StockIsy

Category: Mutual Funds

  • What is SIP

    What is SIP

     

    Systematic Investment Plan (SIP) is an investment strategy that allows individuals to invest a fixed amount of money at regular intervals in specific investment vehicles such as mutual funds. SIP follows the principle of disciplined investing, where investors commit to making consistent contributions towards their investment portfolio over a predetermined period.

    The fundamental principles of SIP include:

        1. Regular and Periodic Investing:

    SIP encourages investors to contribute a fixed amount regularly, typically on a monthly basis. This consistent approach helps inculcate financial discipline and ensures a systematic allocation of funds towards investments.

       2. Rupee Cost Averaging:

    One of the core principles of SIP is the concept of rupee cost averaging. With regular investments, investors buy more units when prices are low and fewer units when prices are high. This strategy helps smooth out the impact of market volatility and potentially reduces the average cost of acquiring units over time.

       3. Power of Compounding:

    SIP leverages the power of compounding, wherein the returns generated from investments are reinvested to earn additional returns. As time progresses, compounding can significantly enhance the growth of the investment portfolio, resulting in the potential for wealth creation.

       4. Flexibility and Affordability:

    SIP offers investors the flexibility to start with a relatively small investment amount. This affordability factor allows individuals to initiate their investment journey with a manageable sum and gradually increase their contributions as their financial situation permits.

       5. Long-Term Focus:

    SIPs are designed for long-term wealth creation. By consistently investing over an extended period, investors can harness the benefits of compounding and ride out short-term market fluctuations, aligning their investment strategy with their long-term financial goals.

       6. Diversification:

    SIPs provide the opportunity to invest in a diversified portfolio of securities through mutual funds. By investing across various asset classes and sectors, SIP investors can spread their risk and potentially benefit from the growth of different sectors of the economy.

       7. Convenience and Automation:

    SIPs offer convenience to investors as the investment process can be automated. Through pre-authorized bank mandates, investors can set up automatic deductions from their bank accounts, ensuring a seamless and hassle-free investment experience.

     

    Explaining the process of investing through SIP:

       1. Selecting a Mutual Fund:

    The first step is to choose a mutual fund that aligns with your investment objectives, risk tolerance, and financial goals. Consider factors such as fund performance, historical returns, fund manager expertise, investment philosophy, and expense ratio while making your selection.

       2. Determining the Investment Amount:

    Decide on the amount you wish to invest in the mutual fund through SIP. This can be a fixed amount, such as ₹5,000 per month, or any other amount that suits your budget and investment capacity.

       3. Setting the SIP Duration:

    Determine the duration or tenure for which you want to continue investing through SIP. It can be a few months, several years, or even an open-ended period depending on your financial goals and investment horizon.

       4. Frequency of Investments:

    Choose the frequency at which you want to make SIP contributions. Most commonly, SIPs offer monthly, quarterly, or bi-annual investment options. Select the frequency that suits your cash flow and investment preferences.

       5. Submitting the Application:

    Fill out the application form provided by the mutual fund company or its authorized distributor. Provide the necessary details, including personal information, investment amount, SIP duration, and frequency of investments.

       6. Completing the Documentation:

    Attach the required documents, such as Know Your Customer (KYC) compliance documents, proof of identity, address, and bank account details, as specified by the mutual fund company. Ensure that all the documents are correctly filled and submitted along with the application.

       7. Bank Mandate and Auto-Debit Authorization:

    Set up a bank mandate to authorize the mutual fund company to automatically deduct the SIP amount from your bank account at the chosen frequency. Provide the necessary authorization for auto-debit instructions.

       8. SIP Account Creation:

    Upon submission of the application and completion of the necessary documentation, the mutual fund company will create a SIP account for you. This account will reflect your SIP investments and provide periodic statements of your holdings.

       9. Monitoring and Reviewing:

    Regularly monitor the performance of your SIP investments. Review the statements provided by the mutual fund company to track the growth of your investment portfolio. Consider consulting with a financial advisor periodically to assess the progress of your investments and make any necessary adjustments.

       10. SIP Renewal and Adjustments:

    At the end of the chosen SIP duration, you have the option to renew your SIP or make any adjustments to the investment amount, duration, or frequency based on your evolving financial goals and market conditions.

     

    Also Read | TYPES OF MUTUAL FUND

  • TYPES OF MUTUAL FUND

    TYPES OF MUTUAL FUND

    TYPES OF MUTUAL FUND:

    Types of Mutual Fund

     

    A.          BY CONSTITUTION

     

    1.OPEN ENDED FUNDS

    DEFINITION: “These funds buy & sell units on a continuous basis &, here, allow investors to enter & exit as per their convenience. The units can be purchased & sold even after the initial offering (IFO) period (in case of new fund). The units are bought & sold at the net asset value (NAV) decleared by the fund.”

    The number of outstanding units goes up or down every time fund house sells or repurchases the existing units. This is the reason that the unit capital of an open ended mutual fund keeps varying. The fund expanse in size when the fund house sells more units than it repurchases as more money is flowing in.

    An open ended fund provides investors an easy, low cost way to pool their money & purchase a diversified portfolio reflecting a specific investment objectives, such as growth & income. Investors do not need a lot of money to gain entry into an open ended fund, making the fund easily accessible for investment.

    Open ended funds are available in most developed countries, but T terminology & operating rules vary. US mutual funds, UK units trusts & OEICs, European SICAVs, & hedge funds are all examples of open ended funds.

    On the other hand, the funds size reduces when the fund house repurchases more units than it sells. An open ended fund is not obliged to keep selling new units all the time. For instanace, if the management thinks that it cannot manage a large sized fund optimally, it can stop accepting new subscription requests from investors. However it has to repurchase the units at all times.

     

    2.CLOSE ENDED FUND:

    A close ended fund is also known as closed end investment or closed end mutual fund. A closed ended fund is organized as publicly traded investment company by the securities & exchange commission (SEC). Like a mutual fund a closed end fund is a pooled investment fund with a manager overseeing the portfolio, it raises a fixed amount of capital through.

    New shares in a closed end funds are not created by managers to meet demand from investors, the shares can be purchased & sold only in the markets, which as the original design of the mutual fund, which predctes open end mutual funds but offers the same actively-managed pooled investment.

    Usually a characteristic of closed end schemes is that they are generally traded at a discount to NAV, but clear to maturity, the discount narrows.

     

    ·    DIFFERENCE BETWEEN OPEN ENDED & CLOSE ENDED MUTUAL FUND:

    Both open end & closed end funds have been around for many decades. Close end funds are the oldest among these introduced in the late 19th century. Exchange traded funds or ETFs are a relatively recent innovation in the fund business & were launched about 20years ago. Currently, there are 7,407 open ended funds with total net assets of $12.1 trillion. But close end fund by far have the smallest market share, with 568 funds worth about $252.6 billion. This doesn’t mean that open ended funds are always the best option & their funds types should be ignored.

     

    BASIS FOR COMPARISON OPEN-ENDED FUNDS CLOSED-ENDED FUNDS
    Meaning Open-ended funds can be understood as the schemes that offer new units to the investors on a continuous basis. Closed-ended funds are the mutual funds, which offer new units to investors for a limited period only.
    Subscription These funds are available throughout the year for subscription. These funds are available only during specified days for subscription.
    Maturity There is no fixed maturity. Fixed maturity period, i.e. 3 to 5 years.
    Liquidity provider Funds itself Stock market
    Corpus Variable Fixed
    Listing No listing on stock exchange, transactions are performed directly through fund. Listed on a recognized stock exchange for trading.
    Transactions Executed at the end of the day. Executed in real time.
    Determination of price Price can be determined by dividing NAV from shares outstanding. Price is determined by supply and demand.
    Selling price Net Asset Value (NAV) plus load, if any. Premium or discount to Net Asset Value (NAV).
     

     

     

    3.INTERVAL FUND

     

    DEFINITION : “A non- traditional types of closed ended mutual fund that periodically offers to buy back a percentage of outstanding shares from shareholders. Shareholders are not required to sell their shares to the fund.”

    Interval fund shares typically do not trade on the secondary market although many interval funds do offer shares for sale at current net asset value (NAV) on a continuous basis.

    Fess for interval funds tend to be higher than for other types of mutual funds as do returns. High yields are the main reason investors are attracted to interval funds. Here is a closer look at these investments. Minimum investment are often between $10,000 & 25,000 & have expense ratio as high as 3%.

     

    B.           BY INVESTMENT OBJECTIVE

     

    1.GROWTH FUND & EQUITY FUND:

     

    These fund invest in stocks. Wealth creation & capital appreciation is the primary objective of equity fund. They have the potential to generate higher return & are best for long term investment. These funds goal is to grow faster than money market or fixed income funds with higher risk comes higher reward. There are many different types of equity funds because there are many different types of equities.

     

                I.            DIVERSIFIED FUND

    DIVERSIFIED FUND

    A diversified fund is a fund that is broadly diversified across multiple market sectors or geographic regions. It holds multiple securities, often in multiple asset classes. Its broad market diversification helps to prevent idiosyncratic event in one area from affecting on entire portfolio.

     

    a.  SMALL CAP

     Small cap funds invest primarily in stock in companies with sizes between &300million & $2billion. Small cap fund that invest in small sized companies. Mutual funds have restrictions that limit them from buying large portions of any one issuers outstanding shares, which limit the risk while giving an investors exposure to this segment of the market.

    b. MID CAP

                    A mid cap fund invest in companies between $2billion to $10billion in the market cap. These are established business that are still considered developing & thus have a higher growth rate than large cap fund. Mid cap which invest in mid sized business.

    c.  LARGE CAP FUNDS

    Large cap funds invest in stocks in the largest companies in the world, with market caps in excess of $10billion. These can include apple,exxon,&google.

     

            II.            INDEX FUND

                          These funds aim to track the performance of a specific index such as the S&P/TSX COMPOSITE INDEX. The value of the mutual fund will go up or down as the index goes up or down. Index funds typically have lower costs than actively managed mutual funds because the portfolio manager doesn’t have to do as much research or make as many investment decisions.

     

        III.            SECTORAL FUNDS

     

     SECTORAL FUNDS

    Sectoral fund invest mostly in a particular sector or along the lines of a defined theme. Since the investment are concentrated on a single sectors or theme, sector funds are considered extremely risky. It is very important to time the entry into & exit from them as the fortunes of sectors changing in different cycles in the economy. They are meant for investor should take only a small exposure in them.

    Sectoral funds have performed have done well over the period of 10 years & better than other equity funds, but there is risk associated with it & you need to stay invested in the fund for longer period for a economy & sectors like IT. So if you are convinced that these sectors will move forward in the long run, then you can invest with long term return in your view.

     

    • FOREIGN EQUITY FUNDS

    Foreign equity funds or global/ International funds, invest in a specific region outside of an investors home country. These funds sometimes have very high returns, but it is hard to classify them as either riskier or safe than domestic investment.

     

    2.DEBT/INCOME/BOND/FIXED INCOME FUNDS

    These invest in fixed income securities, like government securities or bonds, commercial papers & debentures, bank certifications of deposits & money market instruments like treasury bills, commercial paper etc. These  are relatively sufer investments & are suitable for income generation.

     

    3.HYBRID FUND

    HYBRID FUND

    These invest in both equities & fixed income, thus offering the best of both, growth potential as well as income generation. They try to balance the aim of achieving higher returns against the risk of losing money. Most of these funds follow a formula to split money among the different types of investments.

     

     

    4.MONEY MARKET FUND

     

    MONEY MARKET FUND

    The money market fund (also called a money market mutual fund) is an open ended fund that invest in short term debt securities such as U.S. treasury bills & commercial paper. Money market funds are widely (though not necessarily accurately) regarded as being as safe as bank yet providing a higher yield. Regulated in the UNITED STATES under the investment company Act of 1940. Money market funds are important providers of liquidity to financial intermediaries.

    A money market fund is an investment whose objective is to earn interest for shareholders while maintaining a Net Asset Value (NAV) of $1 per share. Money market funds portfolio is comprised of short term, or less than one year, securities representing high quality, liquid debt & monetary instruments. Investors can purchase shares of money market funds through mutual funds, brokerage firms & banks.

    A money market funds purpose is to provide investors with safe place to meet easily accessible.

    It is types of mutual fund characterized as a low risk, low return investment. They have no loads, which are fees mutual funds may charge for entering or exiting the funds.

    A money market funds might also hold short term U.S. treasury securities, such as T-Bills, certificates of deposit (COD); & corporate commercial buyer & other instruments specified by RBI. These funds have a minimum lock in period of 15 days. Till recently, the RBI regulated money market funds but they now come under SEBI.

    Subscribe to Blog via Email

    Enter your email address to subscribe to this blog and receive notifications of new posts by email.

    Click me for detail study of Mutual fund

  • Know about Mutual Fund

    Know about Mutual Fund

    DEFINITION:

    “A mutual fund is a professionally managed investment scheme, usually run by an asset management company that brings together a group of people & invests their money in stocks, bonds & other securities.”

     

    INTRODUCTION:

    Mutual funds are the most popular investment types for the everyday investor. Because they are easy to use in many in many ways, investing for dummies. A mutual fund is a kind of investment that uses money from many investors to invest in stocks, bonds & other types of investment. A fund manager decides how to invest the money & for this he is paid a fee, which comes from the money in the fund. All the MUTUAL FUNDS are registered with SEBI.

    In simpler terms, mutual funds are like baskets. Each basket holds certain types of stocks, bonds or a bland of stocks & bonds to combine for one mutual fund portfolio.

    Eg:   An investor who buys a fund called XYZ international stock is buying one investment security, the basket that holds dozens or hundreds of stocks from all around the globe, hence the “International” monike.

    Mutual fund

    TIP’S FOR BEGINNERS INVESTING IN MUTUAL FUNDS

    • Start saving & investing early in life.
    • Try to understand the fund in which you are investing.
    • Check the past performance of your mutual fund.
    • Don’t avoid Index fund.
    • Experience of fund managing team
    • Do not commit common mistakes
    • Understanding the risk involved
    • Keep your investment objective clear.
    • The NAV does not matter.
    • Diversify your investment over time.
    • Have an investment discipline.
    • Invest in stocks if you are prepared to take risks.
    • Never forgot your mutual fund investment.
    • Stay invested for a longer period of time.

     

    NAV ( NET ASSET VALUE )

    NET ASSET VALUE is the total asset value (net of expenses) per unit of the fund & is calculated by AMC (asset management company) at the end of every business day. In order to calculated the NAV of a mutual fund, you need to take current market value of the funds assets minus the liabilities, if any & divide it by the number of share outstanding. NAV is calculated as follows.

    NAV Rs. = MARKET/FAIR VALUE OF SECURITIES + ACCRUED          INCOME + RECEIVABLE + OTHER ASSETS + ACCRUED   EXPENSES – PAYABLES – OTHER LIABILITIES

    / NO.OF UNITS OUTSTANDING OF THE SCHEME/OPTION

    Eg. If the market value of securities of mutual fund scheme is Rs. 500 lakh & the mutual fund has issued 10lakh units of Rs. 10lakh each to investors, then the NAV unit of the fund is Rs.50.

     

    ADVANTAGES OF MUTUAL FUND

    DIVERSIFICATION

    Mutual funds provide the benefits of diversification across different sectors & companies. A single mutual fund can hold securities from hundreds or even thousands of issuers. This by investing in a mutual fund, you can gain from the benefits of diversification & asset allocation, without investing a large amount of money that would required to build an individuals portfolio. The diversification considerably reduces the risk of serious monetary loss due to problems in a particular company or industry.

    AFFORDABILITY

    You can begin buying units or shares with a relatively small amount of money.

    Eg. Rs. 500 for the initial purchase.

    Some mutual funds also permits you to buy more units on a regular basis with even smaller installments.

    Eg. Rs.50 per month.

     

    LOW TRANSACTION COST

    Due to economics of scale, mutual funds pay lower transaction costs. The benefits are passed on to mutual fund investors which may not be enjoyed by an individual who enters the market directly.

    TRANSPARENCY

    Funds provide investors with updated information pertaining to the markets & schemes through fact sheets, offer documents, annual report etc.

     

     

    DISADVANTAGES OF MUTUAL FUNDS

    ·      High Expense Ratios and Sales Charges

    If you’re not paying attention to mutual fund expense ratios and sales charges, they can get out of hand. Be very cautious when investing in funds with expense ratios higher than 1.20%, as they will be considered on the higher cost end. Be weary of 12b-1 advertising fees and sales charges in general. There are several good fund companies out there that have no sales charges. Fees reduce overall investment returns.

    ·      Management Abuses

    Churning, turnover and window dressing may happen if your manager is abusing his or her authority. This includes unnecessary trading, excessive replacement and selling the losers prior to quarter-end to fix the books.

    ·      Tax Inefficiency

    Like it or not, investors do not have a choice when it comes to capital gain payouts in mutual funds. Due to the turnover, redemptions, gains and losses in security holdings throughout the year, investors typically receive distributions from the fund that are an uncontrollable tax event.

    ·      Poor Trade Execution

    If you place your mutual fund trade any time before the cut-off time for same-day NAV, you’ll receive the same closing price NAV for your buy or sell on the mutual fund. For investors looking for faster execution times, maybe because of short investment horizons, day trading, or timing the market, mutual funds provide a weak execution strategy.

WhatsApp chat