What are Mutual Funds?
- Investors own the mutual funds.
- Professional managers manage the affairs for a fee.
- The funds are invested in a portfolio of marketable securities, reflecting the investment objective.
- Value of the portfolio and investors’ holdings alters with change in market value of investments.
Types of Mutual Funds:
- Initial issue for a limited period
- Continuous sale and repurchase
- Size of the fund changes as investors enter and exit
- NAV-based pricing
Closed end funds
- Sale of units by fund only during IPO
- Listing on exchange and liquidity for investors
- Size of fund is kept constant
- Price in the market is usually at a discount
Some parameters to look at Equity funds
- Age and size
- Performance and risk
Some parameters to look at Debt funds
- Expense ratio
- Credit quality
- Average maturity
Some parameters to look at Money market funds
- Liquidity and expense ratio
8 things to ignore while looking at Mutual Funds:
- Mutual funds lack excitement
- Mutual funds are too diversified
- Mutual funds are too expensive
- A lower NAV scheme is better then a higher NAV scheme
- If the market falls mutual funds would not fall
- If I start a systematic investment plan and default after a time my money would be forfeited.
- I can manage the same returns by looking at fund portfolio and buying the top end stocks.
- My fund would double the money in one year.
8 reasons to invest into Mutual Funds:
- Experts manage your money at 2.5% of your wealth irrespective of the size of your investments. You are just not dependent upon any single individual for news, tips or khabar.
- Every one knows when to buy but no one knows when to sell. While no expert can sell at the top they really know when to get out.
- You can start with small amounts of money Rs 5,000 for one time investment and Rs 1,000 for a systematic investment plan.
- Diversified mutual funds have created a lot of wealth over a period of 10 years. Some funds have multiplied wealth by over 14 times during that period.
- Diversified mutual funds follow de-risked strategies by balancing stock and sectoral weightings within prudential norms. This helps them catch almost all rallies in the markets.
- Mutual funds provide great liquidity. Money can be taken out within 72 hours and there is nothing called a circuit filter.
- The problems of calling up brokers, filling demat instruction slips, making and receiving payments at the end of each settlement cycles, keeping contract notes and records for taxation purposes are all eliminated.
- Some funds offer tax saving facility under sec – 80 C. Investment into these funds can be made up to a maximum limit of Rs 100,000. These funds have how ever closed ended.
See how a Systematic Investment Plan (Rupee Cost Averaging) is the best way to invest into Mutual funds.
The best strategy to make money in the markets is to buy low and sell high. Since it is almost impossible to time the markets on a regular basis the best alternative for investors is to follow the Systematic Investment Plans (SIPs) route.
An SIP does not assure a profit or protect against a loss but the probability of making a loss through an SIP over a longer period of time is almost negligible. Overall, systematic investment programs have been recognized historically as an excellent method for developing what could be a substantial investment, i.e., wealth accumulation.
Under the SIP the investment over a period of time. That is, instead of a lump sum amount a pre-specified amount is periodically invested into a mutual fund scheme.
The number of units that accrue to you on each periodic investment are a function of the then prevailing net asset value (NAV) of the scheme you have opted for. By using this technique, SIPs make the volatility in the market work in your favour. More units are purchased when a scheme's NAV is low and fewer units when the NAV is high.
As a result, even if the market is falling or rising, the average per unit cost price in a SIP will always be less than the average per unit sale price.
Therefore, the average unit cost is lower than average unit price irrespective of market rising or fluctuating. This happens because you get the advantage of buying more units when the market is low and averaging out the purchase price.
Some points to consider before deciding on a SIP
- Ascertain your investment horizon.
- Decide on the periodicity of investment.
- Determine the amount you can comfortably invest in a SIP periodically.
- Pick a scheme according to your risk profile.
- Invest for long term.
Points to remember while investing in a SIP
- If you have created a Systematic Investment Plan, always keep the following points in mind
- SIP trigger will hit the FREE BALANCE in your Bank Account and not your ALLOCATION / LIMITS. Absence of sufficient balance will result in your trigger being REJECTED. .
- Rejection of a trigger in a particular month DOES NOT END your SIP. The remaining triggers will be executed based on the above condition.
- You can MODIFY / CANCEL at any point of time.
Each Systematic Investment Plan is treated as a fresh purchase and entry load as applicable would be charged by the fund.