Sunday, February 1, 2009

Advantages of investing in a well-managed mutual fund

There are several advantages of putting your money in a well-managed mutual fund. You will ensure an appreciation in capital as mutual funds will usually outperform the broader markets. But how is this made possible?

  1. Professional expertise: Experienced fund managers in top mutual funds are thorough professionals. They track the markets, literally on a minute to minute basis and from a longer perspective as well.
  2. Timely investment decisions: Backed by their professional expertise and market knowledge, fund managers are in a better position than an uninformed investor to understand the markets and take timely investment decisions.
  3. Achieving diversification and reduced risk: A mutual fund scheme spreads its investments across a number of select stocks or debentures. As a result, the risk factor is greatly reduced. Just to elaborate, even if the prices of a few stocks go down, other companies in the MF portfolio that record a rise balance it out. The latter can well compensate for these fallen stocks. Thus, no substantial loss is caused to the investor.
  4. Less inexpensive: Compared to direct investments in the market, mutual funds tend to cost less. This is owing to significant savings in brokerage costs, depository costs, demat costs, etc.

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Saturday, January 31, 2009

Following different mutual fund types

As we have explained to you, various fund schemes with different investment objectives can be floated by an AMC (Asset Management Company). AMC performs marketing, accounting and other associated tasks pertaining to the fund.

When you purchase the units of a fund, you pay a certain percentage of it as a fee, called the entry load. When you sell the units of a fund, you pay a certain percentage of it as a fee, called the exit load. As is the practice, only one of the loads – entry or exit - is charged.

There are different fund schemes as explained below.

A diversified equity mutual fund invests in stocks of various listed companies across sectors like IT, infrastructure, power, etc. A balanced fund invests in both equity (shares) as well as debt (fixed return investments) instruments.

Debt funds invest invariably in fixed return investments such as bonds. A liquid fund invests mostly in money market instruments; they work as fixed return investments over a very short period of time.

Equity Linked Saving Schemes (ELSS) are qualified as diversified equity mutual fund plans that offer a tax exemption under Section 80C of the IT Act. Your money invested is locked for at least three years to avail of the tax benefit.

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Friday, January 30, 2009

Understanding corpus and Assets under Management

Portfolio of a mutual fund indicates all the investments (individual stocks and other instruments) that have made by the fund. Certain amount of the portfolio is held in cash.

Let us try to follow what the MF corpus stands for; let us assume a very small MF has a starting investment of 1,000 units. Each of the units is worth Rs 10. Thus the total amount with the mutual fund is Rs 10,000. This amount is mentioned as the corpus. Later, more investors put in additional Rs 2,000. Now the corpus will become Rs 12,000.

On the other hand, Assets under Management (AUM) indicates the total value of the investments presently managed by the fund. Let us assume the corpus is Rs 12,000. The value of the total units has gone up owing to an increase in the price of the stocks it has invested in. As a result, the Rs 12,000 invested is now worth Rs 16,000. This amount is denoted as AUM.

Corpus and Assets under Management are indicators about the size of a mutual fund scheme.
Depending on the prevailing value of the investments, Net Asset Value or NAV of a mutual fund tends to rise or fall.

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Key mutual fund related concepts

Before investing in a mutual fund (MF), you should be familiar with certain key concepts to understand the way MF industry works.

AMC (Asset Management Company): AMC is the fund house or the financial firm that manages the investors’ money. The mutual fund is initiated by a sponsor who acts alone or with a corporate entity to establish it. The sponsor appoints an AMC for managing the pool of investment.

NAV (Net Asset Value): NAV is the market price of a single unit of a mutual fund. When a fund launches an NFO (new fund offer), it is priced at Rs 10.

Entry load and exit load: Let us assume you are putting in Rs 10,000. If the entry load is 2%., you need to pay Rs 200. So Rs 9,800 is invested on your behalf in the fund. Now, let us say you are selling all the units of your fund. At that point of time the amount you invested is now Rs 15,000. If the exit load is 2%, you will pay Rs 300. So, you get back Rs 14,700. Generally, if a mutual fund charges an entry load, it will not charge an exit load, or vice versa. Ideally, check the load applicable before you invest in a mutual fund.

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Monday, January 12, 2009

Mutual funds help you in meeting your ambitious financial goals

Investing and saving are two entirely different propositions. There is a group of passive investors who do not mind letting the money remain in their saving banks account. On the other hand, there are forward-looking people who set a long-term goal when it comes to safeguarding their future, especially their post-retirement life. Mutual funds help them in meeting their ambitious financial goals.

The concept of mutual fund is simple. A number of investors with the same financial goal pool their money, which is invested by professional fund managers. As an investor, you are allotted units of the mutual fund scheme. Mutual funds allow individual investors to put in a small amount, who still gain from being part of a large pool of funds, deployed selectively and strategically.

All unit holders share the mutual fund's monetary gains, proportionate to the amount each one has invested. Latest NAV of mutual funds can be checked in newspapers or on the internet to gauge the performance of the fund.

Investing in a leading mutual fund makes sense than buying and selling on your own different individual stocks and bonds. This is probably something that you simply don’t have the time, inclination, knowledge or orientation to get involved in. This is why entering the stock markets through mutual funds is a sensible way of investing.

Each individual’s investor's risk profile and return expectations are also important considerations. Another factor is timeframe or how long one would want to keep one’s money invested. Of course, it is also important to select the best mutual funds in India to ensure long-term monetary gains.

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Sunday, January 11, 2009

Advantages of mutual fund investment

Investing in a systematic manner will allow you to leverage the power of compounding. This holds especially true for equities even when the markets are falling. However, instead of managing your portfolio on your own, you should ideally leave the task to a reliable mutual fund company in India.

Mutual fund industry in India helps investors fully exploit the potential of their investment portfolio. Mutual fund investment is indeed a sensible, long-term approach. Rupee cost averaging will help you see through the turbulent market and substantially cut down on the risk of investing even in volatile markets.

To elaborate, if you invest a fixed amount in a mutual fund scheme in a regular manner, you will get more units as the Net Asset Value (NAV) is lower. This helps you in lowering the average cost per unit. The strategy is termed 'rupee cost averaging'.

Through Systematic Investment Plan (SIP) with a leading mutual fund in India, you can make the volatility of the markets work well in your favor. Since the amount that you invest every month is the same, you as an investor will be buying more units with the price falling. In a bear market, this will clearly work to your advantage. And once the market starts looking up, the NAV would go up and the value of your original investment will multifold when the price gets higher. This will allow you to enjoy sustained returns over a longer period of time by investing your hard-earned money in a systematic way.

An effective Rupee Cost Averaging (RCA) strategy ensures that the average unit cost is lesser than the average sale price per unit. SIP helps you attain your long-term investment goals.

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Saturday, January 10, 2009

SIP your way to wealth

Young call center executive Satish, 23, wants to buy his own home before he turns 30, but is not sure whether his current savings and salary levels are enough to fulfill his future goals. His income has though just touched a level where he can think of making decent investments. He can invest about Rs 2,000 on a monthly basis.

On the other hand, Mr. Chandran, a retired private sector employee, wants to invest his post-retirement corpus in the best possible manner. He can easily spare Rs 6,000 a month, but he is not so keen on bank deposits, NSC or even postal saving schemes because he is looking for a higher rate of return.

What are the most suitable investment options for both? Well, the simple yet sure strategy for both Mr. Chandran and young Satish is SIP.

What and why SIP?

What is SIP? Why is it imperative to invest in SIP? Obviously, both would want to know because their profiles are so vastly different! We try to explain here.

There are multifold advantages of investing your hard earned money through SIP or Systematic Investment Plan.

1. SIP is a methodical way of investing in the stock markets, designed for those keen on building wealth in a steady albeit assured manner over a period of time.
2. SIP is an excellent option for those investors who wish to get their portfolio going, but do not have a large pool of savings to start with.
3. Anyone can subscribe to SIP by starting with the least possible investment amount (to start with) on monthly basis for one year or more.
4. SIP helps you to plan and secure a better future for you and your family.

You will learn more about SIP and its power of compounding in the subsequent posts.

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