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Mutual fund investments can be made in two ways, lump sum or through Systematic Investment Plan (SIP). In lump sum investment, the investor makes a single payment towards the investment. This works well in the market that is on an upward trend. However, lump-sum investments in equity funds carry the risk of volatility. But make note, for debt investments, the market levels do not matter.
There is a quote: “A jug fills drop by drop”. It means that you can achieve investment success by taking little baby steps. SIP allows you to invest a fixed sum at regular intervals. SIP helps to inculcate discipline in investing. Another thing about SIP is that it helps to harness the power of compounding. Looking at the following table you can see that an investor who invests Rs 10,000 every month is able to generate decent returns. (Click learn more at the end of the article for the table)
SIP is perfectly safe. It helps to mitigate the adverse impact of volatility. The smaller investments also ensure that the investor gets the benefit of rupee cost averaging. During the downturn, SIP helps to accumulate more units of the same scheme thus reducing the cost of investments. The averaging out reduces the impact of volatility which in turn allows the investor to reach his financial goals easily.
It is difficult to pin-point the exact fund. If one wants to invest he should consult a good financial advisor. It is essential to evaluate one’s financial goals and risk tolerance before investing. However, equity markets often witness volatile periods. Hence, it is advisable to build a diversified portfolio. As far as 2021 is concerned, one can consider investing in equity funds, gold funds, and REIT. Once the effects of the present pandemic are over, the beaten-down real estate sector has the potential to bounce back due to increased business activity.
SIP has become extremely popular among small investors. Many investors are still confused about investing through SIP. Minimum documents are required to begin SIP investments. To start an SIP one needs PAN card, a photograph, address proof and a cheque book. The cheque book is required to provide bank details. The simplified procedure for SIP ensures peace of mind for Investor. The entire process can be completed online.
SIPs can be used to meet short, medium and long term financial goals. An investor can set up several SIPs according to his goal. Different SIPs can be set up for equity, debt, gold funds or international funds. Thus, with the help of SIP, an investor can put up a financial plan in place that not only protects his or her portfolio but also helps to fulfil various goals. The following illustration helps to understand financial planning for women.
Net asset value(NAV) is the value of a fund’s asset less the value of its liabilities per unit. While investing, investors try to buy cheap and sell at a high price. But this does not apply to mutual funds. High NAV has got a bad rap from investors, but contrary to popular belief the funds with high NAV are not considered as expensive. The low NAV can get you more units but it does not mean they will perform just because they are available cheap.
It is true that direct plan has a lower expense ratio compared to a regular plan, and this is because the investor can purchase the units directly from the fund. If we calculate the impact in equity segment, the impact or the savings amount to 0.5%. So if you are investing Rs. 5,000 per month you would be saving just Rs 25 per month. But by investing in a regular plan you have access to valuable advice and tools that are priceless. Ask yourself, are you willing to spend hours analyzing various scheme documents every day? Do you have the expertise to do so? A wrong decision can cost you dearly. Hence in the long term, the cost outweighs the benefits offered by direct plans.
The role of a financial advisor is that of a mentor. A good financial advisor analyzes your risk profile and suggests the most appropriate investments for you. Remember the financial advisors are professionals who understand the nuances of the investments better than a layman. By paying a nominal fee an investor can get access to valuable services such as evaluation of the fund, devising investment strategy, maintenance of records and a lot more. Investing is a full-time job. An analysis of historical returns shows that financial advisors can help you to clock extra 1%-1.5% returns on your investment.
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