Top 5 Advantages Of SIP OLD
As per the famous saying the basic need of an individual is Roti (Food), Kapda (Clothing) aur Makaan (Shelter) but we can extend it further to SIP (Systematic Investment Planning).
Before discussing SIP, let us first understand/revisit what is mutual fund, in brief?
Mutual fund is a vehicle to mobilize money from the investors to invest in different markets and securities, in line with the investment objectives agreed upon, between the mutual fund and the investors. In other words, through investment in a mutual fund, a small investor can avail professional fund management services offered by an asset management company.
Mutual fund is a pool of money managed by experts by investing in stocks, bonds and other securities with the objective of improving their savings. These experts will create a diversified portfolio from these funds.
SIP and advantages of SIP
Systematic Investment Plan in Mutual Fund is commonly named as SIP and it is getting very popular in India. Systematic Investment Plan is such a beautiful tool, which; if used properly can help you achieve all your financial goals.
We all have various financial obligations. Some of them are daily needs, school fees, etc that involve the major outgo of your cash. Others like a trip with your family or buying a fancy gizmo entails a one-time payment for which money can be relatively easily collected. But for long-term goals like retirement or purchasing a home requires you to save and invest for many years. Yet irrespective of the amount involved and the time horizon, planning and investing money systematically and regularly enables you to sail through these obligations. A SIP could prove to be a simple and effective solution towards achieving these goals.
A SIP is a method of investing in mutual funds, by investing a fixed sum at a regular frequency, to buy units of a mutual fund schemes. It is quite similar to a recurring deposit of a bank or post office. For convenience, an investor could start a SIP with a low rate of Rs 500; however, this amount may differ from one fund house to another.
What is your equation to investments:
2) OR EARN-SAVE=SPEND
The first one is the wrong way of investing. You should be saving in a disciplined manner and SIP enables you to follow the second, which is the correct equation of investments.
Advantages of SIP
1) Light on the wallet: It is easier to build a long-term innings with singles than hitting 4s and 6s everytime. It is convinient to save Rs.500 or Rs.1000 every month than trying to save a lac in one shot. SIP does not hurt and it gives long term benefit as well.
2) Makes market timing irrelevant: If market lows give you the jitters and make you wish that you had never invested in equity markets, then SIPs can help you blunt that depression. Most retail investors are not experts on stocks and are even more out-of-sorts with stock market oscillations. But that does not necessarily make stocks a loss-making investment proposition. Studies have repeatedly highlighted the ability of stocks to outperform other asset classes (debt, gold, property) over the long-term (at least 5 years) as also to effectively counter inflation. So if stocks are such a great thing, why are so many investors complaining? Its because they either got the stock wrong or the timing wrong. Both these problems can be solved through an SIP in a mutual fund with a steady track record.
3) Helps you build for the future: Most of us have needs that involve significant amount of money, like child's education, daughter’s marriage, buying a house or a car. If you had to save for these milestones overnight or even a couple of years in advance, you are unlikely to meet your objective (wedding, education, house, etc). But if you start saving a small amount every month/quarter through SIPs that is treated as sacred and that is set aside for some purpose, you have a far better chance of making the down payment on your house or getting your daughter married without drawing on your PF (provident fund).
4) Compounds returns: The early bird gets the worm is not just a part of the jungle folklore. Even the ‘early’ investor gets a lion’s share of the investment booty vis-à-vis the investor who comes in later. This is mainly due to a thumb rule of finance called ‘compounding’. According to a study by Principal Mutual Fund if Investor Early and Investor Late begin investing Rs 1,000 monthly in a balanced fund (50:50 – equity:debt) at 25 years and 30 years of age respectively, Investor Early will build a corpus of Rs 8 m (Rs 80 lakhs) at 60 years, which is twice the corpus of Rs 4 m that Investor Late will accumulate. A gap of 5 years results in a doubling of the investment corpus! That is why SIPs should become an investment habit. SIPs run over a period of time (decided by you) and help you avail of compounding.
5) Lowers the average cost: SIPs work better as opposed to one-time investment. This is because of rupee-cost averaging. Under rupee-cost averaging an investor typically buys more of a mutual fund unit when prices are low. On the other hand, he will buy fewer mutual fund units when prices are high. This is a good discipline since it forces the investor to commit cash at market lows, when other investors around him are wary and exiting the market. Investors may even be pleased when prices fall because the fixed rupee investment would now fetch more units.
Open Demat Account
Free Demat account, No conditions apply
- 0%* Brokerage
- Flat ₹20 per order
How To invest In Stock Markets
We all have, atleast that one Uncle or an Aunty, who keeps on giving advice to your family to invest in the share market. Over the years he/she has made money out of thin air and as a kid I have always been amazed by this sorcery. This was what pushed me into understanding finance and even after completing 15 years indulging in the share market, I am nothing close to being a seasoned trader.
I am sure like me many would be struggling to find out things on their own. However, in today’s world wherein you have information on the finger tips, its relatively easy to find out about, ‘Investing in stocks’ and how to go about it. Below have tried to list down in a very simple way what does a person need to know to begin:
Most of the trading in the Indian stock market takes place on its two stock exchanges: the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). The BSE has been in existence since 1875. The NSE, was founded in 1992 and started trading in 1994. Both exchanges follow the same trading mechanism, trading hours, settlement process, etc. There are 7,000 + stocks listed on the BSE which is the larger of the two exchanges in terms of number of companies listed. However, only 3,000 of these stocks are actively traded
To start investing in the stock markets, you need 3 types of accounts – Trading Account (to place buy/sell orders), Demat Account (to hold your shares in dematerialized form), and a Bank Account (for fund transfers).
An account similar to a bank account, to be opened with a ‘stock exchange registered stock broker’. This account is used for placing orders in the stock exchange (i.e. to buy/sell shares).
An account where shares are held in a dematerialized form (i.e. electronically instead of the investor taking physical possession of certificates). The demat account is required to receive/transfer shares when you buy/sell shares through your trading account.
Your regular savings or current bank Account should be linked to your trading account. The Bank account is required to transfer/receive money when you buy/sell shares through your trading account.
Typically, if you sign up with a stock broker, they will guide you on not only the opening of the trading account but also the demat account and linking of your bank account. Just like banks provide you with the facility to open and maintain saving accounts, in the same way the Depositories provide the facility to open and maintain demat accounts. In India, the government has mandated two entities –National Securities Depository (“NSDL”), and Central Depository Services (India) (“CDSL”) – to be the custodian of dematerialized securities.
Most big stock brokers register themselves as a Depository Participant (“DP”) who act as an agent of the Depositories to make its services available to the investors. Effectively both your trading account and your demat account is maintained by your stock brokers (mostly through setting up of 2 different entities). In case of some stock brokers, they use the depository services of other bigger financial institutions or custodians and only provide the frontend trading account. As an investor, no one approach is better than the other for you, as typically, it takes the same amount of time for shares to be deposited and withdrawn from the demat account in either case.
To open a trading / demat account, follow the following process:
1. Approach a BSE and NSE registered stock broker.
2. Fill up the KYC form provided by the stock broker.
3. Attach the required documents – (i) identity proof and (ii) address proof.
4. Produce the original PAN card during account opening.
5. For Derivatives segment (i.e. futures and options market), 6 months account statement of your existing bank account is required.
6. One cancelled cheque of the bank account you want to link to your trading account.
7. 3 passport size photographs
Now days there are brokers who offer complete online services for the same. So the hassle of getting all the formalities done off-line has been reduced to nil. Infact some sites like 5paisa.com give a complete hassle free solution online.
What you should look at before opening Demat and the trading account schemes:
1. Account Opening Charges: This is the fee charged at the time of opening demat and trading account.
2. Account Maintenance Charges: This is the annual fee charged to maintain demat & trading account.
3. Brokerage Charges for Intraday transaction: If you take a position (buy) on a stock and release (sell) that position before the end of that day’s trading session, it is described as intraday trading. The brokerage charges for intraday transaction are very nominal. In fact now days you have flat brokerage rates for whatever amount of trade you do.
4. Brokerage Charges for transaction requiring delivery: If you buy a share and hold it beyond that trading session (i.e. for a term longer than one day) or when you sell a share you own and do not buy it back during a single trading session, the transaction qualifies as a delivery based transaction as the name of the owner of the share is changed with the Depository. The brokerage charges are higher in this case as additional processing is required.
5. Brokerage Charges for Futures and Options transaction: The Brokerage fees applied on the transaction in the Futures and Options segment (mostly varies 0.02 – 0.05% on the total cost of transaction for futures and ? 25 – ?100 per lot for option contracts). The rates mentioned here are just tentative and would urge to check with a broker.
6. Apart from the brokerage charges, you may want to consider the software/ technology provided by the stock broker for online trading and if the stock broker has a good service standard for call and trade facility (to enable you to place orders over the phone).
These days, most big commercial banks provide trading and demat account services and link it to your savings account. However, their brokerage charges are higher than specialized stock brokerage firms.
Many people term this as an advantage, that having an account with a Bank (like HDFC, ICICI, Kotak etc) is that they typically provide a three-in-one-account (i.e. savings account, trading account and demat account are all linked to each other). However, now day’s brokers provide integration with multiple bank accounts, wherein one could use any of their bank accounts to transfer money for the transactions. Having all these accounts linked to each other ensure that you get a completely paperless mechanism for trading. Thus now those days have gone wherein one could say that for beginners and low volume investors/traders having an account with a bank is better.
It is advisable to open your account with a broker who gives you the best service at the lowest price and helps you make money and in turn ‘Build Wealth’ for you.
Important Points you should see before investing in shares
An individual invests in a stock in order to earn profit. It is very disheartening when you invest your hard-earned money in a stock which doesn’t give you desired returns. It is really important to do all the research before you choose to invest in a particular stock.
Here are a few things to check before you choose to invest in a stock.
1. Company background
Read about the company that you want to invest in. Find out what their business is. Visit their website, read news articles related to the company.
2. Financial performance of Company
It is important to analyse the past performance to understand how the company has grown over the years. Read the balance sheets to see how their balance sheets have grown in the past.
3. Stock value
There are ways to find out whether a stock is over or undervalued. Some basic methods would include Price to Earning ratio (P/E ratio), Price to Sales Ratio that helps one understand if the market value of the stock is in line with the growth trends of the company.
4. Industry outlook
Read about the competitors and peers of the company. Finds out what competitive edge your company has over the others. Find out if the advantage is sustainable. Find out about the market share, and overall performance of the industry that they operate in. Look for regulatory, political factors that may impact the industry.
5. Promoter check
Always read about the people who are running the company. Find out their background and how long they have spent with the company. Frequent changes in the top management, inexperienced top managers may be poor indicators while picking the right stock.
The ABC’s of Investing
The money that you earn is partly spent and the rest is saved for a rainy day. Savings refer to the funds that are kept aside in safe custody, such as a savings account. Instead of keeping this money idle, you can invest your savings in various financial instruments which will pay you a hefty return in the near future.
The question that arises now is how and where to invest this money. Potential investors can always take the help of a financial advisor and an investment advisor, both of who are capable of providing detailed knowledge on the subject on investment and investing money. Investors can start investing after fulfilling the following simple steps:
- Obtaining documents relating to Personal Identification Proof and Address Proof.
- Approaching intermediaries like a broker, RM etc.
- Filling up the KYC form and furnishing the details required.
- Filling up of the broker-client agreement.
- Opening a DEMAT Account and linking it with a savings account.
As soon as these steps are completed, an investor can start investing in the financial market.
The investment options can be well classified into 2 parts. They are:
- Physical assets: It comprises of tangible items like real estate, commodity, goldand silver in the form of jewelry and even antiques.
- Financial assets: It comprises of FDs with banks, small savings instruments with the post offices, provident fund, pension fund, money market instruments and capital market instruments.
The money market gives the scope of short term investment options. It deals with debt instruments such as bills of exchanges, commercial bills, treasury bills, certificate of deposits etc. These have relatively low risk and relatively low returns. However, they are one of the safest investment options, especially for those investors who want to play safe.
A capital market is an option for long term investment. The various instruments of capital market are shares of companies (equity), mutual funds, SIP investment, derivatives market, IPOS, etc. These have a higher risk and higher returns in comparison to the instruments of the money market. Although stock investing is considered to be more rewarding, the high risk factor associated with it can result in loss if there is a downswing in the activities of a company.
The investment strategies of an individual depend on certain factors, such as:
- The risk taking appetite of investor
- The time horizon of investment
- Expected return
- Need for investment
Investments make our fund grow over a period of time whereas savings is just idle cash. Our short term needs can be fulfilled with the help of our savings but for the achievement of our long term financial goals, investment is a must. This is only possible with financial planning.
Tax Saving Investments and their Features
This is the time of the year when you start getting calls from the HR of your company asking for investment declarations. If you have not made any investments yet, here is the list of instruments where you can invest.
|Instrument||Investment||Section of IT Act||Lock-in Period||Returns||Risk||Taxation at Maturity|
|ELSS||ELSS is a type of mutual fund scheme where most of the fund corpus is invested in equities or equity-related products.||80C||3 years||Not fixed, depend upon the performance of equity market. However, in the past, ELSS has given average returns of 12-14%.||Carries some risk||Tax-free|
|PPF||It is a type of investment which is provided by the Government of India||80C||15 years||The rate of returns changes as per government policies.
Current returns - 8.1% compounded annually
|NSC||NSC are bonds issued by the government for small savings and one can purchase these bonds from post offices.||80C||10 years||The interest rate on NSC is decided by the government every year. It is linked to the yield of 10-year government bonds.
The current interest rate is 8%.
|Low Risk||Interest is Taxable|
|Pension Mutual Funds||Pension Mutual Funds invest 40% of the money in equity and 60% in debt instruments.||80C||Until you reach the age of 58||The returns in pension mutual funds are not fixed as it depends on the performance of the equity and debt market. Pension mutual funds have given an average return of 8-10% for a 5-year and 10-year period.||Carries some risk||Tax-free|
|Tax Saving FD||It is a special fixed deposit made with any bank.||80C||5 years||The interest rate varies from one bank to another. It usually ranges from 6.5-7.5%.||Risk Free||Interest earned is taxable|
|Rajiv Gandhi Equity Saving Scheme||Exclusively for first time retail investors. Individuals with an annual income below Rs. 12 lakh can invest.||80CCG||3 years||Depends on the performance of equity markets.||Carries some risk||50% of the invested amount|
What is the right age to buy a term life insurance cover?
Death comes knocking at the door without any prior notice. The death of the only breadwinner of the family brings the family into severe financial crisis. This is the time when you realise the importance of a term insurance policy the most. A term insurance plan secures the life of your loved ones and helps them to meet their day-to-day expenses. It is always better to buy a term insurance plan early in life as an individual gets immense benefits for starting early. Also, the premium charges are also low when you are young.
Let’s take a look at the different ages and factors that one should consider while buying a term insurance.
During the 20s, an individual just steps into his professional life and is relatively debt free. He has lesser family responsibilities and buying a term cover at this age can help him pay off his education loans if any. Moreover, term insurance premiums are less expensive when an individual is young.
An individual, in his 30s, tend to have family and kids. While his income is higher at this age, the responsibilities are much more. He may have financial liabilities like home loan, car loan etc. The premium will tend to be slightly higher, given the family responsibilities.
During this age, an individual’s long term financial liabilities like a home or car loan is paid-off. However, he may have higher responsibilities like his child’s higher education or his own retirement planning. It is better to opt for a cover which provides a greater coverage and financial protection. The cover should be able to take care of your family expenses after your death.
When an individual reaches this age, his children already start earning and most of the debts are paid-off. Family members are not financially dependent on your earnings. During this age, what an individual is most concerned about is his retirement. At this age, the best option for an individual is to buy an endowment plan which will help him save and give him a lump sum amount on maturity.
Term Insurance Premium amounts for a cover of Rs. 50 lakh
The above table shows the difference in premiums as per the age of an individual. As the age increases, premium increases.
Age plays a major role in deciding the amount of your term insurance. The biggest mistake an individual makes is to not opt for a substantial cover for the family. One should make sure that the term cover takes care of all the basic necessities of the family in case of the sudden demise of the policyholder.