cap funds. So from the SEBI point of view, the name of the scheme and the nature of the scheme is completely at opposite ends and bordering on being misleading. 

#3: Use of appropriate benchmarks 

The SEBI has also made note of the benchmark that is used by the Multi cap funds is not in line with the composition of these schemes. That’s because the appropriate benchmark for large-cap funds is the NIFTY 50 while the benchmarks used by Multi cap funds are NIFTY 200 or NIFTY 500.

But, the opinion of the AMCs differ from SEBI’s point of view, and here is what most of the AMCs we spoke to had to say on these observations

Fund Houses’ Response to SEBI’s observations

#1: Counter argument: The lack of noteworthy diversification in most Multicap funds

The fund houses feel that the entire point of opting for Multi cap funds is to have the flexibility of moving between capitalization categories depending on present market conditions, future market outlook, and valuations. 

Diversification can be done using other tools like having a mix of large, mid, and small-cap funds in one’s portfolio but the objective of a Multi cap fund for investors is to build long term wealth.

Over the last three years, large caps and mid/small caps have moved in waves. For example, small and mid-cap companies were grossly overvalued in the last quarter of 2017 and many of them lost 20-30% in value over the next 12 months. Similarly, many investors feel that large-cap companies are overvalued now as the Nifty PE Ratio hangs around 32. This is when flexibility in changing track becomes more important than diversification

#2: Counter argument: Divergence in the name and the nature of the scheme

On the point related to the divergence in the name and the nature of the scheme, it again seems to be a point of view issue. While SEBI looks at the word “Multi cap” as the components of the fund, the investors might be viewing the name around the flexible nature of the fund.

Now, maybe if the name was Flexicap rather than Multicap, the issue of the name being misleading might not have come across.

#3: Counter argument: Use of appropriate benchmarks 

We mentioned earlier that Multi cap schemes use the Nifty 200 or the Nifty 500 as benchmarks. Let’s take the Nifty 500 as the benchmark for this discussion. 

Now, we looked at the composition of the Nifty 500 in terms of large, mid, and small-cap stocks. Here’s what I found:

• Large-cap stocks composition in Nifty 500 is 78%
• Mid-cap stocks composition is 17%
• Small-cap stocks composition is 5%

As you can see, while the benchmark is 78%, 17%, and 5%, SEBI wants these funds to mimic a 50%, 25%, 25% split. In other words, SEBI’s contention of having an appropriate benchmark seems to be going against their own words.

So, what’s next?

Now that we have seen the views of the regulator and the fund house, let’s look at the many options available to the mutual fund companies.

SEBI in their clarification note has hinted at some options. These include:

1. Mutual fund Multi cap schemes can rebalance their portfolio wherein most have to add to small and mid-caps and divest from some of the large-cap stocks in their portfolio
2. Funds can merge their Multi cap scheme with another scheme like a large-cap scheme or a large and mid-cap scheme.

In addition to what SEBI says, some fund houses have hinted at converting the Multi cap fund into a thematic fund or a focused equity fund where there are no or low restrictions on market capitalization. SEBI has given until January 2021 to the mutual fund companies to make the requisite changes. 

It is highly unlikely the fund houses will make this change as this would not be an easy task plus it will change the risk-return profile of the funds. 

What should you do as an investor in Multi cap funds?

Firstly, wait. It’s not even been a week since the announcement. So allow the news to sink in with all stakeholders including the regulator and the mutual fund companies.  SEBI has already come out with a clarification and one can expect all mutual fund houses to release some communication regarding their views and actions pertaining to this circular. 

.The second thing you should do is to have a clear oversight on what proportion of your portfolio is in large, mid, and small-cap companies. While there is a rejig in the composition of Multi cap funds, you need to know how it fits in with your overall portfolio. You can easily do this with the ETMONEY app which gives you the percentages of your holdings in large, mid, and small-cap companies.

How to save Income Tax in India

  

                                                                     What is the Income Tax?

Income tax is a tax that is imposed on the income of individuals or entities. It varies with the income and profits of individuals and entities, respectively. There are differences in the amount of income taxes as its rates vary according to the type and characteristics of the taxpayer.

The amount of income tax will increase simultaneously with the increase in the taxable income of the taxpayer. Earnings subject to taxable income encompasses salaries, wages, dividends, rent, royalties, interest, product sales, and gambling winnings as well.

So, when we see comedian Kapil Sharma tweeting about his massive income tax amount, it includes not only his regular income from the show but also the income from all other activities he is indulged in.

Now, are you wondering how much amount would land up to you for this year's income tax payment? The following table shows the different tax rates for the different categories of taxable income for the fiscal year 2020-2021.

Income Slab	Applicable Tax Rate
Up to Rs 2.50 lakh	Nil
Above Rs 2.50 lakh and up to Rs 5 lakh	5%
Above Rs 5 lakh and up to Rs 7.5 lakh	10%
Above Rs 7.5 lakh and up to Rs 10 lakh	15%
Above Rs 10 lakh and up to Rs 12.5 lakh	20%
Above Rs 12.5 lakh and up to Rs 15 lakh	25%
Above Rs 15 lakh	30%

Oops!! Have you got a high-income tax amount to pay? Do you wish to save your money from getting vanished in Income Tax?

Read further to understand how to save on income tax.

Income Tax Saving Tips

The government of India also provides certain ways in which the income tax of taxpayers could be minimized. Income Tax Act, 1961 entails some tax savers which includes mutual funds, insurance premiums, NPS, medical insurance, home loan, and many others.

There are some sections that act as a relief for the taxpayers, as under these predominant sections, they can save tax. These sections are 80C, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80CCG, 80G.

They can certainly be helpful for many taxpayers, especially the income tax by salaried employees. Discerning the exemptions and allowances for income tax is the foremost thing in the financial planning of any individual or entity.

Therefore, the following table shows the sections and exemption limits for each.

Section	Investments	Exemption Limit
80C	Investments in PPF, PF, insurance, NPS, ELSS, etc.	150,000
80CCO	NPS investments	50,000
800	Investment in medical insurance for self or parents	25,000/50,000
80EE	Interest on Home loan	50,000
80EEA	Interest on Home loan	1,50,000
80EEB	Interest on electric vehicle loan	1,50,000
80E	Interest on education loan	Full amount
24	Interest paid on the home loan	200,000
10(13A)	House Rent Allowance (HRA)	As per salary structures

How to Save Income Tax Under Section 80C?

Under section 80C, various investments and expenses options are present through which you can claim a deduction to a limit of Rs. 1.5 lakh in a financial year. These options are as follows:

Equity Linked Saving Scheme (ELSS)

Equity Linked Saving Scheme is the only mutual funds' category which provides the facility of tax deduction under the Income Tax Act. ELSS comes with a lock-in period of 3 years.  

The returns of ELSS are higher than other income tax saving schemes in the long run, as the investments are made in the equity markets. But two things to be kept in mind with ELSS is that it cannot be withdrawn before the lock-in period of 3 years and have high risk as the investments are in equity markets.

National Saving Certificates (NSC)

NSC is another income tax saving technique that comes with a tenure of 5 years. The National Saving Certificate provides a fixed rate of interest, which is currently 6.8% per annum. 

The interest which is received from this income tax saving technique is a decent tax-saving option and under section 80C, up to Rs. 1.5 lakh could be taken as a rebate. 

Public Provident Fund (PPF)

PPF is one of the most sought after income tax saving techniques in India. In PPF, a long-term investment could be made with a tenure of 15 years. One can open a PPF account in banks and post offices with a minimal amount of Rs. 500. 

The PPF rates change every quarter, which is currently 7.1%. The interesting thing about PPF is that the interest on PPF is tax-free. 

Employees Provident Fund (EPF)

The 12% part of the salaries of employees subjected to Employees Provident Fund is tax-free. Therefore it is a beneficial income tax saving scheme for the service line individuals.

Senior Citizens Saving Scheme (SCSS)

SCSS is an income tax saving scheme which is specially designed for senior citizens. It comes with a tenure of 5 years, which is available for only those who are above 60 years. 

The current rate of interest is 7.4% (taxable). However, the exemption limit of this is Rs. 1.5 lakh. It means the tax deduction of this limit can be availed under this scheme. 

Sukanya Samridhi Yojana (SSY)

This income tax saving technique is especially for those individuals who have daughters that are below the age of 10 years. The investment made by the individuals under the Sukanya Samridhi Yojana scheme helps in reducing their income tax. The interest earned is also tax-free. 

This scheme is valid for 21 years until the daughter gets spousal support. The current rate of interest for the same is 8.5%. 

Tuition Fees

As the name suggests, this income tax saving technique is for those individuals who are parents and fund their children's education. Again the tax dedication of Rs. 1.5 lakh can be claimed under this income tax saving technique. 

The deduction of tax is not dependent upon the child's class or level of education. This income tax saving scheme is for parents of all kinds including, divorced, single parent, or those who have adopted a child. 

Repayment of Home Loan

For not allowing the income tax to hinder the process of buying one's own home, the section 80C comes with a scheme where those people, who are already paying the EMIs for their home loan, are exempted from paying income tax on the interest. 

They can claim tax deductions under section 80C. 

What are the Other Income Tax Saving Options?

Apart from section 80C, there are other sections (mentioned earlier) that provide income tax exemptions. A few of those income tax saving options are as follows:

• There are tax deductions for the contributions to the National Pension System(NPS). The limit for deduction is 1.5 lakh. 
• There is an income tax deduction for the medical insurance premium. This is up to Rs. 25,000, and Rs. 50,000 in case of senior citizens. 
• There is a tax deduction on home loan interest as well; you can claim a deduction up to Rs. 50,000 under section 80EE. 

Bonus Issue of Shares: A Detailed Explanation

   

What is a Bonus Issue?

A bonus issue is an offer in which free additional shares are given to the already existing shareholders. A bonus issue is also known as a scrip issue or capitalization issue. These additional shares which are offered are known as Bonus Shares. 

The bonus shares are issued as an alternative to the increasing payout of dividend. It's like; one company could offer an additional bonus share for every three shares held by the existing shareholder. So, as said above, this offer is similar to the buy 1 get 1 free or buy 3 get 1 free offer. 

With the issue of bonus shares, the share capital of the company increases but the net assets of the company remain constant. The lieu of cash dividends is the reason why bonus shares are issued. 

Shareholders of the company could sell their shares in order to meet the liquidity needs as well. Let's have an in-depth understanding of the reason behind the bonus issues of shares. 

What are the Reasons for Bonus Issues?

As mentioned above, bonus shares are issued for meeting the liquidity needs. When there are situations where the company is running out of cash, and shareholders are expecting their regular dividends, then bonus issues are given to shareholders. By selling these bonus shares, the shareholders can meet their liquidity needs.

Restructuring the company's reserves is another reason why bonus shares are issued. But there is a system on how bonus issues take place. 

Bonus shares are issued in accordance with each shareholder's stake in the company. There is a constant ratio in which these shares are issued to the already existing shareholders of the company. The reason for the same is to keep the relative equity of every shareholder the same as before the issue of bonus shares. 

For example, a six-for-three bonus issue entitles existing shareholders five shares for every three shares they hold before the bonus issue. Now, if you have 1000 shares, then 2000 bonus shares will be issued to you. (1000*6/3). 

Lastly, a bonus issue of shares is done to convert the share premium account.  

However, simply having these reasons is not enough for issuing bonus shares, there are several conditions to it as well. So let us now put some light on the conditions under which we can practice bonus issues.

What are the Conditions for Issuing Bonus Share?

Unlike the normal markets, where the sales-boosting offers are not required to meet any conditions, offers in the share market have to oblige to some conditions.

These conditions are as follows:

• The very first and an important condition for bonus issues of shares is that the company must abide by the guidelines issued by SEBI. 
• Bonus shares could only be issued if the Articles of Association of the company authorizes such an issue. 
• Another condition is that the shares must be released on recommendations of the BOD of the Company, and they should also be sanctioned by the shareholders themselves. 
• This condition is for the good sake of the shareholders. It requires only fully paid-up bonus shares to issue; if partially paid-ups are released, then shareholders will become liable to pay the part value of the share, which would be unfair.

How are Investors Benefited from Bonus Issue of shares?

Bonus issues of shares are successful not only because they are beneficial for the company offering it, but also because they are equally beneficial for the investors. It's just like a normal market where the person giving offers and the person availing offers are both at an advantageous end. 

So, let us just have a quick look into the benefits of bonus shares to investors:

• The investors are not required to pay any extra amount on bonus shares.
• There are various investors who believe in the long-term growth of the company. For them, it is a merit that they are exempted from the tax payments.
• Another big advantage comes to the investors when the company announces cash dividends on the shares. In such scenarios, the investors receive more profits as they hold extra shares because of the previous distribution of bonus shares by the company. 
• Last but not least; the investor is most benefited from the bonus shares when the stock price of the company moves up in the long run. Due to the increased stock price, the wealth of the shareholder also booms.

What is the Difference Between Stock Splits and Bonus Shares?

It happens many times that the non-market players have confusion in the understanding of Bonus shares and Stock Splits. For them, stock split and bonus shares are almost the same concepts. However, there is some significant difference between bonus and split.

The basic meaning of the stock split is dividing the existing outstanding shares into multiple smaller shares. The objective of this stock splits is to increase the affordability of stocks for small retail investors for enhancing the liquidity in the market. 

The biggest difference between bonus and split is the face value of the share. In bonus shares, as discussed, there is no change in the face value. But in the case of stock splits, the face value reduces in proportion to split the ratio. 

The result of the stock split is that the future per share dividend also reduces as the face value reduces. Unlike in bonus shares, a stock split is beneficial for both existing shareholders as well as the new potential investors.

Example of stock split- A stock split of 1:10 means that the shareholder will have 10 shares for every 1 share he holds.

Conclusion

So, contrary to the famous saying 'opportunities don't knock twice', bonus issues of shares come with an additional chance to maximize the wealth of the shareholders. 

They are as amazing and exciting as the Diwali offers. So if you are an investor and in the future, your company comes out with such amazing bonus shares, then don't just let it go. 

Grab this opportunity in the same way you jump in the malls or markets after hearing those buy 1 get 1 offer.