Financial advisors are harping on the importance of Systematic Investment Plan (SIP). But what is SIP and how does it benefit you? Should you opt for it?

The term SIP stands  for Systematic Investment Plan. In this you invest a particular sum at regular intervals. This interval can be daily, monthly quarterly or half-yearly. This sum can be as low as Rs 100.

Why opt for SIP? SIP lets you balance out the no of share or mutual fund units that you purchase. E.g. if your Rs 100 lets you buy 2 units of a mutual fund when the markets are high, you can get 3 units when the markets fall. This means you even out your investments.

Studies have shown that those who opt for SIP earn far higher returns than those who make lump sum investments. Also since you are investing small sums, you are not taking a major risk if the markets crash.

However SIPs don’t work in rising markets. If the NAV or share price keeps on increasing, you will not get any substantial returns.

SIP is suitable for those who have a steady source of income. If your income flow is irregular, then go for lump sum option, to prevent being charged for SIP bounce.

The markets are going up and you see all and sundry investing in stocks. Next day the markets crash and everybody panics and starts rushing out from the markets, thus aggravating the market conditions. US economy is down in dumps and the FIIs start pulling out their money, so even your neighborhood uncle withdraws his money from stock markets.

This type of investing is called as emotional investing where human emotions like euphoria, panic, greed and fear impact the decisions made by the investors. But not many know that emotional investing is bad for your wealth. Here is why.

When emotions take over he person’s rational thoughts, he cannot think clearly. He is easily swayed by the emotions and takes decisions that his emotions tell him to do. He doesn’t realize that markets work in cycles. What goes up comes down and vice versa. So if you manage to hold on though the tough times and avoid over exposure to stocks when the markets go up, you can easily make money in the stocks.

Unfortunately not many understand this principle. They lose focus when they get emotionally charged. They make wrong decisions and so don’t make money in the stock markets. So if you don’t get swayed by your emotions, you can rest assured that market movements will not affect the value of your investments in the long run.

Mutual fund houses are quite adept at catching latest fad in the market and launching new funds based on the fad. Once such fad they have capitalized on is the government’s plan to divest its stake in government-owned companies or PSUs, and introduced mutual funds, called as PSU funds.

PSU funds are those mutual funds that invest in scrips of government-owned companies. These include companies like BHEL, NTPC, IOC, SBI etc. Many fund houses mislead customers by telling them that they will be filthy rich by investing in these companies. But is it true? Will the customer benefit from investing in these funds?

The answer – no. When choosing a company for investment, you have to look at its merits. You need to consider its present and past performance, its growth prospects, its comparison with peers, dividend payout etc. This is applicable even for PSUs. All of them are not gems. You should be able to separate wheat from chaff.

While PSU companies do have an edge when it comes to policy making, there is a major drawback as the government holds a dominant stake, and so can force these companies to bend to the whims of the ministers and MPs and MLAs. Moreover some companies do not have quality customer service, slow decision making etc. All these will impact the functioning of these companies.

Hence it is advisable to give these funds a miss. Instead go for pure diversified fund that will help you get higher returns.

Exchange-traded funds (ETFs) are a type of mutual fund that works like shares, as they can be traded on the stock exchange. Just like stocks, their prices are affected by the trading that takes place on the stock exchange. However they do offer some tactics to help you safeguard your investments. So what are they?

• Proper timing: Proper timing is the key to maximizing your returns. You should have proper timing for both buying and selling the stocks, as you won’t gain anything by holding on to the stocks by hoping that the situation will improve. Instead it is advisable to exit the stocks if there is a decline of 8% in the value of the stock from its highest price. Then once the market has stabilized, you can again buy the stock. It will help you in saving some amount of capital.
• Stop orders: Place a stop loss on your stocks so that if their prices go below this figure, you can sell them. It will help you in protecting your downsides and lower your losses.
• Selling: Sell your ETF to raise cash if you are in desperate need of money, as  it will help you in getting necessary cash for your needs. Alternately you can invest that money in some low-risk investment avenue like bank FD or government bonds, to protect your money.
• Rebalance your portfolio: Divide your portfolio amongst stocks, bonds, gold and mutual funds. This means if the stocks are not doing well, you always have other investments to fall back on. Similarly divide your stocks amongst those belonging to different sectors. So if one sector like IT is not doing well, it will be offset by good performance of another sector like FMCG.

Follow these tactics and protect your wealth even during the downtimes.

It is a normal practice for most investors to look at the NAVs of the funds when evaluating the performance of the funds. However this is not true. Here is why.

The NAV of the mutual fund is calculated on the daily basis, based on the value of its underlying assets divided by the total number of units in the scheme on a specific day. E.g. if the value of the securities in a mutual fund is Rs 3000 and the fund has issued 100 units, then the NAV of the fund is Rs 30. Similarly a fund whose value of the securities is Rs 6000 and has issued 200 units will also have a NAV of Rs 30.

This implies why you should not focus much on the NAV of the mutual fund. Low or high NAV does not matter, when it comes to a mutual fund.

Instead concentrate more on the track record of the fund, dividend history, holdings in the portfolio, service levels, fund manager’s performance etc. This will help you choose the right fund for your needs.

Raju is an engineering graduate working in an MNC. He earns Rs 50,000 a month. His company has given him a platinum credit card that allows him to spend as much as he desires. Raju takes full benefit of this card and spends all his monthly income on clothes, mobiles and eating out. He has totally ignored the concept of investing.

So if you are in this situation, here is how to invest if you are in your 20s.

• Buy a health insurance: Today health care has become expensive. A simple visit to a doctor can set you back by as much as Rs 500. Hospitalization, medicines, medical examinations have all gone up. This is where having a good health insurance helps. Besides paying for any health expenses, you’ll also save money on premium, if you start early. It also gives you tax benefit under section 80-D.
• Invest in equity mutual funds: Equities are the best bet to make money and become wealthy over a long haul. Also earlier you start you can get more by investing smaller amounts due to the power of compounding. Moreover in your young age, you have higher risk appetite, thus allowing you to go for aggressive investments. But a word of caution: DON’T GAMBLE OR SPECULATE.
• Buy your own home: Earlier you buy your home, sooner you’ll find you have exhausted repaying the loan. E.g. if you take a home loan of 20 years, when you are 25, you’ll find you are debt-free by the time you reach 45. This means you’ll be debt-free by the time you retire.

These are some of the useful investment option for people in their 20s. follow them and you’ll grow healthy and wealthy in your old age.

Today Indian mutual fund industry has become highly competitive. Many fund houses have entered the fray and have started offering many mutual fund schemes with innovative schemes. This is sure to confuse many investors. So how do you go about selecting the right mutual fund for your investment?

Here are some tips to help you select the right mutual fund.

• What is your age? Younger people can take more risk as they have a long earning life in front of them. Older you get, lesser the risk you need to get. So it is advisable for youth to invest a bulk of their investment corpus in equity mutual funds, while older people can opt for debt or balanced funds.
• Are you a senior citizen looking for a monthly income? If yes, then opt for monthly income plans from mutual funds. While the income from these plans is not guaranteed, it is sure to help you earn income.
• Do you have some spare cash that you need to use for some other purpose after some time? Then opt for liquid funds. They will let you redeem your money within 24 hours, while fetching you returns higher than your bank account.
• Do you want high returns but don’t want to risk associated with equities? Then opt for gold funds. These funds simply track the prices of gold and there is nobody actively managing the fund. While the returns from these funds cannot beat those from equities, they surely offer returns higher than a normal bank deposits and also offer protection in case the stock markets crash.
• Do you love taking risks? If yes, then go for mutual funds specializing in mid and small caps as these tend to be very aggressive. While they can give you superlative returns they can also be detrimental to your wealth in short-term. If not, choose large cap funds that invest only in the leading companies.

To get the best returns on your money, divide your portfolio between equity, debt and gold funds. In case of equity funds, invest 20-30% in small and mid-cap funds and allocate the rest to large-cap funds. This will give you both the security and high returns.

We all know that from amongst the various asset classes, equities have managed to give the highest returns. This makes stock markets very attractive to those looking to make money. However not many have managed to become rich in stock markets. This is because they don’t know the secrets of becoming wealthy in stock markets.

So if you are wondering what they are, here is what you should know to become successful in stocks.

• Understand the macroeconomic and industry outlook. E.g. if RBI decides to increase the interest rates on loans, those sectors that are impacted by rate hike such as automobiles, realty and banks will be affected. Similarly recession in US will affect IT and export sectors. You should be aware of these developments. Many people tend to overlook these aspects and instead concentrate on the stock prices.
• Find out the quality of management and promoter reputation. The company you are investing in should have progressive management and the promoters should have clean background. This will help prevent scams like Satyam and Enron.
• Find out if the company pays dividend regularly. It implies the company is profit making and has sufficient cash to tide over the tough economic conditions. However don’t make this the sole reason to ignore those stocks that don’t pay dividends as the company may be very strong financially like Bharti Airtel.
• Read the company’s financial reports. It will give you an idea of the way in which the company plans to move. You will also get an idea of the company’s past performance and can catch any anomalies in the company’s performance immediately.
• Find out about the company’s financial ratios. Ratios like PE, ROE, RONW give you an idea whether it is worth investing in the company. You will also understand how the company is performing vis-à-vis its peers.

However this is just the beginning. Once you have invested in the stock, you need to monitor its performance closely to prevent nasty surprises.

Today it has become common place for insurance companies to target unsuspecting customers with their pension plans. However not many of these gullible customers know that pension plans from insurance companies. Here is why.

• While your investment fetches you tax deduction, you end up paying tax on the amount you receive as the pension.
• High charges means just a small portion of your money actually invested.
• You cannot withdraw the money even if your investment performs poorly.

So how should you invest your money to build a sizeable nest egg for retirement?

Here are some tips.

• Diversify your investments across PPF, bank FDs, debt and equity mutual funds initially. Then as you near retirement age, transfer your equity investments to debt instruments for capital safety and to get regular income. Start by invesing 80% of your portfolio in equities, then make it 50% when you reach mid-40s and then keep 20% in equities when you are a couple of years away from retirement.
• If possible, invest in a property to get a good rental income after retirement.
• But under no circumstances should you touch these funds. This is particularly true for equity funds, which will give you compounded annual growth rate of at least 15%.
• While safety of your capital, don’t shy away from taking some risks. Invest in companies like Tata companies, HDFC and Infy to get good returns on your capital without risking your capital.

Today stock markets are at an all-time high. The companies are reporting rise in their profits and are giving out hefty dividends. Yet why are investors not making any money? Why are only a few investors getting richer?

Well, here are the reasons why this happens. Avoid these mistakes and see a rise in your wealth.

• Concentrating a lot on growth: A company may have taken a lot of debts in order to fuel its growth. But its profits may be sinking. This means the company is in big trouble when the recession strikes or when the interest rates go up, as it can make it difficult for the company to meet its obligations. Instead it would be better if the investors pay attention to the company’s financial statements to avert their losses.
• Overconfidence: Many people tend to adopt the same approach to stock investing as mutual funds. They buy more of poor-performing stocks if the stock price goes down, as they would do with a mutual fund. But while mutual fund is a collection of different stocks, direct stock investing involves only one stock. So if the stock is performing poorly, sell it and move on to better performing stock.
• Concentrated portfolio: When a particular sector is doing well, people tend to accumulate more of the companies included in the sector and ignoring others. Similarly if small and mid-caps are doing well, people tend to accumulate more of them and ignore others. This lop-sided portfolio will end up ruining your wealth.
• Excess activity: Different analysts and brokers have different opinions about the stocks in your portfolio. While one broker recommends you sell stock A, another will tell you to buy the same stock. The result – balance sheets of the brokerages go on increasing. And of course, it is from your pocket.

No wonder with all these mistakes, people don’t make any wealth in the markets. Stop these mistakes and watch your wealth soar.