New income tax e-filing portal and its benefits

 

            The Income Tax (I-T) department will launch its new e-filing portal www.incometax.gov.in for taxpayers on June 7. This will replace the existing portal of the department www.incometaxindiaefiling.gov.in. As a result, the existing web portal will be shut for 6 days between June 1 and 6. According to the income tax department, the new portal will simplify all services, making it highly user-friendly for all users.

Key features of the "e-filing 2.0 portal" are as following :-

(a) It will be a mobile-friendly portal and taxpayers will have easy step-by-step guidance with user manuals and videos.

(b) Helpdesk support and chatbots will be available.

(c) There will be secured and multiple options for login.

(d) Multiple options will be there for on-portal tax payments too.

(e) Pre-filled forms and simplified ITR utility be made available.

(f) All the functions of this portal on the desktop will be available on the mobile application as well.

(g) The mobile application will be enabled subsequently for access on a mobile network.

An order was issued by the systems wing of the department that said the "transition" from the old portal to the new will be completed and made operational from June 7. "In preparation of this launch and for migration activities, the existing portal of the department at www.incometaxindiaefiling.gov.in would not be available for a brief period of 6 days from June 1 to 6”.  The e-filing portal is used by the taxpayers to file their individual or business category income tax returns (ITRs) and to raise complaints seeking refunds and other works with the tax department.

Source : www.cnbctv18.com

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Why stock market is disconnected from the Indian economy

 

            The Nifty 50, one of India’s two premier stock market indices, ended Friday at a record 15,436 points. This happened at a time the Indian economy is struggling through the second wave of the covid-19 pandemic, with the slowdown expected to last through much of this year. The economy is likely to be in slow-burn rather than experiencing the quick contraction seen last year.

Meanwhile, the daily rate of vaccination, something which could help the country achieve herd immunity and get the economy back on feet quickly, has fallen dramatically after peaking in early April. Also, many families have had to spend heavily in covid-related expenses. Those who have not, are scared about what will happen as and when the third wave strikes. In this scenario, it is well worth asking what is still driving the stock market, in an upward direction.

A stock market does not wait for things to happen. It discounts for possibilities. In an environment where the economy is expected to slow down, stock prices should have been adjusting for that possibility. But that is true only if you work with the assumption that the stock market and the overall state of the economy are linked.

Calculations based on data from the Centre for Monitoring Indian Economy show that the corporate profit of publicly listed companies -- measured by their profit after tax as a percentage of the gross domestic product (GDP) -- has been falling over the years. GDP is the measure of the economic size of the country. The ratio peaked at 5.84% in 2007-08. It was down to 3.46% of the GDP in 2013-14, before plunging to a two-decade low of 1.07% in 2019-20.

In 2020-21, in the midst of a pandemic, the profit after tax to the GDP ratio of listed companies which have declared their results so far, has jumped to 2.42% of the GDP. In absolute terms, the profit made by listed corporates in 2020-21 has been at an all-time high. This is even before all the results have come in. It is important to understand how this has happened. A close look at the data tells us that the bulk of the profit has come from driving down costs. When large corporates drive down costs, they do so by renegotiating terms with employees, suppliers, and contractors.

These suppliers and contractors then renegotiate terms with the people and firms they work with. This is how things boil down the hierarchy. People working in these firms earn lower incomes and must cut down their own expenses to survive. So, what is good for corporates, isn’t necessarily good for the overall economy.

Nevertheless, what is good for the listed companies should be good for the stock market as well. Does this mean that stock prices have been going up because of the increase in profit of listed corporates in 2020-21? To some extent, yes. As the RBI Annual Report for 2020-21 points out: “Even considering… earning[s] growth of the corporates, the stock prices cannot be explained by fundamentals alone."

Also, it needs to be mentioned here that stock prices have been rising faster than company earnings for close to eight years now, and price to earnings ratios of stocks have been at all-time high levels for a while now. Hence, the fact that listed companies did well in 2020-21 cannot be the main explanation for the continued rise in stock prices and the huge disconnect with the state of the economy. So, what explains this? As the RBI Annual Report points out: “The stock price index is mainly driven by money supply and FPI (foreign portfolio investors) investments."

What does this mean in simple English? The year-on-year money supply (as measured by M3) as of March 2021, had grown by 11.74%, after having steadily grown by over 12% through much of 2020 and in January-February of 2021. This has happened because the RBI printed money and pumped it into the financial system, to drive down interest rates. With tax revenues collapsing, the government’s gross borrowing in 2020-21 was expected to jump to ₹12.8 trillion. As the government’s debt manager, it is the RBI’s job to ensure that the government can borrow at low interest rates.

The RBI did just that. It printed a lot of money in 2020-21 and continues to do so this year. This led to two things. It drove down interest rates on fixed deposits, the major form of saving for Indians, to very low levels. In fact, once adjusted for inflation and income tax, the rate of return from fixed deposits is in negative territory. This led to more individuals looking for a higher return and investing their savings in the stock market. This pushed up stock prices to higher levels, disconnected from the overall state of the economy. This can be seen from the fact that the number of demat accounts, which had stood at 39.3 million as of December 2019, jumped by more than 40% to 55.1 million by March 2021. Clearly, more people have been trading and investing in the stock market, in the process driving up stock prices. This also shows that there is no free lunch. The government being able to borrow at a low rate of interest has come at the cost of savers receiving a lower rate of interest as well. You and I are paying for this privilege of the government. This also has an impact on consumption, though it cannot be easily measured.

Other than the RBI printing money, foreign portfolio investors bought stocks worth a record $37 billion in 2020-21. This happened because central banks of the rich world, like the RBI, have been printing money, to drive down interest rates and help their governments borrow at low rates. Also, the hope was that at lower interest rates, corporates will borrow and expand, and people will borrow and spend, and thus help increase economic activity. But this also led to individuals and institutions searching for higher returns and in the process, investing money in stock markets across the world. This also explains to a large extent the huge rallies that cryptocurrencies have seen, the recent correction notwithstanding. It is the expectation that the central banks will continue printing money, that seems to be driving the stock market.

The RBI Annual Report warns against this in its annual report, in a slightly roundabout manner: “This assessment shows that liquidity injected to support economic recovery [read money printing] can lead to unintended consequences in the form of inflationary asset prices [stock market rising] and providing a reason that liquidity support cannot be expected to be unrestrained and indefinite and may require calibrated unwinding once the pandemic waves are flattened and real economy is firmly on recovery path."

In fact, in the recent past, whenever there have been suggestions that the money printing cannot continue indefinitely, the stock markets across globe have been spooked. The fact that the Nifty has touched an all-time high means investor haven’t taken the RBI’s warning seriously.

Source :  www.livemint.com

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National Pension System (NPS) - Withdrawal, Exit & Account Opening Rules

 

            Subscribers of the National Pension System (NPS) may soon be able to withdraw their whole contributions. According to sources, the Pension Fund Regulatory and Development Authority (PFRDA) aims to establish a new alternative for retirees that would allow them to take their whole investment at once if their corpus is up to Rs 5 lakh. During the current phase of the coronavirus pandemic, the raised threshold of Rs 5 lakh will provide improved liquidity to a particular subset of subscribers. Beneficiaries can withdraw up to Rs 2 lakh from their NPS account presently whereas pensioners can withdraw 60% of their contributions after this limit has been exceeded. According to sources, the regulatory body would allow subscribers to maintain a portion of their pension funds for investment in annuities or by pension fund managers directly. As per the existing guidelines of NPS, check current withdrawal, exit, partial withdrawal, and account opening rules below.

 

NPS current withdrawal rules

If the entire accumulated corpus is less than or equal to Rs. 2 lakhs at the time of Superannuation/at the age of 60 years, a subscriber can claim a 100 per cent withdrawal. In the event of an early exit if the total accrued corpus is less than or equal to Rs. 1 lakh, the subscriber has the option of withdrawing the whole amount. However, one can only exit the NPS once ten years have passed. In the event of a partial withdrawal, the subscriber must have been a member of the NPS for at least three years and the withdrawal amount should not exceed 25% of the contributions made. A maximum of three withdrawals is permitted throughout the subscription period. Investors can withdraw funds in part for their children's higher education, marriage, the purchase/construction of a residential home (under certain conditions), and the treatment of serious diseases. Subscribers can make a partial withdrawal request online. Subscribers can also submit a physical partial withdrawal form (601-PW) along with supporting documents to POP, which will allow a POP to launch an online application, on the other hand, POP must 'Authorize' the withdrawal application in the CRA system. Subscribers can also request an Online Withdrawal by logging into their NPS account. This request must be confirmed and approved by the concerned POP. If a Subscriber is unable to make an online Withdrawal request, he or she must submit a physical Withdrawal form to the POP, with the requisite documents. POP will proceed with the withdrawal request on behalf of the subscriber depending on the subscriber's preference.

 

NPS Current Exit Rules

An exit is regarded as the closing of a subscriber's pension account under the National Pension System. According to the PFRDA (Exits and Withdrawals under NPS) Regulations 2015, subscribers can exit NPS in the following circumstances:  

 

(a) Upon Superannuation:

When a subscriber hits Superannuation/60 year of age, he or she must utilize at least 40% of the accrued pension fund to buy an annuity that will give a regular monthly income. The outstanding funds can be withdrawn out in one go. Subscribers can choose for a 100 per cent lump-sum withdrawal if their entire accrued pension corpus is less than or equal to Rs. 2 lakhs.

 

(b) Premature Exit

In the event of a premature withdrawal (before reaching the age of superannuation/60 years of age) from NPS, at least 80% of the Subscriber's accumulated pension corpus must be used to purchase an Annuity that would deliver a regular monthly annuity. The outstanding money can be withdrawn in one go. However, after ten years, one can exit from NPS. Subscribers who have a total corpus of less than or equal to Rs. 1 lakh can choose for a 100 per cent lump sum withdrawal.

 

(c) Upon Death of Subscriber:

The entire accrued pension corpus (100%) would be given to the subscriber's nominee/legal heir.

 

Options for exit from NPS

Subscribers have the option of staying invested in NPS for up to 70 years or exiting NPS. Subscribers of NPS have the following options to opt according to npscra.nsdl.co.in:

 

Continuation of NPS account:

Subscribers can keep contributing to their NPS account once they reach the age of 60/superannuation until they reach the age of 70. This contribution made beyond the age of 60 is also eligible for tax deductions under NPS.

 

Deferment (Annuity as well as Lump sum amount):

Subscribers can delay withdrawals and remain invested in NPS until they reach the age of 70. Subscribers can choose to delay only lump-sum withdrawals, only Annuity, or both lump sum and Annuity.

 

Start your Pension:

Subscribers can exit NPS if they do not want to continue/defer their account. He or she can submit an exit request online and start earning pension according to NPS exit guidelines.

 

Note:

If the Subscriber meets the age and corpus requirements for purchasing an annuity, the pension starts immediately, based on the annuity scheme chosen by the respective Annuity Service Provider (ASP).

 

NPS new account opening rule

The pension regulator has approved the seamless digital onboarding of new subscribers via Points of Presence (POPs) and Central Record Keeping Agencies (CRAs). CRAs will continue to create soft copies of NPS subscribers' applications for accounts created digitally in CRA platforms, including eNPS. According to the revised guidelines, NPS subscribers will no longer be required to submit a physical application form to their respective CRAs. Before the activation of a Permanent Retirement Account Number (PRAN), subscribers will have the alternative of e-Sign or OTP authentication. This regulation will apply to NPS accounts registered through POPs as well.

Source : www.goodreturns.in

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Intrinsic value

 

What is Intrinsic Value?

The intrinsic value of a business, or any investment security is the present value of all expected future cash flows, discounted at the appropriate discount rate. Unlike relative forms of valuation that look at comparable companies, intrinsic valuation looks only at the inherent value of a business on its own. Another way to define intrinsic value is “The price a rational investor is willing to pay for an investment, given its level of risk”. Simply, it refers to what a stock or any asset is actually worth.

Calculation of Intrinsic value :-

The main methods to calculate Intrinsic value are explained below :-

1. Analysis based on Net Present Value (NPV) :-

The standard approach to calculate an Intrinsic value is based on NPV.

Intrinsic value = (CF₀)/(1 + r)⁰ + (CF₁)/(1 + r)¹ + (CF₂)/(1 + r)² + (CF₃)/(1 + r)³ + ... + (CF_n)/(1 + r)ⁿ

Where:

CF₁ is cash flow in year 1,  CF₂ is cash flow in year 2, etc.

n = number of periods included

Risk Adjusting the Intrinsic Value can be based on two concepts, such as :-

(a) Discount Rate

By using discount rate that includes a risk premium in it to adequately discount the cash flows. In the discount rate approach, a financial analyst will typically use a company’s weighted average cost of capital (WACC).

WACC = [risk-free rate + (volatility of the stock X equity risk premium)].

Here, risk-free rate is usually a government bond yield, and volatility is a premium based of the stock.

The rationale behind this approach is that if a stock is more volatile, it’s a riskier investment. Therefore, a higher discount rate is used, which has the effect of reducing the value of cash flow that would be received further in the future, because of the greater uncertainty.

(b) Certainty Factor

By using a factor on a scale of 0-100% certainty of the cash flows in the forecast materializing. A certainty factor, or probability, can be assigned to each individual cash flow or multiplied against the entire net present value (NPV) of the business as a means of discounting the investment. In this approach, only the risk-free rate is used as the discount rate as the cash flows are already risk-adjusted. For example, the cash flow from a U.S Treasury note comes with a 100% certainty attached to it, so the discount rate is equal to yield, say 2.5% in this example. Compare that to the cash flow from a very high-growth and high-risk technology company. A 50% probability factor is assigned to the cash flow from the tech company and the same 2.5% discount rate is used. At the end of the day, both methods are attempting to do the same thing to discount an investment based on the level of risk inherent in it.

2. Analysis based on a financial metric :-

A quick and easy way of determining the intrinsic value of a stock is to use a financial metric such as the price-to-earnings (P/E) ratio. The formula for this approach using the P/E ratio of a stock as :

Intrinsic value = Earnings per share (EPS) x (1 + r) x P/E ratio

where r = the expected earnings growth rate

For instance, ABC company generated earnings per share of $3.30 over the last 12 months. Assume that the company will be able to grow its earnings by around 12.5% over the next 5 years, and the stock currently has a P/E multiple of 35.5. By using these figures, ABC company's intrinsic value is:

= 3.30 x (1 + 0.125) x 35.5  

= $131.79 per share

3. Analysis based on Asset valuation :-

The simplest way of calculating the intrinsic value of a stock is to use an asset-based valuation. The formula for this calculation of an intrinsic value is:

Intrinsic value = [(Sum of a company's assets, both tangible and intangible) – (Sum of a company's liabilities)]

For example, assume the ABC company's assets totaled $500 million. Its liabilities totaled $200 million. Then, the intrinsic value of ABC company would be $300 million for the stock i.e. $500 - $200.

The limitation of this approach is that it does not incorporate any growth prospects for a company. Asset-based valuation can often yield much lower intrinsic values than the other approaches.

4. Analysis based on value of options :-

There is a rock-solid way of calculating the intrinsic value of stock options that doesn't require any guesswork. The formula for this calculation of an intrinsic value is:

Intrinsic value = [(Current Stock price – option’s strike price) x Number of call options]

For example, a given stock trades for $35 per share. we own 4 call options that entitle us to buy 100 shares per call option for $30. Then, Intrinsic value of the call option’s stock in this case would be :

= ($35 – $30) x 400

= $2,000

Options that are not "in the money (ITM)," meaning that the strike price is greater than the current share price, have no intrinsic value and are trading only for time value i.e., the potential that the stock price could increase and drive the option price higher.

 

Why calculating intrinsic value is useful

The goal of value investing is to seek out stocks that are trading for less than their intrinsic value. There are several methods of evaluating a stock's intrinsic value, and two investors can form two completely different (and equally valid) opinions on the intrinsic value of the same stock. However, the general idea is to buy a stock for less than its worth and evaluating intrinsic value can help you do just that.

 

Challenges with Intrinsic Value

(a) The trouble with calculating intrinsic value is that it is a very subjective exercise. There are so many assumptions that must be made, and the final net present value (NPV) is very sensitive to changes in those assumptions.

(b) Each of the assumptions in the WACC (beta, market risk premium) can be calculated in different ways, while the assumption around a confidence or probability factor is entirely subjective.

(c) Essentially, when it comes to predicting the future, it is, uncertain. For this reason, all the most successful investors in the world can look at the same information about a company and arrive at totally different figures for its intrinsic value.

 

Intrinsic Value vs Current Market Value

Though both the Intrinsic value and market value are two distinct ways to value a company, Intrinsic value is an estimate of the actual true value of a company regardless of market value, whereas Market value is the current value of a company as reflected by the company's stock price, or how much it would cost to buy it. Therefore, market value may be significantly higher or lower than the intrinsic value. In a verdict, Value investors look for companies with higher intrinsic value than market value as a good investment opportunity.

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Weighted Average Cost of Capital (WACC)

 

Definition of WACC

Weighted Average Cost of Capital (WACC) of a firm represents its combination of common shares, preferred shares, and debt.  The cost of each type of capital is weighted by its % of total capital and they are added together. WACC is used in financial modelling as the discount rate to calculate the Net Present Value (NPV) of a business.

WACC = Cost of equity + Cost of Debt

Where:

Cost of equity = (Equity risk premium x Beta) + Risk free rate

Cost of debt (after tax) = [Average yield on debt x (1 – Tax rate)]

Here, (1 – Tax rate) means Tax shield

WACC  =  (E/V x R_e)  +  [(D/V x R_d)  x  (1 – T)]

Where:

E = market value of the firm’s equity market cap
D = market value of the firm’s debt
V = total value of capital (equity plus debt)
E/V = percentage of equity capital
D/V = percentage of Debt capital

R_e = cost of equity at required rate of return
R_d = cost of debt (i.e. yield to maturity on existing debt)
T = tax rate

 An extended version of the WACC formula is shown below, which includes the cost of Preferred Stock.

WACC = (Cost of equity x % of equity) + [(Cost of debt x % of debt) x (1-tax rate)] + Cost of preferred stock x % of preferred stock)

The purpose of WACC is to determine the cost of each part of the company’s capital structure based on the proportion of equity, debt, and preferred stock it has. Each component has a cost to the company. The company pays a fixed rate of interest on its debt and a fixed yield on its preferred stock. Even though a firm does not pay a fixed rate of return on common equity, it does often pay dividends in the form of cash to equity holders. The weighted average cost of capital is an integral part of a DCF valuation model, and thus, it is an important concept to understand for finance professionals, especially for investment banking and corporate development roles. 

 

Cost of Equity

The cost of equity is calculated using the Capital Asset Pricing Module (CAPM) which equates rates of return to volatility i.e. risk vs reward. 

Cost of equity (R_e)  =  R_f  +  [β  ×  (R_m − R_f )]

Where:

R_f = Risk-free rate (typically the 10-year U.S. Treasury bond yield)
β = Beta of equity (levered)
R_m = Annual return of the market

The Cost of equity is an implied cost or an opportunity cost of capital. It is the rate of return that shareholders require i.e. in order to compensate them for the risk of investing in the stock.  The Beta is a measure of a stock’s volatility of returns relative to the overall market i.e the respective benchmark index of that stock.  It can be calculated by using historical return data.

 

Risk-free Rate

The risk-free rate is the return that can be earned by investing in a risk-free security, e.g., U.S. Treasury bonds. Typically, the yield of the 10-year U.S. Treasury is used for the risk-free rate.

 

Equity Risk Premium

Equity Risk Premium is defined as the extra yield that can be earned over the risk-free rate by investing in the stock market. One simple way to estimate Equity Risk Premium is to subtract the risk-free return from the market return. This information will normally be enough for most basic financial analysis. However, in reality, estimating Equity Risk Premium can be a much more detailed task. Generally, banks take Equity Risk Premium from a publication called Ibbotson’s.

Levered Beta

Beta refers to the volatility (or riskiness) of a stock relative to all other stocks in the market (i.e. bench mark index of that stock). There are a couple of ways to estimate the beta of a stock. The first and simplest way is to calculate the company’s historical beta (using regression analysis) or just pick up the company’s regression beta from Bloomberg. The second and more thorough approach is to make a new estimate for beta using public company comparable. To use this approach, the beta of comparable companies is taken from Bloomberg and the unlevered beta for each company is calculated.

 Levered beta includes both business risk and the risk that comes from taking on debt. However, since different firms have different capital structures, unlevered beta (asset beta) is calculated to remove additional risk from debt in order to view pure business risk. We can calculate unlevered beta as below:

Unlevered Beta = Levered Beta / [{1 + (1 – Tax Rate)} x (Debt / Equity)]

Levered Beta = Unlevered Beta x [{1 + (1 – Tax Rate)} x (Debt / Equity)]

The average of the unlevered beta is then calculated and re-levered based on the capital structure of the company that is being valued. In most cases, the firm’s current capital structure is used when beta is re-levered. However, if there is information that the firm’s capital structure might change in the future, then beta would be re-levered using the firm’s target capital structure. After calculating the risk-free rate, equity risk premium, and levered beta, Cost of equity = [Risk-free rate + (equity risk premium x levered beta)].

 

Cost of Debt and Preferred Stock

Determining the cost of debt and preferred stock is probably the easiest part of the WACC calculation. The cost of debt is the yield to maturity on the firm’s debt and similarly, the cost of preferred stock is the yield on the company’s preferred stock. Simply multiply the cost of debt and the yield on preferred stock with the proportion of debt and preferred stock in a company’s capital structure, respectively. Since interest payments are tax-deductible, the cost of debt needs to be multiplied by (1 – tax rate), which is referred to as value of the tax shield. This is not done for preferred stock because preferred dividends are paid with after-tax profits. Take the weighted average current yield to maturity of all outstanding debt then multiply it by (1 - tax rate) and you have the after-tax cost of debt to be used in the WACC formula.

 

What is WACC used for?

The Weighted Average Cost of Capital (WACC) serves as the discount rate for calculating the Net Present Value (NPV) of a business.  It is also used to evaluate investment opportunities, as it is considered to represent the firm’s opportunity cost. Thus, it is used as a hurdle rate by companies. A company will commonly use its WACC as a hurdle rate for evaluating Mergers and Acquisitions (M&A), as well as for financial modeling of internal investments.  By knowing WACC, if an investment opportunity has a lower Internal Rate of Return (IRR) than its WACC, it should buy back its own shares or pay out a dividend instead of investing in the project.

 

Nominal vs Real Weighted Average Cost of Capital

Nominal free cash flows (which include inflation) should be discounted by a nominal WACC and real free cash flows (which exclude inflation) should be discounted by a real weighted average cost of capital.  Nominal is most common in practice, but it is important to be aware of the difference.

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Compound Annual Growth Rate (CAGR)

 

Definition of CAGR

The rate at which annual growth of investments over a specific period assuming the profits were reinvested at the end of each year of the investment’s lifespan is known as Compound Annual Growth Rate (CAGR). In other words, CAGR is a measure of how much have earned on your investments every year during a given interval. This is one of the most accurate methods of calculating the rise or fall of your investment returns over time.

CAGR Formula

CAGR = (Ending balance / beginning balance)^1/n - 1

Here,

Ending balance is the value of the investment at the end of the investment period.

Beginning balance is the value of the investment at the beginning of the investment period.

‘n’ is the number of years has invested.

Use of CAGR 

Generally, people tend to look at returns in absolute terms. Imagine you have invested ₹1,00,000 in a particular mutual fund for a period of 3 years. At the end of the 3rd year, the value of your investment grew to ₹1,85,000. In absolute terms, your fund has generated a return of 85% over the 3 years. You could say that your money has nearly doubled during this period. However, this can be a bit misleading. It does not tell you how much your investment has actually grown over each year. This is where CAGR becomes very useful. Here, we can calculate the CAGR to understand its benefits.

CAGR = (185000/100000)^1/3 - 1

          = 23%

In other words, your investment in the fund has given you an average return of 23% every year over the last 3 years. Essentially, CAGR tells the compounded returns you earn on an annual basis irrespective of the individual yearly performances of the fund. This is because your investments do not grow at the same rate every year. Some years, you may have high returns while during other years, your returns may be lower. In fact, it is possible to earn negative returns too. CAGR provides you with the information of the average returns earned by a fund every year in a certain time period. This is not a true rate of return. Rather, it is a representational figure of how much your investment growth provided they grew at the same rate every year. By knowing CAGR, you can understand how your fund is performing and thereby you can take necessary investment actions. Calculation of CAGR can help to mutual fund investors as following :-

(a) Better investment decisions

The CAGR helps you to analyze your investment decisions every year. For instance, if you have purchased an equity mutual fund 5 years ago, the CAGR gives you the average rate of returns you have earned every year over the past 5 years. This can help you to understand whether the fund's returns are as per your expectations or not. If the fund is not performing well, you may want to reconsider your investment in the future.

(b) Compare returns between different funds and benchmarks

You can also use the CAGR to compare the returns you earn on a particular fund against similar funds. This can help you understand how well the mutual fund is performing compared to its peers. You can also compare against the benchmark indices for greater clarity. In other words, Investors can compare the CAGR of two alternatives to evaluate how well one stock performed against other stocks in a peer group or against a market index.

Calculation of CAGR :-

Example 1 :-

Imagine you invested $10,000 in a portfolio with the returns outlined below:

From Jan 1, 2014, to Jan 1, 2015, your portfolio grew to $13,000 (or 30% in year 1).

On Jan 1, 2016, the portfolio was $14,000 (or 7.69% from Jan 2015 to Jan 2016).

On Jan 1, 2017, the portfolio ended with $19,000 (or 35.71% from Jan 2016 to Jan 2017).

We can see that on an annual basis, the year-to-year growth rates of the investment portfolio were quite different as shown in the parenthesis. On the other hand, the compound annual growth rate smooths the investment’s performance and ignores the fact that 2014 and 2016 were so different from 2015. The CAGR over that period was 23.86% and can be calculated as follows:

CAGR = ($19,000 / $10,000)^1/3 -1

        =23.86%

The compound annual growth rate of 23.86% over the three-year investment period can help an investor compare alternatives for their capital or make forecasts of future values. For example, imagine an investor is comparing the performance of two investments that are uncorrelated. In any given year during the period, one investment may be rising while the other falls. This could be the case when comparing high-yield bonds to stocks, or a real estate investment to emerging markets. Using CAGR would smooth the annual return over the period so the two alternatives would be easier to compare.

Example 2 :-

An investment is rarely made on the first day of the year and then sold on the last day of the year. Imagine an investor who wants to evaluate the CAGR of a $10,000 investment that was entered on June 1st, 2013 and sold for $16,897.14 on September 9th, 2018. Before the CAGR calculation can be performed, the investor will need to know the fractional remainder of the holding period. They held the position for 213 days in 2013, a full year in 2014, 2015, 2016, and 2017, and 251 days in 2018. This investment was held for 5.271 years, which calculated by the following:

2013 = 213 days

2014 = 365 days

2015 = 365 days

2016 = 365 days

2017 = 365 days

2018 = 251 days

The total number of days the investment was held was 1,924 days. To calculate the number of years, divide the total number of days by 365 i.e. (1,924/365), which equals 5.271 years. The total number of years the investment was held can be placed in the denominator of the exponent inside CAGR’s formula as follows:

Investment CAGR = ($16,897.14​ / $10,000)^1/5.271 ​−1

                         =10.46%

Limitations of CAGR

CAGR works suitably for lumpsum investments. In case of Systematic Investment Plans (SIPs), it does not take the periodic investments into account as it only considers the initial and final values for the calculation. CAGR does not reflect investment risk.

CAGR vs. IRR

The CAGR measures the return on an investment over a certain period of time. The internal rate of return (IRR) also measures investment performance but is more flexible than CAGR. The most important distinction is that CAGR is straightforward enough that it can be calculated by hand. In contrast, more complicated investments, and projects, or those that have many different cash inflows and outflows, are best evaluated using IRR. To back into the IRR rate, a financial calculator, Excel, or portfolio accounting system is ideal.

Conclusion

CAGR is a very useful method to calculate the growth rate of an investment. It can be used to evaluate the past returns or estimate the future returns of your investments. Overall, the CAGR is a very useful tool, and it can help us to analyze our investments. 

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43rd GST Council meeting key points

 

            The GST Council on Friday left taxes on COVID-19 vaccines and medical supplies unchanged after the BJP and Opposition-ruled states sparred over whether the tax cut benefits will reach the common man.

Congress and other Opposition-ruled states have been demanding a reduction in taxes, but the central government felt the move may not result in tangible gains for people. "It is one thing to rush to say – do this, it will benefit the common man. But when the technical, fitment and law committees go into the details, you realize that that could have collateral impact on many others," Finance Minister Nirmala Sitharaman said.

"I am not talking about the revenue generation aspect, but how many other items will get included in it as a result of which how you are going to implement it," she added. Briefing reporters after the 43rd meeting of the GST Council, the finance minister said a ministerial panel will be constituted to decide on the rates on the vaccines and medical supplies. The panel will submit its report by June 8.

"When these benefits, because they are going to manufacturers or intermediaries, (will) be passed over to the end user, the patients, on that there were different views. "And therefore, I suggested that a GoM (Group of Ministers) go into details and take a call. As a Council, we are responsible to see how it reaches the common man… the GoM will come back to us and we will take a final call," Sitharaman said.

The GST Council in its meeting decided to exempt levies on the import of coronavirus relief material till 31 August, even if they are imported on payment basis or free of cost for donating to the government or a state-approved agency. ‘Amphotericin B’ which is a medicine used for treatment of black fungus has also been included in the exemptions list. Finance Minister Nirmala Sitharaman announced on Friday.

"Adhoc exemptions have been given for Covid-related equipment. As a Council we are responsible for tax relief reaching the end-user, the common man, which is why there was an impasse on exempting Covid-19 related material," FM Sitharaman has said.

Issues of Covid-related equipment was one of the items on the agenda that had a very detailed discussion.

Key takeaways from FM Sitharaman's address :-

1. One of the biggest decisions today is the reduction of the compliance burden of small taxpayers and medium-sized taxpayers. Late fee, Amnesty-related matters also decided upon. To provide relief to small taxpayers, an Amnesty scheme recommended for reducing late fees payable in these cases.
2. Taxpayers can now file their pending returns and avail the benefits of this Amnesty scheme with reduced late fees, FM Sitharaman said.
3. Late fees have also been rationalized. The rationalized late fee and the decision to reduce the maximum amount of late fee for small taxpayers will come into effect for future tax periods. This will provide a long-term relief to small taxpayers: FM Nirmala Sitharaman
4. To provide relief to taxpayers, late fee for non-furnishing of GSTR-3B for July 2017 to April 2021 has been capped at Rs 500 per return for those taxpayers who did not have any tax liability. For those with tax liability, a maximum Rs 1,000 per return late fees would be charged, provided such returns are filed by August 31. Besides, filing of annual returns for 2020-21 fiscal for taxpayers with aggregate turnover of up to Rs 2 crore has been made optional.
5. The GST Council will assemble for a special session later to ensure there is a discussion on the compensation cess post-2022: Sitharaman
6. "As we are in the last of the 5 years of 14% compensation protected revenue arrangement, I've assured the members, we'll hold special session of GST Council, exclusively on single-point agenda of how compensation cess be collected, how long, how much, beyond July 2022," the FM said.
7. On GST compensation cess, same formula as last year to be adopted this year too. Rough estimate is that Centre will have to borrow ₹1.58 Lakh crore and pass it on to the states, says FM Sitharaman
8. Due to rising cases of black fungus, Amphotericin B has also been included in the exemptions list: FM Nirmala Sitharaman
9. I've decided and announced in Council that a Group of Ministers quickly formed who will submit their report within 10 days - on or before 8 June, so that if there are any further reductions which need to be done will be done, in the sense, that rates will be decided by them: FM
10. ₹4,500 crore was paid to two Covid-19 vaccine manufacturers, as advance payment. The country is engaging with suppliers and manufacturers including Japanese, European Union for vaccines. In the coming months, supply will be more than what it is, the FM said.

 The 43rd GST Council meeting, chaired by Finance Minister Nirmala Sitharaman and comprising state finance ministers, was held via video conferencing. The council is meeting for the first time in nearly eight months.

Ahead of the first meeting of the top decision-making body, finance ministers of eight states ruled by non-BJP and its like-minded parties -- Rajasthan, Punjab, Chhattisgarh, Tamil Nadu, Maharashtra, Jharkhand, Kerala and West Bengal -- had devised a joint strategy to press for a zero tax rate on Covid essentials.

Currently, domestically manufactured vaccines and commercial imports of vaccines attract a 5% GST, while Covid drugs and oxygen concentrators attract a 12% levy.

With regard to the issue of compensation payable to states, the Centre has estimated the shortfall at ₹2.69 lakh crore.

The Centre expects to collect over ₹1.11 lakh crore through cess on luxury, demerit and sin goods which will be given to the states to compensate them for the shortfall in revenue arising out of GST implementation.

The remaining ₹1.58 lakh crore would have to be borrowed to meet the promised compensation.

Source : www.cnbctv18.com and  www.livemint.com

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