Mutual Fund - A complete Analysis

Mutual Fund - A complete Analysis
Definition:
A mutual fund is a professionally-managed firm of collective investments that pools money from many investors and invests it in stocks, bonds, short-term money market instruments, and/or other securities. In a mutual fund, the fund manager, who is also known as the portfolio manager, trades the fund's underlying securities, realizing capital gains or losses, and collects the dividend or interest income. The investment proceeds are then passed along to the individual investors. The value of a share of the mutual fund, known as the net asset value per share (NAV), is calculated daily based on the total value of the fund divided by the number of shares currently issued and outstanding.

Concept:
A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realised are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.

History:
The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank the. The history of mutual funds in India can be broadly divided into four distinct phases

First Phase – 1964-87 Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI.
The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700 crores of assets under management.

Second Phase – 1987-1993 (Entry of Public Sector Funds)1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990.
At the end of 1993, the mutual fund industry had assets under management of Rs.47,004 crores.

Third Phase – 1993-2003 (Entry of Private Sector Funds) With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996. The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores. The Unit Trust of India with Rs.44,541 crores of assets under management was way ahead of other mutual funds.

Fourth Phase – since February 2003 In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs.29,835 crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. As at the end of September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes.

Types of Mutual Funds:
On the basis of their structure and objective, mutual funds can be classified into following major types:

Closed-end fundsOpen-end fundsLarge cap fundsMid-cap fundsEquity fundsBalanced fundsGrowth fundsNo load fundsExchange traded fundsValue fundsMoney market fundsInternational mutual fundsRegional mutual fundsSector fundsIndex fundsFund of funds

Closed-end Mutual Fund
A closed-end mutual fund has a set number of shares issued to the public through an initial public offering. These funds have a stipulated maturity period generally ranging from 3 to 15 years. The fund is open for subscription only during a specified period. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where they are listed.Once underwritten, closed-end funds trade on stock exchanges like stocks or bonds. The market price of closed-end funds is determined by supply and demand and not by net-asset value (NAV), as is the case in open-end funds. Usually closed mutual funds trade at discounts to their underlying asset value.

Open-end mutual fund An open-end mutual fund is a fund that does not have a set number of shares. It continues to sell shares to investors and will buy back shares when investors wish to sell. Units are bought and sold at their current net asset value.Open-end funds keep some portion of their assets in short-term and money market securities to provide available funds for redemptions. A large portion of most open mutual funds is invested in highly liquid securities, which enables the fund to raise money by selling securities at prices very close to those used for valuations.

Large Cap FundsLarge cap funds are those mutual funds, which seek capital appreciation by investing primarily in stocks of large blue chip companies with above-average prospects for earnings growth. Different mutual funds have different criteria for classifying companies as large cap. Generally, companies with a market capitalisation in excess of Rs 1000 crore are known large cap companies. Investing in large caps is a lower risk-lower return proposition (vis-à-vis mid cap stocks), because such companies are usually widely researched and information is widely available.

Mid cap funds Mid cap funds are those mutual funds, which invest in small / medium sized companies. As there is no standard definition classifying companies as small or medium, each mutual fund has its own classification for small and medium sized companies. Generally, companies with a market capitalization of up to Rs 500 crore are classified as small. Those companies that have a market capitalization between Rs 500 crore and Rs 1,000 crore are classified as medium sized. Big investors like mutual funds and Foreign Institutional Investors are increasingly investing in mid caps nowadays because the price of large caps has increased substantially. Small / mid sized companies tend to be under researched thus they present an opportunity to invest in a company that is yet to be identified by the market. Such companies offer higher growth potential going forward and therefore an opportunity to benefit from higher than average valuations.But mid cap funds are very volatile and tend to fall like a pack of cards in bad times. So, caution should be exercised while investing in mid cap mutual funds.

Equity Mutual FundsEquity mutual funds are also known as stock mutual funds. Equity mutual funds invest pooled amounts of money in the stocks of public companies. Stocks represent part ownership, or equity, in companies, and the aim of stock ownership is to see the value of the companies increase over time. Stocks are often categorized by their market capitalization (or caps), and can be classified in three basic sizes: small, medium, and large. Many mutual funds invest primarily in companies of one of these sizes and are thus classified as large-cap, mid-cap or small-cap funds.Equity fund managers employ different styles of stock picking when they make investment decisions for their portfolios. Some fund managers use a value approach to stocks, searching for stocks that are undervalued when compared to other, similar companies. Another approach to picking is to look primarily at growth, trying to find stocks that are growing faster than their competitors, or the market as a whole. Some managers buy both kinds of stocks, building a portfolio of both growth and value stocks.

Balanced FundBalanced fund is also known as hybrid fund. It is a type of mutual fund that buys a combination of common stock, preferred stock, bonds, and short-term bonds, to provide both income and capital appreciation while avoiding excessive risk. Balanced funds provide investor with an option of single mutual fund that combines both growth and income objectives, by investing in both stocks (for growth) and bonds (for income). Such diversified holdings ensure that these funds will manage downturns in the stock market without too much of a loss. But on the flip side, balanced funds will usually increase less than an all-stock fund during a bull market.

Growth FundsGrowth funds are those mutual funds that aim to achieve capital appreciation by investing in growth stocks. They focus on those companies, which are experiencing significant earnings or revenue growth, rather than companies that pay out dividends. Growth funds tend to look for the fastest-growing companies in the market. Growth managers are willing to take more risk and pay a premium for their stocks in an effort to build a portfolio of companies with above-average earnings momentum or price appreciation.In general, growth funds are more volatile than other types of funds, rising more than other funds in bull markets and falling more in bear markets. Only aggressive investors, or those with enough time to make up for short-term market losses, should buy these funds.

No-Load Mutual FundsMutual funds can be classified into two types - Load mutual funds and No-Load mutual funds. Load funds are those funds that charge commission at the time of purchase or redemption. They can be further subdivided into (1) Front-end load funds and (2) Back-end load funds. Front-end load funds charge commission at the time of purchase and back-end load funds charge commission at the time of redemption.

On the other hand, no-load funds are those funds that can be purchased without commission. No load funds have several advantages over load funds. Firstly, funds with loads, on average, consistently underperform no-load funds when the load is taken into consideration in performance calculations. Secondly, loads understate the real commission charged because they reduce the total amount being invested. Finally, when a load fund is held over a long time period, the effect of the load, if paid up front, is not diminished because if the money paid for the load had invested, as in a no-load fund, it would have been compounding over the whole time period.

Exchange Traded Funds
Exchange Traded Funds (ETFs) represent a basket of securities that are traded on an exchange. An exchange traded fund is similar to an index fund in that it will primarily invest in the securities of companies that are included in a selected market index. An ETF will invest in either all of the securities or a representative sample of the securities included in the index. The investment objective of an ETF is to achieve the same return as a particular market index. Exchange traded funds rely on an arbitrage mechanism to keep the prices at which they trade roughly in line with the net asset values of their underlying portfolios.

Value FundsValue funds are those mutual funds that tend to focus on safety rather than growth, and often choose investments providing dividends as well as capital appreciation. They invest in companies that the market has overlooked, and stocks that have fallen out of favour with mainstream investors, either due to changing investor preferences, a poor quarterly earnings report, or hard times in a particular industry.Value stocks are often mature companies that have stopped growing and that use their earnings to pay dividends. Thus value funds produce current income (from the dividends) as well as long-term growth (from capital appreciation once the stocks become popular again). They tend to have more conservative and less volatile returns than growth funds.

Money Market Mutual FundsA money market fund is a mutual fund that invests solely in money market instruments. Money market instruments are forms of debt that mature in less than one year and are very liquid. Treasury bills make up the bulk of the money market instruments. Securities in the money market are relatively risk-free. Money market funds are generally the safest and most secure of mutual fund investments. The goal of a money-market fund is to preserve principal while yielding a modest return. Money-market mutual fund is akin to a high-yield bank account but is not entirely risk free. When investing in a money-market fund, attention should be paid to the interest rate that is being offered.

International Mutual Funds
International mutual funds are those funds that invest in non-domestic securities markets throughout the world. Investing in international markets provides greater portfolio diversification and let you capitalize on some of the world's best opportunities. If investments are chosen carefully, international mutual fund may be profitable when some markets are rising and others are declining.
However, fund managers need to keep close watch on foreign currencies and world markets as profitable investments in a rising market can lose money if the foreign currency rises against the dollar.

Regional Mutual Fund
Regional mutual fund is a mutual fund that confines itself to investments in securities from a specified geographical area, usually, the fund's local region. A regional mutual fund generally looks to own a diversified portfolio of companies based in and operating out of its specified geographical area. The objective is to take advantage of regional growth potential before the national investment community does. Regional funds select securities that pass geographical criteria. For the investor, the primary benefit of a regional fund is that he/she increases his/her diversification by being exposed to a specific foreign geographical area.

Sector Mutual Funds
Sector mutual funds are those mutual funds that restrict their investments to a particular segment or sector of the economy. These funds concentrate on one industry such as infrastructure, heath care, utilities, pharmaceuticals etc. The idea is to allow investors to place bets on specific industries or sectors, which have strong growth potential. These funds tend to be more volatile than funds holding a diversified portfolio of securities in many industries. Such concentrated portfolios can produce tremendous gains or losses, depending on whether the chosen sector is in or out of favour.

Index Funds
An index fund is a type of mutual fund that builds its portfolio by buying stock in all the companies of a particular index and thereby reproducing the performance of an entire section of the market. The most popular index of stock index funds is the Standard & Poor's 500. An S&P 500 stock index fund owns 500 stocks-all the companies that are included in the index. Investing in an index fund is a form of passive investing. Passive investing has two big advantages over active investing. First, a passive stock market mutual fund is much cheaper to run than an active fund. Second, a majority of mutual funds fail to beat broad indexes such as the S&P 500.


Fund of Funds
A fund of funds is a type of mutual fund that invests in other mutual funds. Just as a mutual fund invests in a number of different securities, a fund of funds holds shares of many different mutual funds.Fund of funds are designed to achieve greater diversification than traditional mutual funds. But on the flipside, expense fees on fund of funds are typically higher than those on regular funds because they include part of the expense fees charged by the underlying funds. Also, since a fund of funds buys many different funds which themselves invest in many different stocks, it is possible for the fund of funds to own the same stock through several different funds and it can be difficult to keep track of the overall holdings.
Advantages of Mutual Funds
The advantages of investing in a Mutual Fund are:
Diversification: The best mutual funds design their portfolios so individual investments will react differently to the same economic conditions. For example, economic conditions like a rise in interest rates may cause certain securities in a diversified portfolio to decrease in value. Other securities in the portfolio will respond to the same economic conditions by increasing in value. When a portfolio is balanced in this way, the value of the overall portfolio should gradually increase over time, even if some securities lose value.

Professional Management:Most mutual funds pay topflight professionals to manage their investments. These managers decide what securities the fund will buy and sell.

Regulatory oversight: Mutual funds are subject to many government regulations that protect investors from fraud.

Liquidity: It's easy to get your money out of a mutual fund. Write a check, make a call, and you've got the cash.

Convenience:You can usually buy mutual fund shares by mail, phone, or over the Internet. Low cost: Mutual fund expenses are often no more than 1.5 percent of your investment. Expenses for Index Funds are less than that, because index funds are not actively managed. Instead, they automatically buy stock in companies that are listed on a specific index.
Transparency
Flexibility
Choice of schemes
Tax benefits
Well regulated
Drawbacks of Mutual Funds Mutual Funds have their own drawbacks and it may not suit the investment needs of all kinds of investors because of its limitations and the drawbacks. Following are the few drawbacks of Mutual Funds:
No Guarantees: No investment is risk free. If the entire stock market declines in value, the value of mutual fund shares will go down as well, no matter how balanced the portfolio. Investors encounter fewer risks when they invest in mutual funds than when they buy and sell stocks on their own. However, anyone who invests through a mutual fund runs the risk of losing money.
Fees and commissions: All funds charge administrative fees to cover their day-to-day expenses. Some funds also charge sales commissions or "loads" to compensate brokers, financial consultants, or financial planners. Even if you don't use a broker or other financial adviser, you will pay a sales commission if you buy shares in a Load Fund.
Taxes: During a typical year, most actively managed mutual funds sell anywhere from 20 to 70 percent of the securities in their portfolios. If your fund makes a profit on its sales, you will pay taxes on the income you receive, even if you reinvest the money you made.

Management risk: When you invest in a mutual fund, you depend on the fund's manager to make the right decisions regarding the fund's portfolio. If the manager does not perform as well as you had hoped, you might not make as much money on your investment as you expected. Of course, if you invest in Index Funds, you forego management risk, because these funds do not employ managers.

The Future
By December 2004, Indian mutual fund industry reached Rs 1,50,537 crore. It is estimated that by 2010 March-end, the total assets of all scheduled commercial banks should be Rs 40,90,000 crore.The annual composite rate of growth is expected 13.4% during the rest of the decade. In the last 5 years we have seen annual growth rate of 9%. According to the current growth rate, by year 2010, mutual fund assets will be double.

Some facts for the growth of mutual funds in India
1 . 100% growth in the last 6 years.
2. Number of foreign AMC's are in the que to enter the Indian markets like Fidelity Investments, US based, with over US$1trillion assets under management worldwide.
3. Our saving rate is over 23%, highest in the world. Only channelizing these savings in mutual funds sector is required.
4. We have approximately 29 mutual funds which is much less than US having more than 800. There is a big scope for expansion.
5. 'B' and 'C' class cities are growing rapidly. Today most of the mutual funds are concentrating on the 'A' class cities. Soon they will find scope in the growing cities.
6. Mutual fund can penetrate rurals like the Indian insurance industry with simple and limited products.
7. SEBI allowing the MF's to launch commodity mutual funds.
8. Emphasis on better corporate governance.
9. Trying to curb the late trading practices.
10. Introduction of Financial Planners who can provide need based advice.

Growth or Dividend

Yesterday one of my Relationship Managers called me from his client place and he told me, “My client is confused whether to go for a growth or a dividend option, please speak to him”. I did speak to him, but he was arguing with me that dividends are something extra, which he can avail from a fund. Therefore my dear readers, today I would like to discuss on various things related to the growth and dividend option of a mutual fund, so that you will not get confused while investing in a mutual fund.

What is the difference between growth and dividends?A mutual fund generally offers two schemes: dividend and growth.

The dividend option does not re-invest the profits made by the fund though its investments. Instead, it is given to the investor from time to time.
In the growth scheme, all profits made by the fund are ploughed back into the scheme. This causes the NAV to rise over time.
How does it affect on the NAV?The NAV of the growth option will always be higher than that of the dividend option because money is going back into the scheme and not given to investors.

How does it affect on you?You don't gain or lose anything by selecting any one scheme. Either you make the choice to get the money regularly (dividend) or at one time (growth).
If you choose the growth option, you can make money by selling the units at a high NAV at a later date.
If you choose the dividend option, you will get the money time and again as well as avail of a higher NAV (though the NAV here is not as high as that of a growth option).

Say there is a fund with an NAV of Rs 24. It declares a dividend of 40%. This means it will pay 40% of the face value. The face value of a mutual fund unit is 10 (its NAV in this case is 24). So it will give you Rs 4 per unit. If you own 1,000 units of the fund, you will get Rs 4,000. Since it has paid Rs 4 per unit, the NAV will fall from Rs 24 to Rs 20.
If you invest in the growth option, you can sell the units for Rs 24.
If you invest in the dividend option, you can sell the units for Rs 20, since you already made a profit of Rs 4 per unit earlier.

What you must know about dividends?The dividend is not guaranteed. If a fund declared dividends twice last year, it does not mean it will do so again this year. You could get a dividend just once or you might not even get it this year. Generally, funds whose NAV is above 10 are in a position to consider a dividend. Remember, though, declaring a dividend is solely at the fund's discretion; the periodicity is not certain nor is the amount fixed.

Which should you take?This depends on your overall investments and income. If you are looking at a long-term investment and are not interested in money being given to you at various intervals, the growth option is meant for you. If you are keen on receiving an income at various intervals, opt for the dividend option.

The tax impactDividends from a mutual fund are not taxed. When you sell the units of a mutual fund and make a profit, it is known as capital gain, which will be taxed under the prevailing income tax laws.

NAV and the Myths

Net asset value represents the value of each unit in the portfolio. It is the book value. NAV of a mutual fund always varying depends on the market fluctuations. NAV of any portfolio can be calculated after deducting all liabilities from the total asset value of the portfolio. NAV helps an investor to measure the performance of his investments very easily. Nowadays NAV is becoming very familiar to us with the rapid growth and expansion of mutual funds and insurance industry.The general formula for calculating NAV is…….NAV = Total asset value – Total liabilities
Total no of units

Yes, this is all about NAV. But my dear readers, today I would like to discuss on certain myths and misconceptions around the concept of NAV.I started my career with selling of insurance and Mutual Funds, and I faced many situations where the clients were very particular about NAV. And of course, they were very keen on investing in low NAV funds. Many a times I did convince them but the misconception what many of us have sometimes ends up with low returns or loss on investments. Even I got many queries from my readers as well as from my clients that -“Is low NAV cheap?”Is a fund with lower NAV a better investment option than a fund with a higher NAV? Since you can buy more units, is it cheaper? Should mutual fund schemes with a higher NAV be avoided?These are some other questions I faced from my clients and readers. The answer to these questions is that it is irrelevant how high or low the NAV of a mutual fund or a ULIP plan is. And, whatever may be the NAV you invested with, the amount you invested remaining unchanged. Because, high NAV means less number of units and low NAV means more number of units. I can prove the same with ‘N’ number of examples.Let us take an example, where there are two investment options –- One with the NAV of 10 and- Other with the NAV of 100.Ordinary investors always look at first option as the NAV is very low when comparing to option two. But if you look at it with little practicality, you will understand it better that both the option will yield you the same if the investment strategies of both are same. Please go through the below illustration which proves the same-Let us take the initial investment as 10000 and the NAV value as above. Then, an investor will get 1000 units in case of option one and 100 units in case of option two. If both the investment options yield 30% at the end of year, NAV of option one will become 13 and the second will become 130.Therefore, the total fund value of option one has become 13*1000=13000 and the second has become 130*100=13000. And, if one sells those units in both the investment options he will get the same amount.If you still have doubts, I can give you some more reasons to avoid measuring the funds in terms of its NAV. One of them is, low NAV schemes may be new to the market and it is very difficult to predict the future performance of the same as there are no past records to asses. But in case of high NAV funds which are in the market from long time will have their own performance records which help us to measure the performance in a better way.Therefore, as a financial consultant my advice is kindly stop looking at NAV before investing; instead look at the quality and other performance records.

SIP - Systematic Investment Plan

Today’s world has offered us with lot of attractive things, which leave us empty handed at the middle of the month itself. We have lot of needs to take care of, lot many things to buy, different loans and EMIs to repay and many dreams to plan as well. But it is very difficult to plan and realize those needs and plans successfully, because we may not be able to procure funds for these things in time. Even if you start saving money to serve these things right from the day one you dreamt of, the inflation and sky rocketing price hikes will ultimately let you down.

Therefore, we need to plan our savings and investments in a more structured and profitable way. Obviously, there are different investment tools available in the market which gives you good returns and flexibility as well. But, these investment tools may not develop the habit of regular investment in us. One of my ex-colleague was telling me that have a habit of buying one gram gold every month. Of course that is a very nice idea but it won’t help us to serve our short term needs as keeping gold is little risky and returns are very less in the short term.Now, I would like to introduce you all a well-known investment tool called SIP (Systematic Investment Plan) with its unique features.The Systematic Investment Plan allows investors to save a fixed amount of rupees every month or quarter for the purchase of additional units in a mutual fund. SIP helps us to plan our retirement, childrens education, wealth creation and finacial planning as well.
SIP mainly helps us to get addicted to an investment principle –Income – Savings = Expenditure, instead of following the principle of –Income - Expenditure = Savings.Investing through SIP can offer the following benefits:It helps to Build Wealth over the Long term – “the compounding effect”The key to building wealth is to start investing early and regularly. These regular amounts of savings, however small they may be, can possibly grow into a substantial amount of wealth over the long-term. Therefore, if you have to save regularly, it makes sense to pay yourself first and that is the only way to increase your savings.Look at the following example and you may be pleasantly surprised at the benefits of investing systematically over the Long-term:-An investment of Rs. 1,000 per month in an instrument yielding a net compounded return of 12% per annum, over a period of 30 years, can grow to over Rs. 35 lacs.It will take only 33 years to achieve Rs. 1 crore, if invested Rs. 1000/- per month and money grows at 15% p.a.It will take only 28 years to achieve Rs. 1 crore, if invested Rs. 2000/- per month and money grows at 15% p.a.It will take only 25 years to achieve Rs. 1 crore, if invested Rs. 3000/- per month and money grows at 15% p.a.In the short run a 1% differential in the rate of return may not matter as much, but in the long run it can be significant.
Make the volatility of the market work in your favour – the rupee cost averagingSecurities markets (equities and fixed income instruments) can be volatile and it is rarely possible to predict the future and time the market. We can seldom accurately predict when a particular stock will move up or where the interest rates are headed. Since the amount invested per month is a constant, the investor ends up buying more units when the price is low and fewer units when the price is high. Therefore, the average unit cost will always give the benefit of investing when the market is rising, falling, or fluctuating. This concept is called Rupee Cost Averaging.Load StructureMost of the Asset management companies had waived off entry load in equity mutual funds if the investor is investing through SIPs.Other Advantages
Investor is forced to save some amount if he wants to achieve a certain target amountAsset management companies had tied up with few banks for direct debit in their account of the investment amountMinimum amount to start with SIP is as low as Rs. 500/- per month.Conclusion:I hope all my readers will start investing through SIPs regularly as it is considered as one of the most important and popular investment tool across the world. Warren Buffet tells that he purchased his first share when he was 14, but still he feels that he was late, therefore don’t wait anymore, and get started with one or more SIPs, so that you will only start finding it very easy to realize all your dreams and plans in time.

SIP and SWP

My dear readers, I discussed on SIP in my earlier article. Today, I would like to give you the complete picture of different benefits, which can be availed from proper planning of SIP and SWP.As I discussed in my earlier article on SIP, systematic investment plan allows investors to save a fixed amount of rupees every month or quarter for the purchase of additional units in a fund.
SWP or systematic withdrawal plan allows an investor to get back his investment amount plus its returns in regular intervals over a period of time. In simple, I call it as a tool to avoid spending money, because SWP restricts an investor from withdrawing all his investments at a time and thereby, it helps an investor to avoid unnecessary expenditures.SWP works well in case of ELSS SIPs. If you are investing in ELSS schemes through SIPs, you can take back your first investment amount only after 36 months, 2nd after 37th month from the date of commencement and 36th month from the date of investment and so forth. Therefore, the investment you made over a period of 36 months can be taken back in lump sum only after 72 months. But if you register for SWP, your investment amount plus returns of respective installments will be credited to your bank account in regular intervals soon after completion of 36 months from the date of investment of each installment.I observed many of my clients that they have the misconception of making profits from the market movements through SWP. I can say that, it helps you to reduce the risk of redemption only. SWP will not maximize the returns in any situation.SWP works as a pension plan, where one can invest certain amount of money in regular intervals while earning and he can take back through SWP in regular intervals after retirement. Therefore it is one of the better option for retirement planning also.