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Sunday, November 21, 2010
Advantages & Drawbacks of Investing through Mutual Fund
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Posted by Saral Gyan at 6:00:00 PMFriday, November 19, 2010
Investing In Stocks Versus Mutual Funds
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Posted by Saral Gyan at 8:00:00 AMSaturday, October 9, 2010
4 Good Reasons For Investing Through SIPs
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Posted by Saral Gyan at 6:00:00 PMTaxation on your Mutual Fund Investments
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Posted by Saral Gyan at 2:00:00 PMSaturday, October 2, 2010
How to Build a Mutual Fund Portfolio?
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Posted by Saral Gyan at 10:30:00 PMFriday, October 1, 2010
How to Select a Mutual Fund?
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Posted by Saral Gyan at 12:30:00 AMWednesday, September 29, 2010
Are you Investing in Mutual Fund?
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Posted by Saral Gyan at 10:30:00 PMMonday, September 27, 2010
What is a Mutual Fund?
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Posted by Saral Gyan at 11:00:00 PMTuesday, September 21, 2010
SIP is a Boon for Small Investors
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Posted by Saral Gyan at 6:00:00 PMSunday, September 12, 2010
Understanding ELSS Mutual Fund
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Posted by Saral Gyan at 8:00:00 PMELSS Funds Shine during the Week
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Posted by Saral Gyan at 7:00:00 PMThursday, July 22, 2010
Invest in Individual Stock or Mutual Fund?
Conventional wisdom will tell you to put your money in a mutual fund. Well, conventional wisdom does not apply in the stock market. Today, there are more mutual funds with various schemes than there are stocks to buy from the stock indices. A mutual fund can be your worst investment decision.
There is an enormous amount of money being put into mutual funds every year. These so-called "safe" investments have been consistently under performing the markets over the years.
That's right, when the market goes up 40%, your mutual fund probably returned 25%. What happens when the market goes down? And believe us, it does go down! If the market is down 20%, your fund will probably be down 30% and you lose both ways.
If there are almost more mutual funds than there are stocks, then how do you pick a mutual fund?
Do you need a mutual fund that helps you pick a mutual fund? Sounds silly, doesn't it? Guess what, they already exist. There are mutual funds that take your money and pick different mutual funds to invest in.
With all the free information available today, you're better off picking the stocks yourself. You would save yourself a lot of money.
You can dramatically reduce your investment expenses by cautiously selecting your individual stocks, and minimizing the number of your trades. The average mutual fund has fees and expenses of over 1.00% per year for the privilege of underperforming the market. Between 85% and 95% of mutual fund managers underperform the indices, depending on who's doing the counting.
One of the big advantages of mutual funds is diversification. Your mutual fund manager pools your money with thousands of other people and builds a portfolio containing hundreds of securities representing companies in dozens of industries.
Unfortunately, too much diversification isn't good for you. You don't need to hold hundreds of securities to be properly diversified. Increasing the number of securities held does reduce your risk, but the reduction becomes negligible once the portfolio reaches 20 or 25 securities, spread across several industries.
If you need only 25 securities to be completely diversified, why is your fund manager holding 200 securities in your mutual fund?
He can't buy enough stock in the companies he likes, so he has to add second and third rate issues to remain fully invested. Even if your mutual fund manager is a bona fide genius, it's unlikely he has more than 5 or 6 good investment ideas a year. You want your mutual fund manager's best ideas, not the 200 mediocre ones.
Once a mutual fund gets too large, the manager has to buy large capitalization stocks for liquidity. Also there are restrictions on how much of any one stock they can hold.
So, how do you decide what stocks to buy?
People have many different ways to pick stocks. Some people will only look at companies which have good earnings and sound fundamentals.
Others will look at the core of the business and determine if the products or services offered is better than it's competitors or they might only look at the charts of stocks and try to determine if the stock is going higher or lower.
Many might even not look at anything and just get in and get out of stocks in matter of seconds.
Do you think that you don't have time to become an amateur securities analyst?
In such a case stock picking answer is really simple:
Just listen to equity analysts and evaluate their stock research and investment ideas in terms of company background, past performance, management views, dividend payments & risk involvement. Check your risk factor and accordingly break up your stock investments by investing in Small, Mid & Large cap stocks.
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Posted by Saral Gyan at 9:40:00 PMSunday, July 18, 2010
Differences between a Hedge Fund & a Mutual Fund
There are mainly five key distinctions:
1. Relative Performance:
Mutual Funds are measured on relative performance. Their performance is compared to a relevant index such as the S&P 500 Index or to other Mutual Funds in their same sector.
Hedge Funds, on the other hand, are expected to deliver absolute returns by attempting to make profits under all circumstances, even when the relative indices are down.
2. Regulation:
Mutual Funds are highly regulated, restricting the use of short selling and derivatives. These regulations serve as "handcuffs," making it more difficult to outperform the market or to protect the assets of the Mutual Fund in a downturn.
Hedge Funds, on the other hand, are unregulated and therefore unrestricted. They are allowed to short sell and are able to use many other strategies designed to accelerate performance or reduce volatility.
However, an informal restriction is generally imposed on all Hedge Fund managers by professional investors who understand the different strategies and typically invest in a particular Fund because of the manager's expertise in a particular investment strategy.
These investors require and expect the Hedge Fund to stay within its area of specialization and competence. Hence, one of the defining characteristics of Hedge Funds is that they tend to be specialized, operating within a given niche, specialty or industry that requires a particular expertise.
3. Management Renumeration:
Mutual Funds generally remunerate management based on a percent of assets under management.
Hedge Funds always remunerate managers with performance-related incentive fees as well as a fixed fee. Investing for absolute returns is more demanding than simply seeking relative returns and requires greater skill, knowledge, and talent.
Not surprisingly, the incentive-based performance fees tend to attract the most talented investment managers to the Hedge Fund industry.
4. Protection Against Declining Markets:
Mutual Funds are not able to effectively protect portfolios against declining markets other than by going into cash or by shorting a limited amount of stock index futures.
Hedge Funds, on the other hand, are often able to protect against declining markets by utilizing various hedging strategies.
The strategies used, of course, vary tremendously depending on the investment style and type of Hedge Fund. But as a result of these hedging strategies, certain types of Hedge Funds are able to generate positive returns even in declining markets.
5. Future Performance:
The future performance of Mutual Funds is dependent on the direction of the equity markets.
The future performance of many Hedge Fund strategies tends to be highly predictable and not dependent on the direction of the equity markets.
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Posted by Saral Gyan at 7:00:00 PMMonday, July 12, 2010
Investing in Index Fund
This kind of fund will have you spreading your money around an entire index of stocks such as the Nifty 50, the Mid Cap Index, or the Sensex. These are just three of the possibilities.
Whenever you put your money into a whole index, you are going to own a tiny piece of all of the stocks within the index. This means that if something horrible happens to one of those companies, then you may still make money on the day. You will not have all of your eggs in that one basket, so you will not see all of your money melt away. Using this kind of fund is better than trying to pick a mutual fund to invest in, because mutual funds specialize in particular types of stocks. It is possible that this type of stocks might get hit all at once. For example, the technology stocks might take a collective drop all at once. This would mean that if you are invested in a technology heavy mutual fund, then you would lose considerable amounts of money.
Instead of investing in a mutual fund, then you should invest in an entire index. By doing this, you will benefit with the general growth of the overall market. The overall market has always gone up over long periods of time, so you are likely to make money if you leave it invested for the long term.
Invest in the indexes if you want the most security possible for your money in stock market.
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Posted by Saral Gyan at 6:00:00 PMTuesday, June 15, 2010
Mutual Fund ELSS - Best Tax Saving Instrument
What is section 80C?
As per Income Tax act 80c investment up to Rs 1,00,000 in tax saving instruments like PPF, NSC, ELSS etc. are eligible for deduction from the gross total income hence reducing the total taxable income.
For example, Mr. Suresh (Resident individual with age less than 65 years) has annual income of Rs 10,00,000 and he invest Rs 1,00,000 in ELSS then his taxable income is reduced to Rs 9,00,000. As per the current tax laws, his saving will be Rs. 30000 if he takes benefit of section 80C provision.
Benefits of ELSS over other Tax Saving Instruments
High Risk- High Return: ELSS being a equity-linked scheme has the potential to earn higher returns as compared to other tax-saving instruments that give returns of a fixed nature. A longer investment horizon reduces the risk in equity investment considerably. Lock-in-period of 3 years in ELSS ensures that investor has a longer investment horizon. Moreover, an investor has the option to stay invested for more than 3 years.
Liquidity: On liquidity parameter, ELSS is the best option. The lock-in period of 3 years is the shortest as compared to other tax saving instruments. The maturity period of NSC is 6 years and of PPF is 15 years. An investor looking for intermittent cash flow can also opt for dividend payout option in ELSS.
According to current tax laws, dividend and long-term capital gains from ELSS schemes are tax-free in the hands of the investor under section 10(35) and section 10(38) respectively. Barring PPF, interest on all other tax saving instrument is taxable.
Investors can also go in for Systematic Investment Plan (SIP) in ELSS and benefit from the concept of rupee cost averaging and power of compounding.
Suitability: ELSS is suitable for all types of investors who have moderate to high risk appetite and need to invest in tax planning schemes/instruments.
Note: ELSS as tax saving instrument may not be the best option for an investor at the age of 55, if stock market is in bearish phase during that period, returns on investment from ELSS after 3 years may not exist and there could be loss, hence it is always good to invest through SIP (systematic Investment Plan).
ELSS is the best tax saving instrument for investors in the age group of 25 - 45, as they can hold it for a longer period to get good returns as compared to other tax saving instruments under 80C and keep on investing on regular basis to get benefitted from Rupee Cost averaging in a long run.
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Posted by Saral Gyan at 10:40:00 PMWednesday, June 9, 2010
Fund House Expenses in Managing a Fund
Annual Recurring Expenses:
The Expense Ratio is also known as Annual Recurring Expenses. This basket of charges comprises the fund management fee, agent commission, registrar fees and the selling and promotion expenses. The expense ratio is disclosed every March and September and is expressed as a percentage of the fund’s average weekly net assets. A fund’s expense ratio states how much you pay a fund in percentage terms to manage your money.
For example, let’s assume you invest Rs 10,000 in a fund with an expense ratio of 1.5 per cent. This means that you pay the fund Rs 150 to manage your money. The expense ratio affects the returns you get as well. If the fund generates returns of 10 per cent, what you will get is just 8.5 per cent after the expense ratio of 1.5 per cent has been deducted. Hence, this makes it necessary for investors to know the expense ratio of the funds he invests in.
Since the expense ratio is charged every year, a high expense ratio over the long term can eat into your returns massively. For example, Rs 1 lakh invested over a period of 10 years would grow to Rs 4.05 lakh if the fund delivers returns of 15 per cent per annum. But when we deduct the expense ratio of 1.5 per cent per annum, then your returns come down to Rs. 3.55 lakh, down by almost 14 per cent over the period of 10 years.
Different funds have different expense ratios. However to keep things in check, the Securities & Exchange Board of India (SEBI) has stipulated an upper limit that a fund can charge. The limit stands at 2.50 per cent for equity funds and 2.25 per cent for debt funds. The largest component of the expense ratio is the management and advisory fees.
Now that you know everything about expense ratios, let’s see if it really matters. The answer is yes, it does, especially in the case of debt funds. Debt funds generate about 7 – 9 per cent returns and any percentage of expense ratio becomes a substantial amount in the case of such low yields. On the other hand, in the case of actively managed equity funds, the issue of expenses is more complicated. The wide divergence of returns between ‘good’ and ‘bad’ funds makes the expense ratio secondary. However, if you are stuck between two similar funds, the expense ratio can be a good differentiator. But keep in mind, expense ratio is charged even when the fund’s returns are negative.
Note: Overall, before you invest in a mutual fund, it is imperative that you check out the fund’s expense ratio. But remember that a low expense ratio doesn’t necessarily mean that the fund is good. A good fund is one that delivers good returns with minimal expenses.
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Posted by Saral Gyan at 8:00:00 PMSaturday, May 29, 2010
Mutual Fund options - Growth, Dividend & Reinvestment
If you choose a good quality equity fund, your investments are likely to appreciate steadily over time, overcoming most temporary setbacks. Therefore, the focus should be on investing for the long term. Before you invest your money, make sure the schemes are selected taking into account the track record and the quality of the portfolios. Your Mutual Fund portfolio should provide you an adequate exposure to each of the market segments depending on your risk profile. In other words, investors need to re-look at equity funds, not with the rose coloured spectacles but with the high powered ones of analytical selection.
Suggested reading:
- Equity Mutual Funds - Choice of wide varieties
- Mistake MF Investors Make
- 3 General Types of Mutual Funds
- What are Mutual Funds?
- Basics: Mutual Fund
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Posted by Saral Gyan at 10:00:00 AMWednesday, May 26, 2010
Equity Mutual Funds - Choice of wide varieties
While normal diversified funds are well understood, there are certain other varieties of equity funds whose suitability to investors with different risk profiles is not well known or understood. Let us analyse a variety of funds that are diversified in nature but have different investment styles/philosophies.
Flexicap / Multicap Fund:
These are by definition, diversified funds. The only difference is that, unlike a diversified fund, the offer document of a multi cap / flexi cap fund generally spells out the limits for minimum and maximum exposure to different market caps. To that extent, an investor retains the control on the exposure to each market segment, which is not possible in a typical diversified fund.
Contrarian Fund:
A contra fund is positioned against conventional wisdom. In other words, a contrarian fund invests in out-of-favour companies but at the same time have unrecognized value. It is ideally suited for investors who want to invest in a fund that has the potential to perform in all types of market environments as it blends together for both growth and value opportunities.
Index Fund:
An index fund is a type of passively managed fund that seeks to track the performance of a benchmark market like BSE Sensex of S&P CNX Nifty. The major advantage of investing in an index fund is that one knows exactly the shares the fund would invest in. The downside of investing in an index fund is that one forfeits the possibilities of earning above average returns.
Dividend Yield Fund:
A dividend yield fund invests in shares of companies having high dividend yield. Most of these funds invest in the stocks where the dividend yield is higher than the dividend yield of a particular index i.e. Sensex or Nifty and are ideal for investors who are looking to diversify within equity segment and require regular dividends.
Sector Fund:
A sector fund is highly focused in that its investments are aimed at a particular industry. The basic idea is to enable the investors to take advantage of industry cycles. Since sector funds ride on market cycles, they have the potential to offer good returns if the timing is perfect. However, as sector funds invest in one industry or sector, they do not provide the downside risk protection available in a diversified fund.
Thematic Fund:
A thematic fund focuses on structural as well as cyclical factors that play an important role in the economy. A thematic fund looks for trends that are likely to result in out performance of cetain sectors or companies. By incorporating macro environment in the investment process, a thematic fund adds value and protects investments from adverse movements in the macro environment. At the same time, there is a danger that the market may take more time to recognize views of the fund house with regards to a particular theme which forms the basis of launching a fund.
Exchange Traded Fund:
ETF is a hybrid product that combines the features of an index fund as well as stocks. These funds are listed on the stock exchanges and their prices are linked to the underlying index. ETF can be bought and sold like any other stock on an exchange at prices that are expected to be closer to the NAV at the end of the day.
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Posted by Saral Gyan at 11:00:00 PMWednesday, May 5, 2010
Mistake MF Investors Make
Investing without a plan: Many investors start the investment process without determining the investment objectives and deciding on the right asset allocation to achieve these objectives. Though the MF investment process is simple, it still requires planning, perseverance and time.
Underestimating risk, overestimating reward: It is quite common to see MF investors make this mistake. One needs to be careful about this aspect of investing, as different schemes have different risk profiles and you should expect returns commensurate to that.
Going for short term gains: Many investors often lose sight of their long term objectives to fulfill their short-term needs. In this process, they end up making wrong decisions. As a result, they either lose a part of their hard-earned money or earn much lower returns.
Allowing portfolio to ride: Many equity fund investors allow the portfolio to ride when the market is in a bullish phase. In times like these, they often forget about the original mix of equity and debt and/or large-cap and mid-cap stocks. No doubt, the equity market requires a long term commitment to secure investment benefits, but it is equally important to rebalance the portfolio from time to time.
Averse to trying investment options: Investors, who invest in conservative options offered by mutual funds, often hesitate to look at other smart options like monthly income plans, equity and derivative funds and well-diversified equity funds. These funds, if held in the right proportion, have the capability to improve returns for a long term investor. Though investment risks and economic uncertainties can never be eliminated. MFs - thanks to their mix of experience, research and analysis - are in a much better position to ensure that investors in different segments achieve their investment objectives.
Discontinuing SIP in a falling market: SIP, or systematic investment plan, is the best way to build up capital over a period of time for those who don't have a lump-sum to invest. However, it requires discipline to continue irrespective of the state of the market. There are investors who get panic whenever the market witness a fall and get tempted to discontinue to SIP. However, the fact is that an investor, who takes the SIP route, benefits in a falling market, as he gets more units for the same amount. Therefore, one needs to carry on and reap the benefits in the long run.
Investing in same category NFO: Many investors perceive wrongly that NFO (New Fund Offering) is cheaper as compared to other available funds in the same category. The simple reason is that investors look at the price of 10 Rs per unit which does not make any difference in terms of returns if compared with old fund. Investment in NFO is suggested only if fund offers some value services which is not available in existing funds. Investing in NFO in the same category should be avoided as fund does not carry any past performance. Moreover, NFO promotion and advertisement cost is paid by the fund manger from the total corpus collected from investors.
Not analysing a fund's track record: One of the most important parameters in the selection process is the past performance. Many investors, however, make the mistake of either ignoring the track record or considering short-term performance while selecting funds. While analysing performance, the focus should be on differentiating investment skill of the fund manager from luck and on identification of those funds with the greatest likelihood of future success. The following factors are important in evaluating the track record of a fund manager:
- Consider long-term track record rather than short-term performance. It is important bacause long-term track record moderates the effects, which unusually good or bad short-term performance can have on a fund's performance.
- Evaluate the track record against similar funds. Success in managing a small - or in a fund focusing on a particular segment of the market - cannot be relied upon as an evidence of anticipated performance in managing a large or a broadbased fund.
- Discipline in the investment approach is important, as the pressure to perform can make a fund manager susceptible to change tracks in terms of stock selection as well as investment strategy.
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Posted by Saral Gyan at 6:00:00 PMSunday, April 4, 2010
3 General Types of Mutual Funds
1. Stock Funds :
Stock funds, also called equity funds, are the most volatile of the three, with their value sometimes rising and falling sharply over a short period. But historically stocks have performed better over the long term than other types of investments. That’s because stocks are traded on the expectation that a company’s future results will include expanded market share, greater revenues and higher profits. All of that would increase shareholder value.
Generally stocks fluctuate because of investor's assessment of economic conditions and their likely impact on corporate earnings.
Not all stock funds are the same. Some common funds include:
Growth funds, which offer the potential for large capital appreciation but may not pay a regular dividend.
Dividend (Income) funds, that invest in stocks that pay regular dividends.
Index funds, which try to mirror the performance of a particular market index, such as the S&P CNX 500 Composite Stock Price Index.
Sector funds, usually specialize in a particular industry segment, such as finance, pharmaceutical or technology.
2. Bond Funds :
Bond Funds, also known as fixed income, invest in corporate and government debt with the purpose of providing income through dividend payments. Bond funds are often included in a portfolio to boost an investor’s total return, by providing steady income when stock funds lose value.
Just as stock funds can be organized by sector, so too bond funds can be categorized. They can range in risk from low, such as a Treasury bond, to very risky in the form of high-yield or junk bonds, which have a lower credit rating than investment-grade corporate bonds.
Though usually safer than stock funds, bond funds face their own risks including:
The possibility that the issuer of the bonds, such as companies or municipalities, may fail to pay back their debts.
The chance that interest rates will rise, which causes the value of the bonds to decline
The possibility that a bond will be paid off early. When that happens within bond funds there is the chance the manager may not be able to reinvest the proceeds in something else that pays as high a return.
3. Money Market Funds :
Money market funds have relatively low risks, compared to other mutual funds and most other investments. By law, they are limited to investing only in specific high-quality, short-term investments issued by the government, corporations, and state and local governments.
Historically the returns for money market funds have been lower than for either bond or stock funds, leaving them vulnerable to rising inflation. In other words, if a money market fund paid a guaranteed rate of 3 percent, but over the investment period inflation rose by 4 percent, the value of the investor’s money would have been eroded by that 1 percent.
Today Fund Houses offer variety of products, which include all above type of options for investment in a single scheme, different combination of funds are available in market today with pre defined allocation of investments in various categories. Balanced Furnds is a category which include investments in Stocks as well as Bonds/Debentures Fund.
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Posted by Saral Gyan at 5:25:00 PM