The lowdown on a few points that could prove to be a stepping stone towards becoming a smart investor
Systematic Investment Plan (SIP) is a simple plan to increase wealth over a long period of time in a disciplined manner. It allows us to invest in the stock market by way of mutual funds so that you can beat the ups and downs in the market by averaging your cost and diversifying across sectors.
Making it work for you: SIP is a disciplined and easy investment plan. Investor can put in their small savings to accumulate units of specific mutual fund schemes and thereby participating into big investment portfolio. Investors’ money is auto-debited from bank account and the amount is used to buy units of specific mutual fund scheme at the market rate or net asset value of that day. It helps an investor to save and invest in a disciplined and consistent manner throughout the volatile market condition and accumulate units at different rates and benefit from rupee-cost averaging and power of compounding.
Benefits of SIP: Encourage disciplined savings: It is very important for investors to avoid the noise in the market and stay committed towards long-term investment goal. SIP investment encourages savings and keeps an investor disciplined and stay committed towards investment.
Flexibility: An investor can increase or decrease or discontinue SIP investment anytime.
Rupee- cost averaging: It helps in accumulating units at better rates during volatile market conditions compare to lump sum investment.
Power of compounding: SIP encourages investments at early stage because it requires lesser amount to be committed towards it and due to which the investments enjoy the magic of power of compounding.
Convenience: SIP is a hassle-free mode of investment. You can issue a standing instruction to your bank to facilitate auto-debits from your bank account.
Net Asset Value (NAV) defined: It represents a fund’s per share market value. This is the price at which investors buy fund shares from a fund company and sell them (redemption price) to a fund company. It is derived by dividing the total value of all the cash and securities in a fund’s portfolio, less any liabilities, by the number of shares outstanding. An NAV computation is undertaken once at the end of each trading day based on the closing market prices of the portfolio’s securities.
Identifying the goal and risk tolerance: It is very important for an investor to analyze his/her goals and appetite for taking risk. For example, if an investor wants to participate in equity with less risk, he/ she should be looking at large cap funds and moderate to high risk, in that case an investor can look at mid-cap or small cap funds or sector funds for aggressive return. It is also important to analyze the liquidity requirement and accordingly select funds like for short-term liquidity requirement it is highly recommended to park money in short debt schemes or liquid schemes.
Track the portfolio return versus benchmark return and asset categories return: It is one of the important tools to analyze how efficiently the fund manager has managed the money during various market conditions and how good he has performed versus benchmark return and also same asset categories return during the same period. One can look at more than one year to five years horizon to understand the overall performance of the scheme.
Charge and fees: It is important to know that what you will be paying to mutual funds for managing your money. Like expense ratio or exit load charges clients can look at. However, the important point to note is that if the fund has delivered very good return in adverse market condition, then in that case one should not shy away from high expense cost.
