Wednesday, April 30, 2008

Why Mutual Fund is better then Stock Market ?

One of my friend recently asked me why should I invest in Mutual fund when they are themselves going to invest in stock market. I can directly invest in stock market and make more profits. I said....YES definitely you can.

Its just the co-incidence that many people ask me this question all the time and I say you can If you have the knack of stock picking, If you can know when to buy a share and when to exit a stock, and if you can do the research of the companies you want to invest in. If you can keep track your portfolio consistently.

The answer always is well, I will buy when the stock of company A is down and sell when the share price goes High. but does it work so SIMPLE, theoretically yes but to implement it trust me its very very very difficult. I can tell you from my experience in stock market it really is very difficult to outperform all the time. I have seen lots of people who burned there fingers in penny stocks and so many other stories are there which were all based on tips and so on this includes yours truly as well.

There were times whenever I sold a share immediately the share price of that stock would rise. and vice versa whenever I bought a share its stock price would stumble that was learning curve before it occurred to me that I can be wrong one time , two time but not again and again. Then my eyes opened to big bad world of penny stocks.

There are operators who exactly knows the number of stocks that are out there with public and the number of stocks with the promoters. As soon as the promoters ratio is high the price will normally go up. but as and when you sell the share and the operator buys the share they usually hit upper circuit and nobody has the shares in the market except this operator and hence the price goes up and up and up. and reverse is also true as soon as the operator start selling shares nobody is there to buy it and the price goes down and down and down till it keeps on hitting lower circuits. (We usually blame ourselves for this wrong decisions)

Well give a pat on your back it was not you who made a wrong decision ! There are some bad elements who manipulate retail investors.

TIP:
1) Always stick to an 'A' group stock.
2) even better is to invest via mutual fund and you don't need to worry about making decision when to sell when to buy; Fund manager is there to have a headache while we can sleep in peace.

What is Mutual Fund ?

Well in the most simplest of terms. Take an analogy of five young friends who want to start a business together. They need say 25 lakhs to start the business. Each one of has only 5 lakhs, None of the friends can start the business on his own but all of them together can definitely start the business on a partnership basis. same way

In mutual fund during NFO (New Fund offer) the fund house decides on the objective of the fund and launch the fund. e.g recently reliance launched Reliance Natural Resources fund. The objective was to invest money in the companies which deals with natural resources like power, oil, metals etc). People who think this strategy will work will start investing the money in there own capacity. All this collected money is pooled together and Professional Fund Manager decides in which companies this money should be invested.

There are various types of Mutual Funds each with there own objective and strategy. Most new comers should stick with Large cap equity diversified fund from a reputed business house. Always while dealing with your hard earned money go after the REPUTED fund house who have great track record.

Tuesday, April 29, 2008

What is SIP; How does it work ?

SIP is called Systematic Investment Planning.

Let us say that you are a salaried person and earn around 40k per-month. You want to save tax and make investment for your retirement or for your child's higher education or for your daughters marriage. you decide to invest Rs. 1 Lakh every year and get tax benefit under sec 80c.

Instead of putting 1 lakh at one go in Mutual Fund. you split that one lakh in equal installment of Rs. 8500 per month. (1Lakh / 12 months = 8,333.33 approx 8,500 )

Benefits of doing this.
1) Its very easy to do once you sign up for an SIP application form with good ELSS scheme. you can ECS it from your salary account and Rs.8500 will be automatically invested in Mutual fund without you going through the hassle of writing cheque every month.
2) It makes you disciplined as its automated.
3) By investing regularly in small chunks you get the benefit of cost averaging your money. (Which is you buy more units when value is low and buy less units when value is high).

SIP is strongly recommended for each and every individual.

I want to save tax; What is ELSS and how can I save tax via ELSS

ELSS is nothing but E:Equity L:Linked S:Saving S:Scheme. This are mutual funds with 3 year lock-in period.

Finance minister Mr. Chidambaram has included ELSS as one of tax saving instrument,along with your regular LIC, PPF etc.

Investments in ELSS can also get you tax benefit under section 80c. This comes under the overall exemption limit of Rupees One Lakh.

Recently last two years it has been observed that most people who used to invest Rs.70,000 in PPF and rest in LIC have now started switching there investment into ELSS.

Why is that so ?
Reason 1: The lock-in is of 3 years compare to 15 years in PPF
Reason 2: Good performing Mutual Funds normally give dividends where as PPF does not.

Last and very most important reason is over a long period of say 15 years Mutual Funds has always outperformed all other asset class. In the short term however mutual fund can give you -ve return sometimes.

you will be amazed that Rs. 1 Lakh invested in SBI Magnum Taxgain 5 years ago is now more then 10 lakhs.

NOTE: I am strong believer in SIP (Systematic Investment Planning) compare to one time investment in Mutual Fund. SIP safeguards your money against market volatility.

I want to invest in Mutual Fund but I dont know to how to invest in Mutual Fund, can you explain the procedure ?

Investing in Mutual fund is very very simple.
Steps
1) Decide on the schemes in which you want to invest money.
you can check out www.valueresearchonline.com for top performing funds
2) you can directly download forms from the respective fund houses websites and fill the forms on your own and submit them to the fund house.
3) If you don't want to do the paperwork on your own find any AMFI certified agent near your vicinity, he should do all the paper work for you.
4) Feel free to call us if you need any help in Mumbai

Documents to be Submitted
1) Completed Application form of the respective AMC
2) Cheque in favour of the scheme you want to invest in
3) Copy of Pan card (self Attested)
4) KYC document if the invested amount is more then Rs 50,000

Note :
1) Always write the name of the scheme on the cheque to which you are investing in.
e.g if you want to invest in ELSS scheme called SBI - Magnum Taxgain to save tax
write the cheque in favour of "SBI - Magnum Taxgain"

2) on the Back side of the cheque again you can write following
a) Your Name
b) Application Number
c) Name of the scheme

Monday, April 28, 2008

Crorepati with just Rs. 100

This was the first lesson my grandmother taught us. We have big joint family and lots of kids in the home. Every kid had a separate piggy bank that was safeguarded in the grandmothers cupboard. It was in those early days we use to get lots of gifts during Diwali or birthdays or on some special occasion. But the seed fund was provided right at the time of birth and all the childs money is saved separately. All this money was collected by all the kids and put in there piggy bank and everybody really tried to increase there AUM :-) in a piggy bank. As years progressed we started getting pocket money and awards on various achievements in schools etc. This investment grew slowly and slowly into near about lacs by the time we achieved adulthood.

My dad told me once that he has kept just Rs. 100 for his grandchild in FD. I said "sau rupaiya mein kya hoga dad". He asked what do you think this Rs.100 will be in 50 years I said maybe one thousand or at most 2 thousand. he asked me again what will it be in 100 years. I said maybe 5 thousand at the most. He explained me with following table saying that if you invest your money in FD which gives a return of 9% year on year. Its like doubling your investment every 8th year.

1 year = Rs. 100
8 year = Rs. 200
16 year = Rs. 400
24 year = Rs. 800
32 year = Rs. 1,600
40 year = Rs. 3,200
48 year = Rs. 6,400
56 year = Rs. 12,800

64 year = Rs. 25,600
72 year = Rs. 51,200
80 year = Rs. 102,400
88 year = Rs. 204,800
96 year = Rs. 4,09,600
108 year = Rs. 8,19,200

Look at the power of compounding its exponential rise. Just Rs. 100 can make you a lakhphati.

Now if you take a look at average returns of any diversified equity mutual fund for last 10 years Its MORE then 15%. Let us safely assume an average return of 15% which means roughly doubling your money every 5 year.

1 year = Rs. 100
5 year = Rs. 200
10 year = Rs. 400
15 year = Rs. 800
20 year = Rs. 1,600
25 year = Rs. 3,200
30 year = Rs. 6,400
35 year = Rs. 12,800
40 year = Rs. 25,600
45 year = Rs. 51,200
50 year = Rs. 102,400 (Lakhpati)

55 year = Rs. 204,800 (Lakhpati)
60 year = Rs. 4,09,600
65 year = Rs. 8,19,200
70 year = Rs. 16,38,400
75 year = Rs. 32,76,800
80 year = Rs. 65,53,600
85 year = Rs. 1,31,07,200 (crorepati)
90 year = Rs. 2,62,14,400
95 year = Rs. 5,24,28,800
100 year = Rs. 10,48,57,600 (More then 10 crores)

Its amazing, its awesome, I feel like dancing once I complete 100 years :-)
But the point is maybe not 100 years not 50 years but you can definitely plan for your retirement and you can save at least Rs 100 per month for 20 years or more and you will end with handsome money when you retire.

Thats what I call Financial Independence !!

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