Want to invest online in a mutual fund? Here’s how

We all know that investing in mutual funds is the key to getting rich. But with SEBI doing away with entry load charges, many mutual fund brokers have stopped dealing in mutual funds, as they would get their commissions from the entry loads. Instead now it has become mandatory for them to get their fees from their customers. But since they had never actually looked after their clients’ needs and since India never had the culture for paying for the investment advice, the brokers lost their source of their income.

So if you want to invest in the mutual funds, and don’t have time to make frequent trips to the fund house, you can opt for online option. Most mutual funds have tie-ups with many leading bans (except cooperative banks), to allow their customers to invest in their numerous schemes. In fact today, you can do all those things online for which you had availed of the broker’s services.

Now if you want to start investing online here’s how to go about it.

  • If you are an existing investor: Then in that you have already completed the formalities to open the account. You just need to apply for the PIN, to get online access. Most of the fund houses have a tie-up with CAMS to handle their customer service requirements. You can visit the CAMS site and get all the necessary details. Once you get the PIN, you can login on the fund’s site to do the transactions.
  • If you are a new customer: Then you need to open an account. You need to fill the account opening form, submit a cheque for the investment amount along with the PAN card and KYC. The cheque will vary from scheme to scheme, starting from Rs 500 for tax saving mutual funds to Rs 1 lakh and above for some liquid funds. With effect from 1st Jan 2011, it has become mandatory to submit the KYC. If you don’t have it, the fund house will do it for you, free of cost. Now when filling out the form, you can select for online option. In that case, you will get the PIN once your account is opened

 

After you get your PIN, you are all set to invest online.

Should you opt for SIPs in stocks?

We are all familiar with the SIPs in the mutual funds. They allow you to stagger your investments in the stock markets and let you benefit from the market volatility. Now brokerages have also started offering SIPs in direct stocks in the direct equities on the similar lines. But are these SIPs safe? Should you go for them? Well, here is a low down on these SIPs.

These SIPs like those of the mutual funds, let you buy stocks in small amounts. This can be very good strategy in case of expensive stocks like BHEL of Infosys. Now if the market crashes at the time of your SIP installment date, you can buy more stocks of these companies. So the returns you earn in this way are much higher than what you would normally earn by making a lump sum investment in the stocks.

But the problem arises if the market goes up drastically. In case of mutual funds, it won’t make much difference. But in case of direct equities the price of a stock can go as high as Rs 100-200 within a month. This will affect your investments as you will get smaller number of shares in this instance.

Also your stock selection should be perfect. If you  had opted for SIP in stocks like RCom or DLF, you would have lost money. Hence it is essential for you to be aware of the fundamentals of the stock.

Lastly, it is costlier to go for SIP in stocks as you have to pay brokerage on each purchase. Besides you also have to pay for the demat charges. Hence you should be very careful when going for SIPs in direct equities.

Impact of regulatory changes on your investments

The last couple of years have seen a flurry of regulatory changes affecting the various Indian investment products. These changes are sure to impact all of us. So it is essential for you to understand what these regulatory changes mean for you. Here are some of the major changes impacting various investment products.

Regularization of ULIPs

  • Reduction of charges: Before the ULIP charges were capped, the insurers charged exorbitant charges on these products. Hence it took a long time for the  recovery of these charges. But now IRDA has put a limit on these charges. This means you can recover your charges more quickly.
  • Spreading out of charges over the policy term: Previously these charges were deducted during the initial 3-5 years of the product. As a result, your corpus decreased significantly. But now, the final amount goes up significantly, as more amount is invested initially.
  • Hike in lock-in period: The the lock-in period for these products has gone up to 5 years from the earlier 3 years. This is a very important change as equities tend to give better returns over a long period, and most ULIPs are equity-based products. So you tend to get higher returns.
  • Guaranteed return on pension scheme: The pension schemes from insurance companies are now set to offer you a guaranteed return of 4.5%.
  • Limitation on surrender charges: With this move, you will get higher amount, if you decide to surrender your policy prematurely.

 

Revised guidelines for PMS

  • Minimum investment for PMS to be fixed at 5 lakhs: Previously, PMS managers would accept clients even though they couldn’t invest Rs 5 lakhs. But with this new SEBI circular, the minimum amount for PMS account has been fixed at Rs 5 lakhs.
  • PMS Managers to charge fee only on the excess profit generated: SEBI has said that the PMS Manager can charge their fee only on the excess profit generated over the previous year. E.g. if you invest Rs 5 lakhs, which after a year becomes Rs 8 lakhs, then you pay fee only on Rs 3 lakhs and not on the entire corpus. This saves you money in the long run. Moreover this fee will be levied at interval exceeding a quarter. This will safeguard your returns.

 

Abolishment of entry loads in mutual funds

  • This means lesser churning, fewer NFOs and no mis-selling. It means investors gain.

Why fund ratings should not lure you?

It has become common nowadays for mutual fund industry to lure gullible investors by giving star ratings to their funds. Gullible investors who don’t know better fall prey to these ratings and end up investing in these funds, only to regret later on. This is because star ratings have no meaning when it comes to investing. Here are the drawbacks of star ratings for the funds.

  • Variations in rating system: The rating agencies use different rating parameters to rate the funds. This can create inconsistency in the rankings of the funds. So a fund may get higher ranking in the ratings but may give poorer returns than its peers. Also just insisting on the ratings will make the investor ignore the consistent performers.
  • Expensive proposal: Fund ratings keep on changing. Now if you keep on focusing only on the star ratings then, you will end up churning your mutual fund portfolio regularly, thus making you pay STT and other duties. Besides you also end up losing the appreciation of your investment amount.
  • Suitability: While funds across all categories do get five star ratings, all of them may not be suitable for everybody. E.g. if you have a low risk appetite, then mid-cap funds are a strict no-no for you. So even if these funds do have five star rating, they will not be suitable for you.

 

So instead of concentrating on the ratings, it is advisable to focus more on the fund performance, your risk appetite, time horizon and fund management. This will help you earn substantial returns over a long time.

Benefits of SIP for long-term investors

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.

Should you invest in PSU Funds?

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.

How to use ETF tactics to safeguard your investments?

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.

Why NAV of a mutual fund does not give an idea of returns?

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.

Tips to select the right mutual fund

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.

Disadvantages of global funds

Sometime back, international or global funds were a rage. Many investors were heavily seduced by these funds. This is because they could get international exposure at a nominal sum. They did not have to get RBI permission to invest abroad. They did not have to face the hassle of foreign currency conversion as the fund house took care of all these formalities.

However it was observed that these funds underperformed local mutual funds. In fact, in many instances, investors have seen the value of their investment eroding. Why is that? Why did these funds fail to deliver?

Well, here are some of the of the reasons while global funds failed to deliver.

  • As global funds invest their corpus abroad, effect of economic crisis in the country in which they have invested, will end up eroding the value of the investment.
  • Foreign currency exchange will affect the value of the investment. If the foreign currency is stronger than Indian rupee, the value of your investment will increase and vice versa.
  • Taxation will differ from country to country. Taxes will affect the value of your investment. Besides you’ll end up paying taxes in India as well, since unlike normal mutual funds, these funds are taxable.

 

So what should you do? Well, as far as possible, avoid these funds. However if you choose to do so, just invest a small portion (not more than 5%) in such funds. But this should be done only after building up a robust portfolio of domestic funds. This will help you withstand the shocks in the international markets

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