WHAT IS MUTUAL FUND AND HOW TO EARN SAFELY FROM IT.
This Is How Mutual Funds Work - Did You Know This?
Want to save for a rainy day and don't know where to keep the extra money? Though investment avenues are multifarious, but more versatile are the reasons for which a person plans to save. Some want to just keep aside a portion of money and use it in the future when a big corpus is created (which is nothing more than sum total of amount saved every year), while others want their money to return to them after increasing.
Age old habit of keeping money in savings account in banks has somewhat lost many of its takers; reasons are many to quote. Interest rates have slashed down in recent times, one of the most popular reasons to begin with. In addition to these, newer investment options have popped up in recent times and performed beyond expectations. So, investing in mutual fund has proved to be an enticing option for those investors who are profit-oriented in thinking, and who doesn't want extra money.
If you observe closely, people have been saving since times immemorial. Mutual fund companies have just given a systematic garb to the people's savings habits. When mutual funds were not around, a group of people used to pool together a specific amount from each member, and by the way of lottery they used to declare the beneficiary of the collected money for the month. (This system is still functional at informal level!)
Now let's take a look at the mutual funds that are somewhat analogous to this practice of pooling money. Companies dealing in mutual funds not only collect money from the investors, but also look for premises such as stocks of the companies, debt instruments, and other assets that are considered profit-yielding options. Money invested by the individual investors and pooled together by the fund managers is used for - infrastructural developments, to carry out an ambitious infrastructural project of a company or for bringing some technological innovation - that is of great use to the inhabitants of the country. All these reasons give way to the possibility of earning returns from the money that investors give to their fund managers, from savings point of view.
Investment made in mutual funds grows due to power of compounding and averaging of return-cost ratio. By giving your money to the fund manager to invest, you are handing him over the responsibility of managing your corpus. Thus, he re-invests returns made by your money at a constant rate every year and other returns generated in the form of interest, dividends etc. also keep appending. That is why, there is an appreciable increase registered in the amount you invested at the end of the investment period. This is the main principle behind the working of a mutual fund.
Past performance figures reveal that investors putting their trust in mutual fund investments were able to earn 15-20% returns, on an average. At times, it has grown to as high as 30-40% too. Since there is an intelligent mix of market-oriented and debt-based options in a typical mutual fund, the risk also is comparatively less, as compared to pure equity-based instruments like, stocks.
Thus, by savings in mutual funds, an investor meets a variety of purposes:
1. He is able to earn extra from his own savings
2. He is indirectly contributing to the economic development of the country
3. He is creating extra income for himself to meet the unforeseen expenses
4. And last but not the least, he is securing his future too.
Costs involved in investing in mutual funds comprise of transaction costs, asset management cost, holding fees and other implied taxes. Thus, the amount that is actually invested is your money minus all the taxes. Mutual funds perform in spite of all these costs, such is the power of compounding. To make more out of your money, it is advisable to keep the money for the long term. So, if you are looking for the investment option that is yielding like a stock but safer than it, then mutual funds prove to be the smartest choice.
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When to Sell Your Mutual Fund Scheme?
Your mutual fund scheme might have made good returns in the past. However, there could be some signs of bad performance and you may need to get out of such MF schemes. There are various reasons / scenarios where you need to sell your mutual fund schemes.
1) Under Performance compared to benchmark: If your MF is not providing good returns, there could be several reasons. However, if your mutual funds are under performing compared to benchmark, then you should check the scheme details and sell such mutual funds. E.g. if a large cap mutual fund "X" scheme has given 10% annualized returns in last 5 years compared to SENSEX, which has given 13% annualized return, then your X scheme is under-performing. You should check the reasons before exiting.
2) Change in Fund Manager: Fund manager is the backbone of the MF scheme performance. In case there is any change in existing funds manager who has been managing funds well, you should check the past history of the new fund manager. In case fund manager has inadequate experience, you should review your mutual fund and exit appropriately.
3) RBI Repo Rate impacts Debt MFs: When RBI cuts down in repo rates, bond yields will drop and prices would go up and this would improve returns in debt funds. When you see that interest rates are going in an upward direction, your debt fund returns fall. Hence, under this situation, you should take a call and get out of debt funds. However, you should review the RBI direction towards repo rate and not just one instance.
4) Redeem based on your goals: Though your MFs are performing well, based on your financial goals, you may need to switch between equity to debt. E.g. During retirement where you need to reduce your exposure to equity funds as it carries risk. Another example is about meeting a planned financial goal 2-3 years ahead of time. In such case you cannot invest in equity funds till last minute of the goal. You may sell equity MF and then invest in debt funds or debt related instruments.
5) Does not meet your goal: When you have purchased a MF which does not meet your goal or objective, you should exit immediately instead of regretting it and keeping it as is. E.g. mid-cap funds can be brought only by high risk investors. In case you are low to moderate risk investor, and purchased mid-cap funds, you should exit immediately.
How Mutual Funds Can Make You a Millionaire
Your mutual fund scheme might have made good returns in the past. However, there could be some signs of bad performance and you may need to get out of such MF schemes. There are various reasons / scenarios where you need to sell your mutual fund schemes.
1) Under Performance compared to benchmark: If your MF is not providing good returns, there could be several reasons. However, if your mutual funds are under performing compared to benchmark, then you should check the scheme details and sell such mutual funds. E.g. if a large cap mutual fund "X" scheme has given 10% annualized returns in last 5 years compared to SENSEX, which has given 13% annualized return, then your X scheme is under-performing. You should check the reasons before exiting.
2) Change in Fund Manager: Fund manager is the backbone of the MF scheme performance. In case there is any change in existing funds manager who has been managing funds well, you should check the past history of the new fund manager. In case fund manager has inadequate experience, you should review your mutual fund and exit appropriately.
3) RBI Repo Rate impacts Debt MFs: When RBI cuts down in repo rates, bond yields will drop and prices would go up and this would improve returns in debt funds. When you see that interest rates are going in an upward direction, your debt fund returns fall. Hence, under this situation, you should take a call and get out of debt funds. However, you should review the RBI direction towards repo rate and not just one instance.
4) Redeem based on your goals: Though your MFs are performing well, based on your financial goals, you may need to switch between equity to debt. E.g. During retirement where you need to reduce your exposure to equity funds as it carries risk. Another example is about meeting a planned financial goal 2-3 years ahead of time. In such case you cannot invest in equity funds till last minute of the goal. You may sell equity MF and then invest in debt funds or debt related instruments.
5) Does not meet your goal: When you have purchased a MF which does not meet your goal or objective, you should exit immediately instead of regretting it and keeping it as is. E.g. mid-cap funds can be brought only by high risk investors. In case you are low to moderate risk investor, and purchased mid-cap funds, you should exit immediately.
Mutual funds are a way of parking your surplus money in the schemes which are according to your investing needs. Every one of us wants to be at the peak of success and earn a lot of money to lead a luxurious life. It is true that all of us cannot own a company as big as Microsoft, but still it is possible to earn a notable amount for being able to afford a lavish lifestyle. However, we all save some money through our entire life for the rainy day or to fulfil our future needs. But, small savings are not sufficient to accommodate the requirements. The reason being, savings do not provide many returns on the amount deposited in the banks. While, investments in mutual funds would bring up the required profits from the money which has been deployed into them.
We often hear our elders say that earning money is not easy, and it takes an entire lifetime to accumulate petite amount. It was true back then. Since the inception of mutual funds, there has been an easier way to invest and grow your wealth easily. Here are some important points which could help you to multiply your money manifolds:
Hike investments through a systematic process: Systematic investment is the most preferred investing method which would let the clients invest at regular time duration for a stipulated period of time. The clients have to be very consistent in adding up to their investments at a very slow pace. If you invest a lump sum, then it might not be possible for you get the benefits of the bullish and bearish market scenario, and you will not be able to get the maximum returns for your investments. Any sweet dish gets sweeter as we add sugar to it gradually. But, if we put the entire amount at once then there are chances of getting the dish spoiled. Hence, to savor the sweetness of your investments, invest through monthly SIP in your selected schemes mutual fund scheme.
Be focused on long-term financial goals: Mutual funds provide schemes for each and every client. The schemes include equity, hybrid, debt, etc. All these plans have been provided so as to attract customers from each and every segment to actively participate in mutual funds. The investment in mutual funds may facilitate the clients to invest in even short-term schemes, but the returns from such a plan are not at par with that of long-term mutual funds. Thus, it is advised by the financial experts that the clients must aim for investing over a longer time spell. It will help you to bring out the maximum gains from your investments.
Identify your cash inflow and outflow: A cash surplus is one of the most prominent factors in determining the amount which you can afford to invest. The cash surplus is calculated by subtracting the inflow of capital with the outflow. If the balance is positive, then you have that much amount left for investing, and if you have a negative balance, then that shows your borrowings. If the clients have an extra surplus then only they are capable of investing in mutual funds. So, it is necessary to manage your income and expenditure in a way that will let you have some unused amount for parking it at the correct place through the mutual fund schemes.
Monitoring the existing investments: Though it is said that mutual fund schemes provide returns during the long run, still one should not just invest and forget. A timely review of the plans is required in order to maintain the balance of returns. There are fund managers who allocate the funds and ensure the returns to the clients. However, it is the duty of the clients to carefully spot the difference between the promised and the actual returns because it is their hard-earned money that has been deployed and not anyone else's.
Remove the under-performers from portfolio: It happens many times that we go for shopping and instantly like something. We buy and bring it home. But, after using it for some time, we realize that it is not as per the standards and will result in loss of time and money. So, either we return it or give it to someone else.
In the same way, the clients should review their portfolio at regular intervals and discard the mutual funds which are not productive. As the money is invested in the wrong places, it is necessary to clean the portfolio at regular intervals as the non-productive schemes will result in wastage
To conclude, mutual funds can help you to be a millionaire if you abide by some necessary rules set by the experts. So value the importance of your money and make the maximum use of it.
A Good Investment Strategy to Make Money Investing
Whether the year is 2011, 2012 or 2020 - here's a good investment strategy to make money investing without a crystal ball. Any good investment plan considers both investment selection and timing. If you can't make money investing with this simple strategy, rest assured that only the few and the lucky will make money.
Before you stress over putting together a good investment strategy for 2011 and going forward, ask yourself the obvious question. Where do most successful people invest (or where have they in the past) to make money investing over the long term? The answer before the financial crisis was bonds, stocks and real estate. The answer today for the average investor is the same and takes the simple form of bond funds, stock funds and equity real estate funds. In the final analysis, if all three of these investment areas tank - we're likely in a depression and only a lucky few folks or smart speculators will make money investing.
Good investment strategy does not rely on speculation or trying to time the markets. No matter what you hear, no one has a proven and consistent record in market timing that beats the markets significantly over the long term. If they did they'd make a ton of money investing, and they'd hide their secrets, not share them. So, why not settle for a good investment strategy that makes only one major assumption: that the USA will grow and prosper over the long term?
Investing money in the three areas above is simple with mutual funds. To lower your risk and add flexibility to your investment strategy, add a fourth fund type called a money market fund. At today's interest rates these might not look like a good investment, but they are safe and earn interest that tracks current rates. Getting more specific, by owning just 4 different funds you can put together a good investment strategy for 2011 and beyond and make money by investing in America's future. In order from high safety to higher risk and greater profit potential: a money market, intermediate-term bond, large-cap equity-income, and equity real estate fund is all you need to own.
A good investment strategy to get your feet wet is to simply invest equal money in all 4 funds. Timing strategy requires no judgment calls or guessing. One year later and once a year after that, you simply move money around to make all 4 funds equal in value again. This automatically forces you to take some money off the table from your better-performing funds - and to move more money into those that didn't do as well. The net result over time is that you are buying more shares when prices are down, are selling shares that are relatively expensive.
This is also a good way to make money investing over the long term while keeping a lid on risk. Simply buying and holding funds is not a good investment strategy, and has gotten many average investors in trouble in the past. For example, real estate funds were good investments for multiple years until they were nailed by the financial crisis. Had you owned them and just held on, by 2009 you could have had a significant amount of money accumulated and at risk there... resulting in big losses as a result of the financial crisis.
There's more than just simplicity involved in what I am calling a good investment strategy for 2011 and well beyond. This strategy employs two of the only time-tested tools in the investment business: BALANCE & REBALANCE and DOLLAR COST AVERAGING. The first tool keeps you on track while keeping a lid on risk, and the second is the tool that works to lower your average cost of investing by having you buy more shares when prices are lower and fewer when they are high.
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You can put a good investment strategy together with only moderate risk by owning just 4 different mutual funds. People make money investing over the long term with bonds, stocks and real estate; and the smart ones keep some money in a safe investment as well for flexibility. In years past, some folks simply got lucky and made money investing without a strategy.
With a good investment strategy you won't need to cross your fingers and rely on luck. If America prospers in 2011 and beyond - so should you.
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