Microreviews

After our guide to investing through IPOs, we bring to you the guide to investing through Mutual Funds (MFs) and Systematic Investment Plans (SIPs). This article will help you in identifying if MFs and SIPs are the right investment class for you, will answers questions like What are MFs and SIPs and their various types, What are it’s advantages  and How do you evaluate an SIP?

Most of us do not have much of an understanding of the Stock markets and it’s behavior. It’s a fact that most investors take decisions based on the rumors, speculation and listening to others who are as much unaware of the market analytics. This is where Mutual Funds and SIPs prove to be the best investment class for investors with a medium appetite for Risk/Returns.

Before I start to explain how an SIP works, let’s get a brief understanding of Mutual Funds.

What is a Mutual Fund?

Wikipedia Definition- “A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests it in stocks, bonds short-term money-market instruments, and/or other securities.”

Mutual funds comprise of shares, debt or government bonds. The various types of MFs will be discussed later on.

MFs are offered in the market by Asset Management Companies (AMCs), which are in turn managed by qualified and experienced Fund managers who have detailed knowledge and resources to take the right decisions on your behalf. The fund managers use a host of techniques like complex fundamental and technical analysis to buy and sell shares for you.

Let me draw an analogy here, of a Mutual Fund with the stock of a company.

The price of a stock is similar to the Net Asset Value (NAV) of a Mutual Fund. So, if the NAV of a MF is 25, for Rs 1000 you can buy 1000/25= 40 Units of that MF.

Similar to the price of a stock the NAV also fluctuates depending on the movement of the constituent assets in the MF.

Is MFs/ SIPs the right investment avenue for me?

If you satisfy any or all of the points mentioned below, MFs/ SIPs might just be the perfect investment avenue for you.

-          I have no clue about how the stock markets operate but, still I want to invest in them to get better returns on my savings.

-          I always keep buying/ selling my shares at the wrong time.

-          I want to make an investment which gives higher returns and at the same time I want to get Tax exemptions on the investments made.

-          I can’t find out enough time to do research and adjust or balance my portfolio according to the market movements.

What is a Systematic Investment Plan?

Has it happened to you that once you have invested a substantial amount of money on a scrip and right after that the markets tanked? It could take years before you can see some profit on a wrong investment made. It is extremely tough to time the markets, even with the help of seasoned Fund Managers.

Systematic Investment Plans are a flavour offered by the MFs wherein you don’t restrict your investment to one time. Instead, you invest regularly, irrespective of the market movements.

Advantages of Investing in a SIP

-          You do not need to try and time the market movements.

-          Instead of investing a sizeable chunk at one go, you distribute it over a longer period at a pre-determined frequency (Monthly, Quarterly etc). This leads to regular saving as well as Investment.

-          You can invest regularly in the MFs which are Equity Linked Savings Schemes (ELSS). These give you Income Tax exemptions.

-          The power of asset compounding can be best achieved by an investment vehicle like SIPs. You can insure your Retirement, your child’s education or your long term goals using this.

-          Helps you in building a large corpus for yourself and your family, which can be used in the future.

Various Types of MFs/ SIPs

You might be someone who believes in the long term potential of the Real Estate sector, or someone who believes that Power will be ‘in’ thing to be in, or someone who likes to benefit out of special opportunities.

Mutual funds provide you that wide array of choices. Depending on your preference and risk appetite you can choose the right fund for yourself.

Diversified Funds- These funds invest in shares of all sectors like IT, Infra, Power, FMCG etc. Usually the companies chosen are large caps or mid caps and are present in the BSE/ NSE index.

Sectoral Funds- These funds invest most of their money into a particular theme- Real Estate, IT, Life Style etc.

Contra Funds- The fund managers in Contra funds take a contrarian strategy to others. The identify companies with sound fundamentals but, which has underperformed in the past and invest in them. The success of these funds are highly dependent on the calls taken by the fund manager.

Special Opportunities/ Situations Funds- This types of funds are quite similar to the contra funds. These funds take advantage of special situations/ opportunities in the market and invest. The best example would be funds which invested in the scrip of Satyam Computers when it took the downward spiral and reached Rs 6 per share. Now Satyam is trading at Rs 120.

ELSS Funds- The Equity Linked Savings Schemes are MFs/ SIPs which lets you get TAX Exemptions under rule 80(C). These type of funds have a lock in period of three years. So, if you invest today, you will be able to redeem your units only after 3 years.

Funds investing in Gold and Arbitrage- There are funds which invest in other asset classes like Gold and Futures. These can be used to diversify one’s portfolio.

A detailed article on Gold, it’s price movements and ways to invest in it is coming up shortly.

How to evaluate an MF/ SIP?

Even when investing through MFs, you have to take the decision of choosing the right fund for yourself. The various ways to do this are-

-          Compare the fund you like with the Indices. For example, if you want to go for a diversified fund, compare it with the Nifty / Sensex. See if it has outperformed or underperformed the indices. Similarly, if you want to invest in a banking sectoral fund, compare it with the Banking indices of NSE/ BSE. Do a comparison of the last 6 months, 1 year and 3 years performance.

-          Each fund has a portion invested in the asset and a portion in liquid cash. This ratio can be 80:20 or 60:40 or anything depending on whether the fund is aggressive or passive. Choose the one that best fits your risk appetite and investment style.

-          Check if your fund provides the options to switch. If you are not happy with a particular fund’s performance, you should be able to  switch to another one.

Entry and Exit Loads

For buying MFs we do not need to pay nay brokerage. We need to pay a percentage of our investment as a fees to the Asset Management Firm as the fund management fees.

The fees paid while entering a MF is Entry load and the fees paid while exiting it is called Exit Load. Presently there is not Entry load on any MF in India. The Exit load varies from MF to MF.

All the best.

Choose wisely, Invest well.

Related posts:

1. Starters guide to investing through IPOs
2. NHPC IPO – Post listing strategy. Sell/Hold/Buy? Listing Price Predictions
3. NHPC IPO- Layman’s review
4. Reliance Infratel, Next Big IPO in Pipeline.
5. Cadbury rejects Kraft deal! Why and what next now?

Tags: ELSS, Investing through Mutual Funds and SIPs, NAVs, sectoral funds, tax exemption