Know - SYSTEMATIC INVESTMENT PLAN (SIP)

Systematic Investing in a Mutual Fund is the answer to preventing the pitfalls of equity investment and still enjoying the high returns. And it makes all the more sense today when the stock markets are booming.

It’s an expert’s field.
Let’s leave it to them. Management of the fund by the professionals or experts is one of the key advantages of investing through a mutual fund. They regularly carry out extensive research - on the company, the industry and the economy – thus ensuring informed investment. Secondly, they regularly track the market. Thus for many of us who do not have the desired expertise and are too busy with our vocation to devote sufficient time and effort to investing in equity, mutual funds offer an attractive alternative.

Putting eggs in different baskets.
Another advantage of investing through mutual funds is that even with small amounts we are able to enjoy the benefits of diversification. Huge amounts would be required for an individual to achieve the desired diversification, which would not be possible for many of us. Diversification reduces the overall impact on the returns from a portfolio, on account of a loss in a particular company/sector.

It’s all transparent & well regulated
The Mutual Fund industry is well regulated both by SEBI and AMFI. They have, over the years, introduced regulations, which ensure smooth and transparent functioning of the mutual funds industry. This makes it safer and convenient for investors to invest through the mutual funds.

Market timing becomes irrelevant
One of the biggest difficulties in equity investing is WHEN to invest, apart from the other big question WHERE to invest. While, investing in a mutual fund solves the issue of ‘where’ to invest, SIP helps us to overcome the problem of ‘when’. SIP is a disciplined investing irrespective of the state of the market. It thus makes the market timing totally irrelevant. And today when the markets are high, it may not be prudent to commit large sums at one go. With the next 2-3 years looking good from Indian Economy point of view, one can expect handsome returns thru’ regular investing.

Does not strain our day-to-day finances
Mutual Funds allow us to invest very small amounts (Rs 500 – Rs 1000) in SIP, as against larger one-time investment required, if we were to buy directly from the market. This makes investing easier as it does not strain our monthly finances. It, therefore, becomes an ideal investment option for a small-time investor, who would otherwise not be able to enjoy the benefits of investing in the equity market.

Reduces the average cost
In SIP we are investing a fixed amount regularly. Therefore, we end up buying more number of units when the markets are down and NAV is low and less number of units when the markets are up and the NAV is high. This is called rupee-cost averaging. Generally, we would stay away from buying when the markets are down. We generally tend to invest when the markets are rising. SIP works as a good discipline as it forces us to buy even when the markets are low, which actually is the best time to buy.

Helps to fulfill our dreams
The investments we make are ultimately for some objectives such as to buy a house, children’s education, marriage etc. And many of them require a huge one-time investment. As it would usually not be possible raise such large amounts at short notice, we need to build the corpus over a longer period of time, through small but regular investments. This is what SIP is all about. Small investments, over a period of time, result in large wealth and help fulfill our dreams & aspirations.

Mutual Funds - FAQs

Q1-What do Mutual Funds do with the money that they collect from us?

A Mutual Fund is a pool of investments managed by professional money managers. When you invest in a Mutual Fund, you are actually pooling your money with other people who have similar investment goals.

An expert called a Fund Manager invests that money on behalf of the whole group. He invests this pool of investments in securities, ranging from shares to debentures, or a mixture of Equity and Debt, depending on the objective of the scheme.


Q2 - Do any Mutual Funds invest in both stocks and bonds ?

Yes. Balanced funds invest in a combination of stocks and bonds also known as Equity and Debt instruments. A typical mix of 60:40 is allocated to Debt and Equity instruments respectively. Returns from Balanced funds are normally lower than pure equity Mutual Funds when markets are rising, however if the market declines, the losses are also normally lower. Balanced funds are best suited for investors who seek a blend of Equity and Debt.


Q3 - Can Mutual Funds help save tax?

Yes. Tax saving schemes of Mutual Funds offer tax rebates to the investors under section 80C of the Income Tax Act, 1961 as the government offers tax incentives for investment in specific avenues. E.g. Equity Linked Saving Schemes (ELSS). As per the Finance Bill of 2005, tax savings can be made on an investment up to Rs. 1 lakh.


Q4 - What are Tax-exempt and Non Tax- exempt funds?

Generally, when a fund invests in tax-exempt securities, it is called a Tax – exempt fund. In India, after the 1999 Union Government Budget, all the dividend income received from any of the Mutual Funds is tax – free in the hands of the investors. However, funds other than Equity Funds have to pay a distribution tax, before distributing income to investors. In other words, equity Mutual Fund schemes are tax – exempt investment avenues, while other funds are taxable for distributable income.


Q5 - How is investing in a Mutual Fund different from depositing money in a Fixed Deposit?

When you deposit money with the bank in its Fixed Deposit, it promises to pay you a certain rate of interest for a certain specified period of time. On the date of maturity, the bank is supposed to return the principal amount and interest to you. However, in the case of a Mutual Fund, the money you invest, is in turn invested by the fund manager, on your behalf, as per the investment objectives specified for the scheme. The profit, if any, less expenses, is reflected in the Net Asset Value (NAV) or distributed as income to you.


Q6 - Is there any regulation over the investments made in Mutual Funds?

Yes. A comprehensive set of regulations for all Mutual Funds operating in India was introduced with SEBI Regulations, 1996 to protect the investor, ensuring that the investors’ funds are invested in approved securities only.

Every Mutual Fund that intends to sell securities to the public must first file a prospectus with the regulators and must give each purchaser a disclosure document which outlines the risk. The information contained in these documents is intended to allow investors and their financial advisers to make prudent and informed investment decisions.


Q7 - How are the returns on my investment distributed to me?

When you invest in Mutual Funds, you could receive returns in either of the two ways –
Capital Gain – This is the profit, which you earn if you sell the units at a higher NAV than the original cost.
Income Distribution (dividend) – When a fund makes a profit on its investments, this profit will be given to you as a dividend. You can reinvest your dividend in the fund or retain it in the form of cash. In addition, you can also reinvest in the fund to buy more units.


Q8 - How do I choose the right Mutual Fund?

The choice of the right Mutual Fund depends on your investment objective. This varies according to your risk taking capacity, age, financial position, etc.
Funds may be chosen on these criteria –
Background & credentials of the sponsor
The track record of the scheme
Degree of transparency (as reflected in the frequency and quality of the fund communications in the form of disclosures, monthly updates, leaflets, etc.)


Q9 - What is an SIP (Systematic Investment Plan)?

A Systematic Investment Plan is simply what the name suggests
- a method where an investor contributes a fixed amount every month regularly in any of the schemes offered by a Mutual Fund. It is similar to regular saving schemes like a recurring deposit or a monthly deposit. The exception being that your monthly contribution is being invested to buy units of the Mutual Fund scheme of your choice. You can do this by investing as little as Rs. 500/- per month.


Q10 - What are the advantages of investing in an SIP (Systematic Investment Plan)?

There are lots of advantages of joining an SIP
It is a convenient mode of making an investment. You can make regular investments with as low as Rs.500/- per month.
It’s as simple as issuing a minimum of 6 to 12 post-dated cheques for identical amounts chosen by you (say Rs.500/-per month). These will be drawn in favour of the fund you choose to invest into.
It helps you take advantage of the fluctuations of the stock market by Rupee Cost Averaging. You can buy more units when the prices are low and fewer units when the prices are high. This method reduces the average unit cost compared to buying them in a lump sum.
Since you are essentially investing a certain amount of money on a regular basis for a longer time span, you will enjoy the benefits of compounding.


Q11 - Can a Mutual Fund change the nature of the scheme from the one specified in the Offer Document?

Yes. However, no change in the nature of terms of the scheme, known as fundamental attributes of the scheme can be carried out unless a written communication is sent to each unit-holder and an advertisement is placed in an English newspaper (with a nation-wide circulation) and a regional language newspaper. The unit-holders have the right to exit the scheme at the prevailing NAV without any exit-load if they do not want to continue with the scheme.


Q12 - What should an investor look for in an Offer Document?

An abridged Offer Document, which contains useful information, is required to be given to the investor by the Mutual Fund. The application form for subscription to a scheme is an integral part of the Offer Document. SEBI has prescribed minimum disclosures in the Offer Document.
An investor needs to give due attention to the portions of the Offer Document relating to the main features of the scheme, risk factors, initial issue expenses, recurring expenses to be charged to the scheme, entry or exit loads, sponsor’s track record etc. All of which are important details which must be looked at before investing.


Q13 - If schemes in the same category of different Mutual Funds are available, should one choose a scheme with a lower NAV?

In the case of Mutual Fund schemes, lower or higher NAVs of similar schemes of different Mutual funds do not have much relevance. Investors should choose a scheme based on its merit considering the Mutual Fund’s track record, service standards and professional management.
On the other hand, it is likely that better managed schemes with higher NAV may give higher returns. An efficiently managed scheme at higher NAV may not fall as much as an inefficiently managed scheme with a lower NAV. Therefore, the investor should give more weightage to the professional Management of the scheme instead of lower NAV.


Q14 - What are the time-tested investment strategies that work?

Start investing as early as possible – The power of compounding is the single most important reason for you to start investing early.
Buy Mutual Funds and hold long-term – Historically, world over, and even in India, stocks have outperformed every other asset class over the long run.
Diversify your investment – By diversifying across assets, you can reduce your risk without necessarily having to reduce your returns. To get the maximum benefit of reducing your risk through diversification, spread your portfolio across different asset classes.


Q15 - How do Mutual Funds minimize risk?

By diversification. When you invest in one Mutual Fund, you instantly spread your risk over a number of different companies. In addition, the selection of which securities to buy, the allocation of cash and securities, and the timing of purchases is performed by the fund manager or management team. These individuals have the resources, time, crucial market information and training to make well informed investment decisions.


Q16 - Why should I choose to invest in a Mutual Fund?

If you are someone who does not have the time and expertise to analyze and invest in stocks and bonds, Mutual funds offer a viable investment alternative. This is because:
- Mutual funds diversify the risk by investing in a basket of assets (equity, debt, etc) rather than putting all the eggs in one basket. You will have a team of professional fund managers with in-depth research inputs from investment analysts, who will manage your investment.
- As an individual you may not have the access to critical information for making investments. Being large institutions, Mutual Funds have critical information on markets.

Q17 - What does the term ‘risk’ mean in Mutual Funds?

All investments whether in shares, debentures or deposits involve risk. Which means – the share value may go down depending on the performance of the company, the industry, state of capital markets and the economy; or companies may default in payment of interest / principal on their debentures / bonds / deposits etc. Similarly, other criterion which might negatively affect the returns of a Mutual fund may be categorized as risk.
While risk cannot be completely eliminated, Mutual Funds help to reduce risks through diversification and professional management.


Q18 - What are the value-added services which are provided by a Mutual Fund?

There was a time when Mutual Funds in India took several weeks to send redemption cheques; when they revealed precious little of where your money was invested. Those days are thankfully behind us. Today, as it should be Mutual funds provide a host of value-added services
Anytime convenience – All fund houses allow easy access – walk-in, phone or over the Net facilities to investors. Most have toll-free numbers, where investors can call in for inquiries and updates.
Cheque book facility – To cut down the inordinately long processing time, certain fund houses give the option of redemption cheques of a certain percentage, at the time of the investment itself.
Online transactions – wherein you can buy / sell units on the Net.
Triggers, alerts – With instant triggers and alerts, fund houses keep the buy-and-forget type of investors well informed about the market movements.


Q19 - Why should investors consider Debt schemes as an investment option?

Debt-oriented schemes play a very important role in the portfolio of the individual. The first point is that the investors will not have access to several of the instruments that Debt Mutual Funds invest in. In most Debt markets, the minimum amount size of an investment is so large that the normal investor will never be able to get an exposure to these instruments. In such a situation, using the Debt Mutual Fund route is the best option.
The other reason why one should be looking at these schemes is also because the tax impact of Mutual Funds will be more favourable for the investor here, as compared to several other routes present where the post – tax returns will be hit. Thus going in for a higher return will also draw investors here.


Q20 - How much return can I expect by investing in Mutual Funds?

Investors need to be clear that Mutual Funds are essentially medium to long term investments. Hence, short term abnormal profits will not be sustainable in the long run. But in the medium to long run, Mutual funds tend to outperform most other avenues of investments. At the same time, they avoid the risk of direct investment by you since they involve experts for professional fund management.


Q21 - How do I invest money in Mutual Funds?

Contrary to belief, investing in Mutual Funds is not difficult at all. In fact, its’ very simple process. One can invest by approaching a registered broker of Mutual Funds. One can also approach the respective offices of the Mutual Fund called investor service centres (ISCs) in that particular town / city. You are required to fill up an application form and subsequently give a Cheque or Demand Draft for the amount to be invested.


Q22 - Can I get to know the performance of my Mutual Fund schemes on a daily basis?

Yes. The performance of a scheme is reflected in its Net Asset Value (NAV) which is disclosed on a daily basis in case of open-ended schemes and on weekly basis in case of close-ended schemes.
By law, the NAVs of Mutual Funds are required to be published in newspapers and are also available on the websites of Mutual Funds.
Additionaly, all Mutual Funds are required to put their NAVs on the website of Association of Mutual Funds in India (AMFI) – http://www.amfiindia.com/


Q23 - What are open-ended and close-ended Mutual Funds?

An open-ended fund is one that has units available for sale and repurchase at all times. An investor can buy or redeem units from the fund itself at a price based on the Net Asset Value (NAV) per unit. A close-ended fund makes a one-time sale of a fixed number of units. It does not allow investors to buy or redeem units directly from the funds. However, to provide liquidity to investors many close-ended funds get themselves listed on the stock exchange.


Q24 - What is an entry load and an exit load?

Some Asset Management Companies (AMCs) have sales charges, or loads, on their funds (entry load and / or exit load) to compensate form distribution & servicing costs. Funds that can be purchased without a sales charge are called no-load funds. Entry load is charged at the time an investor purchases the units of a scheme. The entry load percentage is added to the prevailing NAV at the time of allotment of units. Exit load is charged at the time of redeeming (or transferring an investment between schemes). The exit load percentage is deducted from the NAV at the time of redemption (or transfer between schemes.)

Why Mutual Funds ?

A Mutual fund is a common pool of money into which investors place their contributions that are to be invested in accordance with a stated objective. The ownership of the fund is thus joint or 'mutual'; the fund belongs to all investors. a single investor's ownership of the fund is the same proportion as the amount of the contribution made by him or her bears to the total amount of the fund.

A mutual Fund is constituted as a Public Trust created under the Indian Trusts Act, 1882.

ADVANTAGES OF INVESTING THROUGH MUTUAL FUNDS

There are several reasons that can be attributed to the growing popularity and suitability of mutual funds as an investment vehicle especially for retail investors:

Asset Allocation:

Mutual funds offer the investors a valuable tool Asset Allocation. This is explained by an example.

An investor investing Rs.1 lakh in a mutual fund scheme, which has collected Rs. 100 crores and invested the money in various investment options, will have his Rs. 1 lakh spread over a number of investment options, i.e. Equity, Debt. (Govt/Securities, Company deposit) money market etc. Thus "Asset Allocation" is allocating your investments into different investment options depending on your risk profile and return expectations.

Diversification:

Diversification is spreading your investment amount over a large number of investments in order to reduce risk. For instance, if you have Rs. 10,000/- to invest in Information Technology (IT) stocks, this amount will only buy a handful of stocks of perhaps one or two companies. A fall in the market price of any of these company stocks will significantly erode your investment amount. Instead, it makes sense to invest in an IT sector fund scheme so that your Rs. 10,000 is spread across a larger number of stocks thereby reducing your risk.

Professionals at Work:

Few investors have the time or expertise to manage their personal investment every day, to efficiently reinvest interest or dividend income, or to investigate the thousands of securities available in financial markets. Fund Managers are professionals and experienced in tracking the finance markets, having access to extensive research and market information, which enables them to decide which securities to buy and sell for the fund. for an individual investor, this professionalism is built in when invested in mutual fund.

Reduction of Transaction Cost:

While investing in securities, all the costs of investing such as brokerage custodian services etc. borne by you are at the highest rates due to small transaction sizes. However, when going through a fund, you have the benefit of economies of scales; the fund pays lesser costs because of larger volumes, a benefit passed on to its investors like you.

Easy Acess to your Money:

This is one of the most important benefits of a mutual fund. Often you hold shares or bonds that you cannot directly, easily and quickly sell. In such situations, it could take several days or even longer before you are able to liquidate your holding. Investment in mutual fund, on the other hand is more liquid. An investor can liquidate his mutual fund investment by selling the units to the fund itself and receive his money within 3 working days.

Transparency:

The investor gets regular information on the value of his investment in addition to disclosure on the specific investments made by the fund, the proportion invested in each class of assets and the fund manager's investment strategy and outlook.

Saving Taxes:

Tax saving schemes of mutual funds offer investors a tax rebate under section 80C of the income tax act. Under this section, an investor can invest upto Rs.1,00,000 per Financial year in a tax saving scheme.

Investing in the Stock Market Index:

Index schemes of mutual funds give the opportunity of investing in scrips that make up a particular index in the same proportion of weightage that these scrips have in the index. Thus, the return on your investment mirrors the movement of the index.

Investing in Government Securities: Gilt & money market schemes of mutual funds also give you the opportunity to invest in government securities and money markets (including the interbank call money market)

Well Regulated Industry:

All mutual funds are registered with SEBI and they function within the provision of strict designed to protect the investors. The operations of mutual funds are regularly monitored by SEBI.

Convenience & Flexibility: Mutual funds offer their investors a number of facilities such as inter-fund transfers, online checking of holding status, etc, which direct investments don't offer.

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Risk factors: Mutual Funds and Securities Investments are subject to market risks and there is no assurance or guarantee that the scheme's objects will be achieved. Please read the offer document carefuly before investing.

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No. 23, Cantonment Complex,
Camp, Belgaum - 590 001
Karnataka - India
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About us:

Ad Enterprises, located at No.23, Cantonment Complex, Camp, Belgaum-590 001, Karnataka - India is into Investment Consultancy; headed by Datta Kanbargi and Anita Kanbargi who are amfi certified financial advisors.

We have vast experience in the fileld of finance. Presently we have our own set-up marketing products like Life Insurance schemes, Small Saving Schemes (Postal schemes), Mutual funds, RBI Relief Bonds, Capital Bonds, NRI Investments, Portfolio Management, Systematic Investment Plans.

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Datta Kanbargi is SBI Mutual Fund - Agency Manager for the Belgaum District. He is also awarded as 'UTI Mutual funds - Chairman Clubs Member' for the year 2006.