While listed shares dominate the investment landscape, a lesser-known avenue offers unique opportunities for investors-Unlisted Shares. Unlisted shares are those of privately held companies that are not available on any stock exchange.
Unlisted shares are not traded on stock exchanges, making them less accessible to investors. Often unlisted shares are owned by founders, employees, venture capitalists, or private equity investors.
Unlisted shares have lower liquidity compared to listed shares. The absence of an organised market for buying and selling unlisted shares can make it challenging to exit investments quickly.
There are two common ways of investing in unlisted companies.
Companies may offer shares to private individuals or institutions through private placements. Investors can participate in these offerings based on eligibility criteria and investment terms set by the issuing company.
Specialised platforms, brokers, and marketplaces facilitate buying and selling unlisted shares. These platforms connect buyers and sellers and provide a regulated framework for transactions.
Obtaining information on unlisted shares can be more challenging compared to listed shares. However, investors can explore the following sources:
Companies issuing unlisted shares may provide information through private placement documents, investor presentations, and annual reports, although these may not be as extensive or publicly available as those of listed companies.
The most reliable place to get the data on an unlisted company would be the Ministry of Corporate Affairs website, as all companies have to submit their annual report and financial statement. One can quickly go there and check the information.
Some research firms specialise in analysing and providing insights on unlisted companies. Their reports can offer valuable information and analysis to investors.
Valuing unlisted shares involves a combination of qualitative and quantitative factors. Some methods commonly used for valuation include:
Assessing the company's earnings potential and applying a suitable multiplier based on industry benchmarks or comparable listed companies.
Determining the net value of the company's assets after deducting liabilities.
Estimating the future cash flows generated by the company and discounting them to present value.
Valuation differences between unlisted and listed shares can be substantial. Unlisted shares tend to trade at a discount to their listed counterparts due to limited liquidity, restricted access, and more significant risks associated with unlisted companies.
Meanwhile, not everything is great, and there are also challenges associated with investing in unlisted shares, including:
Unlisted shares can be illiquid, making it difficult to exit investments when desired.
Unlike listed companies, information on unlisted companies may be limited, making thorough due diligence crucial and challenging.
Investing in unlisted shares is suitable for specific types of investors, including:
Individuals with substantial financial resources and a higher risk appetite may consider unlisted shares as part of their investment strategy.
Experienced investors who can conduct thorough research and due diligence can capitalise on opportunities in unlisted shares.
These funds specialise in investing in unlisted companies and are well-positioned to assess their growth potential and manage associated risks.
A rule of thumb would be if you can put aside money to invest and pass on the share certificates to your grandchildren, you can consider the unlisted shares for that amount.
Unlisted shares offer a distinct avenue for investors seeking opportunities beyond listed markets. While they differ from listed shares regarding market accessibility and liquidity, they provide the potential for higher returns and diversification. Investors can purchase unlisted shares through private placements or secondary markets, and information can be obtained through company disclosures and research firms. Valuing unlisted shares requires a combination of quantitative and qualitative factors, and they generally trade at a discount compared to listed shares. Investing in unlisted shares has challenges, including liquidity risk and limited information availability. However, for high-net-worth individuals, sophisticated investors, and specialised funds, unlisted shares can be an attractive addition to a well-diversified investment portfolio.
AIFs are for sophisticated investors, high-net-worth individuals, institutional investors, and qualified institutional buyers. SEBI sets eligibility criteria for investing in AIFs, which typically consider minimum net worth, financial expertise, and risk-taking ability. These criteria ensure that AIF investments are accessed by knowledgeable investors who can bear the associated risks.
The minimum investment required in the AIF is Rs 1 crore for an investor.
Employees, Directors, and fund managers can make a minimum investment of Rs 25 lakh.
Expect a lock-in period of around 3 yrs. Some AIFs may not have a lock-in, and some may have a lock-in of up to 5 years.
Unlisted shares can provide attractive returns, primarily if invested in promising startups or high-growth private companies.
Investing in unlisted shares allows investors to diversify their portfolios beyond traditional listed stocks and access sectors or companies unavailable in the public markets.
Systematic Withdrawal Plan (SWP) is highly convenient mutual fund facility which allows you to draw a fixed amount from your mutual fund scheme at a specified frequency (monthly, quarterly, annual etc). SWP cash-flows are generated by redeeming a certain number of units of your mutual fund scheme based on prevailing NAVs. The SWP amount is credited to your savings bank account every month or at any other interval specified by you in your SWP mandate. You can continue your SWP for a long period of time if the average return of the scheme is higher than the SWP withdrawal rate.
These mutual fund schemes invest in equity and equity related securities. Equity funds have sub-categories based on the market cap segments, where the scheme may primarily invest in e.g. large cap, large and midcap, midcap, small cap, multicap, flexicap etc. The primary investment objective of equity funds is capital appreciation.
These mutual funds schemes invest in debt and money market instruments. Debt funds have sub-categories based on the maturity profiles of the underlying debt or money market instruments e.g. overnight, liquid, ultra-short duration, low duration, short duration, medium duration, long duration etc. The primary investment objective of equity funds is capital appreciation.
These funds invest in both equity and debt securities. They may also invest in other classes like gold, REITs, InvITs etc. The primary investment objective of hybrid funds is asset allocation. Different types of hybrid funds include aggressive hybrid funds, conservative hybrid funds, balanced advantage funds, equity savings etc.
Different fund categories and sub-categories have different risk profiles. Mutual funds provide investment solutions for a wide spectrum of risk appetites and investment needs. Your financial advisor can help you select the right investment option for you.
Unit represents a certain percentage ownership in the schemes asset. If you invest in Rs 100,000 in a mutual fund scheme and the schemes NAV is Rs 100, then you will be allotted 1,000 units. The value of your mutual fund holding will depend on the number of units and the current NAV.
Total expense ratio (TER) of a mutual fund scheme is the cost of managing and operating the scheme on a per unit basis. It is calculated by dividing the total expenses of the fund with the assets under management (AUM). The expenses of the fund include fund management, registrar and transfer agent fees, custodian fees, transaction costs and marketing and distribution costs. A schemes NAV is calculated after deducting TER. Different mutual fund schemes have different TERs.
If you redeem within the exit load period (as specified in the Scheme Information Document), the exit load will be deducted from your redemption NAV based on the exit load structure of the scheme.
There are two options in mutual fund schemes - Growth and IDCW (Income distribution and Capital Withdrawal). In growth option, the profits made by the scheme are re-invested in the scheme. In IDCW option, the profits made by the scheme are distributed to investors for time to time.
Every mutual fund scheme has a benchmark, against which the performance of a scheme is compared. Examples of benchmark indices are Nifty 100 TRI, Nifty Midcap 150 TRI, and Nifty 500 TRI etc. The fund manager of active mutual fund scheme aims to beat the benchmark, while passive funds like ETFs and Index Funds track the benchmark index.
Return is the profit and / or income made by you from your mutual fund scheme. Returns over investment periods exceeding 1 year in mutual funds are annualized. Annualized returns are expressed in Compounded Annual Growth Rate (CAGR). For example, in the last 10 years (as on 12th November 2022), HDFC Flexicap Fund (growth option) gave 15.38% returns. This means if you invested Rs 100,000 in HDFC Flexicap Fund 10 years back your investment value today (as on 12th November 2022) will be Rs 418,124.
Mutual fund invest in capital market securities e.g. stocks. The price of the underlying securities can go up or down depending on market movement; hence the NAV of your mutual fund scheme can also up or down. The volatility in the value of your mutual fund investment in your risk. Different mutual fund schemes have different risk profiles. SEBI has asked all AMCs to label the risk of different schemes in a RISKOMETER from low to very high. Your financial advisor will help you in investing in the right mutual fund scheme according to your risk appetite.
Mutual funds, whose average equity allocation (i.e. where underlying assets are equity and equity related securities) is 65% or more, are treated as equity funds from tax perspective. These include all equity funds and also several hybrid fund categories. Short term capital gains (investment holding period of less than 12 months) in equity funds are taxed at 15%. Long term capital gains (investment holding period of more than 12 months) in equity funds are tax free up to Rs 100,000 and taxed at 10% thereafter. Short term capital gains (investment holding period of less than 36 months) in non equity funds are taxed as per the income tax rate of the investor. Long term capital gains (investment holding period of more than 36 months) in non equity funds are taxed at 20% after allowing for indexation. Investments in mutual fund Equity Linked Savings Schemes (ELSS) qualify for deductions under Section 80C.