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Some myths about investing in a Mutual Fund, including through SIP

ashish — Sun, 25 Apr 2010 10:58:26 +0000

There are many myths prevalent about investing in a Mutual Fund, especially through a SIP (Systematic Investment Plan). In this article, we will talk about some of these myths, and provide a detailed explanation of what is the actual reality.
- Let us start with the first one that talks about investing a NFO of a Mutual Fund. I have heard of a number of people who prefer to invest in a NFO since they feel that it gives them the Mutual Fund at unit price (similar to the IPO of a stock that is obtained at the original issue price). However, this is not a valid comparison. For an individual company that goes in for an IPO, the concept is that the company will improve over a period of time, and the IPO price is a good point at which to start acquiring the company. However, the NFO price of a new Mutual Fund is not the same. The NAV of a Mutual Fund at any point of time is the value of the stocks that the Mutual Fund holds at any point of time. So, whether the price of a Mutual Fund unit is Rs. 10 or Rs. 265, the price is the correct value. In fact, if you have bought a MF with a NAV of Rs. 265, that means it has a track record which can be used to determine its performance, and whether it is worth buying.
- You need not do every investment via a SIP. If you have selected some MF’s based on performance and decided to hold them for a long term (5 years+), you can invest in a lump sum rather than through a SIP.
- What happens if you miss a month’s SIP. If you miss a month’s SIP, all that it means is that there will be no investment for that month, but it does not mean that your existing SIP will be dropped, or something similar will happen
- You can do better than a SIP. It needs a pretty arrogant as well as well informed person to claim that they can do better than a SIP. Investing in a MF by themselves means that you need to decide when to invest, and go through the logistical process of actually doing the investment.
- When investing in a tax-saving fund through a SIP, can you withdraw all your money after 3 years. NO. As per income tax rules, investments in tax-saving MF’s means that you can only withdraw 3 years after the investment was made, so you can only withdraw each SIP 3 years after it was made
- You can only invest the regular SIP amount in the MF. If you have more money in a certain month, you can invest as a lump sum in the same MF as which you are investing through a SIP.

What is a Systematic Investment Plan (for Mutual Funds) – and some details

ashish — Fri, 23 Apr 2010 09:26:17 +0000

If you are somewhat new to investing in the equity market for investment, you would know some of the terms, but may not understand the meaning of some of these terms. For example, you would know what Mutual Funds are, and may even have invested in some of them, but would not know too many details. In this article, we will cover one of the ways of investing in Mutual Funds, called a Systematic Investment Plan. There are a lot of queries about the Systematic Investment Plan (also called a SIP), with some people not sure about what the difference is there between a SIP and a Mutual Fund. So, let us be very clear about what the meaning of a Systematic Investment Plan is, and how it works.
A Systematic Investment Plan refers to the periodic (typically monthly) investment in a Mutual Fund (and is done automatically by allocating money so that it is picked up regularly and invested in the specified Mutual Fund). How is this different from regular investing ? Well, you could study various Mutual Funds (or even get a tip about which Mutual Fund is better), and then decide to invest a given sum of money into a Mutual Fund. You will get a certain number of units of the Mutual Fund at a certain NAV (which is the price of a unit of the Mutual Fund as of that date). However, it is possible that the market may be a high when you buy (in which case you are unlucky), or you can get the Mutual Fund when the price is low (in which case you are unlucky). However, it is difficult to time the exact stage when you can intervene in the market; to get a better chance of being able to average your way through the vagaries of the stock market, you can go in for a Systematic Investment Plan.
In a Systematic Investment Plan, the intention is to go in for a more disciplined and systematic approach towards investment. Mutual Funds offer a way to invest on a regular period, where you can invest a fixed amount into the Mutual Fund. This amount is invested in the Mutual Fund on regular intervals, and catches the NAV of the units as of that date. So, over a period of a year, the number of units of the Mutual Funds that are brought vary depending on the NAV of the Mutual Fund. This ensures that you are no longer stuck with the ups and lows of the market. Over a period of time, using the SIP method to invest ensures that you are able to make savings, and also get the benefits of the higher rates of return from equity, while avoiding the fluctuations inherent in the market. In addition, you no longer have to get into the headache of figuring out when to invest.

Learn more about Fixed Maturity Plans – Article on Economic Times

ashish — Wed, 27 Jan 2010 12:20:29 +0000

Fixed Maturity Plans were all the hot thing a couple of years back, especially in the year 2007. They were advertised as plans that offered ‘guaranteed’ returns, even though the regulator did not allow fund companies to announce guaranteed returns, only advertise the returns as indicated returns. FMP’s are actually similar to fixed deposits in banks, where the money is invested in fixed-income securities, the equivalent of almost investing in debt funds. The maturities offered were varied, going from one months to three years. The FMP’s were closed ended in nature, and would not ask for fresh funds after the opening. The idea was that they exposed the customer to a much lower level of risk than equities. Interest payments would ensure that the customer got money at regular intervals.
However, in the crash that started in January 2008, FMP’s also suffered huge pressures, and performance really got clobbered, with people no longer feeling the charm that they used to feel earlier. Further, the huge pressure of redemptions meant that some Mutual Funds actually made it more difficult for investors to redeem their money. However, FMP’s are now making a comeback, given that many MF’s have announced a range of new schemes. The indicated returns are lower than were being offered earlier, and with more stringent controls put in by SEBI to ensure that funds did not invest in highly risky debt schemes. However, there is still not too much liquidity in FMP’s, with very low trading on the exchange.
Read more about Fixed Maturity Plans in this article (link)

But investors have to be careful about their investments in such products. After some investors burned their fingers in some FMP offerings in 2008, the product was not as safe as it seemed. “Poor credit quality of papers and illiquidity of instruments were chief reasons behind the problems faced by FMP investors,” says Devendra Nevgi, founder of Delta Global Partners, a Mumbai-based investment advisory firm. As regulators have banned mutual funds from giving out indicative yields and portfolios that induced the investors in the past, it is difficult to judge the offerings in the market. “A fund manager may end up chasing higher yield at the cost of the quality of paper. This is a big risk an FMP investor faces,” says Nandkumar Surti, CIO of JP Morgan AMC.
So if you are sure you do not require the money for say, 12-15 months, you can consider an FMP. Given the abundant liquidity in the market, this may not be the best time to invest. “Short-term rates up to one year are expected to go up by 100 basis points. In February and March, investors may come across better opportunities, given the traditional withdrawal of liquidity owing to year end,” opines Mr Nevgi.

Mistakes commonly made by equity investors

ashish — Sun, 09 Aug 2009 18:15:15 +0000

Everybody makes mistakes in the equity market, so one cannot blame retail investors for making many mistakes. Even acclaimed mutual fund and hedge fund investors have made mistakes over the years, but that does not excuse the retail investors from trying to learn about the mistakes that they keep on making so that they reduce the number of mistakes they make in the future. At the minimum, investors should learn about these mistakes so that they can try and learn from these mistakes. Some of these mistakes are:
1. Investors typically join the herd. So, when the stock market crashes, people run to liquidate their holdings, even at a loss. For example, when the market was really down in October, companies that were fundamentally sound were picked up by people who believed in the long term.
2. People look at tips, and even do investment based on tips even if they know nothing about the company or stock.
3. People do not read about the fundamentals of the companies that they are investing in. Typically, company valuations follow the projections of the sectors that these companies belong to, and after that, the company performance also plays a role. However, people do not bother finding out these facts.
4. People invest and forget. There are a number of people who invest in companies or mutual funds and do not re-evaluate the nature of their investments and the performance over a regular period, say every 6 months or every year
5. Diversify your portfolio: Do not invest everything you have in the stock market. Invest in mutual funds, some in debt funds, some in PPF, some in realty, and so on. Make sure that you are properly diversifying your investments, at the same time, make sure that you invest only where are you comfortable in your level of knowledge. Even consider things such as investments in gold and art.
6. Don’t get caught up in greed. When people lost out in January 2008 after markets had climbed to record highs, people were not willing to consider that the market could go down. People were not willing to take some of their investments out of the market, and lock that money in safer investments.
7. Invest for the long term. Don’t get scared by short term movements. Even while tracking them, make sure that if you have invested based on fundamentals, and for the long term, you don’t lose patience.
8. Don’t get tricked by other people. You will always hear people say that they made incredible amounts of money in investing in the stock market, and there is a feeling of being left behind. Remember, you only hear the stories that are positive, and you should never let such stories guide your actions.