Lessons on mutual funds

Why you need to invest in mutual funds

Types of funds

Benefits of investing in mutual funds

Why you need to invest in mutual funds

If you want higher returns combined with lowest risks, mutual fund is the answer. The money invested in mutual funds is invested in debt market, capital market and money market instruments like shares and debentures depending on the type of mutual fund. Mutual funds are a safe place for investing your hard earned money and it also provides a good return of atleast 20%-25% over a period of time as compared to the conventional National Savings Certificates (NSC) and Fixed Deposits that offer less than 10% returns. Systematic Investment Plans or SIP as they are commonly known as, are an excellent substitute for the Recurring Deposits (RD) of banks and post office. The value of your investments fluctuates depending on the stocks or bonds in which the fund has invested the money. The investment portfolio of the fund is extremely diverse and even if some of the investments don’t move in the upper direction, the other investments help in generating a reasonable yield.

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Types of funds

You have several options to choose from. Some funds invest in only shares, while some invest only in bonds and debentures. The fund may even be investing only in shares that are listed in the stock exchange and form part of the index number of the stock exchange (SENSEX). You can choose growth oriented funds if you aim at capital appreciation through investment in shares with high growth potentials. Else, income-oriented funds will suit your needs of regular income in the form of high dividend payouts. Also, another classification is that of open-ended funds and close-ended funds. In case of open-ended funds, there is no fixed maturity period and you can easily purchase or sell the units at the Net Asset Value.

Meanwhile, close-ended funds have a fixed maturity period of 2 to 15 years and the fund cannot issue new units once it is closed.

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Benefits of investing in Mutual funds

  • You can easily transfer investments from one scheme to another with the help of updated market information.

  • In case of open-ended funds, you can sell your units to the mutual funds directly at any point of time, while in case of close-ended funds, you can sell the units in the market.

  • Different schemes to suit your needs

  • Transparency is assured as NAV of the schemes are declared at regular intervals

  • You stand to gain by the expert services of fund managers at very nominal cost.

  • Offers tax shelters

  • Diversification of investments decreases the risk of volatility in prices.

  • Well regulated by SEBI and all functions are within the strict regulations designed to safeguard the interest of the investors.

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Net Asset Value

Net Asset Value or NAV is Assets less liabilities of the fund as on a particular date. The NAV of a unit
is calculated as-

NAV of a unit = Net Asset Value of fund/ Number of units outstanding

The NAV fluctuates with the purchase or sale of investment securities, the value of the investments
held by the firm, the assets and liabilities of the fund and the number of units sold by the fund or redeemed.

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MIN mandatory from January 1

MIN Number is mandatory , if you plan to invest Rs 50,000 or more in MF from Jan,1 2007.
This will be applicable for pre-registered SIPs too.

MIN need to be obtained only once and can be used across all fund houses.

MIN form and other information are available on
AMFI website.

If you are not investing more than Rs. 50,000 ,You need not worry as of now.

Compare Mysore Palace and a Two Bedroom flat

Mysore Palace was built between 1897 and 1912 at an outlay of around Rs. 42 Lakhs.

You will have to strive hard to get a two bedroom flat in Bangalore today for the same amount (Just four walls).

The Compounding effect of Inflation does such wonders!!!!@. So, whenever we do investment planning (Say a financial plan for the future like child’s education or retirement planning) it is very important to factor inflation into our plans. If we don’t do this, the whole plan can go for a toss.

We must also choose investment avenues that can grow ahead of inflation. Overall return of the portfolio must at least keep pace with inflation if not outpace it.

Always have ‘Inflation’ in mind when you invest or plan for the future.

Presentation on Inflation

Why you must have a PPF account?

1. Highest Return- 8% among the safest category of investment.

2. Only instrument that falls under EEE (Exempt - Investment amount, Exempt- Interest accrual ,Exempt- Interest pay out) category under Income Tax Act..You need not pay a single penny of tax.

3. Power of compounding can act effectively as the investment period is for 15 years.

4. Tax exemption under section 80 C.

5. The Lock-in period keeps reducing as years go by (15,14,13....and so on). Example if you opened a PPF account in 1992..the amount you invest in 2005 can be got back in 2006....
So Open PPF account even if you are wary of the 15 year lock in ….Keep investing the minimum amount every year (Rs 500) and you can use it during the final 3/4 years with a minimum lock in period!!

Happy Investing :-)

Equity MF Investment Approach

Traditional Approach to Investing in Equity MF is illustrated in the Pyramid given above. The approach is bottom up ( See Arrow mark direction).

NSC and PPF Comparison

NSC and PPF Comparison

1. Return - 8% on both.

2. Lockin Period -15 Years for PPF and 6 years for NSC

3. PPF - Principal + Interest (fully exempt from tax), Tax Payable on Interest at the end of sixth year in NSC

4. Interest earned every year on NSC can be shown as reinvestment under Section 80 c for the current year.

For Example
if you invested Rs 50,000 in NSC in Jan'06.You would have availed Rs 50,000 under Sec 80c last year.

You can also claim the interest earned on 50,000 during the current year under Section 80 c.

See Table below for details.

From a taxation point of view PPF is better (Why you must have a PPF account?), if you are comfortable with the lock in period of 15 years.

Time in the market is more important

Wondering what's happening to the sensex after the blood bath that has been happening for the past couple of days!!!

These Volatility should'nt really affect a long term investor. In an article in TOI , there was an excellent comparsion between two investors.

1. Both the investors were in the market from 1980 to Dec 2005, Investing 10,000 every year.

2. A always invested when market was at its low (year low), B on the contrary did invest in highs alone (Year high)

3. The difference in ROI was just 2% between them. (per annum return , 16%- B and 18%-A)

It was interesting to note this... Because " In God we trust , Others Need DATA"..So it was a proof with data for the fact that " Time in the market is more important than timing the market".

Q & A - Mutual Funds

What do you think about the below mutual funds for long term, which one is the best . I am planning to invest, please spend some of your time and help me :)
1) Prudential ICICI infra
2) Reliance Growth
3) Reliance vision
4) Sundaram select midcap
5) Magnum Global fund.
Im looking for Equity diversified mutual fund for aperiod of 3-5 years. - ideasmoney blog visitor

1) Prudential ICICI infra

Infrastructure is a great growth area and it has fetched a lot of returns recently. This is a sectoral fund and carries diversification within the sector only. so , the risk/ return proportion is high. Sectoral Funds are not generally suggested for a beginner (investor).If you are willing to take the sectoral risk (infrastructure) ..you can go for it. ( Also look at Tata Infrastructure, Sundaram Capex before you decide)

2) Reliance Growth
4) Sundaram select midcap
5) Magnum Global fund.

All the three of the aforesaid funds are midcap funds . Midcaps tend to outperform other funds in the long term ..as the mid caps companies ability to grow is generally perceived to be higher than the large caps. But the time you keep invested in these funds need to be a bit longer than other diversified equity funds to fetch the results. You can definitely go for these, as you are looking for a 5 year investment period.( Sundaram midcap has multiplied money almost 9 times in four years and Reliance growth almost 25 times in 11 years!!)

3) Reliance vision

Funds like Reliance Vision, HDFC Equity are stable funds. They are more Large Cap oriented with an ability to fetch stable returns . They should form a core of your portfolio. (These are must haves and you can allocate a good share of your portfolio to these funds for more stability ).

Most importantly take the SIP route..happy investing

NSC/ FD VS Equity MF Comparison table

A self explanatory table of comparison between investments

( Fixed Deposit/ National Savings Certificate Vs Diversified Mutual Fund)

Amount in Rs
InvestmentF.D./ NSCDiversified Equity MF
Period6 years6 years
Maturity Value15868.7429859.84
Tax on Income/ Capital gains 1573.680
Value of Investment after 5 Years10109.8725674.65
(post tax post inflation)
Difference (15564.78)
RatesPer annum
Inflation 6%
Rate of Interest on F.D./NSC8%
Rate of Return on MF 20%***(Last five years average 40%)
Income Tax rate30%

***This post was published originally in Dec 2006 ( When the global equities were moving to a  peak ). In those times,an average equity mutual fund had annualized returns over 40% for five years ( 2001-2006). In 2013, the average annualized return for equity funds stand at around 5 % (considering the last five year period 2008-13).

So, Please know your facts and risks associated well before investing. Blind extrapolation of the past would lead to great failures.

Some facts about Warren Buffet

Some facts about Warren Buffet - Second Richest Man ...................

There was a one hour interview on CNBC with Warren Buffet, the
second richest man who has donated $31 billion to charity.
Here are some very interesting aspects of his life:

1)He bought his first share at age 11 and he now regrets that he
started too late!

2)He bought a small farm at age 14 with savings from delivering

3)He still lives in the same small 3 bedroom house in mid-town
Omaha, that he bought after he got married 50 years ago.
He says that he has everything he needs in that house. His house does
not have a compound wall or a fence.

4) He drives his own car everywhere and does not have a driver or
security people around him.

5)He never travels by private jet, although he owns the world's
largest private jet company.

6)His company, Berkshire Hathaway, owns 63 companies.
He writes only one letter each year to the CEOs of these
companies, giving them goals for the year.
He never holds meetings or calls them on a regular basis.

7) He has given his CEO's only two rules.
Rule number 1: do not lose any of your share holder's money. Rule
number 2: Do not forget rule number 1.

8)He does not socialize with the high society crowd. His past time
after he gets home is to make himself some pop corn and watch television.

9) Bill Gates, the world's richest man met him for the first time
only 5 years ago. Bill Gates did not think he had anything in common
with Warren Buffet. So he had scheduled his meeting only for half hour.
But when Gates met him, the meeting lasted for ten hours and Bill Gates
became a devotee of Warren Buffet.

10)Warren Buffet does not carry a cell phone, nor has a computer on
his desk.

11)His advice to young people: Stay away from credit cards and
invest in yourself.

Amazing individual indeed!

3 "I"'s that can make you Wealthy

Look at any of the wealthy people in the world , they would have got rich by any of the 3 I's that follow.

1. Innovation

Being innovative ...being different from the crowd.
Innovation need not be restricted to a product innovation or a technology breakthrough...but also innovative way of doing a business......successfully turning ideas into reality.
Doing things that the crowd doesnot do ....thinking differently can also all be classified as innovation for this purpose.
if you take the first generation billionaires throughout the word they have become rich mostly by being innovative or by championing an innovative idea.

Needless to say , every organisation emphasises its employees to be innovative.

2. Investment

Investing in a disciplined and planned manner can make you wealthy. Investment is spotting opportunities and multiplyig your wealth through those opportunities.
Its essentially identifying Question marks and Stars ..keeping your bets on them till they become Cash cows.
This is the best way for the not so innovative kind.

Wondering about the third 'I' ...That's nothing but

3. Inheritance....You can be wealthy because you inherit wealth....there's nothing much you can do about it. :-)
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