Investments:
We all have to invest, and irrespective of the amount we want maximum returns with minimum risk. But the catch lies here, more the returns higher the risk. Thought this is true in some extent, here I will list some ways you can diversify your money and reap bountiful returns with minimum risk.
Average Returns form various investments:
Bank: 9%
Gold: 10-15%
Mutual Funds: 30%
Stocks: 10, 100, 200, 300 it could be anything
If we analyze the above chart, we find that stocks give maximum returns while Banks give least returns. However returns on bank deposits are guaranteed while in stocks event the capital is not maintained.
So lets begin:
Do not put all your money in one scheme, diversify.
An Ideal Distribution will be:
Bank: 30% money
Gold: 15%
Stocks:15%
Mutual Funds: 40%
Lets begin with Mutual Funds:
All the investment in stock markets either directly or indirectly should be for long term. No one gets rich overnight here, though otherwise is always possible. However proper planned and systematic investment will definitely help a good investor to seek opportunity and create wealth.
How to select funds?
A good fund is a fund which has delivered consistent returns for at least past 3 years. You can check the fund profiles yourself on the following websites.
All the 5 or 4 star funds on Value research online are good funds. They are as good as band deposits giving at least 20% returns in the long term (3 years or more)
Here I have listed few funds, pick according to your risk appetite.
Aggressive:
- Reliance Diversified Power.
- Magnum Global
- UTI Infrastructure
- Reliance Vission
Growth:
- DSP TIGER
- HDFC Top 200
- Sundaram Select Mid cap
Stable:
- SBI contra
- HDFC Prudence
- Magnum Balanced
Tax Planning.
- SBI Taxgain
- Principle Tax Savings
The funds listed in the stable category are really rock solid, and best in their category. No portfolio is complete without including them.
Pick 5-6 good funds and continue to invest in them. Do not go beyond 6 as it will be difficult to monitor all the funds.
What about NFO's?
NFO, New Fund Offers are devils in disguise. Our aim by investing in Mutual Funds is to get stable, steady returns over a long period of time.NFO is a new fund and has no track record to check its performance. It is like betting on a novice. Generally NFOs attract high commissions so don't be surprised if your broker dumps them on you time and again.
These days you will find many NFOs which will have a unique investment strategy. These are all tricks to lure in more investors. All new funds have heavy initial expanses and take ages to recover them. It is always better to go for the established funds. Not many funds will give returns better than a well established funds for a long period. Even if a new fund does perform well you can always invest in it later. Remember NAV ( Net Asset Value) of the fund is irrespective of the fund performance. There is no specific advantage in getting a NFO at Rs10 over the established fund of NAV Rs.120
Just stick to mutual funds who have stood the test of time and NEVER go for an NFO.
What is right time for investing?
Every time is good time for investing. One should look out for opportunities to invest. A market correction is an opportunity. Keep the money handy. Invest when you feel the time is right and be regular in investing. The motive behind mutual fund is that you hire the manager to manage your funds. So if you invest at the peak of the market does not mean that your money has been invested. The fund manager decides when to invest or divest the money so as to maximize the profits. So just be regular in investing, sit back and enjoy the returns.
Should one go for systematic investment plan?
A systematic investment plan (SIP) is to invest a particular amount regularly. Mostly SIP's are monthly or quarterly. Now a days investing through SIP is very simple, the money gets deducted form the bank account every month on that specified date.
Markets are volatile, naturally the NAV of the mutual fund keeps on changing. Investing regularly helps us benefit form this fluctuations.
Let me give a simple example.
Imagine Suresh invests Rs. 1000 every month in an equity mutual fund scheme starting in January. His friend, Rajesh, invests Rs. 12000 in one lump sum in the same scheme. The following table illustrate how their respective investments would have performed from Jan to Dec:
| | | Suresh’s Investment | Rajesh’s Investment | ||
| Month | NAV | Amount | Units | Amount | Units |
| Jan-04 | 9.345 | 1000 | 107.0091 | 12000 | 1284.1091 |
| Feb-04 | 9.399 | 1000 | 106.3943 | | |
| Mar-04 | 8.123 | 1000 | 123.1072 | | |
Apr-04 | 8.750 | 1000 | 114.2857 | | |
May-04 | 8.012 | 1000 | 124.8128 | | |
Jun-04 | 8.925 | 1000 | 112.0448 | | |
Jul-04 | 9.102 | 1000 | 109.8660 | | |
Aug-04 | 8.310 | 1000 | 120.3369 | | |
Sep-04 | 7.568 | 1000 | 132.1353 | | |
Oct-04 | 6.462 | 1000 | 154.7509 | | |
Nov-04 | 6.931 | 1000 | 144.2793 | | |
Dec-04 | 7.600 | 1000 | 131.5789 | | |
Total | 12000 | 1480.6012 | 12000 | 1284.1091 | |
As seen in the table, by investing through SIP, you end up buying more units when the price is low and fewer units when the price is high. However, over a period of time these market fluctuations are generally averaged. And the average cost of your investment is often reduced.
This illustrative example taken form HDFC webpage.
Visit http://www.hdfcfund.com/BenefitsofSystematic/index.jsp for further details.
Remember the benefits are pronounced only over a long time.
Should I invest all the money at one go?
No. I would recommend to use the market fluctuations to your benefit. The principle of SIP works here too.
Should I see a broker or should I invest directly?
A broker charges 2.25%. He does not charge you directly but fund house makes the cut and pays him. However if you invest through the fund house directly you don't have to pay the brokerage (Effective since 4th Jan 2008). However you are not entitled to the services of broker if you invest directly. Common services provided by the broker include selecting of the funds, filling of the forms, submitting of the form in the fund house, and submitting the redemption request to the fund house.
If the amount invested is small then you wont mind the brokerage. But as the amount increases the brokerage becomes significant. For Rs. 100000 the brokerage becomes Rs. 2250.
In short if you do not need the services of the broker, invest directly through fund house. Online investments do not attract entry load however you need to have an internet banking account for that purpose.
When should I book profits?
While investing write down what are the objectives. How much returns do you expect and when do you want to exit. Once these objectives are achieved exit the market. But remember do not exit from one scheme and invest into another at the same time. Wait for a market correction before investing again. Be patient we have a correction every couple of months.Exiting form one scheme and entering in other has no monetary benefit.
Ideally you should invest, and over a period of time redeem your capital cost and let the interest portion earn for you. That way you are investing with zero risk as capital is already recovered.
BEST OF LUCK.
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