The Insurance Regulatory and Development Authority has warned insurers not to issue policies without receiving the requisite proposal forms from customers as stipulated under Section 4 of the Irda Act 9 (Proposal for Insurance).
"Any violation of this provision by an insurer shall be viewed seriously by the authority and action as deemed fit, (will be) taken," said the regulator in a communication received by insurance company CEOs on Monday.
Irda said it has received several complaints that policies were being issued without collecting proposal forms from customers. The regulator further pointed out that "the number of complaints of policies being issued without the consent of policyholders, either through telemarketing or banking channels, especially through credit cards, is on the rise."
Credit card companies are now being watched closely since co-branded credit cards offered by leading banks come with either life, accident or health insurance schemes to lure in first-time card holders. Premiums towards these policies are deducted directly from the customer's credit card.
In this process, there is no verification or proposal form filled in by the insured person; the only form which the customer fills out is a credit card application. Customers feel that in the absence of relevant documentation they are exposed to exploitation by the insurers.
It may be recalled that couple of years ago, the regulator pulled up Citibank and two general insurers -- Tata AIG and Royal Sundaram -- for foisting accident insurance covers on credit card-holders.
Irda has summoned insurers to explain why and how their personal insurance schemes are being tied up with credit card companies.
It is alleged that credit card companies have been charging the card-holders the premium for insurance cover without their consent, and automatically debiting card-holder accounts against the insurance premia.
How card firms milk customers
S Srikanth, a Chennai-based software engineer, bought a credit card from a major bank, which came with personal accident insurance, which he didn't opt for.
What irked Srikanth was that the bank was debiting the premium and administrative charges from his account automatically.
"Just because they give a customer a credit card does not mean that they own the customer and resort to such tactics. It is a dangerous notion for financial institutions to harbour," Srikanth says.
"Irrespective of the merits of the insurance cover, I feel that the scheme is unethical as I have not given debiting authority in writing to the bank."
An industry expert gives an example of a credit card company offering 5 lakh (500,000) cards with accident cover. At a conservative estimate of average collection per card-holder being Rs 300 per annum, the credit card company would mop up around Rs 12.37 crore (Rs 123.7 million) per annum. On this, an insurance commission of 15 per cent works out to Rs 1.8 crore (Rs 18 million).
If you own a credit card, chances are that you were probably asked by the company if you would like to slap on some credit insurance. In most cases, gullible customers are unfamiliar with this type of insurance and accept it, especially if tax benefits under sections 80 C or 10(D) are offered.
Actuarial sources note that credit insurance is beneficial to the credit card company since it can be used to pay off debt when a credit card holder dies.
Thus, the final beneficiary of the customer's insurance policy is the credit card company itself, they add.
Tuesday, February 19, 2008
Wednesday, February 6, 2008
Tax? 10 things to do before March 31 - Investment Guide
The Income Tax department does not want too many papers as proof of investments made or expenses incurred. But it is always better to file them now.
So please rush! Here are ten things to do before March 31, 2008 or before the financial ends:
1. If you are claiming deduction for house rent allowance on account of actual rent paid, collect the rent receipts from the owner and keep them in your possession.
2. If you received any gifts during the year, please collect the gift deeds. The deeds should clearly state that you received the gift without any consideration.
3. In case you have changed employment during the financial year, you have to go back to your previous employer and collect the Form 16.
4. If you have donated to charitable trusts, obtain a receipt and also a certificate saying the trust is an approved one under Section 80G of the Income Tax Act, 1961.
5.Collect all your bank statements and TDS certificates, if any. This will help you calculate your earning from bank interest and deposit advance tax if required.
6. If you have a running home loan, you must collect the certificate of repayment of principal amount and the interest paid during the financial year from the bank.
7. If you are claiming an interest-paid deduction on an educational loan, get a certificate of repayment made in the financial year where the interest is stated separately.
8. Keep all receipts for contributions made to schemes listed under Section 80C, such as insurance payment, PPF, ELSS, and children's tuition fees.
9. In case you are claiming a deduction for any medical disability under Section 80U, do not forget to collect a certificate of disability from an authorised doctor.
10. If you are claiming deduction for payment of health insurance premium, you need to keep the premium receipt indicating that the premium was paid in cheque.
So please rush! Here are ten things to do before March 31, 2008 or before the financial ends:
1. If you are claiming deduction for house rent allowance on account of actual rent paid, collect the rent receipts from the owner and keep them in your possession.
2. If you received any gifts during the year, please collect the gift deeds. The deeds should clearly state that you received the gift without any consideration.
3. In case you have changed employment during the financial year, you have to go back to your previous employer and collect the Form 16.
4. If you have donated to charitable trusts, obtain a receipt and also a certificate saying the trust is an approved one under Section 80G of the Income Tax Act, 1961.
5.Collect all your bank statements and TDS certificates, if any. This will help you calculate your earning from bank interest and deposit advance tax if required.
6. If you have a running home loan, you must collect the certificate of repayment of principal amount and the interest paid during the financial year from the bank.
7. If you are claiming an interest-paid deduction on an educational loan, get a certificate of repayment made in the financial year where the interest is stated separately.
8. Keep all receipts for contributions made to schemes listed under Section 80C, such as insurance payment, PPF, ELSS, and children's tuition fees.
9. In case you are claiming a deduction for any medical disability under Section 80U, do not forget to collect a certificate of disability from an authorised doctor.
10. If you are claiming deduction for payment of health insurance premium, you need to keep the premium receipt indicating that the premium was paid in cheque.
Tuesday, February 5, 2008
How to optimize your tax using mutual funds?
Mutual Funds by their very nature are not tax saving instruments but investment products that may offer tax concessions. But the question is whether these should be looked at as tax saving instruments?
Moneycontrol tells you how to kill two birds with one stone - how to optimize tax while getting the best from mutual funds.
Equity Linked Savings Schemes (ELSS) are Strong Favorites:
ELSS schemes give twice the benefit as compared with diversified equity schemes. They give you tax sops on investments and are also exempt from long term capital gains tax. (Also read - How does an MF investor stand to gain now?)
These are special equity funds, which have to invest at least 80% of their corpus in equity, and investments are locked in for a period of 3 years. Investments can get you benefits under Section 80C i.e. investments of upto Rs 1 lakh in such schemes can be reduced from your gross income.
Hemant Rustagi, CEO, Wiseinvest Advisors believes that ELSS is the best example of an investment option that provides you a very simple way of investing in stock market and save taxes while doing so. “Being equity oriented schemes, ELSS have the potential to provide better returns than most of the options under section 80C. Also, as per the current tax laws, an ELSS investor is not only entitled to earn tax free dividend but also the long term capital gains are not taxable”, he adds.
But should an investor go the whole nine yards and put in the entire permissible amount of 1 lakh in ELSS? Probably not!
Ranjeet Mudholkar, Head - Certified Financial Planners Board, cautions that Sec 80 C covers your principal on housing loan, PF, pension plan, life premiums, so only what is left after that can give you a benefit if invested in ELSS.
All Smiles From Equity Funds:
Apart from ELSS schemes, diversified equity schemes are a good investment considering that capital gains in equity funds below one year are taxed at a rate of 10% and over a year are tax-free. This option can be best excercised using a Growth Plan offered by mutual funds. The primary objective of a Growth Plan is to provide investors long-term growth of capital. (Also read - Mutual Funds: Your best personal Portfolio Manager)
Dividend paid in Dividend Plans is tax free, and no distribution tax is deducted. However, every time we buy or sell equity shares a Securities Transaction Tax, STT, of 0.25% is paid and further when you redeem your investment, again STT is deducted from your redemption price.
So what strategy will help to reduce the burden of STT to the minimum possible extent?
Investment expert Krishnamurthy Vijayan advises to choose the dividend option, while it remains tax-free. “Though both decisions are by and large tax-neutral, your STT will go down if your profits have already been taken out by you in the form of dividend”, he adds.
Debt Funds Can Benefit From Indexation:
Debt funds have lost their sheen thanks to falling interest rates and paling tax sops when compared with equity schemes.
Any fund wherein the average holding in equity is 65% (as per Budget 2006) or below is treated as a debt fund. If you invest for less than 1 year in the growth option of a debt fund, you will have to pay Capital Gains Tax on your "profits" at the rate at which you pay income tax on your income. But, if you stay invested for over a year, you can either pay 10% tax on the profits or pay 20% after reducing the rate of inflation (indexation benefit). So if you are invested for three or four years, your tax may become much, much lower than 10%.
Nevertheless for the risk averse, there are ways to reduce the tax burden on returns.
Investors can also benefit from double indexation benefit (when you invest late in one financial year say on March 28, 2005, and redeem early in the next financial year say on April 2, 2006, you use the index of both Financial Year ending March 2006 and March 2007 to get this benefit for as little as 366 days) provided the two financial years' index adds up to more than 10%. (Also read - How to ride the rising interest rate tide?)
In the dividend option, dividend is tax free in your hands. But the dividend distribution tax deducted at source also comes out of your NAV. So you end up paying a tax of 10%. Further any increase in NAV over and above the dividend distributed, is taxed as in the case of the growth option.
Vijayan advises most debt fund investors who have a reasonable horizon to invest for at least one year or more, in any case and choose the growth option, since by and large this would prove most tax efficient for retail investors in the lower tax brackets.
Moneycontrol tells you how to kill two birds with one stone - how to optimize tax while getting the best from mutual funds.
Equity Linked Savings Schemes (ELSS) are Strong Favorites:
ELSS schemes give twice the benefit as compared with diversified equity schemes. They give you tax sops on investments and are also exempt from long term capital gains tax. (Also read - How does an MF investor stand to gain now?)
These are special equity funds, which have to invest at least 80% of their corpus in equity, and investments are locked in for a period of 3 years. Investments can get you benefits under Section 80C i.e. investments of upto Rs 1 lakh in such schemes can be reduced from your gross income.
Hemant Rustagi, CEO, Wiseinvest Advisors believes that ELSS is the best example of an investment option that provides you a very simple way of investing in stock market and save taxes while doing so. “Being equity oriented schemes, ELSS have the potential to provide better returns than most of the options under section 80C. Also, as per the current tax laws, an ELSS investor is not only entitled to earn tax free dividend but also the long term capital gains are not taxable”, he adds.
But should an investor go the whole nine yards and put in the entire permissible amount of 1 lakh in ELSS? Probably not!
Ranjeet Mudholkar, Head - Certified Financial Planners Board, cautions that Sec 80 C covers your principal on housing loan, PF, pension plan, life premiums, so only what is left after that can give you a benefit if invested in ELSS.
All Smiles From Equity Funds:
Apart from ELSS schemes, diversified equity schemes are a good investment considering that capital gains in equity funds below one year are taxed at a rate of 10% and over a year are tax-free. This option can be best excercised using a Growth Plan offered by mutual funds. The primary objective of a Growth Plan is to provide investors long-term growth of capital. (Also read - Mutual Funds: Your best personal Portfolio Manager)
Dividend paid in Dividend Plans is tax free, and no distribution tax is deducted. However, every time we buy or sell equity shares a Securities Transaction Tax, STT, of 0.25% is paid and further when you redeem your investment, again STT is deducted from your redemption price.
So what strategy will help to reduce the burden of STT to the minimum possible extent?
Investment expert Krishnamurthy Vijayan advises to choose the dividend option, while it remains tax-free. “Though both decisions are by and large tax-neutral, your STT will go down if your profits have already been taken out by you in the form of dividend”, he adds.
Debt Funds Can Benefit From Indexation:
Debt funds have lost their sheen thanks to falling interest rates and paling tax sops when compared with equity schemes.
Any fund wherein the average holding in equity is 65% (as per Budget 2006) or below is treated as a debt fund. If you invest for less than 1 year in the growth option of a debt fund, you will have to pay Capital Gains Tax on your "profits" at the rate at which you pay income tax on your income. But, if you stay invested for over a year, you can either pay 10% tax on the profits or pay 20% after reducing the rate of inflation (indexation benefit). So if you are invested for three or four years, your tax may become much, much lower than 10%.
Nevertheless for the risk averse, there are ways to reduce the tax burden on returns.
Investors can also benefit from double indexation benefit (when you invest late in one financial year say on March 28, 2005, and redeem early in the next financial year say on April 2, 2006, you use the index of both Financial Year ending March 2006 and March 2007 to get this benefit for as little as 366 days) provided the two financial years' index adds up to more than 10%. (Also read - How to ride the rising interest rate tide?)
In the dividend option, dividend is tax free in your hands. But the dividend distribution tax deducted at source also comes out of your NAV. So you end up paying a tax of 10%. Further any increase in NAV over and above the dividend distributed, is taxed as in the case of the growth option.
Vijayan advises most debt fund investors who have a reasonable horizon to invest for at least one year or more, in any case and choose the growth option, since by and large this would prove most tax efficient for retail investors in the lower tax brackets.
Friday, February 1, 2008
Comparing Mutual Fund portfolios?
Investors who do a bit of research on their own are often stumped by how mutual funds with relatively similar portfolios have sharp variance in their performances. They expect such funds to post similar results by virtue of similar portfolios.
We believe this can be explained easily if investors factor in some points in their analysis.
At Personalfn, clients taking a keen interest in their investments are a common sight. They often evaluate their investments critically and do their homework, like comparing portfolios of various mutual funds looking for patterns, reasons for outperformance/underperformance and why similar portfolios have wide disparities in performance.
It's always a good sign for investors to take more than a casual interest in their investments. Although the financial planner is there to guide them, investors must never lose sight of the fact that it is after all their money.
While comparing portfolios of various mutual fund schemes, investors must keep the following points in mind:
1) If you wish to compare portfolios of two mutual funds, first ensure that they belong to the same category. For instance, comparing the portfolios of two diversified equity funds that invest across the market (large caps, mid caps) is rational but comparing a thematic fund's portfolio with that of a diversified equity fund isn't.
While comparing mutual funds across categories is flawed right from the start, there may be some instances when a diversified equity fund's portfolio might coincide with that of a thematic fund. But such a scenario is likely to be rare and short-lived. Short of these instances, such a comparison would give very misleading results.
2) Investors often evaluate portfolios to get into the fund manager's mind so to speak. At least that is the case with some popular names like Warren Buffett.
However, some investors go a step further and compare portfolios of two mutual funds to understand why there is a disparity in their performance despite the presence of similar stocks and sectors across the two portfolios.
For instance, they will compare the latest portfolios of two mutual funds and try to figure out why their returns over 3-year are so disparate? There is a fundamental flaw in this evaluation. The latest portfolios cannot unravel what happened 3 years ago.
To understand that, investors will have to go back 3 years and evaluate the portfolios of both the mutual funds over this time frame i.e. from then until now. The disparity in the two portfolios over this period (3 years in this case) should explain the disparities in their performance.
3) Another point that investors ignore while studying portfolios is that simply being invested in similar stocks and sectors is not reason enough for mutual funds to deliver the same performance.
Even when two portfolios have the same stocks and sectors, they could have invested in these stocks/sectors in varying allocations/proportions and over varying time frames, which could explain the disparities in their performance.
4) Let's assume there are two mutual fund portfolios with fairly similar stocks and sectors in roughly similar allocations, but yet have varying performance.
To unravel the disparity in their performances, it's necessary to examine the performance of each stock and sector in their respective portfolios in detail. When investors get down to doing that, they will find that there is at least one stock/sector that has appreciated very sharply which eventually proves to be the difference between the two funds.
That is what one smart investment decision can do to a mutual fund's performance. There have been many instances of just a couple of investment decisions changing the fortunes of a mutual fund dramatically. However, for investors to determine which particular investment decision made all the difference, they will have to evaluate each investment made by the mutual fund (in terms of stocks and sectors).
5) To continue the previous point, at times investors may not be able to trace a particular stock/sector that made a huge difference to the mutual fund's fortunes. In such a scenario, it could well be that it was not an investment in a particular stock/sector that did the trick; it could simply be a higher cash allocation in a particular month which coincided with a stock market crash.
We have seen this happen in the past, when a mutual fund's performance jumped not so much due to its stock/sector investments as much as its cash allocation during a market downturn. While evaluating mutual fund portfolios, investors must also keep this point in mind.
So while it is an encouraging sign to see investors take an avid interest in their investments, they must adopt the right approach so as to make an accurate evaluation. This way, they can have a fairly good idea about why certain mutual funds are doing well or have done well in the past.
We believe this can be explained easily if investors factor in some points in their analysis.
At Personalfn, clients taking a keen interest in their investments are a common sight. They often evaluate their investments critically and do their homework, like comparing portfolios of various mutual funds looking for patterns, reasons for outperformance/underperformance and why similar portfolios have wide disparities in performance.
It's always a good sign for investors to take more than a casual interest in their investments. Although the financial planner is there to guide them, investors must never lose sight of the fact that it is after all their money.
While comparing portfolios of various mutual fund schemes, investors must keep the following points in mind:
1) If you wish to compare portfolios of two mutual funds, first ensure that they belong to the same category. For instance, comparing the portfolios of two diversified equity funds that invest across the market (large caps, mid caps) is rational but comparing a thematic fund's portfolio with that of a diversified equity fund isn't.
While comparing mutual funds across categories is flawed right from the start, there may be some instances when a diversified equity fund's portfolio might coincide with that of a thematic fund. But such a scenario is likely to be rare and short-lived. Short of these instances, such a comparison would give very misleading results.
2) Investors often evaluate portfolios to get into the fund manager's mind so to speak. At least that is the case with some popular names like Warren Buffett.
However, some investors go a step further and compare portfolios of two mutual funds to understand why there is a disparity in their performance despite the presence of similar stocks and sectors across the two portfolios.
For instance, they will compare the latest portfolios of two mutual funds and try to figure out why their returns over 3-year are so disparate? There is a fundamental flaw in this evaluation. The latest portfolios cannot unravel what happened 3 years ago.
To understand that, investors will have to go back 3 years and evaluate the portfolios of both the mutual funds over this time frame i.e. from then until now. The disparity in the two portfolios over this period (3 years in this case) should explain the disparities in their performance.
3) Another point that investors ignore while studying portfolios is that simply being invested in similar stocks and sectors is not reason enough for mutual funds to deliver the same performance.
Even when two portfolios have the same stocks and sectors, they could have invested in these stocks/sectors in varying allocations/proportions and over varying time frames, which could explain the disparities in their performance.
4) Let's assume there are two mutual fund portfolios with fairly similar stocks and sectors in roughly similar allocations, but yet have varying performance.
To unravel the disparity in their performances, it's necessary to examine the performance of each stock and sector in their respective portfolios in detail. When investors get down to doing that, they will find that there is at least one stock/sector that has appreciated very sharply which eventually proves to be the difference between the two funds.
That is what one smart investment decision can do to a mutual fund's performance. There have been many instances of just a couple of investment decisions changing the fortunes of a mutual fund dramatically. However, for investors to determine which particular investment decision made all the difference, they will have to evaluate each investment made by the mutual fund (in terms of stocks and sectors).
5) To continue the previous point, at times investors may not be able to trace a particular stock/sector that made a huge difference to the mutual fund's fortunes. In such a scenario, it could well be that it was not an investment in a particular stock/sector that did the trick; it could simply be a higher cash allocation in a particular month which coincided with a stock market crash.
We have seen this happen in the past, when a mutual fund's performance jumped not so much due to its stock/sector investments as much as its cash allocation during a market downturn. While evaluating mutual fund portfolios, investors must also keep this point in mind.
So while it is an encouraging sign to see investors take an avid interest in their investments, they must adopt the right approach so as to make an accurate evaluation. This way, they can have a fairly good idea about why certain mutual funds are doing well or have done well in the past.
Tuesday, January 29, 2008
7 good reasons to invest in SIPs
Fact No. 1: Over a long term horizon, equity investments have given returns which far exceed those from the debt based instruments. They are probably the only investment option, which can build large wealth. Fact No. 2: In short term, equities exhibit very sharp volatilities, which many of us find difficult to stomach. Fact No. 3: Equities carry lot of risk even to the extent of loosing ones entire corpus. Fact No. 4: Investment in equities require one to be in constant touch with the market. Fact No. 5: Equity investment requires a lot of research. Fact No. 6: Buying good scrips require one to invest fairly large amounts.
Systematic Investing in a Mutual Fund is the answer to preventing the pitfalls of equity investment and still enjoying the high returns. And it makes all the more sense today when the stock markets are booming. (Also Read - 5 corners of a sound Investing Strategy)
1. It’s an expert’s field – Let’s leave it to them
Management of the fund by the professionals or experts is one of the key advantages of investing through a mutual fund. They regularly carry out extensive research - on the company, the industry and the economy – thus ensuring informed investment. Secondly, they regularly track the market. Thus for many of us who do not have the desired expertise and are too busy with our vocation to devote sufficient time and effort to investing in equity, mutual funds offer an attractive alternative. (Read more - The Investors biggest Dilemma)
2. Putting eggs in different baskets
Another advantage of investing through mutual funds is that even with small amounts we are able to enjoy the benefits of diversification. Huge amounts would be required for an individual to achieve the desired diversification, which would not be possible for many of us. Diversification reduces the overall impact on the returns from a portfolio, on account of a loss in a particular company/sector.
3. It’s all transparent & well regulated
The Mutual Fund industry is well regulated both by SEBI and AMFI. They have, over the years, introduced regulations, which ensure smooth and transparent functioning of the mutual funds industry. This makes it safer and convenient for investors to invest through the mutual funds. (Check out - Foolproof strategies to maximize your profits)
4. Market timing becomes irrelevant
One of the biggest difficulties in equity investing is WHEN to invest, apart from the other big question WHERE to invest. While, investing in a mutual fund solves the issue of ‘where’ to invest, SIP helps us to overcome the problem of ‘when’. SIP is a disciplined investing irrespective of the state of the market. It thus makes the market timing totally irrelevant. And today when the markets are high, it may not be prudent to commit large sums at one go. With the next 2-3 years looking good from Indian Economy point of view, one can expect handsome returns thru’ regular investing.
5. Does not strain our day-to-day finances
Mutual Funds allow us to invest very small amounts (Rs 500 – Rs 1000) in SIP, as against larger one-time investment required, if we were to buy directly from the market. This makes investing easier as it does not strain our monthly finances. It, therefore, becomes an ideal investment option for a small-time investor, who would otherwise not be able to enjoy the benefits of investing in the equity market.
6. Reduces the average cost
In SIP we are investing a fixed amount regularly. Therefore, we end up buying more number of units when the markets are down and NAV is low and less number of units when the markets are up and the NAV is high. This is called rupee-cost averaging. Generally, we would stay away from buying when the markets are down. We generally tend to invest when the markets are rising. SIP works as a good discipline as it forces us to buy even when the markets are low, which actually is the best time to buy. (Read more - Invest wisely and get rich with equity MFs)
7. Helps to fulfill our dreams
The investments we make are ultimately for some objectives such as to buy a house, children’s education, marriage etc. And many of them require a huge one-time investment. As it would usually not be possible raise such large amounts at short notice, we need to build the corpus over a longer period of time, through small but regular investments. This is what SIP is all about. Small investments, over a period of time, result in large wealth and help fulfill our dreams & aspirations.
Systematic Investing in a Mutual Fund is the answer to preventing the pitfalls of equity investment and still enjoying the high returns. And it makes all the more sense today when the stock markets are booming. (Also Read - 5 corners of a sound Investing Strategy)
1. It’s an expert’s field – Let’s leave it to them
Management of the fund by the professionals or experts is one of the key advantages of investing through a mutual fund. They regularly carry out extensive research - on the company, the industry and the economy – thus ensuring informed investment. Secondly, they regularly track the market. Thus for many of us who do not have the desired expertise and are too busy with our vocation to devote sufficient time and effort to investing in equity, mutual funds offer an attractive alternative. (Read more - The Investors biggest Dilemma)
2. Putting eggs in different baskets
Another advantage of investing through mutual funds is that even with small amounts we are able to enjoy the benefits of diversification. Huge amounts would be required for an individual to achieve the desired diversification, which would not be possible for many of us. Diversification reduces the overall impact on the returns from a portfolio, on account of a loss in a particular company/sector.
3. It’s all transparent & well regulated
The Mutual Fund industry is well regulated both by SEBI and AMFI. They have, over the years, introduced regulations, which ensure smooth and transparent functioning of the mutual funds industry. This makes it safer and convenient for investors to invest through the mutual funds. (Check out - Foolproof strategies to maximize your profits)
4. Market timing becomes irrelevant
One of the biggest difficulties in equity investing is WHEN to invest, apart from the other big question WHERE to invest. While, investing in a mutual fund solves the issue of ‘where’ to invest, SIP helps us to overcome the problem of ‘when’. SIP is a disciplined investing irrespective of the state of the market. It thus makes the market timing totally irrelevant. And today when the markets are high, it may not be prudent to commit large sums at one go. With the next 2-3 years looking good from Indian Economy point of view, one can expect handsome returns thru’ regular investing.
5. Does not strain our day-to-day finances
Mutual Funds allow us to invest very small amounts (Rs 500 – Rs 1000) in SIP, as against larger one-time investment required, if we were to buy directly from the market. This makes investing easier as it does not strain our monthly finances. It, therefore, becomes an ideal investment option for a small-time investor, who would otherwise not be able to enjoy the benefits of investing in the equity market.
6. Reduces the average cost
In SIP we are investing a fixed amount regularly. Therefore, we end up buying more number of units when the markets are down and NAV is low and less number of units when the markets are up and the NAV is high. This is called rupee-cost averaging. Generally, we would stay away from buying when the markets are down. We generally tend to invest when the markets are rising. SIP works as a good discipline as it forces us to buy even when the markets are low, which actually is the best time to buy. (Read more - Invest wisely and get rich with equity MFs)
7. Helps to fulfill our dreams
The investments we make are ultimately for some objectives such as to buy a house, children’s education, marriage etc. And many of them require a huge one-time investment. As it would usually not be possible raise such large amounts at short notice, we need to build the corpus over a longer period of time, through small but regular investments. This is what SIP is all about. Small investments, over a period of time, result in large wealth and help fulfill our dreams & aspirations.
Sunday, January 20, 2008
SIPs: All you need to know - Save Tax, Invest wisely in mutual funds
Regular visitors and clients of taxmanager.blogspot.com appreciate the importance of the systematic investment plan (SIP) route of investing in mutual funds. However it is surprising to note that it takes difficult times (read volatile markets) for the investing community at large, to appreciate the importance of such a handy facility.
Simply put, investing via an SIP entails making regular investments (generally) in smaller denominations as opposed to making an one-time lump sum investment. The intention is to capitalise on the volatility in equity markets by lowering the average purchase cost. While few would dispute the utility that an SIP can offer, there is a flipside to the same as well. In this article, we discuss the pros and cons of SIP investing.
How an SIP helps. . .
1. Lowers the average purchase cost
Perhaps the single most important advantage offered by an SIP is the opportunity to lower the average purchase cost. This is achieved in periods when equity markets experience a turbulent patch.
Since the investment amount for each installment is fixed, the investor gains by receiving a higher number of units. An example will clarify this better. Suppose the monthly investment installment is Rs 1,000 and the fund's net asset value (NAV) is Rs 50; this will lead to 20 units of the fund being credited to the investor.
However, in the next month on account of the volatile markets, the fund's NAV falls to Rs 40. This will lead to a lowering in the average purchase cost; as a result, the investor will have 25 units credited to his account. In other words, an SIP can help investors benefit from volatility in equity markets.
2. Induces disciplined investing
Lack of disciplined investing is one of the major reasons for investors not achieving their financial goals. For example, often monies that are kept aside for investment purpose end up getting used for extraneous purposes.
As a result, the investor is even further divorced from his goals. An SIP ensures that the investor continues to be invested in a disciplined manner and thereby stays on course to achieve his financial goals.
3. Lighter on the wallet
An often heard excuse for not investing is lack of monies. SIP takes care of this problem by lowering the minimum investment amount.
For example, while the minimum investment amount for a lump sum investment in a diversified equity fund could typically be Rs 5,000, for an SIP it can be as low as Rs 500. As a result, investing via the SIP route becomes lighter on the wallet.
4. Makes market timing irrelevant
Along with cricket and movies, timing the market ranks as a popular pastime. Investors have an inexplicable urge for timing markets and trying to get invested when markets have bottomed out. It's a different matter that timing markets to perfection and doing so consistently is beyond most investors.
An investment via the SIP route makes market timing irrelevant. On account of the on-going investments, investors can afford to bid adieu to one of their favourite pastimes and concentrate on more pressing matters.
When an SIP won't deliver�
1. In rising markets
An SIP could fail to deliver on its proposition of lowering the average purchase cost, if equity markets rise in a secular manner. Such a scenario is fairly possible over shorter time periods. As a result, investing via an SIP could prove to be more expensive vis-�-vis a lump sum investment. Hence, the solution lies in opting for an SIP that runs over an appropriate time frame, say at least 12-24 months.
2. A directionless SIP
By a directionless SIP, we are referring to an SIP that is not a part of an investment plan or an aimless SIP. It should be understood that an SIP is not an 'end'; instead, it is the 'means' to achieve an end. Hence starting an SIP in isolation is unlikely to be of too much help. Instead, the SIP should form part of an investment plan aimed at achieving a predetermined objective.
3. An SIP in the wrong fund
Investing via the SIP mode doesn't improve the prospects of a wrong fund. A poorly managed fund stays that irrespective of the investment mode. Its shortcomings will not be eliminated by an SIP. Hence the key lies in first selecting a well-managed fund that is right for the investor and then investing in it via an SIP.
As can be seen, the SIP mode of investing has a fair number of advantages to offer; conversely, there can be instances when it may not deliver as expected. Investors on their part should make well-informed investment decisions after acquainting themselves of both the pros and cons.
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