SIP: One of the best tools to invest in volatile equities?

SIP: One of the best tools to invest in volatile equities?

Much like the tides in the sea, the bourses can be pretty unpredictable as well. Just like the tide that rises one day and withdraws another, similarly, the stock market fluctuates every day, going up and down. At certain times the volatility can be much high, leading to despair and disappointment. In periods of high volatility timing is critical. A sudden rise in prices can escalate the value of your investment, at this point, traders sell their investments at the high value that they will receive. On the other hand, a sudden drop or a crash can leave your investment value in tatters. The market has been turbulent, ever since the crash on August 24, 2015, which was the largest drop (1,624.51 points) the S&P BSE SENSEX has ever witnessed. 

In such times investing can be a big gamble even for experienced traders. But this does not mean one should stop investing at all, and wait till things settle down. On the contrary, investors should opt for Systematic Investment Plans (SIP) and harness the power it possesses. SIPs are similar to a recurring deposit account in banks, except the money is invested in a mutual fund and not a bank deposit.  Typically, this sum collected by MFs is invested in the debt/equities. But rather than being a loss-making proposition, SIPs can make positive gains even when the markets are unstable.

SIP includes the following benefits, which make it a suitable tool for investing in volatile equities.

Rupee Average Costing

In SIP, a fixed sum of money is invested periodically. Depending on whether the market is going up or down, the numbers of units that can be purchased vary, since the sum of money to be invested is fixed. Hence, when the market is going up, fewer units are bought at a high price and when the market is going down, more units are purchased at a low price. This induces a habit of investing, even when the market is low and other investors generally do the opposite and also in the long run SIP reduces the average cost of investments.  

Small but effective investments

In SIPs, you can invest small amounts over a long period of time instead of a lump sum amount in one go.  This way you can invest regularly and not face a financial block since the amounts are small. Also, volatility in the market will have small effects on small investments and not a big effect in the case of a one-time lump sum investment.

Power of Compounding
SIP is based on the principle of compounding. Regular investments calculated with compound interest earned on your investments could potentially increase your returns at a growing rate leading to a substantial amount at the end of a long term. 

Unaffected by timing

SIPs aim at long-term wealth creation. Since SIPs make you invest regularly regardless of market conditions that are prevailing, one develops investment discipline. Equities have the potential to outperform other instruments such as debt and gold in the long term. SIP in a mutual fund with the help of compounding and rupee average costing can stabilise the volatility to a certain extent and help you get the maximum benefit of long-term equity investment.

In the end, wise investors will understand the power of small and regular investments. Investment in equity funds through SIP can be a relatively less risky proposition, in comparison to direct investment in equities. Also, it has been shown time and again that sustained investments over a long-term help build a substantial corpus. Hence, SIP route to mutual funds can be a good strategy to adopt.

Happy Investing

Source:Moneycontrol.com

How to manage your money to build an emergency fund

How to manage your money to build an emergency fund 


Having a specific amount of money set aside for emergencies definitely eases the burden on a person’s mind, when faced with a calamity.

For better or for worse, money is a very important part of our lives. And a financial emergency has the potential of taking a drastic toll on our psychological and physical health. Emergencies can range from losing one’s phone to losing one’s house in a natural disaster- the intensity varies, but the unexpectedness does not. Having to suddenly make a substantial payment or a source of income drying up are both causes for the alarm bells to start ringing. So, how does one protect against the inevitable and prepare for a financial emergency? The answer is simple- start an emergency fund today!

Having a specific amount of money set aside for emergencies definitely eases the burden on a person’s mind, when faced with a calamity. It is simply one (very significant) thing less to worry about. The important part to remember is that the process of building a financial buffer is a very gradual one. You do not have to create an enormous fund in one month; all you have to do is start small and stay disciplined, in order to comfortably tide over difficulties. Here is a step-by-step guide on how to manage finances and save for hard times:

1. Fix your goal- 

The first question one needs to tackle is this- how much do I need to save in order to emerge unscathed from an emergency? While there is no foolproof way of deciding on a number, it is a good idea to figure out one’s monthly expenses to begin with. The goal is to save between three and six months’ worth of expenses (the more the better), making sure that once there is an emergency, you have enough to cover all essential expenses- rent, electricity bill and/or water bill, food and kitchen expenses, any EMIs that are pending, daily expenditures etc. Once you have decided how many months of expenditure you can comfortably save for, that figure becomes the final goal.

In order to make sure you save a decided amount of money every month, it is advisable to make that amount a part of your monthly budget from the very beginning. Yes, you will have to forgo some luxury spending initially, but as the emergency stash starts growing, the restraint will seem worth it. A word of caution, though- don’t forgo making credit card payments in order to stash away emergency cash. The interest to be paid will pile up at an alarming rate and your credit score will go down, making it difficult to take loans in future.

2. Choose the best method- 

There are a number of ways to save for emergencies and the simplest one is to open a separate, accessible savings account that you do not use until the need arises. More often than not, banks allow customers to set up automated transfers of a fixed amount of money, every month, from a salary account to another savings account. Once you have worked out your monthly expenses, and decided upon an amount to save, all you need to do is begin transferring the fund automatically. Though extremely easy, this is a low-return option and is more advisable for individuals who have just begun saving.

For higher returns, one can avail of a number of alternative routes of building emergency funds. The saved money can be put into high-liquidity investment options like Money Market Funds which typically give a 7-8% annual return. Most of these options do not have a lock-in period and an individual can deposit and withdraw money at any point in time, with the withdrawals rarely taking more than one business day.

3. Mix it up/Break it down- 

Every person has his or her own style and comfort level, and any one financial plan will not work for all. It is absolutely okay to tweak the conventional path to suit oneself, as long as you do have a well-charted out plan. You can break the emergency fund saving down into smaller goals, if you are just starting out and larger figures intimidate you. You could also set a closer milestone, such as six months, to explore your saving behaviour and figure out what works for you before launching upon a longer plan. Getting a friend or family member aboard your savings endeavour can also make it easier to stay on track- letting them remind you about the monthly milestone or indulging in a little celebration together once a goal is achieved. While financial security is a very serious matter, the ultimate goal is a state of emotional wellbeing, and thus it is counterproductive to be unconstructively stressed about the process. Making saving fun and easy for yourself is the best option.

4. Finish big- 

Staying disciplined and keeping your aim in view will enable you to reach your savings goal. Of course, it is important to understand that financial planning is not a process that ever ends. But it is possible to achieve a certain goal after which you will need to deprive yourself of fewer luxuries- which is a great incentive for keeping your nose to the grindstone in the beginning. Planning early and diligently will ensure that you do not need to be held hostage by financial emergencies later on.


Happy investing
Source:Moneycontrol.com

Spouse and relatives for whom gifts are not taxable

Spouse and relatives for whom gifts are not taxable

If there is an amount that is received from the spouse then this would not be considered as a gift as this is clearly covered under the definition of a relative.

One of the important details with respect to the taxation of gifts in the Income Tax Act is the definition of relatives. There are a great many relatives whom people consider to be close and hence they often get money or other assets from them however the question under the tax laws is not whether one considers them as a close relative but whether they fall under the definition given here. This happens with respect to the relatives of the spouse. Here is a detailed look at some of the conditions that will govern the classification the relatives of a spouse and what this means under the gifting provision.

Spouse

If there is an amount that is received from the spouse then this would not be considered as a gift as this is clearly covered under the definition of a relative. There are two aspects that one must consider on the income tax front when one is receiving something from the spouse which is the impact in terms of the gift and the impact on account of clubbing of income. As far as the gift is concerned along with any amount related to its taxation there is nothing to worry about as the amount received from a spouse would not be taxed without any limits. This is a positive thing for any person because there are lots of occasions wherein an amount has to be given to the spouse to meet some expense and there would not be any tax implication of this move. The other aspect is trickier because the clubbing provision says that any income arising to the spouse due to amount transferred to them would be taxable in the hands of the giver of the amount. This means that even though the initial amount of the gift from the spouse would not have any tax there might be a tax liability arising at a later stage.

Brother or sister of the spouse

The definition of a relative expands with the inclusion of the brother or the sister of the spouse. This means that those related to the spouse are included within the definition. There are a lot of questions whether an amount received from brothers or sisters of the spouse would be covered as a relative and would not be taxable. The answer is yes and this is a big relief because there are a lot of occasions when the brothers or sisters of the spouse actually make a gift and this is seen on several special occasions. Such events and gifts are thus not a source of worry on the taxation front.

Lineal ascendant or descendant of the spouse

Ascendants or descendants of the individual are covered under the definition of relatives and this is natural but what is also a source of comfort for the individual is that the lineal ascendants and descendants of the spouse are also covered. There are family occasions wherein amounts or gifts are received from the ascendants in the spouse’s family and this again would not put any financial burden on the individual. This means taking of gifts from the ascendants or descendants of the spouse is a non taxing affair and this can be clearly accounted for. These days especially in some families even youngsters give gifts that are significant in terms of value and if this is done by a descendant on the spouses side then again it would not be a concern in terms of taxation as this is also covered under the definition of a relative. All this can provide a big relief at the end of the day.


Happy Investing

Source:Moneycontrol.com

Who owns most on India’s stock markets: 5 facts

Who owns most on India’s stock markets: 5 facts

Data as on 2014

Every quarter, all listed companies release the data on ownership of shares to stock exchanges. While it does not change significantly, a quarterly trend gives an insight.

Here are pointers that explain the ownership data:

1.     Foreign institutional investors: FIIs control a sizeable chunk of Indian shares. Their ownership of BSE 500, which accounts for over 90% of the stock market value, stands at 19.6% as of June 30, 2014. This is marginally below the 19.8% they owned in the quarter to March 2014, a record-high. Over the three months to June 2014, jumped by Rs 2,70,000 crore to Rs 16,74,000 crore. FIIs as a group were net buyers (more buying than selling) in sectors like public sector banks, real-estate shares, energy and distribution companies, telecom, healthcare and private banks, according to Credit Suisse estimates.

2.     Indian government: The ownership of India’s government of the BSE 500 index stands at 16% of the BSE 500 value. This is worth Rs 13,44,000 crore. This could perhaps be called the value of India’s sovereign wealth fund. This is a massive amount of wealth the government sits on in the context of deficits that it runs. To put things in perspective, the ownership of shares is nearly three times bigger than the fiscal deficit target set in the budget.

3.     Promoter holding: The promoter holding (other than the government) is at 36% for BSE 500. It has not changed significantly but the overall trend is towards consolidating control over businesses. A NSE study in the past revealed that in 10 years to 2011, company promoters hiked ownership in their companies. For a smaller NSE Nifty 50 group of companies, promoter holding rose to 46.8% from 26.4% in 10 years to 2011, according to the NSE study. This indicates confidence in own businesses or the need to defend their companies against hostile takeovers.

4.     Domestic institutions: In the past, domestic financial institutions like the erstwhile UTI, IDBI and LIC used to dominate corporate ownership. As of June 2014, LIC and domestic mutual funds own 11% or Rs 9,00,000 crore worth of shares. At present, very few people in India buy mutual funds. Credit Suisse expects the number of mutual funds investors to rise in India over the next few years. Effectively, the ownership of Indian companies will also show that change when it happens.

5.     Retail investors: Investing directly in the stock market is getting increasingly difficult for retail investors or individuals. As of June 2014, non-institutional or retail investors own 18% of BSE 500. The ownership of retail investors has halved over 10 years to 2011 in NSE 50 shares to 16%, according to the NSE study. This is largely because retail investors exited the stock market through buyback or open offers initiated by companies.

This work is produced by Simplus Information Services Pvt Ltd.

Happy Investing

EPF Tax has you confused? Here is how to decide between EPF, PPF and NPS

EPF Tax has you confused? Here is how to decide between EPF, PPF and NPS

 The Employee Provident Fund Tax announced in the Union Budget 2016-17 has everyone scurrying to withdraw their deposits. Under the Budget proposal, the government is planning to tax 60 per cent of Employees Provident Fund corpus on contributions made after April 1, 2016. The move by the government has sent confusing signals and has put a spotlight on retirement products available in the country.

After the announcement of the EPF tax in the Budget, the government came under severe pressure to withdraw the entire provision. While speaking at a post-Budget conference with industry chambers, Union Finance Minister Minister Arun Jaitley sought to assuage people's concerns on Wednesday and said he would spell out the final decision on taxing withdrawals from the Employees’ Provident Fund (EPF) at the time of replying to a debate in Parliament.


The minister said the EPF withdrawal tax is not aimed at raising revenues, rather the emphasis of the government is to make India a pensioned and insured society. No tax will levied if the corpus at the time of withdrawal is invested in pension-based annuities, he said.


Meanwhile, we look at the three major retirement schemes – EPF, Public Provident Fund and National Pension Scheme – and what they have on offer for you.


The EPF is run by the Employees’ Provident Fund Organisation (EPFO), while the old-age income security scheme – the Public Provident Fund (PPF) – is sponsored by the government. The National Pension Scheme is sponsored by the Pension Fund Regulatory and Development Authority (PFRDA).


Aside from the EPF and PPF, the National Pension System (NPS) is a recent entrant in this space. Arun Jaitley has sought to make the NPS more tax-friendly. The 40 per cent of the corpus that an investor can withdraw after maturity is proposed to be made tax-free. The long-term aim is to bring it on an equal footing with the EPF on the taxation front.


The Public Provident Fund remains totally exempted throughout. For PPF, with an 8.7 per cent annual rate of interest, the Economic Survey 2016 clearly mentioned that after factoring in tax rate on deposit and interest, the effective interest rate comes to a high 16 per cent.


The NPS, on the other hand, offers market-linked returns with a maximum equity investment of 50 per cent from subscriber money permitted under the scheme. In essence, it provides a window to beat returns from PPF and EPF in the long term.


EMPLOYEES PROVIDENT FUND SCHEME (EPF)


Eligibility: Employees drawing basic salary of Rs 15,000 have to compulsory contribute to the Provident fund and employees drawing above Rs 15,000 have an option to become member of the Provident Fund


Where to open: Scheme is provided by Employees’ Provident Fund Organisation (EPFO) through organisation enrolled with it. Your office will open the account for you if they employ 20 persons or more


Investment limit: Employee contributes 12 per cent of basic salary and and equivalent amount is contributed by the Employer.


Returns: EPF funds will earn a 8.8 per cent for 2015-16, marginally up from the previous 8.75 per cent.


Duration/maturity: Till the retirement of the employee or the employee opting out of


Loans/Withdrawals: You can withdraw from EPF account for children’s education, marriage of self, children and siblings, purchase/construction of a house or any medical emergencies. However, withdrawal is subject to certain conditions:


• Minimum 7 years of service;
• Maximum 3 withdrawals during which you hold the EPF sAccount;
• Maximum aggregate withdrawal would be 50% of the total contributions made by you.


For medical emergencies, there is no minimum service period. However, the maximum amount one can withdraw is 6 times the basic salary and proof of hospitalisation is required.


However, withdrawal for purchase/construction of house is available only once in an individual’s working life. The minimum service period is 5 years and the maximum withdrawable amount is 36 times your total salary (for construction of property) and 24 times (for purchase of property).


Tax Benefits: Currently enjoys the Exempt, Exempt, Exempt (EEE) status. However, Budget 2016-17 has stoked a massive controversy by proposing that has proposed that only 40 per cent of the contributions made to EPF after April 1, 2016, will be tax-free on withdrawal. With widespread opposition to the move, the government is likely to reconsider its decision and a final word is awaited.


Nomination: Subscriber can nominate one or more person belonging to his family. If he has no family he can nominate any person or persons of his choice but if he subsequently acquires family, such nomination becomes invalid and he will have to make a fresh nomination of one or more persons belonging to his family. You cannot make your brother your nominee as per the Acts.


Transfer of Account: Account is transferable with change of change of job of subscriber




PUBLIC PROVIDENT FUND (PPF)


Eligibility: Individuals can open account in their name, also open another account on behalf of a minor. Joint/NRI/HUF accounts cannot be opened.


Where to open: Post offices, public sector banks and few private banks offer the government-run scheme.


Investment Limit: Minimum Rs 500 with a cap of Rs 1.5 lakhs per annum. Deposits can be made in one lump-sum or in 12 installments per year.


Interest Rate/Returns: 8.7 per annum with effect from April 1, 2015. Interest is paid on March 31 every year. Interest calculated on monthly basis on the minimum balance between 5th and last day of the month.


Scheme Duration: 15 years with the provision to extend in one or more blocks of 5 years each. Premature closure is not allowed before 15 years.


Loans/withdrawals: Available from third financial year. Part withdrawal is permitted from 7th Financial Year


Taxation: PPF comes under the Exempt, Exempt and Exempt (EEE) category which makes it tax exempt from investment till maturity. Subscription qualifies for tax benefits under 80C of Income Tax Act.


Nomination: One or more persons can be nominated


Transfer of Account: The PPF account can be transferred free of charge to another branch, another bank or post office.




NATIONAL PENSION SCHEME (NPS)


Eligibility: All citizens between 18 and 60 years as on the date of submission of application


Where to open: Authorised Points of Presence (POP) and almost all private and public sector banks apart from several other financial institutions offer the scheme.


Investment limit: (For Tier-1 non-withdrawable) minimum Contributions is Rs 500 with a total minimum contribution per year at Rs 6,000. For Tier-II (withdrawable) minimum contributions Rs 250 with minimum balance of Rs 2000. No cap on maximum investment.


Returns: NPS offers market-linked returns. Being a defined contribution scheme where subscribers contribute to his account, there is no defined benefit that would be available at the time of maturity. The accumulated wealth depends on the contributions made and the income generated from investment of such wealth.


Duration/maturity: Maturity of scheme is at age 60


Loans/Withdrawals: On retirement, a subscriber can opt out of NPS. However, the subscriber would be required to invest minimum 40 per cent of the accumulated savings to purchase a life annuity, while remaining can be taken out a lump-sum.
 
Tax Benefits: Tier-I account is exempt, exempt, taxed (EET). The amount contributed is entitled for deduction from gross total income upto Rs 1 lakh (along with other prescribed investments) as per section 80C of the Income Tax Act.


The Union Budget 2016-17 has proposed that 40% of retirement corpus of a subscriber of National Pension Scheme (NPS) at the time of retirement will be tax exempt. Further, annuity payment to the legal heir after the death of pensioner has been made exempt from tax.


Nomination: In the event of death of the subscriber, the nominee can receive 100 per cent of the NPS pension wealth in lump sum.




Happy Investing

 

Employee Provident Fund: 5 lesser known facts amid tax row

Employee Provident Fund: 5 lesser known facts amid tax row


The Employee Provident Fund Tax announced in the Union Budget 2016-17 has everyone scurrying to withdraw their deposits. Under the Budget proposal, the government is planning to tax 60 per cent of Employees Provident Fund corpus on contributions made after April 1, 2016. The move by the government has sent confusing signals and has put a spotlight on retirement products available in the country.

After the announcement of the EPF tax in the Budget, the government came under severe pressure to withdraw the entire provision. While speaking at a post-Budget conference with industry chambers, Union Finance Minister Minister Arun Jaitley sought to assuage people's concerns on Wednesday and said he would spell out the final decision on taxing withdrawals from the Employees’ Provident Fund (EPF) at the time of replying to a debate in Parliament. 

The minister said the EPF withdrawal tax is not aimed at raising revenues, rather the emphasis of the government is to make India a pensioned and insured society. No tax will levied if the corpus at the time of withdrawal is invested in pension-based annuities, he said. 

Meanwhile, we look at the three major retirement schemes – EPF, Public Provident Fund and National Pension Scheme – and what they have on offer for you. 

The EPF is run by the Employees’ Provident Fund Organisation (EPFO), while the old-age income security scheme – the Public Provident Fund (PPF) – is sponsored by the government. The National Pension Scheme is sponsored by the Pension Fund Regulatory and Development Authority (PFRDA).

Aside from the EPF and PPF, the National Pension System (NPS) is a recent entrant in this space. Arun Jaitley has sought to make the NPS more tax-friendly. The 40 per cent of the corpus that an investor can withdraw after maturity is proposed to be made tax-free. The long-term aim is to bring it on an equal footing with the EPF on the taxation front. 

The Public Provident Fund remains totally exempted throughout. For PPF, with an 8.7 per cent annual rate of interest, the Economic Survey 2016 clearly mentioned that after factoring in tax rate on deposit and interest, the effective interest rate comes to a high 16 per cent.

The NPS, on the other hand, offers market-linked returns with a maximum equity investment of 50 per cent from subscriber money permitted under the scheme. In essence, it provides a window to beat returns from PPF and EPF in the long term.


EMPLOYEES PROVIDENT FUND SCHEME (EPF) 

Eligibility: Employees drawing basic salary of Rs 15,000 have to compulsory contribute to the Provident fund and employees drawing above Rs 15,000 have an option to become member of the Provident Fund

Where to open: Scheme is provided by Employees’ Provident Fund Organisation (EPFO) through organisation enrolled with it. Your office will open the account for you if they employ 20 persons or more

Investment limit: Employee contributes 12 per cent of basic salary and and equivalent amount is contributed by the Employer.

Returns: EPF funds will earn a 8.8 per cent for 2015-16, marginally up from the previous 8.75 per cent. 

Duration/maturity: Till the retirement of the employee or the employee opting out of 

Loans/Withdrawals: You can withdraw from EPF account for children’s education, marriage of self, children and siblings, purchase/construction of a house or any medical emergencies. However, withdrawal is subject to certain conditions:

• Minimum 7 years of service;

• Maximum 3 withdrawals during which you hold the EPF sAccount;

• Maximum aggregate withdrawal would be 50% of the total contributions made by you.

For medical emergencies, there is no minimum service period. However, the maximum amount one can withdraw is 6 times the basic salary and proof of hospitalisation is required.


However, withdrawal for purchase/construction of house is available only once in an individual’s working life. The minimum service period is 5 years and the maximum withdrawable amount is 36 times your total salary (for construction of property) and 24 times (for purchase of property).

Tax Benefits: Currently enjoys the Exempt, Exempt, Exempt (EEE) status. However, Budget 2016-17 has stoked a massive controversy by proposing that has proposed that only 40 per cent of the contributions made to EPF after April 1, 2016, will be tax-free on withdrawal. With widespread opposition to the move, the government is likely to reconsider its decision and a final word is awaited. 

Nomination: Subscriber can nominate one or more person belonging to his family. If he has no family he can nominate any person or persons of his choice but if he subsequently acquires family, such nomination becomes invalid and he will have to make a fresh nomination of one or more persons belonging to his family. You cannot make your brother your nominee as per the Acts.




Happy investing

How to set your financial goals?

How to set your financial goals?


"By failing to prepare, you are preparing to fail" - Benjamin Franklin (a well-known polymath, politician, writer and scientist).




 We all have some wishes and responsibilities in life. For instance, you might want to go on a holiday, make sure your child attends one of the best colleges in the city or buy a car. To achieve these ambitions, it is extremely important that you have a plan. Just like a student needs to prepare and study well if he wishes to score good marks in a test, you as an individual also need to plan and set your financial goals in order to fulfill your dreams in life. You see, setting goals, is the first step towards achieving them. If you go wrong here, there are slim chances that you would be able to fulfill your wishes on time.

Hence, for your benefit, we have listed down certain points which must be borne in mind while setting your financial goals:

Include your spouse while making goals

You must ensure that you also include your spouse, irrespective of the fact whether she / he is earning or not, while making a list of all the goals which you want to achieve. This is because your spouse might have a lot of inputs which could change the characteristics of your financial goal. For instance, she might be more aware about the academic subjects that your child is inclined towards and the course which he / she is likely to pursue. This might help you while planning for your little one’s future. Also, it is better to have common goals regarding plenty of things such as the family’s dream holiday, buying a new house and so on. Moreover, including family members while setting goals, will avoid conflicts of interest and disagreements within the family in the long run.


Make realistic goals

You might want to travel across the world, live in the most luxurious hotels, buy the most expensive clothes and accessories, and drive your own new sports car and so on. However, these things become a reality only for a handful few people. Hence, it is imperative to let your list of financial goals be realistic. If you set up financial goals that are basically a list of all your heart's desires, you might be disappointed if things don't seem achievable. Although, you must push yourself a little bit to get that extra edge and realise your true potential, it is also important to know your capabilities and not discourage yourself.


Set specific goals

One of the most important points to be kept in mind while setting financial goals is that they should be extremely specific. You must know for whom you are making the goal (for example for yourself or your children), what do you want to achieve, when will the goal occur (say after 5 or 10 years), what is the purpose of the goal, what are the requirements and constraints and so on. Any vagueness while setting a financial goal could become an obstacle when you go out to achieve them.

Attach an approximate value to each of your goal so as to understand how much you need to save every month. It is necessary to take into account and assume a realistic inflation rate and rate of return while determining the cost of your goals. This is extremely important as the inflation bug eats into our hard earned savings every day. For instance, a business school charges Rs 25 lakh today and your child will likely attend in 5 years from now; with 8% annual inflation, the fees you will end up paying would be Rs 36.73 lakh after 5 years. That’s a big difference, and if you planned as per today’s estimate then after 5 years you would be running from pillar to post to arrange for the differential amount or would not be able to send your child for post graduate studies.


Prioritise your goals

It is important to rank your goals in order of importance. This is because only then will you realise the urgency of some goals and meet them on time. For instance, the need for getting an insurance policy is more important than going for a vacation. Also, paying the school fees of your child for the next semester is more important than saving for the latest mobile phone. Goals could be short term (within 2 years), medium term (3 – 5 years) and long term (5 years +). Remember that, while prioritising them, it is also imperative to keep in mind the time horizon remaining for the goal. It will also be prudent to put all the goals along with their specific details and priority down on paper so that you remember all the details. Moreover, having everything in black and white will discourage you to use the money set aside for a particular high priority goal for any other less important things.


Start early

There might be certain goals which won’t show up in your life for quite some time such as your retirement or your child’s marriage etc., so you might think that why should you plan for and set goals which are a long time away. However, remember that setting goals in advance can give you a precious gift – "time". The longer the time you have before the goal turns up for fulfillment, the lesser you will need to save each month and more you can gain from the compounding effect.

Once you have finished setting up all your financial goals, you shouldn’t waste time and start investing regularly. Before you invest, chalk out an asset allocation plan. You should then carefully choose suitable investment avenues. Time left in achieving a particular goal and your risk appetite would largely decide how your asset allocation would look like.
 We are of the view that financial goals, once constructed, are like a road map for the achievement of your objectives. They make your aspirations take shape and become achievable. You must review your financial goals periodically to include any changes that are happening in life.


Happy investing

Of investment goals and asset allocation

Of investment goals and asset allocation

Successful investing is all about having the right strategy in place. The objectives of investment can be many ranging from buying a small appliance in the near future to a house or even putting aside funds for your child’s education. So before you lay down a course map you must first ask yourself what your goal is and how you plan to achieve it. Having laid down your goal the chances of achieving that goal to great extent depends on the right mix of investments. Since investing can bring in rewards and risks, you need to evaluate several factors to determine how aggressive or conservative you want to be with your money.

Most investors tend to be cautious when investing for the future and put most of their money in a portfolio of low-risk investments such as bonds, money market funds for bank deposits. While such investments can offer regular payments and help preserve your principal, they generally don't protect savings against the effects of inflation or provide the growth you need to achieve your investment goals.

 

To overcome these hurdles the ideal springboards are stocks. Stocks have the potential to increase in value at a much faster rate as compared to fixed income securities and also outpace inflation over the long term.

Though stocks can be more volatile in the short-term, their volatility has tended to even out over time. Hence the longer you have to invest, the greater your use of stocks generally can be.

 

Depending on the risk one is willing to take and the investment horizon, there are five broad strategies one can follow. However, one has to keep in mind that these are sample allocations and not definitive. Rather, they're intended to give you a point of reference when considering your own unique situation.

 

To begin with the investor largely has a choice of three asset classes which he can allocate.

Stocks – Can be volatile in the short-term, but offer the best opportunity for long-term growth.

Bonds – Compared to stocks bonds are less volatile and generally provide stable income. However, bonds provide less long-term return potential than stocks.

Cash assets – Provide income with little or no volatility of principal, but offer very limited growth opportunity long-term.

The five broad strategies are:

Very Conservative

This approach may be appropriate for investors who emphasise stability and current income and require very little growth potential. The allocation in this strategy would tilt to a great deal towards bonds and cash, which will make up 80 per cent of the money with the rest being invested in equities.

Conservative

Conservative investors are those who are willing to accept only modest volatility and who seek only limited exposure to growth. They are income oriented. To achieve this the ideal mix would be stocks 40 per cent, bonds 35 per cent and cash 25 per cent.

Moderate

Investors under this segment do the balancing act. They seek to balance moderate growth potential with lower-volatility income investments. Here investment would skew in favour of stocks, which would make up 60 per cent of the portfolio with bonds accounting for 25 per cent and cash 15 per cent.

Aggressive

Aggressive investor looks for high return and is willing to bear the high volatility that goes with it. These investors are growth-oriented who want to temper their exposure to stocks with a moderate position in less volatile securities. Here 80 per cent of the money is invested in stocks with bonds accounting for 15 per cent and cash 5 per cent.

Very aggressive

Investors who are willing to assume short-term volatility to pursue maximum growth over time. These investors invest 90 per cent in stocks with a marginal 5 per cent in bonds and cash each.

While these are broad outlines. When comparing asset allocation strategies to your personal financial situation, you should consider your investment time frame and your risk tolerance level. The more aggressive approaches are generally more appropriate for investors who can afford the greater risks involved, either because they have sufficient assets to weather short-term volatility, or because they have a long time horizon that allows them to look past occasional downturns.

Happy Investing

7 don'ts of stock investing

7 don'ts of stock investing


Stock markets are a crazy place to be in volatile times. Making a quick buck is exhilarating but losing money is equally frustrating. Every stock invested in is an experience and has lessons to offer. An investor who has burnt his fingers in the markets has advice to offer on how to invest. Some of the most common mistakes which investors should avoid are as follows:

Buying on tips: This malaise is rampant in the Indian investing population, which punters and market makers use to the optimum. What you as an investor should do is not buy anything that you don't understand. Do your own research.

Trading too much: The trading bug is infectious and hard to get rid of. Trading reduces returns. The most common mistake which investors should realize is that companies are meant as ‘investments’ and not as trading opportunities. You start making more mistakes with more number of trading decisions.

Buying into market trends: The most common mistake is that people buy according to market trends instead of buying businesses. A bull-run does not mean that a company with a bad business will do well. Your stock will only move up if profits surpass expectations.

Buying junk stocks: Taking a position in a stock, which has no business model can be dangerous. You may be left with dud paper at the end of the day. ‘Vanishing companies’ are commonplace in India.

Overconfidence: Don’t be overconfident. Many investors fall prey to overconfidence, trading too often and these blunders can really cost you. Never bypass the basic tenets of investing.

Panic: Fear stops you from optimizing profit or minimizing losses. Let fundamentals dictate your decisions not emotions.

Chasing performance: Too many investors buy stocks when they're at their peak, after a long run-up. The fundamental rule is "Buy low, sell high".
 

And finally in Sir John Templeton’s words know that outperforming the market is difficult task. Invest-don’t speculate.




Happy Investing

7 Facts you may not know about nomination in investment

7 Facts you may not know about nomination in investment


A person to whom one can transfer the custodianship of his/her assets, in case of the event of the asset-holder’s death, is termed as a ‘Nominee’. Quite certainly, a nomination does not necessarily mean that you transfer your investments ownership as the full and final settlement to your nominee.


As an investor, you spend most of your precious time in deciding on your investments, their tenure, and the returns that your invested money will fetch practically.

Do you know who gets your investment money when you are “no more”? I am sure most of you must have come across the ‘nominations’ column, while filling any of your financial application form, be it that for a Mutual Fund, or a Demat Account, or simply a Bank Account.


More often, people have a tendency to leave the nomination field blank, or fill the same uncertainly, without even understanding the big importance of this little detail. Here, let us try to put forth the significance of a nomination into our financial lives.


What is nomination? A person to whom one can transfer the custodianship of his/her assets, in case of the event of the asset-holder’s death, is termed as a ‘Nominee’. Quite certainly, a nomination does not necessarily mean that you transfer your investments ownership as the full and final settlement to your nominee. Additionally, the distribution of the same will occur in accordance with the WILL.


A nominee could be a legal beneficiary, or he/she could also be any other person, who takes the permissible custody of the investor’s assets, in case of the latter’s death. Why nomination is important? It is necessary for any responsible person to have a nomination in place, in all of his financial investments. In the recent times, in accordance with revised regulations, it has become mandatory to put one’s nomination before commencing any investment.


Amidst the compulsion, one must ensure that the investor nominates the desired person.


Let us now describe the process and the facts related to your nomination registration in some of the following financial assets.


1. Life Insurance:


In this asset scheme, the final claim proceedings will, although settle in the nominee’s favor, but he will be liable to fund distribution only according to the ‘WILL’. If the Will is not prepared, all the heirs will get an equal distribution of the share.


2. Mutual Funds:


The process of Mutual Fund nomination is as simple as filling out your form details, while making an application for investment. One can also change the nomination, by filling the specified form that is available at all Mutual Fund offices. One can also nominate a minor, along with the guardian’s name. The nomination and the fund transfers take place according to the units mentioned in the MF folio brochure. In all future units too, the same nomination will be applicable under the MF document.


3. Demat Account:


The nomination in a demat account will not be like that of Life insurance or Mutual funds. The nominee here will be the legal beneficiary of the shares. Therefore, one must take care, while selecting a nominee for this account. According to the Companies Act, this account’s nominee has the power to supersede the Will, thereby transferring the share holdings to nominee’s Demat.


4. Change of Nomination:


One may change his nominee’s name, anytime during the term of investment. There is no restriction on the number of times, the nomination can be changed. It is better for you to review the nomination periodically. Initially you could have kept your mother as the nominee. After your marriage you may change it to your wife. Later when your children become major, you may change the nominee as your son or daughter.


5. Minor as a Nominee:


Even you can nominate a minor. In case the nominee is a minor, an appointee looks after the asset until the minor turns into a major. So in addition to selecting the nominee you need to select the appointee for the minor nominee


6. Multiple Nominees:


Life Insurance also has the option of having more than one (multiple) nominations, which divides the investor’s assured sum among all his nominees.


7. Claim Process:


The transfer of the investor’s assets does not take place directly, without completing a stipulated claim process. The nominee must first inform the respective financial institutions, regarding the investor’s death, and thereafter seek knowledge of the assets claiming process.


The nominee should also submit the mandatory documents to validate his asset transfer, as stated under the law.


Although due to the law imposed by various regulatory bodies, the transmission processes of every financial institution is different, but let us get to know about some of the primary documents that all of them require.


These include the Identity Proof of nominee, KYC Compliance (in case of MF and Demat Accounts), the Probate of Will, Succession certificate, the Claim Form, and Death certificate of the unit holder.


Concluding the discussion over Nominations, we will just say that this small step is just a way to ensure the security of our loved ones in a large way, which could otherwise become challenging for your nominees.


Therefore, along with this, one should also prepare a registered WILL as part of his succession planning. Doing this will further reduce the pressure of assets’ transfer.


Happy Investing
Source:Holisticinvestmentplanning.in

Checklist Before Investing

Checklist Before Investing

Introduction To Mutual fund

Introduction



The Mutual Fund Industry



The genesis of the mutual fund industry in India can be traced back to 1964 with the setting up of the Unit Trust of India (UTI) by the Government of India. Since then UTI has grown to be a dominant player in the industry. UTI is governed by a special legislation, the Unit Trust of India Act, 1963.

The industry was opened up for wider participation in 1987 when public sector banks and insurance companies were permitted to set up mutual funds. Since then, 6 public sector banks have set up mutual funds. Also the two Insurance companies LIC and GIC have established mutual funds. Securities Exchange Board of India (SEBI) formulated the Mutual Fund (Regulation) 1993, which for the first time established a comprehensive regulatory framework for the mutual fund industry. Since then several mutual funds have been set up by the private and joint sectors.



Growth of Mutual Funds



The Indian Mutual fund industry has passed through three phases.The first phase was between 1964 and 1987 when Unit Trust of India was the only player.By the end of 1988,UTI had total asset of Rs 6,700 crores. The second phase was between 1987 and 1993 during which period 8 funds were established (6 by banks and one each by LIC and GIC).This resulted in the total assets under management to grow to Rs 61,028 crores at the end of 1994 and the number of schemes were 167.

The third phase began with the entry of private and foreign sectors in the Mutual fund industry in 1993. Several private sectors Mutual Funds were launched in 1993 and 1994. The share of the private players has risen rapidly since then. Currently there are 34 Mutual Fund organisations in India. Kothari Pioneer Mutual fund was the first fund to be established by the private sector in association with a foreign fund.

This signaled a growth phase in the industry and at the end of financial year 2000, 32 funds were functioning with Rs. 1,13,005 crores as total assets under management. As on August end 2000, there were 33 funds with 391 schemes and assets under management with Rs. 1,02,849 crores. The Securities and Exchange Board of India (SEBI) came out with comprehensive regulation in 1993 which defined the structure of Mutual Fund and Asset Management Companies for the first time.

 

 

What is a Mutual Fund



Like most developed and developing countries the mutual fund cult has been catching on in India. There are various reasons for this. Mutual funds make it easy and less costly for investors to satisfy their need for capital growth, income and/or income preservation.

And in addition to this a mutual fund brings the benefits of diversification and money management to the individual investor, providing an opportunity for financial success that was once available only to a select few.

Understanding Mutual funds is easy as it's such a simple concept: a mutual fund is a company that pools the money of many investors -- its shareholders -- to invest in a variety of different securities. Investments may be in stocks, bonds, money market securities or some combination of these. Those securities are professionally managed on behalf of the shareholders, and each investor holds a pro rata share of the portfolio -- entitled to any profits when the securities are sold, but subject to any losses in value as well.

For the individual investor, mutual funds provide the benefit of having someone else manage your investments and diversify your money over many different securities that may not be available or affordable to you otherwise. Today, minimum investment requirements on many funds are low enough that even the smallest investor can get started in mutual funds.

A mutual fund, by its very nature, is diversified -- its assets are invested in many different securities. Beyond that, there are many different types of mutual funds with different objectives and levels of growth potential, furthering your chances to diversify.







                             

 

 

Why invest in Mutual Funds.



Investing in mutual has various benefits which makes it an ideal investment avenue. Following are some of the primary benefits.



Professional investment management



One of the primary benefits of mutual funds is that an investor has access to professional management. A good investment manager is certainly worth the fees you will pay. Good mutual fund managers with an excellent research team can do a better job of monitoring the companies they have chosen to invest in than you can, unless you have time to spend on researching the companies you select for your portfolio. That is because Mutual funds hire full-time, high-level investment professionals. Funds can afford to do so as they manage large pools of money. The managers have real-time access to crucial market information and are able to execute trades on the largest and most cost-effective scale. When you buy a mutual fund, the primary asset you are buying is the manager, who will be controlling which assets are chosen to meet the funds' stated investment objectives.



Diversification



A crucial element in investing is asset allocation. It plays a very big part in the success of any portfolio. However, small investors do not have enough money to properly allocate their assets. By pooling your funds with others, you can quickly benefit from greater diversification. Mutual funds invest in a broad range of securities. This limits investment risk by reducing the effect of a possible decline in the value of any one security. Mutual fund unit-holders can benefit from diversification techniques usually available only to investors wealthy enough to buy significant positions in a wide variety of securities.



Low Cost



A mutual fund let's you participate in a diversified portfolio for as little as Rs.5,000, and sometimes less.



Convenience and Flexibility



Investing in mutual funds has it’s own convenience. While you own just one security rather than many, you still enjoy the benefits of a diversified portfolio and a wide range of services. Fund managers decide what securities to trade, collect the interest payments and see that your dividends on portfolio securities are received and your rights exercised. It also uses the services of a high quality custodian and registrar. Another big advantage is that you can move your funds easily from one fund to another within a mutual fund family. This allows you to easily rebalance your portfolio to respond to significant fund management or economic changes.



Liquidity



In open-ended schemes, you can get your money back promptly at net asset value related prices from the mutual fund itself.



Transparency



Regulations for mutual funds have made the industry very transparent. You can track the investments that have been made on you behalf and the specific investments made by the mutual fund scheme to see where your money is going. In addition to this, you get regular information on the value of your investment.



Variety



There is no shortage of variety when investing in mutual funds. You can find a mutual fund that matches just about any investing strategy you select. There are funds that focus on blue-chip stocks, technology stocks, bonds or a mix of stocks and bonds. The greatest challenge can be sorting through the variety and picking the best for you.

 

 

Types of Mutual Funds



Getting a handle on what's under the hood helps you become a better investor and put together a more successful portfolio. To do this one must know the different types of funds that cater to investor needs, whatever the age, financial position, risk tolerance and return expectations. The mutual fund schemes can be classified according to both their investment objective (like income, growth, tax saving) as well as the number of units (if these are unlimited then the fund is an open-ended one while if there are limited units then the fund is close-ended).

This section provides descriptions of the characteristics -- such as investment objective and potential for volatility of your investment -- of various categories of funds. These descriptions are organized by the type of securities purchased by each fund: equities, fixed-income, money market instruments, or some combination of these.

Open-ended schemes



Open-ended schemes do not have a fixed maturity period. Investors can buy or sell units at NAV-related prices from and to the mutual fund on any business day. These schemes have unlimited capitalization, open-ended schemes do not have a fixed maturity, there is no cap on the amount you can buy from the fund and the unit capital can keep growing. These funds are not generally listed on any exchange.



Open-ended schemes are preferred for their liquidity. Such funds can issue and redeem units any time during the life of a scheme. Hence, unit capital of open-ended funds can fluctuate on a daily basis. The advantages of open-ended funds over close-ended are as follows:



Any time exit option, The issuing company directly takes the responsibility of providing an entry and an exit. This provides ready liquidity to the investors and avoids reliance on transfer deeds, signature verifications and bad deliveries. Any time entry option, An open-ended fund allows one to enter the fund at any time and even to invest at regular intervals.



Close ended schemes



Close-ended schemes have fixed maturity periods. Investors can buy into these funds during the period when these funds are open in the initial issue. After that such schemes can not issue new units except in case of bonus or rights issue. However, after the initial issue, you can buy or sell units of the scheme on the stock exchanges where they are listed. The market price of the units could vary from the NAV of the scheme due to demand and supply factors, investors’ expectations and other market factors



Classification according to investment objectives



Mutual funds can be further classified based on their specific investment objective such as growth of capital, safety of principal, current income or tax-exempt income.



In general mutual funds fall into three general categories:



1] Equity Funds are those that invest in shares or equity of companies.

2] Fixed-Income Funds invest in government or corporate securities that offer fixed rates of return are

3] While funds that invest in a combination of both stocks and bonds are called Balanced Funds.



Growth Funds



Growth funds primarily look for growth of capital with secondary emphasis on dividend. Such funds invest in shares with a potential for growth and capital appreciation. They invest in well-established companies where the company itself and the industry in which it operates are thought to have good long-term growth potential, and hence growth funds provide low current income. Growth funds generally incur higher risks than income funds in an effort to secure more pronounced growth.



Some growth funds concentrate on one or more industry sectors and also invest in a broad range of industries. Growth funds are suitable for investors who can afford to assume the risk of potential loss in value of their investment in the hope of achieving substantial and rapid gains. They are not suitable for investors who must conserve their principal or who must maximize current income.



Growth and Income Funds



Growth and income funds seek long-term growth of capital as well as current income. The investment strategies used to reach these goals vary among funds. Some invest in a dual portfolio consisting of growth stocks and income stocks, or a combination of growth stocks, stocks paying high dividends, preferred stocks, convertible securities or fixed-income securities such as corporate bonds and money market instruments. Others may invest in growth stocks and earn current income by selling covered call options on their portfolio stocks.



Growth and income funds have low to moderate stability of principal and moderate potential for current income and growth. They are suitable for investors who can assume some risk to achieve growth of capital but who also want to maintain a moderate level of current income.



Fixed-Income Funds



Fixed income funds primarily look to provide current income consistent with the preservation of capital. These funds invest in corporate bonds or government-backed mortgage securities that have a fixed rate of return. Within the fixed-income category, funds vary greatly in their stability of principal and in their dividend yields. High-yield funds, which seek to maximize yield by investing in lower-rated bonds of longer maturities, entail less stability of principal than fixed-income funds that invest in higher-rated but lower-yielding securities.



Some fixed-income funds seek to minimize risk by investing exclusively in securities whose timely payment of interest and principal is backed by the full faith and credit of the Indian Government. Fixed-income funds are suitable for investors who want to maximize current income and who can assume a degree of capital risk in order to do so.



Balanced



The Balanced fund aims to provide both growth and income. These funds invest in both shares and fixed income securities in the proportion indicated in their offer documents. Ideal for investors who are looking for a combination of income and moderate growth.



Money Market Funds/Liquid Funds



For the cautious investor, these funds provide a very high stability of principal while seeking a moderate to high current income. They invest in highly liquid, virtually risk-free, short-term debt securities of agencies of the Indian Government, banks and corporations and Treasury Bills. Because of their short-term investments, money market mutual funds are able to keep a virtually constant unit price; only the yield fluctuates.



Therefore, they are an attractive alternative to bank accounts. With yields that are generally competitive with - and usually higher than -- yields on bank savings account, they offer several advantages. Money can be withdrawn any time without penalty. Although not insured, money market funds invest only in highly liquid, short-term, top-rated money market instruments. Money market funds are suitable for investors who want high stability of principal and current income with immediate liquidity.



Specialty/Sector Funds



These funds invest in securities of a specific industry or sector of the economy such as health care, technology, leisure, utilities or precious metals. The funds enable investors to diversify holdings among many companies within an industry, a more conservative approach than investing directly in one particular company.

Sector funds offer the opportunity for sharp capital gains in cases where the fund's industry is "in favor" but also entail the risk of capital losses when the industry is out of favor. While sector funds restrict holdings to a particular industry, other specialty funds such as index funds give investors a broadly diversified portfolio and attempt to mirror the performance of various market averages.



Index funds generally buy shares in all the companies composing the BSE Sensex or NSE Nifty or other broad stock market indices. They are not suitable for investors who must conserve their principal or maximize current income.

 

 

Risk vs Reward



Having understood the basics of mutual funds the next step is to build a successful investment portfolio. Before you can begin to build a portfolio, one should understand some other elements of mutual fund investing and how they can affect the potential value of your investments over the years. The first thing that has to be kept in mind is that when you invest in mutual funds, there is no guarantee that you will end up with more money when you withdraw your investment than what you started out with. That is the potential of loss is always there. The loss of value in your investment is what is considered risk in investing.



Even so, the opportunity for investment growth that is possible through investments in mutual funds far exceeds that concern for most investors. Here’s why.

At the cornerstone of investing is the basic principal that the greater the risk you take, the greater the potential reward. Or stated in another way, you get what you pay for and you get paid a higher return only when you're willing to accept more volatility.



Risk then, refers to the volatility -- the up and down activity in the markets and individual issues that occurs constantly over time. This volatility can be caused by a number of factors -- interest rate changes, inflation or general economic conditions. It is this variability, uncertainty and potential for loss, that causes investors to worry. We all fear the possibility that a stock we invest in will fall substantially. But it is this very volatility that is the exact reason that you can expect to earn a higher long-term return from these investments than from a savings account.

Different types of mutual funds have different levels of volatility or potential price change, and those with the greater chance of losing value are also the funds that can produce the greater returns for you over time. So risk has two sides: it causes the value of your investments to fluctuate, but it is precisely the reason you can expect to earn higher returns.

You might find it helpful to remember that all financial investments will fluctuate. There are very few perfectly safe havens and those simply don't pay enough to beat inflation over the long run.







                





Types of risks



All investments involve some form of risk. Consider these common types of risk and evaluate them against potential rewards when you select an investment.



Market Risk



At times the prices or yields of all the securities in a particular market rise or fall due to broad outside influences. When this happens, the stock prices of both an outstanding, highly profitable company and a fledgling corporation may be affected. This change in price is due to "market risk". Also known as systematic risk.



Inflation Risk



Sometimes referred to as "loss of purchasing power." Whenever inflation rises forward faster than the earnings on your investment, you run the risk that you'll actually be able to buy less, not more. Inflation risk also occurs when prices rise faster than your returns.



Credit Risk



In short, how stable is the company or entity to which you lend your money when you invest? How certain are you that it will be able to pay the interest you are promised, or repay your principal when the investment matures?



Interest Rate Risk



Changing interest rates affect both equities and bonds in many ways. Investors are reminded that "predicting" which way rates will go is rarely successful. A diversified portfolio can help in offsetting these changes.

Exchange risk

A number of companies generate revenues in foreign currencies and may have investments or expenses also denominated in foreign currencies.


Changes in exchange rates may, therefore, have a positive or negative impact on companies which in turn would have an effect on the investment of the fund.



Investment Risks



The sectoral fund schemes, investments will be predominantly in equities of select companies in the particular sectors. Accordingly, the NAV of the schemes are linked to the equity performance of such companies and may be more volatile than a more diversified portfolio of equities.



Changes in the Government Policy



Changes in Government policy especially in regard to the tax benefits may impact the business prospects of the companies leading to an impact on the investments made by the fund.



Effect of loss of key professionals and inability to adapt business to the rapid technological change.



An industries' key asset is often the personnel who run the business i.e. intellectual properties of the key employees of the respective companies. Given the ever-changing complexion of few industries and the high obsolescence levels, availability of qualified, trained and motivated personnel is very critical for the success of industries in few sectors. It is, therefore, necessary to attract key personnel and also to retain them to meet the changing environment and challenges the sector offers. Failure or inability to attract/retain such qualified key personnel may impact the prospects of the companies in the particular sector in which the fund invests.

 

 

Choosing a fund



Mutual fund is the best investment tool for the retail investor as it offers the twin benefits of good returns and safety as compared with other avenues such as bank deposits or stock investing. Having looked at the various types of mutual funds, one has to now go about selecting a fund suiting your requirements. Choose the wrong fund and you would have been better off keeping money in a bank fixed deposit.Keep in mind the points listed below and you could at least marginalise your investment risk.



Past performance



While past performance is not an indicator of the future it does throw some light on the investment philosophies of the fund, how it has performed in the past and the kind of returns it is offering to the investor over a period of time. Also check out the two-year and one-year returns for consistency. How did these funds perform in the bull and bear markets of the immediate past? Tracking the performance in the bear market is particularly important because the true test of a portfolio is often revealed in how little it falls in a bad market.



Know your fund manager



The success of a fund to a great extent depends on the fund manager. The same fund managers manage most successful funds. Ask before investing, has the fund manager or strategy changed recently? For instance, the portfolio manager who generated the fund’s successful performance may no longer be managing the fund.



Does it suit your risk profile?



Certain sector-specific schemes come with a high-risk high-return tag. Such plans are suspect to crashes in case the industry loses the marketmen’s fancy. If the investor is totally risk averse he can opt for pure debt schemes with little or no risk. Most prefer the balanced schemes which invest in the equity and debt markets. Growth and pure equity plans give greater returns than pure debt plans but their risk is higher.



Read the prospectus



The prospectus says a lot about the fund. A reading of the fund’s prospectus is a must to learn about its investment strategy and the risk that it will expose you to. Funds with higher rates of return may take risks that are beyond your comfort level and are inconsistent with your financial goals. But remember that all funds carry some level of risk. Just because a fund invests in government or corporate bonds does not mean it does not have significant risk. Thinking about your long-term investment strategies and tolerance for risk can help you decide what type of fund is best suited for you.



How will the fund affect the diversification of your portfolio?



When choosing a mutual fund, you should consider how your interest in that fund affects the overall diversification of your investment portfolio. Maintaining a diversified and balanced portfolio is key to maintaining an acceptable level of risk.



What it costs you?



A fund with high costs must perform better than a low-cost fund to generate the same returns for you. Even small differences in fees can translate into large differences in returns over time.



Finally, don’t pick a fund simply because it has shown a spurt in value in the current rally. Ferret out information of a fund for atleast three years. The one thing to remember while investing in equity funds is that it makes no sense to get in and out of a fund with each turn of the market. Like stocks, the right equity mutual fund will pay off big -- if you have the patience. Similarly, it makes little sense to hold on to a fund that lags behind the total market year after year.

 

 Happy Investing

Source:Icicidirect.com