Albert Einstein once noted that the most powerful force in the universe was the principle of compounding. In investing, this manifests itself through something called compound interest.You might have heard of the saying "Little drops of water fills the empty ocean". Just like the small and little drops of water can fill the entire empty ocean in the long run, so do is the purpose of Systematic Investment Plan (SIP) . A systematic investment plan or SIP (as it is more commonly known) is a way to invest in mutual funds with small sums of money on regularly basis typically monthly or quarterly , over a longer period of time. These small and regular investments will help in growth of your wealth in the long run and you will surely reap the benefits of the fruits that you have planted by doing systematic investments of your hard-earned money in mutual funds.
The idea of SIP is to set apart a sum every month or quarter, and use that to buy units of a particular mutual fund, regardless of its price. People like such a system because it helps them save regularly and build up an investment. These investments are done to achieve our future financial goals like buying a house, child's education, child's marriage, retirement planning etc.
As not all of us are born with a silver spoon in our mouth, each one of us still has a desire to be rich. We always want our hard-earned money to grow at a pace that not only fulfills our financial goals and needs but also helps us to improve our standard of living from good to better.
Thus it is very much essential for all of us todo the proper systematic investment planningof our available finanacial resources in such a way that we can generate the maximum possible returns out of them with minimal risks. For this, you can either plan investments by yourself, or consult an expert generally a financial planner who helps in doing your investments wisely alongwith continuous monitoring of the performance of your portfolio so that you do not miss the best opportunities available in terms of investing and also do not take undue risk on your portfolio. A financial planner will help you in giving meaning to your investments by inclining them with your financial goals. By this way you would know where you are going and it will become easier for you to chart out an appropriate pathway towards the relevant destination point.
Systematic Investment Planing covers the entire gamut of financial plannings you would need to do in life like Child's Marriage Planning, Retirement Planning, Child's Education Planning etc
Benifits of SIP:
Rupee Cost Averaging: As units are bought at periodic intervals, their average cost of acquisition becomes much lower. Thus it enables greater profit.
Made for all classes: An SIP can be started with as low as 500 rupees and hence it is attractive for all classes.
Inculcates habit of investment: AN SIP inculcates a habit of investment and hence helps in procuring a large corpus over a long time.
Compounding effect: An SIP due to its compounding effect increases money by leaps and bounds over a long period of time.
Great Retirement Planner: As it is a long horizon regular investment, it is a great retirement planner.
Low charges: An SIP has very low charges and hence it is an attractive product.
Easy Liquidity: Apart from close ended schemes, all schemes can be converted to cash easily and thus provides easy liquidity.
SIP with insurance cover: Some companies like Reliance,LIC MF,Kotak MF,Birla MF provide SIP with insurance cover hence making it more attractive.
In general SIP s are great tools for financial planning. It is an ideal tool for investors who have little knowledge of markets or have less time to invest in markets. SIP coupled with Term Insurance can prove to be a great combination. In this manner, the investor can gain from the equity market with very low charges and also secure the future of his family by the term cover. It is also advisable to start early as anyone who starts early gets the maximum benefits.
Saturday, March 05, 2011
Personal Financial Planning
Personal financial planning is one of the most important aspects of personal finance.
While one cannot predict the future,one should certainly be better prepared for it as all of us have our goals to be fulfilled at every stage of life and these goals will only be achieved if one has done the financial planning. So, its better to start planning now as prevention is always better than cure. Financial planning is a systematic approach whereby the financial planner maximizes customer's existing financial resources by using the appropriate financial planning tools and investment vehicles to best achieve his financial goals and objectives
In other words, financial planning is the process of meeting once life goals through proper management of one's finances. Life goals can include buying a home, saving for children's education,buying a car, protecting family against financial risks or planning for retirement. The need for financial planning services arises from the need of meeting the financial goals of one's life & it is financial planning that helps us to take a comprehensive look towards one's futures financial needs and goals including cash flow, debt management, education funding, retirement planning, estate conservation and portfolio management. Financial planner gives you the direction to make informed decisions about your investments so that you won't make any mistakes and you can reap the benefits of your financial planning for the rest of your life.
Benefits of Financial Planning
Financial Planning ensures that the right amount of money is available in the right hands at the right point of time in future to achieve specific Financial Goals. Virtually anyone with moderate wealth or a decent income can avail the benefits of financial planning like:
•Financial Planning is based on individual risk profiling, and it provides a road map to achieve financial goals
•Financial Planning helps you take a 'big picture' look at your financial position and it guides you to examine your current financial status and determine objectives.
•It helps in devising a strategy or plan for how you can meet your goals given your current situation and future plans. It also identifies weaknesses and recommends improvements.
•It puts in place the risk management system to meet uncertainties of life through efficient Retirement Planning, Insurance Planning, Tax Planning and Estate planning.
•Financial planning is the process of managing your money to achieve personal economic satisfaction. It allows you to control your financial situation and provides a feeling of security and less stress.
•It is a disciplined approach to managing your finances to reach life goals. It involves systematic & disciplined investment mechanism, which helps in creating wealth over a period of time. It helps you to become more responsible towards disciplined investing.
Personal financial planning can be done in the following 5 steps:
Assessment: The financial condition of an individual can be gauged by formulating balance sheets and income statements. The personal balance sheet calculates the assets on the one hand and liabilities on the other. Assets include car, house, stocks, and bank account. Personal liabilities include credit card debt, bank loan, mortgage etc. Information regarding personal income and expenses is listed under the personal cash flow statement.
Goal setting: After having done a proper assessment of the financial situation, an individual can set up long term as well as short term goals.
Constructing a plan: Once the goals are set, appropriate strategies should be formulated in order to fulfill the goals. This could be achieved by curtailing unnecessary expenditure or by expanding the income level by investing in stocks, real estate or other interest earning assets.
Execution: For proper implementation of the financial plans individuals lack patience and perseverance and hence seek professional help from financial planners, investment advisors and lawyers.
Monitoring and reassessment: The financial plan of an individual should be monitored from time to time for reevaluation.
While one cannot predict the future,one should certainly be better prepared for it as all of us have our goals to be fulfilled at every stage of life and these goals will only be achieved if one has done the financial planning. So, its better to start planning now as prevention is always better than cure. Financial planning is a systematic approach whereby the financial planner maximizes customer's existing financial resources by using the appropriate financial planning tools and investment vehicles to best achieve his financial goals and objectives
In other words, financial planning is the process of meeting once life goals through proper management of one's finances. Life goals can include buying a home, saving for children's education,buying a car, protecting family against financial risks or planning for retirement. The need for financial planning services arises from the need of meeting the financial goals of one's life & it is financial planning that helps us to take a comprehensive look towards one's futures financial needs and goals including cash flow, debt management, education funding, retirement planning, estate conservation and portfolio management. Financial planner gives you the direction to make informed decisions about your investments so that you won't make any mistakes and you can reap the benefits of your financial planning for the rest of your life.
Benefits of Financial Planning
Financial Planning ensures that the right amount of money is available in the right hands at the right point of time in future to achieve specific Financial Goals. Virtually anyone with moderate wealth or a decent income can avail the benefits of financial planning like:
•Financial Planning is based on individual risk profiling, and it provides a road map to achieve financial goals
•Financial Planning helps you take a 'big picture' look at your financial position and it guides you to examine your current financial status and determine objectives.
•It helps in devising a strategy or plan for how you can meet your goals given your current situation and future plans. It also identifies weaknesses and recommends improvements.
•It puts in place the risk management system to meet uncertainties of life through efficient Retirement Planning, Insurance Planning, Tax Planning and Estate planning.
•Financial planning is the process of managing your money to achieve personal economic satisfaction. It allows you to control your financial situation and provides a feeling of security and less stress.
•It is a disciplined approach to managing your finances to reach life goals. It involves systematic & disciplined investment mechanism, which helps in creating wealth over a period of time. It helps you to become more responsible towards disciplined investing.
Personal financial planning can be done in the following 5 steps:
Assessment: The financial condition of an individual can be gauged by formulating balance sheets and income statements. The personal balance sheet calculates the assets on the one hand and liabilities on the other. Assets include car, house, stocks, and bank account. Personal liabilities include credit card debt, bank loan, mortgage etc. Information regarding personal income and expenses is listed under the personal cash flow statement.
Goal setting: After having done a proper assessment of the financial situation, an individual can set up long term as well as short term goals.
Constructing a plan: Once the goals are set, appropriate strategies should be formulated in order to fulfill the goals. This could be achieved by curtailing unnecessary expenditure or by expanding the income level by investing in stocks, real estate or other interest earning assets.
Execution: For proper implementation of the financial plans individuals lack patience and perseverance and hence seek professional help from financial planners, investment advisors and lawyers.
Monitoring and reassessment: The financial plan of an individual should be monitored from time to time for reevaluation.
Knowledge Series-Mutual fund Basics
What is a Mutual Fund?
A mutual fund is just the connecting bridge or a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. The mutual fund will have a fund manager who is responsible for investing the gathered money into specific securities (stocks or bonds). When you invest in a mutual fund, you are buying units or portions of the mutual fund and thus on investing becomes a shareholder or unit holder of the fund.
Mutual funds are considered as one of the best available investments as compare to others they are very cost efficient and also easy to invest in, thus by pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. But the biggest advantage to mutual funds is diversification, by minimizing risk & maximizing returns.
Diversification
Diversification is nothing but spreading out your money across available or different types of investments. By choosing to diversify respective investment holdings reduces risk tremendously up to certain extent.
The most basic level of diversification is to buy multiple stocks rather than just one stock. Mutual funds are set up to buy many stocks. Beyond that, you can diversify even more by purchasing different kinds of stocks, then adding bonds, then international, and so on. It could take you weeks to buy all these investments, but if you purchased a few mutual funds you could be done in a few hours because mutual funds automatically diversify in a predetermined category of investments (i.e. - growth companies, emerging or mid size companies, low-grade corporate bonds, etc).
Types of Mutual Funds Schemes in India
Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position, risk tolerance and return expectations etc. thus mutual funds has Variety of flavors, Being a collection of many stocks, an investors can go for picking a mutual fund might be easy. There are over hundreds of mutual funds scheme to choose from. It is easier to think of mutual funds in categories, mentioned below.
Overview of existing schemes existed in mutual fund category:
BY STRUCTURE
1. Open - Ended Schemes:
An open-end fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices. The key feature of open-end schemes is liquidity.
2. Close - Ended Schemes:
These schemes have a pre-specified maturity period. One can invest directly in the scheme at the time of the initial issue. Depending on the structure of the scheme there are two exit options available to an investor after the initial offer period closes. Investors can transact (buy or sell) the units of the scheme on the stock exchanges where they are listed. The market price at the stock exchanges could vary from the net asset value (NAV) of the scheme on account of demand and supply situation, expectations of unitholder and other market factors. Alternatively some close-ended schemes provide an additional option of selling the units directly to the Mutual Fund through periodic repurchase at the schemes NAV; however one cannot buy units and can only sell units during the liquidity window. SEBI Regulations ensure that at least one of the two exit routes is provided to the investor.
3. Interval Schemes:
Interval Schemes are that scheme, which combines the features of open-ended and close-ended schemes. The units may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV related prices.
The risk return trade-off indicates that if investor is willing to take higher risk then correspondingly he can expect higher returns and vise versa if he pertains to lower risk instruments, which would be satisfied by lower returns. For example, if an investors opt for bank FD, which provide moderate return with minimal risk. But as he moves ahead to invest in capital protected funds and the profit-bonds that give out more return which is slightly higher as compared to the bank deposits but the risk involved also increases in the same proportion.
Thus investors choose mutual funds as their primary means of investing, as Mutual funds provide professional management, diversification, convenience and liquidity. That doesn’t mean mutual fund investments risk free. This is because the money that is pooled in are not invested only in debts funds which are less riskier but are also invested in the stock markets which involves a higher risk but can expect higher returns. Hedge fund involves a very high risk since it is mostly traded in the derivatives market which is considered very volatile.
Overview of existing schemes existed in mutual fund category: BY NATURE
1. Equity fund:
These funds invest a maximum part of their corpus into equities holdings. The structure of the fund may vary different for different schemes and the fund manager’s outlook on different stocks. The Equity Funds are sub-classified depending upon their investment objective, as follows:
Diversified Equity Funds
Mid-Cap Funds
Sector Specific Funds
Tax Savings Funds (ELSS)
Equity investments are meant for a longer time horizon, thus Equity funds rank high on the risk-return matrix.
2. Debt funds:
The objective of these Funds is to invest in debt papers. Government authorities, private companies, banks and financial institutions are some of the major issuers of debt papers. By investing in debt instruments, these funds ensure low risk and provide stable income to the investors. Debt funds are further classified as:
Gilt Funds: Invest their corpus in securities issued by Government, popularly known as Government of India debt papers. These Funds carry zero Default risk but are associated with Interest Rate risk. These schemes are safer as they invest in papers backed by Government.
Income Funds: Invest a major portion into various debt instruments such as bonds, corporate debentures and Government securities.
MIPs: Invests maximum of their total corpus in debt instruments while they take minimum exposure in equities. It gets benefit of both equity and debt market. These scheme ranks slightly high on the risk-return matrix when compared with other debt schemes.
Short Term Plans (STPs): Meant for investment horizon for three to six months. These funds primarily invest in short term papers like Certificate of Deposits (CDs) and Commercial Papers (CPs). Some portion of the corpus is also invested in corporate debentures.
Liquid Funds: Also known as Money Market Schemes, These funds provides easy liquidity and preservation of capital. These schemes invest in short-term instruments like Treasury Bills, inter-bank call money market, CPs and CDs. These funds are meant for short-term cash management of corporate houses and are meant for an investment horizon of 1day to 3 months. These schemes rank low on risk-return matrix and are considered to be the safest amongst all categories of mutual funds.
3. Balanced funds:
As the name suggest they, are a mix of both equity and debt funds. They invest in both equities and fixed income securities, which are in line with pre-defined investment objective of the scheme. These schemes aim to provide investors with the best of both the worlds. Equity part provides growth and the debt part provides stability in returns.
Further the mutual funds can be broadly classified on the basis of investment parameter viz,
Each category of funds is backed by an investment philosophy, which is pre-defined in the objectives of the fund. The investor can align his own investment needs with the funds objective and invest accordingly.
By investment objective:
Growth Schemes: Growth Schemes are also known as equity schemes. The aim of these schemes is to provide capital appreciation over medium to long term. These schemes normally invest a major part of their fund in equities and are willing to bear short-term decline in value for possible future appreciation.
Income Schemes:Income Schemes are also known as debt schemes. The aim of these schemes is to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited.
Balanced Schemes: Balanced Schemes aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. These schemes invest in both shares and fixed income securities, in the proportion indicated in their offer documents (normally 50:50).
Money Market Schemes: Money Market Schemes aim to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer, short-term instruments, such as treasury bills, certificates of deposit, commercial paper and inter-bank call money.
Other schemes
Tax Saving Schemes:
Tax-saving schemes offer tax rebates to the investors under tax laws prescribed from time to time. Under Sec.88 of the Income Tax Act, contributions made to any Equity Linked Savings Scheme (ELSS) are eligible for rebate.
Index Schemes:
Index schemes attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE 50. The portfolio of these schemes will consist of only those stocks that constitute the index. The percentage of each stock to the total holding will be identical to the stocks index weightage. And hence, the returns from such schemes would be more or less equivalent to those of the Index.
Sector Specific Schemes:
These are the funds/schemes which invest in the securities of only those sectors or industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of the respective sectors/industries. While these funds may give higher returns, they are more risky compared to diversified funds. Investors need to keep a watch on the performance of those sectors/industries and must exit at an appropriate time.
Types of returns
There are three ways, where the total returns provided by mutual funds can be enjoyed by investors:
Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly all income it receives over the year to fund owners in the form of a distribution.
If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also pass on these gains to investors in a distribution.
If fund holdings increase in price but are not sold by the fund manager, the fund's shares increase in price. You can then sell your mutual fund shares for a profit. Funds will also usually give you a choice either to receive a check for distributions or to reinvest the earnings and get more shares.
Pros & cons of investing in mutual funds:
For investments in mutual fund, one must keep in mind about the Pros and cons of investments in mutual fund.
Advantages of Investing Mutual Funds:
1. Professional Management - The basic advantage of funds is that, they are professional managed, by well qualified professional. Investors purchase funds because they do not have the time or the expertise to manage their own portfolio. A mutual fund is considered to be relatively less expensive way to make and monitor their investments.
2. Diversification - Purchasing units in a mutual fund instead of buying individual stocks or bonds, the investors risk is spread out and minimized up to certain extent. The idea behind diversification is to invest in a large number of assets so that a loss in any particular investment is minimized by gains in others.
3. Economies of Scale - Mutual fund buy and sell large amounts of securities at a time, thus help to reducing transaction costs, and help to bring down the average cost of the unit for their investors.
4. Liquidity - Just like an individual stock, mutual fund also allows investors to liquidate their holdings as and when they want.
5. Simplicity - Investments in mutual fund is considered to be easy, compare to other available instruments in the market, and the minimum investment is small. Most AMC also have automatic purchase plans whereby as little as Rs. 2000, where SIP start with just Rs.50 per month basis.
Disadvantages of Investing Mutual Funds:
1. Professional Management- Some funds doesn’t perform in neither the market, as their management is not dynamic enough to explore the available opportunity in the market, thus many investors debate over whether or not the so-called professionals are any better than mutual fund or investor him self, for picking up stocks.
2. Costs – The biggest source of AMC income, is generally from the entry & exit load which they charge from an investors, at the time of purchase. The mutual fund industries are thus charging extra cost under layers of jargon.
3. Dilution - Because funds have small holdings across different companies, high returns from a few investments often don't make much difference on the overall return. Dilution is also the result of a successful fund getting too big. When money pours into funds that have had strong success, the manager often has trouble finding a good investment for all the new money.
4. Taxes - when making decisions about your money, fund managers don't consider your personal tax situation. For example, when a fund manager sells a security, a capital-gain tax is triggered, which affects how profitable the individual is from the sale. It might have been more advantageous for the individual to defer the capital gains liability.
Investments in Mutual Fund
Mutual Funds over the years have gained immensely in their popularity. Apart from the many advantages that investing in mutual funds provide like diversification, professional management, the ease of investment process has proved to be a major enabling factor. However, with the introduction of innovative products, the world of mutual funds nowadays has a lot to offer to its investors. With the introduction of diverse options, investors needs to choose a mutual fund that meets his risk acceptance and his risk capacity levels and has similar investment objectives as the investor.
With the plethora of schemes available in the Indian markets, an investors needs to evaluate and consider various factors before making an investment decision. Since not everyone has the time or inclination to invest and do the analysis himself, the job is best left to a professional. Since Indian economy is no more a closed market, and has started integrating with the world markets, external factors which are complex in nature affect us too. Factors such as an increase in short-term US interest rates, the hike in crude prices, or any major happening in Asian market have a deep impact on the Indian stock market. Although it is not possible for an individual investor to understand Indian companies and investing in such an environment, the process can become fairly time consuming. Mutual funds (whose fund managers are paid to understand these issues and whose Asset Management Company invests in research) provide an option of investing without getting lost in the complexities.
Most importantly, mutual funds provide risk diversification: diversification of a portfolio is amongst the primary tenets of portfolio structuring, and a necessary one to reduce the level of risk assumed by the portfolio holder. Most of us are not necessarily well qualified to apply the theories of portfolio structuring to our holdings and hence would be better off leaving that to a professional. Mutual funds represent one such option.
Lastly, Evaluate past performance, look for stability and although past performance is no guarantee of future performance, it is a useful way to assess how well or badly a fund has performed in comparison to its stated objectives and peer group. A good way to do this would be to identify the five best performing funds (within your selected investment objectives) over various periods, say 3 months, 6 months, one year, two years and three years. Shortlist funds that appear in the top 5 in each of these time horizons as they would have thus demonstrated their ability to be not only good but also, consistent performers.
An investor can choose the fund on various criteria according to his investment objective, to name a few:
Thorough analysis of fund performance of schemes over the last few years managed by the fund house and its consistent return in the volatile market.
The fund house should be professional, with efficient management and administration.
The corpus the fund is holding in its scheme over the period of time.
Proper adequacies of disclosures have to seen and also make a note of any hidden charges carried by them.
The price at which you can enter/exit (i.e. entry load / exit load) the scheme and its impact on overall return.
A mutual fund is just the connecting bridge or a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. The mutual fund will have a fund manager who is responsible for investing the gathered money into specific securities (stocks or bonds). When you invest in a mutual fund, you are buying units or portions of the mutual fund and thus on investing becomes a shareholder or unit holder of the fund.
Mutual funds are considered as one of the best available investments as compare to others they are very cost efficient and also easy to invest in, thus by pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. But the biggest advantage to mutual funds is diversification, by minimizing risk & maximizing returns.
Diversification
Diversification is nothing but spreading out your money across available or different types of investments. By choosing to diversify respective investment holdings reduces risk tremendously up to certain extent.
The most basic level of diversification is to buy multiple stocks rather than just one stock. Mutual funds are set up to buy many stocks. Beyond that, you can diversify even more by purchasing different kinds of stocks, then adding bonds, then international, and so on. It could take you weeks to buy all these investments, but if you purchased a few mutual funds you could be done in a few hours because mutual funds automatically diversify in a predetermined category of investments (i.e. - growth companies, emerging or mid size companies, low-grade corporate bonds, etc).
Types of Mutual Funds Schemes in India
Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position, risk tolerance and return expectations etc. thus mutual funds has Variety of flavors, Being a collection of many stocks, an investors can go for picking a mutual fund might be easy. There are over hundreds of mutual funds scheme to choose from. It is easier to think of mutual funds in categories, mentioned below.
Overview of existing schemes existed in mutual fund category:
BY STRUCTURE
1. Open - Ended Schemes:
An open-end fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices. The key feature of open-end schemes is liquidity.
2. Close - Ended Schemes:
These schemes have a pre-specified maturity period. One can invest directly in the scheme at the time of the initial issue. Depending on the structure of the scheme there are two exit options available to an investor after the initial offer period closes. Investors can transact (buy or sell) the units of the scheme on the stock exchanges where they are listed. The market price at the stock exchanges could vary from the net asset value (NAV) of the scheme on account of demand and supply situation, expectations of unitholder and other market factors. Alternatively some close-ended schemes provide an additional option of selling the units directly to the Mutual Fund through periodic repurchase at the schemes NAV; however one cannot buy units and can only sell units during the liquidity window. SEBI Regulations ensure that at least one of the two exit routes is provided to the investor.
3. Interval Schemes:
Interval Schemes are that scheme, which combines the features of open-ended and close-ended schemes. The units may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV related prices.
The risk return trade-off indicates that if investor is willing to take higher risk then correspondingly he can expect higher returns and vise versa if he pertains to lower risk instruments, which would be satisfied by lower returns. For example, if an investors opt for bank FD, which provide moderate return with minimal risk. But as he moves ahead to invest in capital protected funds and the profit-bonds that give out more return which is slightly higher as compared to the bank deposits but the risk involved also increases in the same proportion.
Thus investors choose mutual funds as their primary means of investing, as Mutual funds provide professional management, diversification, convenience and liquidity. That doesn’t mean mutual fund investments risk free. This is because the money that is pooled in are not invested only in debts funds which are less riskier but are also invested in the stock markets which involves a higher risk but can expect higher returns. Hedge fund involves a very high risk since it is mostly traded in the derivatives market which is considered very volatile.
Overview of existing schemes existed in mutual fund category: BY NATURE
1. Equity fund:
These funds invest a maximum part of their corpus into equities holdings. The structure of the fund may vary different for different schemes and the fund manager’s outlook on different stocks. The Equity Funds are sub-classified depending upon their investment objective, as follows:
Diversified Equity Funds
Mid-Cap Funds
Sector Specific Funds
Tax Savings Funds (ELSS)
Equity investments are meant for a longer time horizon, thus Equity funds rank high on the risk-return matrix.
2. Debt funds:
The objective of these Funds is to invest in debt papers. Government authorities, private companies, banks and financial institutions are some of the major issuers of debt papers. By investing in debt instruments, these funds ensure low risk and provide stable income to the investors. Debt funds are further classified as:
Gilt Funds: Invest their corpus in securities issued by Government, popularly known as Government of India debt papers. These Funds carry zero Default risk but are associated with Interest Rate risk. These schemes are safer as they invest in papers backed by Government.
Income Funds: Invest a major portion into various debt instruments such as bonds, corporate debentures and Government securities.
MIPs: Invests maximum of their total corpus in debt instruments while they take minimum exposure in equities. It gets benefit of both equity and debt market. These scheme ranks slightly high on the risk-return matrix when compared with other debt schemes.
Short Term Plans (STPs): Meant for investment horizon for three to six months. These funds primarily invest in short term papers like Certificate of Deposits (CDs) and Commercial Papers (CPs). Some portion of the corpus is also invested in corporate debentures.
Liquid Funds: Also known as Money Market Schemes, These funds provides easy liquidity and preservation of capital. These schemes invest in short-term instruments like Treasury Bills, inter-bank call money market, CPs and CDs. These funds are meant for short-term cash management of corporate houses and are meant for an investment horizon of 1day to 3 months. These schemes rank low on risk-return matrix and are considered to be the safest amongst all categories of mutual funds.
3. Balanced funds:
As the name suggest they, are a mix of both equity and debt funds. They invest in both equities and fixed income securities, which are in line with pre-defined investment objective of the scheme. These schemes aim to provide investors with the best of both the worlds. Equity part provides growth and the debt part provides stability in returns.
Further the mutual funds can be broadly classified on the basis of investment parameter viz,
Each category of funds is backed by an investment philosophy, which is pre-defined in the objectives of the fund. The investor can align his own investment needs with the funds objective and invest accordingly.
By investment objective:
Growth Schemes: Growth Schemes are also known as equity schemes. The aim of these schemes is to provide capital appreciation over medium to long term. These schemes normally invest a major part of their fund in equities and are willing to bear short-term decline in value for possible future appreciation.
Income Schemes:Income Schemes are also known as debt schemes. The aim of these schemes is to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited.
Balanced Schemes: Balanced Schemes aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. These schemes invest in both shares and fixed income securities, in the proportion indicated in their offer documents (normally 50:50).
Money Market Schemes: Money Market Schemes aim to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer, short-term instruments, such as treasury bills, certificates of deposit, commercial paper and inter-bank call money.
Other schemes
Tax Saving Schemes:
Tax-saving schemes offer tax rebates to the investors under tax laws prescribed from time to time. Under Sec.88 of the Income Tax Act, contributions made to any Equity Linked Savings Scheme (ELSS) are eligible for rebate.
Index Schemes:
Index schemes attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE 50. The portfolio of these schemes will consist of only those stocks that constitute the index. The percentage of each stock to the total holding will be identical to the stocks index weightage. And hence, the returns from such schemes would be more or less equivalent to those of the Index.
Sector Specific Schemes:
These are the funds/schemes which invest in the securities of only those sectors or industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of the respective sectors/industries. While these funds may give higher returns, they are more risky compared to diversified funds. Investors need to keep a watch on the performance of those sectors/industries and must exit at an appropriate time.
Types of returns
There are three ways, where the total returns provided by mutual funds can be enjoyed by investors:
Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly all income it receives over the year to fund owners in the form of a distribution.
If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also pass on these gains to investors in a distribution.
If fund holdings increase in price but are not sold by the fund manager, the fund's shares increase in price. You can then sell your mutual fund shares for a profit. Funds will also usually give you a choice either to receive a check for distributions or to reinvest the earnings and get more shares.
Pros & cons of investing in mutual funds:
For investments in mutual fund, one must keep in mind about the Pros and cons of investments in mutual fund.
Advantages of Investing Mutual Funds:
1. Professional Management - The basic advantage of funds is that, they are professional managed, by well qualified professional. Investors purchase funds because they do not have the time or the expertise to manage their own portfolio. A mutual fund is considered to be relatively less expensive way to make and monitor their investments.
2. Diversification - Purchasing units in a mutual fund instead of buying individual stocks or bonds, the investors risk is spread out and minimized up to certain extent. The idea behind diversification is to invest in a large number of assets so that a loss in any particular investment is minimized by gains in others.
3. Economies of Scale - Mutual fund buy and sell large amounts of securities at a time, thus help to reducing transaction costs, and help to bring down the average cost of the unit for their investors.
4. Liquidity - Just like an individual stock, mutual fund also allows investors to liquidate their holdings as and when they want.
5. Simplicity - Investments in mutual fund is considered to be easy, compare to other available instruments in the market, and the minimum investment is small. Most AMC also have automatic purchase plans whereby as little as Rs. 2000, where SIP start with just Rs.50 per month basis.
Disadvantages of Investing Mutual Funds:
1. Professional Management- Some funds doesn’t perform in neither the market, as their management is not dynamic enough to explore the available opportunity in the market, thus many investors debate over whether or not the so-called professionals are any better than mutual fund or investor him self, for picking up stocks.
2. Costs – The biggest source of AMC income, is generally from the entry & exit load which they charge from an investors, at the time of purchase. The mutual fund industries are thus charging extra cost under layers of jargon.
3. Dilution - Because funds have small holdings across different companies, high returns from a few investments often don't make much difference on the overall return. Dilution is also the result of a successful fund getting too big. When money pours into funds that have had strong success, the manager often has trouble finding a good investment for all the new money.
4. Taxes - when making decisions about your money, fund managers don't consider your personal tax situation. For example, when a fund manager sells a security, a capital-gain tax is triggered, which affects how profitable the individual is from the sale. It might have been more advantageous for the individual to defer the capital gains liability.
Investments in Mutual Fund
Mutual Funds over the years have gained immensely in their popularity. Apart from the many advantages that investing in mutual funds provide like diversification, professional management, the ease of investment process has proved to be a major enabling factor. However, with the introduction of innovative products, the world of mutual funds nowadays has a lot to offer to its investors. With the introduction of diverse options, investors needs to choose a mutual fund that meets his risk acceptance and his risk capacity levels and has similar investment objectives as the investor.
With the plethora of schemes available in the Indian markets, an investors needs to evaluate and consider various factors before making an investment decision. Since not everyone has the time or inclination to invest and do the analysis himself, the job is best left to a professional. Since Indian economy is no more a closed market, and has started integrating with the world markets, external factors which are complex in nature affect us too. Factors such as an increase in short-term US interest rates, the hike in crude prices, or any major happening in Asian market have a deep impact on the Indian stock market. Although it is not possible for an individual investor to understand Indian companies and investing in such an environment, the process can become fairly time consuming. Mutual funds (whose fund managers are paid to understand these issues and whose Asset Management Company invests in research) provide an option of investing without getting lost in the complexities.
Most importantly, mutual funds provide risk diversification: diversification of a portfolio is amongst the primary tenets of portfolio structuring, and a necessary one to reduce the level of risk assumed by the portfolio holder. Most of us are not necessarily well qualified to apply the theories of portfolio structuring to our holdings and hence would be better off leaving that to a professional. Mutual funds represent one such option.
Lastly, Evaluate past performance, look for stability and although past performance is no guarantee of future performance, it is a useful way to assess how well or badly a fund has performed in comparison to its stated objectives and peer group. A good way to do this would be to identify the five best performing funds (within your selected investment objectives) over various periods, say 3 months, 6 months, one year, two years and three years. Shortlist funds that appear in the top 5 in each of these time horizons as they would have thus demonstrated their ability to be not only good but also, consistent performers.
An investor can choose the fund on various criteria according to his investment objective, to name a few:
Thorough analysis of fund performance of schemes over the last few years managed by the fund house and its consistent return in the volatile market.
The fund house should be professional, with efficient management and administration.
The corpus the fund is holding in its scheme over the period of time.
Proper adequacies of disclosures have to seen and also make a note of any hidden charges carried by them.
The price at which you can enter/exit (i.e. entry load / exit load) the scheme and its impact on overall return.
Knowledge Series-How and wen to start investing
When to invest:
It's never too late or too early to start investing. The best time to invest is now. The 4 keys that could guide you regarding when to invest are:-
1.Start investing early- Start early and retire rich. Invest whatever you can today and move steadily towards a secure tomorrow.
2.Invest regularly- Invest regularly and methodically and let the magic of compounding work for you.
3.Never time the market- Be a smart investor. Always invest in time but never try to time the market. Timing the market is mastered by none and is beyond one's control.
4.Be patient- For long-term wealth creation, you need to be patient. The longer the investment horizon, the lesser is the risk and greater are the returns.
How to invest:
You toil hard to earn money and, therefore, it is important to invest it wisely. Ask yourself certain questions before deciding on how to invest:
1.What are your needs and financial goals? Do you need a regular income or want to buy a house or require funds for your child's education?
2.How much risk are you willing to take on? Can you withstand the volatilities in the capital market or are you satisfied with a low-risk, low-returns philosophy?
3.How soon do you need the money? Can you invest for a longer time-horizon or do you need money in the near future?
4.What are your cash flow requirements? Do you need a regular income or a lump sum amount after a certain period of time?
It's never too late or too early to start investing. The best time to invest is now. The 4 keys that could guide you regarding when to invest are:-
1.Start investing early- Start early and retire rich. Invest whatever you can today and move steadily towards a secure tomorrow.
2.Invest regularly- Invest regularly and methodically and let the magic of compounding work for you.
3.Never time the market- Be a smart investor. Always invest in time but never try to time the market. Timing the market is mastered by none and is beyond one's control.
4.Be patient- For long-term wealth creation, you need to be patient. The longer the investment horizon, the lesser is the risk and greater are the returns.
How to invest:
You toil hard to earn money and, therefore, it is important to invest it wisely. Ask yourself certain questions before deciding on how to invest:
1.What are your needs and financial goals? Do you need a regular income or want to buy a house or require funds for your child's education?
2.How much risk are you willing to take on? Can you withstand the volatilities in the capital market or are you satisfied with a low-risk, low-returns philosophy?
3.How soon do you need the money? Can you invest for a longer time-horizon or do you need money in the near future?
4.What are your cash flow requirements? Do you need a regular income or a lump sum amount after a certain period of time?
Knowledge series- what are the factoors which influance investment decision?
Past market trends
Sometimes history repeats itself; sometimes markets learn from their mistakes. You need to understand how various asset classes have performed in the past before planning your finances.
Your risk appetite
The ability to tolerate risk differs from person to person. It depends on factors such as your financial responsibilities, your environment, your basic personality, etc. Therefore, understanding your capacity to take on risk becomes a crucial factor in investment decision making.
Investment horizon
How long can you keep the money invested? The longer the time-horizon, the greater are the returns that you should expect. Further, the risk element reduces with time.
Investible surplus
How much money are you able to keep aside for investments? The investible surplus plays a vital role in selecting from various asset classes as the minimum investment amounts differ and so do the risks and returns.
Investment need
How much money do you need at the time of maturity? This helps you determine the amount of money you need to invest every month or year to reach the magic figure.
Expected returns
The expected rate of returns is a crucial factor as it will guide your choice of investment. Based on your expectations, you can decide whether you want to invest heavily into equities or debt or balance your portfolio
Sometimes history repeats itself; sometimes markets learn from their mistakes. You need to understand how various asset classes have performed in the past before planning your finances.
Your risk appetite
The ability to tolerate risk differs from person to person. It depends on factors such as your financial responsibilities, your environment, your basic personality, etc. Therefore, understanding your capacity to take on risk becomes a crucial factor in investment decision making.
Investment horizon
How long can you keep the money invested? The longer the time-horizon, the greater are the returns that you should expect. Further, the risk element reduces with time.
Investible surplus
How much money are you able to keep aside for investments? The investible surplus plays a vital role in selecting from various asset classes as the minimum investment amounts differ and so do the risks and returns.
Investment need
How much money do you need at the time of maturity? This helps you determine the amount of money you need to invest every month or year to reach the magic figure.
Expected returns
The expected rate of returns is a crucial factor as it will guide your choice of investment. Based on your expectations, you can decide whether you want to invest heavily into equities or debt or balance your portfolio
Knowledge series -Why we should invest?
Take a minute to think about why you may want to invest
•Inflation is constantly increasing the cost of goods and services and eating into the value of your income and wealth. You need to save money and invest it well so that the value of every rupee is augmented.
•Higher life-expectancy means people live longer and hence, need more money to maintain their living standards.
•Investing selectively allows you to enjoy tax benefits.
•By investing wisely you can improve your standard of living and create wealth for the future
•Inflation is constantly increasing the cost of goods and services and eating into the value of your income and wealth. You need to save money and invest it well so that the value of every rupee is augmented.
•Higher life-expectancy means people live longer and hence, need more money to maintain their living standards.
•Investing selectively allows you to enjoy tax benefits.
•By investing wisely you can improve your standard of living and create wealth for the future
Knowledge Series-Types of investments
Financial Instruments
Equities
Equities are a type of security that represents the ownership in a company. Equities are traded (bought and sold) in stock markets. Alternatively, they can be purchased via the Initial Public Offering (IPO) route, i.e. directly from the company. Investing in equities is a good long-term investment option as the returns on equities over a long time horizon are generally higher than most other investment avenues. However, along with the possibility of greater returns comes greater risk.
Mutual funds
A mutual fund allows a group of people to pool their money together and have it professionally managed, in keeping with a predetermined investment objective. This investment avenue is popular because of its cost-efficiency, risk-diversification, professional management and sound regulation. You can invest as little as Rs. 1,000 per month in a mutual fund. There are various general and thematic mutual funds to choose from and the risk and return possibilities vary accordingly.
Bonds
Bonds are fixed income instruments which are issued for the purpose of raising capital. Both private entities, such as companies, financial institutions, and the central or state government and other government institutions use this instrument as a means of garnering funds. Bonds issued by the Government carry the lowest level of risk but could deliver fair returns.
Deposits
Investing in bank or post-office deposits is a very common way of securing surplus funds. These instruments are at the low end of the risk-return spectrum.
Cash equivalents
These are relatively safe and highly liquid investment options. Treasury bills and money market funds are cash equivalents.
Non-financial Instruments
Real estate
With the ever-increasing cost of land, real estate has come up as a profitable investment proposition.
Gold
The 'yellow metal' is a preferred investment option, particularly when markets are volatile. Today, beyond physical gold, a number of products which derive their value from the price of gold are available for investment. These include gold futures and gold exchange traded funds
Other Commodites
This includes the commodites which is listed in various commodity exchanges.
Equities
Equities are a type of security that represents the ownership in a company. Equities are traded (bought and sold) in stock markets. Alternatively, they can be purchased via the Initial Public Offering (IPO) route, i.e. directly from the company. Investing in equities is a good long-term investment option as the returns on equities over a long time horizon are generally higher than most other investment avenues. However, along with the possibility of greater returns comes greater risk.
Mutual funds
A mutual fund allows a group of people to pool their money together and have it professionally managed, in keeping with a predetermined investment objective. This investment avenue is popular because of its cost-efficiency, risk-diversification, professional management and sound regulation. You can invest as little as Rs. 1,000 per month in a mutual fund. There are various general and thematic mutual funds to choose from and the risk and return possibilities vary accordingly.
Bonds
Bonds are fixed income instruments which are issued for the purpose of raising capital. Both private entities, such as companies, financial institutions, and the central or state government and other government institutions use this instrument as a means of garnering funds. Bonds issued by the Government carry the lowest level of risk but could deliver fair returns.
Deposits
Investing in bank or post-office deposits is a very common way of securing surplus funds. These instruments are at the low end of the risk-return spectrum.
Cash equivalents
These are relatively safe and highly liquid investment options. Treasury bills and money market funds are cash equivalents.
Non-financial Instruments
Real estate
With the ever-increasing cost of land, real estate has come up as a profitable investment proposition.
Gold
The 'yellow metal' is a preferred investment option, particularly when markets are volatile. Today, beyond physical gold, a number of products which derive their value from the price of gold are available for investment. These include gold futures and gold exchange traded funds
Other Commodites
This includes the commodites which is listed in various commodity exchanges.
Knowledge Series-What does Investment mean?
There is a clear difference between saving and investment.
Savings
Savings are generally funds that you set aside to meet your future needs. These could be taking your family for a small holiday or buying an electronic item. Another important feature of savings is that these can be accessed relatively quickly. The most universal way of saving is in to a bank account ('savings' account) where the money is available to you on demand.
Investments
Investments, on the other hand, is what helps you meet your longer term needs and larger financial goals. There is some level of risk attached to all types of investments and this is what determines the returns on your investments. The higher the risk, the greater the chances of a higher return. There are various investment types along the risk-return spectrum.
Savings
Savings are generally funds that you set aside to meet your future needs. These could be taking your family for a small holiday or buying an electronic item. Another important feature of savings is that these can be accessed relatively quickly. The most universal way of saving is in to a bank account ('savings' account) where the money is available to you on demand.
Investments
Investments, on the other hand, is what helps you meet your longer term needs and larger financial goals. There is some level of risk attached to all types of investments and this is what determines the returns on your investments. The higher the risk, the greater the chances of a higher return. There are various investment types along the risk-return spectrum.
Knowledge Series- Can a customer request for rectification of CIBIL Report?
A customer can request for the rectification in his CIBIL report in case of inaccurate information in the CIBIL report. The credit institution reporting the details of the customers account to CIBIL can carry out the rectification to represent the factual position
Knowledge Series- Can a customer access CIBIL Report?
CIBIL CIR can be purchased directly from CIBIL by following the instructions on the following link: http://www.cibil.com/accesscredit.htm
Knoledge Series-Is it possible to remove customers name from CIBIL?
CIBIL being a repository of credit information pertaining to all credit borrowers, a customer's name cannot be removed from CIBIL. It can be only updated by the member to represent the existing facts.
Knowledge Series-What we have to do Maintain a good credit history
Customers(we ) should ensure good credit history by always making due payments on time. A good credit history may lead to credit being granted faster and on better terms.
Knolwdge Series-What is the reason for customer’s name in CIBIL
Any individual who has availed of / applied for any credit facility from a member of CIBIL will have a CIBIL CIR. CIBIL is not a “defaulters list”, hence having one’s name in CIBIL CIR does not carry a negative connotation unless you have not made due payments on time.
knoledge Series- What is a Credit Information Report (CIR)?
The CIR is a record of your credit payment history compiled from information received from member institutions
knoledge Series- What is a Credit Information Report (CIR)?
The CIR is a record of your credit payment history compiled from information received from member institutions
Knoledge Series-What is Credit Information Company (CIC)? What is CIBIL?
A CIC is a repository of credit information submitted by members comprising banks and other financial institutions. This information is collated in to Credit Information Reports (CIR) which can be used by members while making lending decisions.
CICs are also commonly referred to as “Credit Bureaus”. CIBIL is India’s first fully operational CIC & maintains credit information pertaining to any credit facilities availed of by an individual or an entity. Experian is another credit bureau that has become operational recently
CICs are also commonly referred to as “Credit Bureaus”. CIBIL is India’s first fully operational CIC & maintains credit information pertaining to any credit facilities availed of by an individual or an entity. Experian is another credit bureau that has become operational recently
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