Category Archives: Investment

How does a SIP work?

What is SIP?

SIP or Systematic Investment Plan is a plan through which a person can invest a small amount in a mutual fund at regular intervals say once a month or once a quarter, instead of making a lump-sum investment. 

Invest Small Amount

SIPs can be started with a minimum of ₹500 each month. you can choose the frequency as monthly or quarterly for investing according to your choice.

Averages the purchase cost

SIP make sure that you invest a fixed amount regularly over a period irrespective of the market conditions. you would get more units when the market falls and less units when the market rises .

This averages the purchase cost of your mutual fund units and places the investment in the position to earn good return.  

The compounding factor

The earlier you start investing, the more wealth you are able to create for yourself -and this is  exactly what the power of compounding does for you. 

Whatever sum of money you invest, you will earn interest on it. and, this interest also gets invested to earn interest. Thus, it helps in creating a substantial amount of wealth in the long run.

Achieve your goals

SIP helps to achieve your long-term financial goals as your investments are broken down into smaller, regular investments. Investing a small amount regularly helps you to achieve your long term goal.

Discipline yourself financially

SIP imparts discipline in the investment process, making you invest a fixed amount at regular intervals. By starting early, even with a small amount, you can build a big corpus over a period of time to achieve your financial goals.

How does a SIP work?

  • Every month a fixed amount is deducted from the investor’s bank account and invested in the mutual fund scheme, chosen by the investor at the time of starting a SIP.
  • Every time the amount is invested in the mutual fund scheme, units are allotted to the investor.
  • Since investments are broken down into smaller, regular investments, your investments average out the market ups and downs and results in averaging your cost and maximizing your return.
  • Investor can redeem (withdraw) units or switch to another schemes, whenever he wishes to do so. Investor should check the scheme related document as some mutual funds have a specified lock-in-period.

Things to check before investing in Mutual Funds

Important things to check before investing in Mutual Funds

Mutual funds have emerged as one of the best ways to build a corpus in the long term. In this article we will talk about the important parameters to be checked before investing in Mutual Funds.

Investment Objective and Risk Tolerance

Before investing one should first identify his investment objective and risk tolerance i.e the risk you are willing to take. If you aim to earn capital gains for more than a year, choose a long-term mutual fund scheme wherein your money gets pooled in for a period of at least 12 months in case of equity or a balanced mutual fund and for at least 36 months in case of a debt mutual fund. However, if your investment objective is to earn current income, you should go for short-term mutual fund schemes.
Similarly, if your risk tolerance is high, go for equity mutual funds, otherwise, choose a debt or a balanced mutual fund scheme which tries to offset the involved risk by investing in both equity and debt instruments. A scheme which is aligned with your objectives and is in line with your risk profile is the scheme which you must opt for.

Check the investment allocation

While investing in Mutual fund one should check the asset allocation i.e where the money is actually being invested in? Is only debt or equity+debt or only equity? And in that too in which bifurcation. And based on his risk taking ability he should accordingly choose the mutual fund scheme. Eg; Equity is considered risky in comparison to debt, therefore the return potential of equity is also much higher in equity as compared to debt. The choice of asset is very important and it should be in line with investment objectives.

Background check about the Fund Manager

A check over the experience of the fund manager may ensure that you have given your hard-earned money in deserving hands. A fund manager with expertise in finance and ethical history will be an ideal candidate to go with.

Compare the fund with its Peer Group

Just knowing a mutual fund scheme’s own performance is not enough. It is also important to check how it has performed among its peers and benchmark. Remember this comparison should only be among the same type of mutual fund schemes means comparing apples to apples. For instance, a large-cap mutual fund scheme should not be compared against a small-cap mutual fund scheme. Try to select a fund that consistently outperforms its benchmark and has maintained its performance during market downturns.

Checking Mutual Fund’s Performance Consistency

Another important thing to check before investing in mutual funds is the scheme’s performance over the long term. Instead of checking how much returns the scheme has generated in recent times, make your investment decision considering how it has performed over the past 1, 3 or 5 years. It tells you if it is capable of giving you consistent or stable returns.

Mutual Fund expense ratio and load

While selecting the scheme one should also check the scheme expense ratio and the exit load. Exit load is a fee or an amount charged from an investor when he decides to redeem units of his mutual fund or leaving a scheme. Lower the expense ratio better is the scheme.

Taxation of Mutual Fund

Investor receives two types of income from Mutual fund investment namely capital appreciation and dividend depending on the type of scheme chosen. It is important to inquire about the tax liability arising from a particular scheme, before you plan to invest your money in it.


Power of compounding: Reason to invest

Everyone talks about the investment, why we should invest is still not clear to most of them.

So, what is compounding?

Compounding is the method of earning income from your previous earnings by reinvesting them. Lets understand this with a simple example:

Let us assume that someone invested Rs 1000 per month for 20 years and if the expected rate of return is 10% per year. The interest for the first year would be Rs 565. In compounding, First year’s interest is added to the principal in the second year and so on. So, Second Year Principal will be =(12000+565)=12565 and interest will be Rs 1881.

For more detailed table and graphs, refer to Poonje’s SAVING CALCULATOR http://poonje.com/saving-calculator/

After 20 years, total amount invested will be Rs 240,000.00 and total interest earned will be Rs 519,368.00. If you look closely total interest earned is more than 2 times the amount invested. So, let me simply say this, put your money to work and let it earn more money for you.

Thus, we see that as the time goes, earnings do not multiplies but grows exponentially.

How to make best use of compounding (make your hard earn money to earn more money for you)

Start early

As seen in the above example, you were able to grow an investment of Rs 1000/- per month to nearly Rs 759,368 (invested amount Rs 240,000 and total interest earned Rs 519,368) in 20 years.

However, if you extended the investment horizon by another 5 years, you have earned much more Rs 1,326,833 (invested amount Rs 300,000 and total interest earned Rs 1,026,833).

Thus, the longer you hold more you gain from compounding effect. This is one of the primary reasons to start investing early.

Think before invest

Before investing, think about your investment objective, time period & your risk tolerance. After that choose the investment products that give you a higher rate of interest and meets your objective. Example investing in Fixed Deposit have low interest rate but little to no risk than Mutual funds. Investing in Equities has high return and high risk.

Invest regularly in order to grow your investment

By regularly increasing your investment amount, you can make a huge difference over the long term. Even regular investment helps you, budget your day to day life & restricts you from overspending.

The best way of making your money grow, is to stay diversified and keep investing steadily. If you invest a set amount regularly, you will automatically take advantage of volatility in the market and can grow your investment. Thus, the slow and steady approach tends to yield more growth and less stress.


What is Share Buyback?

The Buyback is a process in which a company repurchases its own shares from its existing shareholders, which reduces outstanding shares in the market. Company buybacks the shares from its interested shareholders by offering them cash. Buyback can be done either through a tender offer route or open market route.

Tender offer

In this offer Shareholders are presented with a tender offer whereby they have the option to submit all of their shares or the portion of shares within a certain time period and at a premium to the current market price. Here the buy back price and duration are predefined.

Open market

Companies buy back shares upto certain number not necessarily the complete declared quantity on the open market over an extended period of time. Here the maximum price is fixed and the buyback can be done up to or below that particular price, not beyond.

Reasons of buyback

Excess cash

Companies that have excess cash available with them, with no plans for investment or any deployment requirements for the same, may consider buybacks, which reduces the number of outstanding shares in the market hence improves the earnings per share for existing shareholders.

Example showing the effect on EPS

Example:- Let assume a Company ABC has one million shares (10,00,000) held with its shareholder.Company had earnings of Rs 10,00,000/- last year.

So, EPS (Earning per share = total earning/total number of outstanding shares) =  Rs 1.0
*If the company buybacks 20% of its outstanding shares at its current market price and if the P/E=50, the shares are traded at Rs 50.0
Outstanding shares left after buyback = (10,00,000-2,00,000)=8,00,000
EPS after Buyback = (1000,000/8,00,000)= Rs 1.25

Undervaluation

Another reason when the company feels to buy back its shares is, when its shares are undervalued means the current share price does not reflect its true value. Thus Company buybacks the shares which increases its EPS and the share price. It can be explained better with below example –
EPS after buyback =1.25
P/E =50 as stated above
Market price= (EPS*P/E) so 1.25*50 = Rs 62.5
Thus shares would trade up now at= Rs 62.5/-

Avoid takeover threats

Buyback is also used by the company to avoid any takeover threats by increasing promoter holding. A takeover occurs when one company tries to acquire another company by acquiring its maximum shares to have a majority stake in the company. When the company buybacks its shares, the outstanding shares in the market reduces which avoids any takeover threats by the shareholders who may be looking for controlling stake in the company.

Tax gains

Companies prefer Buyback to reward their investors than distributing dividend payout because dividend distribution tax is also paid by companies while distributing dividend to its shareholders. Thus Buyback is more tax efficient than dividend payout by the companies.


5 Reasons: why Retirement Planning is Important

Retirement should be the best time of your life, when you can relax and enjoy your life with your loved one. This is the stage when your body becomes tired and want relaxation, So, If you wish to be financially independent and achieve a worry-free retired life, you should plan ahead for your future.

(Use our Retirement calculator to calculate how much to save for your retirement.)

Inflation

Inflation is a one of the primary reason, one must take into account while planning for his retirement. As we all know that the purchasing power of money falls with time, which means we need to spend more in future for purchasing the same good & services. Thus, calculating your retirement funds as well as your expenses become essential.

Medical emergencies

With increasing age, health problems increases, as our body becomes weak. Medical expenses may make a huge dent in your income after retirement. So, if you have sufficient retirement fund to cater to any unforeseen healthcare expenses, you won’t feel to be a burden on your future generation.

Financial Freedom & Security

Investing early shall not only help you gather more funds in the future, but will also help you to achieve financial independence in retirement years.

Post retirement, your invested amount, savings and your returns on investment will help you to plan for bright & secure future.

Getting stuck in the savings mindset

People tend to get hung up on how to save every month. The amount does not matter, even a small amount starting at an early age, can help you save a huge money for your retirement. Thus the later you start, the more and the longer you will have to save and invest to reach a particular retirement amount.

Nuclear Families a trend

Nuclear family is a trend this time. In Indian societies we found it difficult for senior citizens to move themselves from their hometown and stay with their children. In some situations children are not willing to live with their parents. Thus, it is better to make investment decisions during your working life and put your hard-earned money to work for you in future. If you can manage your finances well and could gather sufficient retirement savings, you can live an independent life of your choice.



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