Sunday, 13 November 2011

Systematic Investment Plan.

This is an investment option, which helps the investor to invest in mutual funds regularly on a monthly basis.  The minimum amount of investment in a mutual fund on SIP (systematic investment plan) can be as low as Rs.100 a month.


The benefits of investing in a systematic investment plan:
1.  It creates the investment habit.
2.  Participation in all market movements.
3.  Avoids "timing the market."
4.  Avoids "Greed" and "Fear."

Advantages of investing in a mutual fund.

1.  Initial investment is very low.
2.  Professional management of funds.
3.  Diversification.
4.  Well regulated industry.
5.  Easy liquidity.
6.  Low cost.
7.  Transparency.
8.  Higher return potential compared to fixed deposits.
9.  Very easy to invest in mutual funds.
10.  One of the safest investment option.

Understanding Mutual Funds.

Common terms used:
1.  NAV - Net asset value.
2.  Sale price.
3.  Redemption price.
4.  Switch.
5.  Load (Entry/Exit/Contingent deferred sales charge).
6.  Options (Divident/Growth/Bonus).
7.  Assured return schemes.

Mutual Funds

What are mutual funds?
Mutual fund is an investment option that pools savings of various investors with a common financial goal.  The funds collected will be managed and invested wisely by a person called fund manager.  Fund manager does a market research and invests the money in different sectors in order to yield returns and distribute it among the investors.  The investors get returns in 2 methods, one is dividend method and the other is growth method.  The money invested by the investor will be converted into number of units depending on the net asset value (NAV).  For example, Rs. 10,000 is the investment amount and Rs. 10 is the unit price at the beginning of a new mutual fund offer i.e., New Fund Offer *(NFO).  So, now the number of units will be 10,000/10 = 1000 units.  The investor gets returns on the appreciation of unit price i.e., Rs. 10, Rs. 12, Rs. 14, etc.  For example, if the current NAV or unit price is Rs. 18, then the current value of investment is Rs. 18*1000 units = Rs. 18000.  This method of returns is called as growth method.  The other type of returns is dividend method, where the fund manager declares a percentage of profit made and which will be distributed on a percentage wise to all the investors periodically.