Mutual Funds are increasingly being touted as the retail investors’ investment vehicle in order to achieve their long term financial goals. Mutual Funds carry many advantages for investors like:
Affordability: An investor can start investing through SIP for a sum of Rs. 500 p.m. or a lump-sum of Rs. 5,000.
Expert & Professional Management: It is quite a difficult task for an average investor to carry out detailed analysis on the economy, various asset classes, industries and companies and also to decide what securities to buy, at what price, when to buy and when to sell. A well qualified, expert and professional fund manager does all these things for its investors.
Diversification: It helps you diversify across asset classes like Shares, Govt. Securities, Corporate Bonds, Gold ETFs etc.
Liquidity: Mutual Funds allow investors to liquidate their holdings as and when they want, except in closed ended schemes & ELSS.
Low Expenses: Mutual fund carry “No Entry Load” and offer economies of scale by lowering the transaction costs involved in buying & selling securities and bring down the average costs for the investors.
Tax Efficiency: Mutual Funds are more tax efficient as compared to FDs, NCDs etc.
Tax Benefits: Equity Linked Saving Schemes provide Tax Deduction u/s 80C.
Timing the Markets and Systematic Investment Plan (SIP)
Why do so many people lose money in the stock markets or Equity Mutual Funds?
Because investors are their worst enemies, they don’t follow the two basic principles of equity investing – first, “Buy low when others are selling in panic & sell high when others are buying in greed” and second, “Invest regularly & avoid timing the markets”.
Warren Buffett Quotes “I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful”. But in reality, most retail investors act exactly opposite. They buy high when everybody else is also buying in greed and sell low when everybody else is also selling in fear.
Also, investors always try to “Time the Market”. Timing the Market is the strategy of attempting to predict future price movements through use of various fundamental and technical analysis tools. If investors could perfectly time the market, they would buy only when the markets bottom out or sell when they are at a peak.
Finding the bottoms to invest a significant lump-sum amount & peaks to withdraw, thereby making huge profits from such timing is quite a tough job, except by luck. To execute such timings, investors need to start selling in a rising market or keep buying in a falling market. Unfortunately, stock prices do not always move for the most logical or easily predicable of reasons. An unexpected event can send a stock’s price up or down and you can’t predict those movements with price charts.
An SIP is not an investing option rather it is a tool to execute an investment strategy. SIPs are excellent tools for disciplined participation in volatile markets. SIP runs on the principle of “Rupee Cost Averaging” and doesn’t stop when investors are fearful or greedy. SIP helps you end up buying more units when the prices are low and fewer units when the prices are high. An SIP does not guarantee positive returns, it just imparts discipline to investing.
Lump Sum Investment Vs. SIP Vs. VIP (Value-Averaging Investment Plan)
When does a lump sum investment do better than an SIP?
The answer is simple: When the lump sum investment is being made at the start of a bullish market cycle. Though SIP keeps participating during the bullish phase but a lump sum investment provides better returns than SIP because SIP acquires units at a higher price in the upward cycle. A lump-sum investment requires correct timings to beat SIP, whereas SIP requires persistence, faith and power to overcome fear.
Which is better: Older SIP or Younger VIP?
Value-averaging investment plan (VIP) involves investing a higher amount of money when the markets are moving down and lower amount of money when there is an upswing. The money gets invested in such a manner that the portfolio value keeps tending towards a pre-determined value based on a target rate of return. While this may be emotionally difficult to invest more in a falling market, it is quite rewarding when the markets recover. VIP mode is quite a useful tool in financial planning as the probability of achieving a target value for one’s portfolio is much higher.
Suppose you invest Rs. 10,000 every month in a mutual fund scheme with a target portfolio value of Rs. 6 lacs after 5 years. After making the initial contribution of Rs. 10,000, you find that in the second month, the portfolio value has grown to Rs. 10,200. Now you need to invest only Rs. 9,800 (Rs. 20,000–10,200) in order to reach the target investment value of Rs. 20,000. Suppose, in the third month, the value of the investment declines to Rs 19,600 due to a market correction, you will be required to invest Rs. 10,400 (Rs. 30,000–19,600) to achieve the target investment value of Rs. 30,000 and so on. Remember “Buy Low, Sell High”. Some researchers have concluded that VIP strategy delivers better risk-adjusted returns as compared to SIP over a long term.
The key disadvantage of the VIP is that the sum you invest each month will be highly unpredictable. Also, in a rising market, VIP strategy warrants a sell call which may result in unnecessary transaction charges or even short term capital gain.
Overall, VIP is an interesting and promising method of investment that investors will be well advised to adopt for successful achievement of their financial goals.
Low NAV of a poor MF or High NAV of a good MF – Which one to invest in?
* Mutual Fund with a lower NAV is better than one with a higher NAV.
* You can buy more units when the NAV is low.
* Schemes with higher NAV should be avoided as the returns will be lesser.
All these are myths and complete myths. A high or low NAV of a fund is totally irrelevant and has nothing to do with the future performance. Mutual fund schemes have to be judged on their performance by comparing the returns over the same period. Investment of Rs. 50,000 in two different funds with identical portfolios, one having Rs. 10 as its NAV and the other having Rs. 100 as its NAV, would become Rs. 60,000, if both these funds earn 20% return. With 20% return, the NAV of the first fund will touch Rs. 12 and the NAV of the second fund will turn Rs. 120. It is the stocks in a portfolio that determine returns from a fund, the value of the NAV being immaterial.
Choosing the right fund to invest is not at all difficult but requires knowledge, time and a little bit of guidance. We help you get independent, unbiased, expert advice to select the right Mutual Fund schemes for your portfolio as per your financial objectives.
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