Category Archives: Long term 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.

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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