The Frequently Asked Questions and Our Guidance to your queries.
Why is investing better than saving?
Imagine a 50-overs cricket match in which #6 batsman walks in to bat only in the 5th over. His job is to first ensure he does not lose the wicket, and then focus on scoring runs.
While saving is a must for investing, it is important to save one’s wicket in order to be able to score later. One can save the wicket by playing defensive cricket and avoiding all sorts of shots. But that would result in a very low score. He would need to hit some boundaries by taking certain risks like lofted shots or drives between fielders or cuts and nudges.
Similarly, in order to accumulate large sums to meet one’s financial goals, in order to beat inflation, one must take certain investment risks. Investing is all about taking calculated risks and managing the same, not avoiding the risks altogether.
At the same time, in the cricket analogy, in order to stay at the crease as well as score runs, one must take calculated risks and not play rash shots. Taking unnecessary risks is a bad strategy.
So while saving is necessary, investing is very important to achieve long term goals
What are some mistakes people make when investing in Mutual Funds?
Investing without understanding the product:
Investing without knowing the risk factors
Not investing the right amount
Redeeming too early
Investing without a plan
When should I start investing in Mutual Funds?
There is a beautiful Chinese proverb, “The best time to plant a tree was 20 years ago. The second best time is now.”
There is no reason why one should delay one’s investments, except, of course, when there is no money to invest. Within that, it is always better to use Mutual Funds than to do-it-oneself.
There is no minimum age when one can start investing. The moment one starts earning and saving, one can start investing in Mutual Funds. In fact, even kids can open their investment accounts with Mutual Funds out of the money they receive once in a while in form of gifts during their birthdays or festivals. Similarly, there is no upper age for investing in Mutual Funds.
Mutual Funds have many different schemes suitable for different purposes. Some are suitable for growth over long periods, whereas some may be for those in need of safety with regular income, and some provide liquidity in the short term, too.
You see, whatever stage of life one is in, or whatever one’s requirements, Mutual Funds may have solutions for each one.
What are the benefits of investing in Mutual Funds?
Investing in a mutual fund offers you a gamut of benefits
- Small investments: With mutual fund investments, your money can be spread in small bits across varied companies. This way you reap the benefits of a diversified portfolio with small investments.
- Professionally Managed: The pool of money collected by a mutual fund is managed by professionals who possess considerable expertise, resources and experience. Through analysis of markets and economy, they help pick favourable investment opportunities.
- Spreading risk:A mutual fund usually spreads the money in companies across a wide spectrum of industries. This not only diversifies the risk, but also helps take advantage of the position it holds.
- Transparency & interactivity: Mutual funds clearly present their investment strategy to their investors and regularly provide them with information on the value of their investments. Also, a complete portfolio disclosure of the investments made by various schemes along with the proportion invested in each asset type is provided.
- Liquidity: Closed ended funds can be bought and sold at their market value as they have their units listed at the stock exchange. In addition to this, units can be directly redeemed to the mutual fund as and when they announce the repurchase.
- Choice: A wide variety of schemes allow investors to pick up those which suit their risk / return profile.
- Regulations:All the mutual funds are registered with SEBI. They function within the provisions of strict regulation created to protect the interests of the investor
What should one keep in mind while choosing a good Mutual Fund?
Income, expenses, commitments, financial goals and many other factors vary from person to person.
So before investing your money in mutual funds, you need to analyse the following:
- Investment objective: The first step should be to evaluate your financial needs. It can start by defining the investment objectives like regular income, buying a home, finance a wedding, educating your children, or a combination of all these needs. Also your risk appetite and cash flow requirements form an important part of the decision.
- Choose the right Mutual Fund: Once the investment objective is clear, the next step would be choosing the right Mutual Fund scheme. Before choosing a mutual fund the following factors need to be considered:
- NAV performance in the past track record of performance in terms of returns over the last few years in relation to appropriate yardsticks and other funds in the same category
- Risk in terms of unpredictability of returns
- Services offered by the mutual fund and how investor friendly it is
- Transparency indicated in the quality and frequency of its communications
- It is always advisable to diversify your money by investing it in different schemes.
- This not only cuts down on the risk, but also gives you a chance to benefit from multiple industries and sectors.
How popular are Mutual Funds in other countries?
The Global Assets Under Management (AUM) of Open-end Mutual Fund schemes exceeded US$ 37.1 trillion, across 100,494 schemes as on Dec 31, 2015.
While developed markets have the maximum AUM, developing or emerging markets are beginning to break out. The US had over $17.7 trillion in AUM, while Europe had $12.7 trillion. Asia Pacific countries had $4.7 trillion, of which Australia, China and Japan accounted for $1.52 Trillion, $1.26 Trillion and $1.33 Trillion respectively. Brazil, had over $743 Billion in Mutual Fund Assets. India had Assets of $168 Billion, thus showing the low penetration of Mutual Funds in India, while highlighting the tremendous unrealised potential in India.
The data suggests that Mutual Funds are very popular in developed nations and are rapidly creating acceptance in fast growing emerging markets. Aiding the growth is increase in GDP as well as establishment of effective regulatory structures to manage the growth.
(All data and figures: International Investment Funds Association from Investment Company Institute Year Book 2016)
How can I start investing in Mutual Funds?
Investing in Mutual Funds requires you to complete a few basic formalities. Such formalities may either be completed directly with an Asset Management Company (AMC) at their office, or authorized point of acceptance (PoA), or through an authorized intermediary such as an advisor, banker, distributor or broker.
Prior to investing in a Mutual Fund scheme, you need to complete the Know Your Customer (KYC) process. The completed KYC form may be submitted with the scheme application form (also known as Key Information Memorandum). The application form would have to be carefully filled as it would capture important details like names of all account holders, PAN numbers, bank account details etc. This would have to be signed by all account holders. Much of these can be done through online platforms too.
New investors may take help from their advisors, to make the entire process smooth and easy. And before investing, all investors are advised to read important scheme related documents and know the risks of their scheme choice.
How should I choose whether to go for SIP or Lumpsum?
Invest in SIP or a one-time investment (lumpsum)? Choosing one depends on your familiarity with Mutual Funds, the fund you want to invest in and your goal. If you want to invest regularly to accumulate sufficient capital for a goal, invest in a suitable equity scheme through SIP. Like, if you want to save from your monthly income and put it in an option where you can grow your money significantly so that in the long run it’ll be sufficient to fund your child’s higher education, SIP is the answer. Seek help from a fund adviser if needed.
If you have surplus cash now, like – bonus, proceeds from property sale or retirement corpus, but unsure how to use it, go for lumpsum investment in a debt or liquid fund. SIPs are advisable for investing in equity-oriented schemes while lumpsums are better suited for debt funds. If you are new to investing in Mutual Funds, SIPs are meant for you. SIPs need sufficiently long-time horizons to prove beneficial. You may invest in lumpsum if the market has been following an upward trend and you think it’ll continue for long. SIPs are best suited for a widely fluctuating market phase.
What is SIP?
A systematic investment plan (SIP) is a plan where investors make regular, equal payments into a mutual fund.
Such systematic approaches promote investment discipline, which is useful in long-term wealth creation and protection.
SIP is a hassle-free way to invest money in mutual funds. SIP allows customers to invest a certain amount at a regular interval. It is a systematic approach towards investments and helps subscribers to save and build wealth for the future.
In SIP installments are automatically debited from customer’s bank account. Subscribers are allocated a certain number of units based on the ongoing market rate (called NAV or net asset value) for the day.
Every time a subscriber invests money, additional units of the scheme are purchased at the market rate and are added to the account. Hence, units are bought at different rates and investors benefit from Rupee-Cost Averaging and the Power of Compounding. bank account. And this installments cuts every months so there is no worries about market ups & down.
Why is SIP a great investment option?
The biggest advantage of an SIP is the habit of regular, disciplined savings. Every month, like all other EMIs, this also gets deducted from the bank a/c through electronic clearing service, which is convenient. A SIP does not pinch the pocket much if started at an earlier stage.
Another benefit is that when investing through SIP, it is not necessary to time the market. Investments will be made systematically every month or quarter depending on the option. It ensures investing in all phases of the market where more units will be accumulated during a bearish phase and a lesser number of units in a bullish phase. This way, the investor enjoys the benefit of rupee cost averaging under this method.
With an SIP investment, you give your savings the power of compounding. Here?s an illustration of this works:
Suppose Mr. Ranjan invests Rs. 60,000 at 12 per cent per annum. After 30 years it will add up to Rs. 1.60 crore (Rs. 16 million). If the savings were started 5 years later, the sum accumulated would be lower by Rs. 90 lakh (Rs. 9 million) to just Rs. 89 lakh (Rs. 8.9 million). Just an early start of five years, that is, an additional Rs. 3 lakh (Rs. 300,000) of incremental investment increases your sum by almost a crore (Rs. 10 million). That is the power of compounding.
SIP helps in averaging costs over a period of time. Since you are investing the same amount every month or every quarter, the average NAV at which you have acquired the units will be lower. Here?s an how:
Let’s say, Mr. Pratap has started an SIP in June 2011 with Rs. 10,000 every month.
Amount invested (Rs.)
(Assuming a no load structure)
You might notice more units have been allocated when the NAV is lower and lesser number of units when the NAV is higher. The average cost per unit is Rs. 50,000/4604.0530 = 10.8600 and the average cost during the same period would work out to (Rs. 11 + 11.5 + 10 + 14 + 9 / 5 = 55.5)
However, if Mr. Pratap had invested his Rs. 50,000 all at once in June 2011, he would have been allotted 4,545.455 units at the cost of Rs. 11.
It?s clear that SIP, with its small investments goes a long way in helping you grow your money and achieve your goals.
What is power of compounding?
To many, the power of compounding seems like a difficult topic. But it is not so. We’ll help you understand this in a simple manner.
Let us assume that someone invested Rs. 10,000 @ 8% p.a. The interest for the year would be Rs. 800. However, when the interest is reinvested in the same investment, the earning next year would accrue on original investment of Rs. 10,000 as well as on the additional investment of Rs. 800. This means, the earning for the second year would be Rs. 864. As the years pass, the interest for the year keeps increasing since there is additional investment each year.
How much money would be accumulated after a certain time period if the returns are reinvested? Let us see.
Investment: Rs. 1, 00,000
Rate of return: 8% p.a.
The above table shows some interesting pattern. As the investment is held for longer periods, the earning keeps growing faster. While the earning in the first 5 years was Rs. 0.47 lacs, the same for the next 5-year period was Rs. 0.69 lacs (Rs. 2.16 lacs – Rs. 1.47 lacs). The earning in the 21st year – a single year – was Rs. 0.37 lacs.
“As the time goes, the earnings do not multiply, but grow exponentially.”
Essentially, compounding is the process of earning income on your principal investment plus the income earned – the income also starts to earn as the same is reinvested.
How do I start/stop a SIP? What happens if I miss an installment?
Before you make any Mutual Fund investment, you need to complete a KYC process. This is done through submission of certain documents as proof of identity and proof of address. The process of starting or stopping an SIP is extremely convenient and easy. How to start an SIP is explained in the graphics on the left.
What happens when you skip an installment or two?
SIP is just a convenient mode of investing and not a contractual obligation, there is no penalty even if you miss an installment or two. At most, the Mutual Fund Company would stop the SIP, which means further installments would not get debited from your bank account. At the same time, you can always start another SIP, even in the same folio, even after the earlier SIP was stopped. Please keep in mind, this would be treated as a fresh SIP and hence there could be some time taken to set up the SIP all over again.
Consult with a Relitrade Agent today and start enjoying the benefits of Mutual Funds!
What is Net Asset value (NAV)?
Net Asset Value (NAV) is the actual value of one unit of a given scheme on any given business day.
The NAV reflects the liquidation value of the fund’s investments on that particular day after accounting for all expenses. It is calculated by deducting all liabilities (except unit capital) of the fund from the realisable value of all assets and dividing it by number of units outstanding.
Can NRIs invest in Mutual Funds in India?
Yes, Non Resident Indians (NRI) and Persons of Indian Origin (PIO) can invest in Indian Mutual Funds on a full repatriation as well as non-repatriation basis.
However, NRIs would have to comply with all regulatory requirements such as completion of KYC before investing. It should however be noted that a few countries such as US and Canada have restricted investments by NRIs in Mutual Funds without relevant disclosures. NRIs from these countries, thus need to check once with their advisor on feasibility of investing in Indian funds before actually investing.
NRIs are provided most of the benefits and conveniences of resident Indian investors while investing. They can invest through SIPs, they can switch as per their convenience, they can opt for growth or dividend options and can repatriate the redemption proceeds whenever they want to.
Thus NRIs and PIOs can invest and enjoy the full benefit of investing in a wide variety of Indian Mutual Fund schemes.
Are Mutual Funds an ideal investment for the small investor?
Yes! Even for an investor with modest savings or small beginnings, Mutual Funds are an ideal investment vehicle.
Almost every investor, small or big, has a Savings Bank (SB) account, and anyone with that account can start investing through Mutual Funds. With amounts as low as ₹ 500 every month, Mutual Funds promote the healthy habit of regular investing.
Other benefits for a small investor in Mutual Funds are-
1. Ease of transacting- Investing, reviewing, managing and redeeming from a Mutual Fund scheme are all simple processes.
2. Easy liquidity, maximum transparency and disclosure, timely statements of accounts, and tax benefits are all that a small or first time investor looks out for.
3. Dividends in Mutual Funds are tax free at the hands of the investor
4. A Mutual Fund gives the same investment performance, to an investor who has invested ₹ 500 or one who has invested ₹ 5 crores. Thus it has every investor’s interests in mind – small or big.
5. Professionally managed, diversified portfolio for someone who invests even ₹ 500 a month.
No matter how small the starting amount or modest the objectives.
What is the minimum & maximum tenure that I can invest in Mutual Funds?
The minimum tenure for investment in Mutual Funds is a day and the maximum tenure is ‘perpetual’.
It may be easy to understand the minimum period of a day, i.e. getting units allotted at a particular NAV and then redeemed at the next day’s NAV. However, what is the ‘perpetual’ nature of the maximum tenure? There are open end schemes in India with daily NAV, in existence for more than 20 years. And there are investors too who have stayed invested for that tenure! As long as the schemes continue in operation and offer a NAV based sale and purchase price, investors can choose to continue to stay invested. An open end fund may continue in existence until the fund house decides to terminate it, after obtaining due approval of the trustees.
Why invest through Mutual Funds & not directly in stocks or bonds?
Yes, it is “through” Mutual Funds and not “in” Mutual Funds. What is the difference?
You may indulge in buying and selling stocks and bonds once in a while, but taking help from Mutual Funds to manage your investments may be a much better idea.
When you invest through Mutual Funds, you invest in stocks, bonds or other investments indirectly with the help of professional managers. Instead of doing the tasks yourself, you pay a small fee and avail the services of a fund management company. These services include not just research, selection and buying-selling of various investments, for which a fund manager is well qualified, but also the accounting and administrative activities related to the task of investing, which many may not like to do themselves.
How can I invest in Mutual Funds Online?
What is a systematic withdrawal plan (SWP)?
The unit holder may set up a Systematic Withdrawal Plan on a monthly, quarterly or semi-annual or annual basis to redeem a fixed number of units. The systematic withdrawal plan, besides being popular among investors looking for consistent cash flows from their investments, is helpful for retirees to support their expenses.
What is a systematic transfer plan (STP)?
With an STP, you choose a particular amount to be transferred from one mutual fund scheme to another of your choice. You can go for a weekly, monthly or a quarterly transfer plan, depending on your needs.
How can STP help you?
If you are looking at gradually exposing yourself to equities or reducing exposure over a period of time, then STPs are a good option.
You can start an STP with as minimum an amount as Rs. 500 where in every month a pre-determined amount will be invested into an equity fund. This helps in deploying funds at regular intervals in equities with minimum timing risk. This also gives you an opportunity to earn better than saving bank account rate of return.
Unfreezing equity assets
In case you want to cash out your funds from equity, there?s a momentary exposure to timing risk while exiting the market. To bypass the risk, you can transfer funds from equity schemes to liquid funds and withdraw the money as per your needs.
STP to save tax
If you have been investing in equities using diversified equity funds, and now keen to do some tax-saving investments. You can initiate an STP from the diversified fund to an ELSS of the same fund house. This ensures that you are saved on the transactions front. Instead of selling units of equity mutual fund first and then waiting for the proceeds before investing again, STP makes a smooth transfer of money from one fund to another.
You can initiate an STP for your funds in diversified fund to an ELSS of the same fund house. So instead of selling units of equity mutual fund first and then waiting for the proceeds before investing again, STP makes a smooth transfer of money from one fund to another.
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