Why Invest Through MutualFund

Professional Money Management
Fund managers are responsible for implementing a consistent investment strategy that reflects the goals of the fund. Fund managers monitor market and economic trends and analyze securities in order to make informed investment decisions.
Diversification
Diversification is one of the best ways to reduce risk (to understand why, read The need to Diversify). Mutual funds offer investors an opportunity to diversify across assets depending on their investment needs.
Liquidity
Investors can sell their mutual fund units on any business day and receive the current market value on their investments within a short time period (normally three- to five-days).
Affordability
The minimum initial investment for a mutual fund is fairly low for most funds (as low as Rs500 for some schemes).
Convenience
Most private sector funds provide you the convenience of periodic purchase plans, automatic withdrawal plans and the automatic reinvestment of interest and dividends.
Mutual funds also provide you with detailed reports and statements that make record-keeping simple. You can easily monitor the performance of your mutual funds simply by reviewing the business pages of most newspapers or by using our Mutual Funds section.
Flexibility and variety
You can pick from conservative, blue-chip stock funds, sectoral funds, funds that aim to provide income with modest growth or those that take big risks in the search for returns. You can even buy balanced funds, or those that combine stocks and bonds in the same fund.
Tax benefits on Investment in Mutual Funds
1) 100% Income Tax exemption on all Mutual Fund dividends
2) Equity Funds - Short term capital gains is taxed at 15%. Long term capital gains is not applicable.
Debt Funds - Short term capital gains is taxed as per the slab rates applicable to you. Long term capital gains tax to be lower of - 10% on the capital gains without factoring indexation benefit and 20% on the capital gains after factoring indexation benefit.
3) Open-end funds with equity exposure of more than 65% (Revised from 50% to 65% in Budget 2006) are exempt from the payment of dividend tax for a period of 3 years from 1999-2000.
Note: Equity Funds are those where the investible funds are invested in equity shares in domestic companies to the extent of more than 65% of the total proceeds of such funds.

7 good reasons to invest in SIPs

Fact No. 1: Over a long term horizon, equity investments have given returns which far exceed those from the debt based instruments. They are probably the only investment option, which can build large wealth.Fact No. 2: In short term, equities exhibit very sharp volatilities, which many of us find difficult to stomach.   No. 3:Equities carry lot of risk even to the extent of loosing ones entire corpus. Fact No. 4:Investment in equities require one to be in constant touch with the market. Fact No. 5:Equity investment requires a lot of research. Fact No. 6: Buying good scrips require one to invest fairly large amounts.

Systematic Investing in a Mutual Fund is the answer to preventing the pitfalls of equity investment and still enjoying the high returns. And it makes all the more sense today when the stock markets are booming. (Also Read - 5 corners of a sound Investing Strategy)

1. It’s an expert’s field – Let’s leave it to them
Management of the fund by the professionals or experts is one of the key advantages of investing through a mutual fund. They regularly carry out extensive research  - on the company, the industry and the economy – thus ensuring informed investment. Secondly, they regularly track the market. Thus for many of us who do not have the desired expertise and are too busy with our vocation to devote sufficient time and effort to investing in equity, mutual funds offer an attractive alternative. (Read more -The Investors biggest Dilemma)  

2. Putting eggs in different baskets
Another advantage of investing through mutual funds is that even with small amounts we are able to enjoy the benefits of diversification. Huge amounts would be required for an individual to achieve the desired diversification, which would not be possible for many of us. Diversification reduces the overall impact on the returns from a portfolio, on account of a loss in a particular company/sector.

3. It’s all transparent & well regulated
The Mutual Fund industry is well regulated both by SEBI and AMFI. They have, over the years, introduced regulations, which ensure smooth and transparent functioning of the mutual funds industry. This makes it safer and convenient for investors to invest through the mutual funds. (Check out - Foolproof strategies to maximize your profits)

4. Market timing becomes irrelevant
One of the biggest difficulties in equity investing is WHEN to invest, apart from the other big question WHERE to invest. While, investing in a mutual fund solves the issue of ‘where’ to invest, SIP helps us to overcome the problem of ‘when’. SIP is a disciplined investing irrespective of the state of the market. It thus makes the market timing totally irrelevant. And today when the markets are high, it may not be prudent to commit large sums at one go. With the next 2-3 years looking good from Indian Economy point of view, one can expect handsome returns thru’ regular investing. 

5. Does not strain our day-to-day finances
Mutual Funds allow us to invest very small amounts (Rs 500 – Rs 1000) in SIP, as against larger one-time investment required, if we were to buy directly from the market. This makes investing easier as it does not strain our monthly finances. It, therefore, becomes an ideal investment option for a small-time investor, who would otherwise not be able to enjoy the benefits of investing in the equity market.

6. Reduces the average cost 
In SIP we are investing a fixed amount regularly. Therefore, we end up buying more number of units when the markets are down and NAV is low and less number of units when the markets are up and the NAV is high. This is called rupee-cost averaging. Generally, we would stay away from buying when the markets are down. We generally tend to invest when the markets are rising. SIP works as a good discipline as it forces us to buy even when the markets are low, which actually is the best time to buy. (Read more - Invest wisely and get rich with equity MFs)

7. Helps to fulfill our dreams
The investments we make are ultimately for some objectives such as to buy a house, children’s education, marriage etc. And many of them require a huge one-time investment. As it would usually not be possible raise such large amounts at short notice, we need to build the corpus over a longer period of time, through small but regular investments. This is what SIP is all about. Small investments, over a period of time, result in large wealth and help fulfill our dreams & aspirations.

What is NAV ( Net Asset Value) of mutual fund scheme

The NAV of a mutual fund has not been correctly understood by a large section of the investing community.

This is quite evident from the fact that Mutual Funds had been recently collecting huge corpus in their New Fund Offers or NFOs, whereas the collections in the existing schemes were negligible. In fact, investors sold their existing investments and invested in NFOs. This switch makes no sense, unless the new fund has something different and better to offer.

Misconception about NAV

This situation arises from the perception that a fund at Rs 10 is cheaper than say Rs 15 or Rs 100. However, this perception is totally wrong and investors would be much better off once they appreciate this fact. Two funds with same portfolio are same, no matter what their NAV is. NAV is immaterial.

Why people carry this perception is because they assume that NAV of a MF is similar to the market price of an equity share. This, however, is not true.

Definition of NAV

Net Asset Value or NAV is the sum total of the market value of all the shares held in the portfolio including cash less the liabilities, divided by the total number of units outstanding. Thus, NAV of a mutual fund unit is nothing but the ‘book value’.

NAV vs Price of an equity share

In case of companies, the price of its share is ‘as quoted on the stock exchange’, which apart from the fundamentals, is also dependent on the perception of the company’s future performance and the demand-supply scenario. And hence the market price is generally different from its’ book value.

There is no concept as market value for the MF unit. Therefore, when we buy MF units at NAV, we are buying at book value. And since we are buying at  book value, we are paying the right price of the assets whether it be Rs 10 or Rs.100. There is no such thing as a higher or lower price. 

NAV & it’s impact on the returns

We feel that a MF with lower NAV will give better returns. This again is due to the wrong perception about NAV. An example will make it clear that returns are independent of the NAV.

Say you have Rs 10,000 to invest. You have two options, wherein the funds are same as far as the portfolio is concerned. But say one Fund X has an NAV of Rs 10 and another Fund Y has NAV of Rs 50. You will get 1000 units of Fund X or 200 units of Fund Y. After one year, both funds would have grown equally as their portfolio is same, say by 25%. Then NAV after one year would be Rs 12.50 for Fund X and Rs 62.50 for Fund Y. The value of your investment would be 1000*12.50 = Rs 12,500 for Fund X and 200*62.5 = Rs 12,500 for Fund Y. Thus your returns would be same irrespective of the NAV.

It is quality of fund, which would make a difference to your returns. In fact for equity shares also broadly this logic would apply. An IT company share at say Rs 1000 may give a better return than say a jute company share at Rs 50, since IT sector would show a much higher growth rate than jute industry (of course Rs 1000 may ‘fundamentally’ be over or under priced, which will not be the case with MF NAV).

3 Simple ways to become RICHER in 365 Days

You have got complete 365 days. Why don’t you chalk out a plan to become richer by next year? The good thing is you don't have to employ some highly esoteric investment strategies or complex algorithms to become richer in a year's time. Some simple reorganisation in your personal finance management could make you richer. Almost always, the simplest are the most profound.

1) Make a Financial Plan:

This is the first and foremost important step to become financially successful. It is not your income, but your wealth that counts. People with high income like Michel Jackson died with a lot of debts. So a careful personal finance management is more important than how much you earn. To have an effective personal finance management system in place for you, you need to have a personalized well written financial plan.

What are the things you want to save and invest for? It may be for buying a home, buying a car, children’s higher education, retirement planning. Decide how many years from now you need to achieve each and every goal. Because you need to take into consideration the inflation for all those years and also you need to choose investment options based on the timeframe for investments.

You need to create your own list of financial goals. If you don’t know where you are going, you may end up somewhere you don’t want to be. To end up where you want to be, you’ll need a roadmap, a financial plan.

So create a financial plan for you and your family on this. There is a lot of help available for you online to create a financial plan in various websites with financial calculators. But if you want to create a more workable financial plan, you may seek assistance from professional financial planners.

2) Pay off all high interest debts:

You need to create a plan to come out your high interest debts like personal loan, credit card outstanding, car loan and the like. Credit cards can make it seem easy to buy expensive things when you don’t have enough cash. But it is not free money. To come out of debt, you need to have specific strategies that can work in your own situation. There are 11 ways to get out of debt and stay out of debt. You can choose one or a few ways from this to become debt free.

If you are not giving enough attention to your debt, then it can sink your financial ship. So take some time on this to list down all your borrowings and make out a plan to come out.

3) Start Saving and Investing:

As soon as you have paid off all your high interest debts, you need to start saving and investing for your financial goals. To save more either you need to spend less or you need to earn more. So you check up what are all the ways and means available for you to spend less and earn more.

If you are spending more than your income or all your income and you don’t have any money left to save or invest, you need to look for ways to cut back on your expenses. When you check where you are spending your money, you will be surprised to know how everyday petty expenses that you can do without add up over a year. You need to understand what makes us spend more and strategies to have self control with money to spend smart and save more.

When you started saving money, you need to convert your savings into investments. When you are choosing your investment option you need to take into account, the timeframe for investments, risk you can afford to take, inflation and your financial goals. Also you need to be careful in avoiding the biggest investment mistake. That is to choose a scheme in sync with basic investment principle. Make sure that you are not violating any investment principle. Don’t fall for speculative gains, ponzi schemes and get rich quick schemes.

Mutual fund investment by means of SIP ( Systematic Investment Plan ) is best saving option

If you follow these simple but authentic steps, by next year you will be richer than what you are in this year. Celebrate this year with much more confidence and peace of mind by following these simple steps for financial success.

The above matter views of Mr. Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached atramalingam@holisticinvestment.in