Preface

Many investors deploy their savings in the capital markets, with the objective of creating wealth and planning their finances. But very often ignore to invest more systematically, and often act on the tips provided by friends and relatives. For some enjoying the thrill of roller coaster ride (ups and downs) of the capital markets gives a high which they often mistaken to be systematic investing. Mind you no one can time the markets well, and if you try to do the same you are not investing systematically, but rather doing some trading activity which can surely give you a high, but does no good to your long-term objective of wealth creation. While planning your investments, it is imperative that you invest regularly and systematically by having the right investment insights which will enable you to build wealth over the long-term. Taking into account few rules of financial planning, will also be beneficial for your investment portfolio, and help you to meet your financial goals. Remember, if you do not have the right perspective, mutual fund investing could be a conundrum, and you could go down the wrong path, reaching an unwanted destination. Hence, in such a case it is imperative that you understand various nuances that go into mutual fund investments. To understand all this requires some words of experience. Through this guide, we have tried to capture our expertise and experience for your benefit. This will enable you to understand the wise and systematic way of investing through SIPs (Systematic Investment Plans) and debunk some of the misconceptions of SIP investing. We hope it will be informative reading and wish you a VERY HAPPY INVESTING!!

Team Personal FN

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Disclaimer
This Guide is for Private Circulation only and not for sale, is only for information purposes and Quantum Information Services Private Limited (Personal FN) is not providing any professional / investment advice through it and, does not constitute or is not intended to constitute an offer to buy or sell, or a solicitation to an offer to buy or sell financial products, units or securities. Personal FN disclaims warranty of any kind, whether express or implied, as to any matter/content contained in this guide, including without limitation the implied warranties of merchantability and fitness for a particular purpose. Personal FN and its subsidiaries / affiliates / sponsors / trustee or their officers, employees, personnel, directors will not be responsible for any direct/indirect loss or liability incurred by the user as a consequence of his or any other person on his behalf taking any investment decisions based on the contents of this guide. Use of this guide is at the users own risk. The user must make his own investment decisions based on his specific investment objective and financial position and using such independent advisors as he believes necessary. Personal FN does not warrant completeness or accuracy of any information published in this guide. All intellectual property rights emerging from this guide are and shall remain with Personal FN. This guide is for users personal use and the user shall not resell, copy, or redistribute this guide, or use it for any commercial purpose.

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Index
Section I: Introduction The thrill that kills!!
Section II: A SIP a can keep your financial worries away

What is a SIP? 4 good reasons for investing through SIP Section III: A SIP can make your financial dreams come true Section IV: Choosing the right mutual fund schemes for SIPs Section V: Debunking some common myths about SIP investing Section VI: Your take home points How should I register for a SIP? Section VII: Annexure

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I - Introduction
The Thrill that kills!
The capital markets are the tantalizing pulse of any economy, as the capital market indices to an extent reveal the confidence of investors (both domestic as well as foreign) in the economy. But, in the journey of betting in the capital markets, investors often tend to get thrilled, and often indulge in trading / gambling rather than investing. They tend to time the markets, rather than invest regularly. Well, while trading / gambling might give you excitement, in the long run the stock market excitement might be hazardous to your wealth as well as your health. Remember, a trader is good only till his last trade. You dont know what the future has in store for you good, bad or ugly? Take the case of the year 2007. The Indian equity markets were roaring. Lots of IPOs (Intial Public Offers), NFO (New Fund Offers), all analysts giving buy calls on stocks as well as mutual funds etc. - there was lots of positive excitement! But who knew what the future had in store. In the year 2008 U.S. Sub-prime mortgage crisis emerged, global banks went bust and the global economy went tumbling down into a recession, causing pain that went on for almost a year and a half.

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(Source: ACE MF, Personal FN Research)

Today, the scenario is different. Many would say that we have recovered. Yes, no doubt we have recovered; but the global economic recovery post recession is fragile, as U.S. economy is still under a lot of debt burden (the debt-to-GDP ratio stands at 93%), though of late it has managed to show recovery (growth for the fourth quarter of 2011 was at 3.0%). Even the Euro zone is not completely out of the woods. Though Greece has managed to get another dose of bailout $130 billion, there is no clear roadmap as to how it will honour its future debt payment and bring down its debt. So, if you were excited in the bullish phase of 2006 and 2007, and acted on the wrong advice provided by someone telling you to pump in more money in lump sum, you would have still been wondering today how to recover the lost money. In our opinion investors, both new as well as existing ones should refrain from making such a mistake again and invest your money in a systematic manner in the capital markets. Remember a thrill can give you a kick, but the kick can kick you out.

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II - A SIP can keep your financial worries away

Now, in the market conditions seen above (turmoil of 2008-09), if one was a slow and steady player who took a SIP (Systematic Investment Plan) and exuded confidence on the long-term fundamentals of the Indian economy, one would have been more wealthier and a happier investor.

(Source: ACE MF, Personal FN Research)

The above chart reveals that if one were to start a SIP of Rs 5,000 a month, on March 09, 2009 for period of 3 years (36 months) in an actively managed fund and a passive fund (index fund) respectively, your investment of Rs 1,80,000 (Rs 5000 X 36 months) would have fetched you Rs 2,09,860 and Rs 1,93,083 respectively on SIP end date i.e. March 09, 2012. Whereas the same investment (of Rs 1,80,000) in a lump sum form under the actively managed fund and the passive fund respectively, would have yield you Rs 4,64,109 and Rs 3,84,680 respectively on March 09, 2012. While one may say wheres the benefit of investing through the SIP route?, one needs to recognise that the accentuated returns have occurred in the lump sum mode, as investments were made when the Indian equity markets were right at the bottom of the Indian equity markets (when BSE Sensex was at xxxx). While with SIP return on investment was lower, as units were bought in the rising markets where the average cost of buying units amounted to be higher. But, this example cited here should not pull you back from investing through the SIP route. And even if you try to time the market, you would be repeating the same mistake. Sure, you may go right once, twicebut not always. You may get a kick as well; but timing the markets may not be your cup of tea always, which in turn may land you in a soup. Remember, when the markets turn volatile SIPs help you to even out the volatility. In fact SIPs work
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wonderfully well while the markets are on a downswing, as more units are bought at a cheaper Net Asset Value (NAV), thus resulting in lower average cost. Now having learnt how SIPs have been able to give better returns during the turbulence of the equity markets, lets understand primarily what is meant by SIP, and then how it can go a long way to create wealth for you.

What is SIP?
Simply put, a SIP refers to Systematic Investment Plan which is mode of investing in mutual funds in a systematic and regular manner. The method of investing is similar to your investment in a recurring deposit with a bank, where you deposit a fixed sum of money (into your recurring deposit account), but the only difference here is, your money is deployed in a mutual fund scheme (equity schemes and / or debt schemes) and not in a bank deposit, and hence your investments (in mutual funds) are subject to market risk. A SIP enforces a disciplined approach towards investing, and infuses regular saving habits which we all probably learnt during our childhood days when we used to maintain a piggy bank. Yes, those good old days where our parents provided us with some pocket money, which after expenditure we deposited in our piggy banks and at the end of particular tenure we saw that every penny saved became a large amount. SIPs too work on the simple principle of investing regularly which enable you to build wealth over the long-term. In case of SIPs, on a specified date which can be on a daily basis, monthly basis, or on a quarterly basis, a fixed amount as desired by you, is debited from your bank account (either through a ECS mandate or through post-dated cheques forwarded) and invested in the scheme as selected by you for a specified tenure (months, years). Today some Asset Management Companies (AMCs) / mutual fund houses also provide the ease and convenience of transacting online. They have set up their own online transaction platforms, where one can do SIP investments, through the IPIN (Internet Personal Identification Number) provided by the AMC and following the procedure as made available on their websites. So, you have fewer hassles while investing as well as tracking your investment dates.

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4 good reasons for investing regularly through SIPs

1. Light on the wallet
Instead of feeling the pinch of investing a lump sum amount at one go, SIPs enable you to invest smaller amounts at regular intervals (daily, monthly or quarterly) thereby also attempting to infuse regular saving habits in you.
THE FACT

So, if you cannot invest Rs 5,000 in one shot, thats not a huge stumbling block, you can simply take the SIP route and trigger the mutual fund investment with as low as Rs 250 per month. Mind you, if you want to manage the volatility of the equity markets on daily basis you can start daily SIP as well.

The average annual per capita income of an Indian citizen is approximately only Rs 25,000 (i.e. monthly income of Rs 2,083). Therefore, a sum of Rs 5,000 (minimum application amount in most mutual funds) for a one-time entry in a mutual fund may still appear high (2.4 times the monthly income!).

2. Makes market timing irrelevant

If market lows (as experienced during the turmoil of 2008 and early 2009), gave you the jitters and made you feel that you had never invested in equities, then SIPs would have been of help. Timing the markets, apart from requiring a full time attention also requires expertise in understanding economic cycles and market scenarios, which you may or may not possess. But, that does not necessarily make equities a loss-making investment proposition. Studies have repeatedly highlighted the ability of equities to outperform other asset classes (debt, gold, even real estate) over the long-term (at least 5 years) as also to effectively counter inflation. So, now one may ask if equities are such a great thing, why are so many investors complaining. Well its because they either got their stock or the mutual fund wrong or the timing wrong. In our opinion both these problems can be solved through a SIP in a mutual fund with a steady track record, as the SIP route enables you to even-out the volatility of the equity markets effectively.

3. Power of compounding
As SIPs subscribe you to the habit of investing regularly, it enables you to compound your money invested. So, say you start a SIP of Rs 1,000, in a mutual fund scheme following prudent investment

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system and processes, with a SIP tenure of 20 years and expect a modest return of 15% p.a., your money would grow to approximately Rs 15 lakh Your every bit of savings makes you richer

(Source: Personal FN Research)

4. Rupee cost averaging

In order for you to absorb the shocks of the volatile equity markets well, SIP works better as opposed to one-time investing. 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 and similarly buys fewer mutual units when prices are high. This infuses good discipline since it forces you to commit cash at market lows, when other investors around you are wary and exiting the market. It also enables you to lower the average cost of your investments. Provides cushion against market volatility

(Source: ACE MF, Personal FN Research)

So if you were to invest through the SIP route while the Sensex fell from 21,000 to 8,000 your average cost of investments would have been very low and hence when the market rose again, your gains would have increased substantially, and moreover you would have managed the volatility of equity markets well.
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III - A SIP can make your dreams come true

All of us have financial goals may be buying a house, buying a dream car, providing good education to children, getting them (children) married well, retiring etc. But all this comes with systematic financial planning. Very often many invest in the equity markets, with a motive of making short-term gains, and often ignore to use the equity markets as a window for long-term wealth creation, in order to achieve ones financial goals. While some try to create wealth over the long-term by investing in equities, they often time the equity market which lands them on the wrong foot thus eroding wealth. This is because you cannot time the markets well. Hence, adopting the SIP route and subscribing to good habit of saving and investing regularly, as we learnt in our good childhood days where we use to maintain a piggy bank, will work wonders for achieving financial goals. While handling your finances it is important that you undertake your saving activity as regularly as your income and expenses. Merely deploying your savings in IPOs, stocks, NFOs, mutual funds etc by getting excited with what your broker / distributor or friend says, is just not the right way to go about investing your hard earned money. Your savings have to be systematically deployed in a disciplined manner, in various asset classes after understanding your risk appetite. This is commonly known as your asset allocation; and your ideal asset allocation depends upon your: Age Your age and the tenure of your investment plays a vital role in your asset allocation. The younger you are more risk you can take and vice-a-versa. Similarly, if you start early the tenure which you get while investing in an investment avenue is greater, which enables one to make more aggressive investments and create wealth over the long-term to meet your financial goals. Investing through SIP at an early age is beneficial as it provides you the advantage of rupee cost averaging at every level, along with compounding over the long-term.
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QUICK READ Ideal asset allocation should depend upon: Age Income Expenses Nearness to goal Risk appetite

Lets understand this much better with the help of an illustration. An early bird gets a bigger pie

Particulars
Present age (years) Retirement age (years) Investment tenure (years) Monthly investment (Rs) Returns per annum Sum accumulated (Rs)

Vijay
25

Ajay
30

Sanjay
35

60

60

60

35

30

25

7,000

7,000

7,000

10%

10%

10%

2,65,76,466

1,58,23,415

92,87,834

(Source: PersonalFN Research)

The above table reveals that, Vijay starts at age 25, and invests Rs 7,000 per month until retirement (age 60). His corpus at retirement is approximately Rs 2.65 crore. Ajay starts at age 30, a mere 5 years after Vijay, and invests the same amount until retirement (also at age 60). His corpus comes up to approximately Rs 1.58 crore, note the difference between the 2 corpuses here. And lastly, we have Sanjay, the latest bloomer of the lot. He begins investing at age 35, the same amount monthly as Vijay and Ajay, and invests up to his retirement (also at age 60). His corpus is, in comparison, a meagre Rs 92 lakh.

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(Source: PersonalFN Research)

The above illustration reveals the early bird gets the bigger worm. So, the earlier you start a SIP, the more you will benefit from the power of compounding as the tenure you have to achieve your financial goal is longer. Moreover, longer the SIP tenure, higher would be the corpus which you will be able to create for meeting your financial goals. Prudence in choosing a longer SIP tenure

(Source: ACE MF, Personal FN Research)

The diagram above reveals the value of the monthly SIP investment of Rs 1,000 if done for a longer SIP tenure would enable you to create a substantial corpus to meet your financial goals.

So, the morale of the two illustrations presented above is: The earlier you begin your SIPs, the better-off you are in creating a corpus for meeting your financial goals. Also if you choose a greater SIP tenure, higher is the corpus accumulated for meeting your financial goals.
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Income If your income is high, your willingness to take risk is high. This thus can work in your favour, as you have sufficient annual income (from your work business / profession, service) which allows you to park more money into the equity asset class, for generating higher returns and creating a good corpus for your financial goal.

Similarly, if your income is not high enough (i.e. it is low), an equity allocation through the SIP mode in mutual funds can still provide you, the ability to create a corpus to attain your financial goal through power of compounding, and at the same time manage the volatility of the equity markets through compounding.

Also depending upon your risk appetite (for low risk appetite), you can also adopt the same strategy for Debt mutual funds, taking a view of the interest rate scenario in the country.

Expenses In order to keep your financial health in pink in the long-term, it is important that you live within means and curtail your unnecessary expenses. It is this strategy which will enable you save a large portion of your monthly earnings, which can be deployed in suitable asset classes (depending upon your age, income, risk appetite and nearness to goal) through SIP mode which would be lighter on your wallet.

Nearness to goal Your nearness to your financial goal is also relevant while doing financial planning. If you are many years away from the financial goal, you should ideally allocate maximum allocation to the equity asset class and less towards fixed income instruments. So, say you have a financial goal of getting your daughter married well after 20 years from now, with an amount requirement of say Rs 50 lakh, you would require to start with a monthly SIP amount of Rs 3,300 in a mutual fund which offers you return of at least 15% p.a.

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Risk appetite Your willingness to take risk which is a function of your age, income, expenses, nearness to goal, will be an important determinant while framing your financial plan. So, if your willingness to take risk is high (aggressive), you can skew your portfolio more towards the equity asset class. Similarly, if your willingness to take risk is relatively low (conservative), your portfolio can be skewed towards fixed income instruments, and if you are a moderate risk taker you can take a mix of 60:40 into equity and debt respectively. While investing, practicing this exercise and adopting the SIP mode in mutual funds, can help you to get the appropriate balance between debt and equity in your portfolio. To broadly understand what should be your asset allocation, you can go by the thumb rule for asset allocation - which is 100 minus your age. So, for example if your age is 30, 70% (100 30) of your money can be invested in equity and the rest 30% can be invested in debt instruments. Hence by having a 70% allocation to equity you are classified as an aggressive investor, as your willingness to take risk is more. Asset allocation by thumb rule

(Source: Personal FN Research)

Remember SIP helps you to systematise your savings and leads to wealth accumulation over the longterm, which enables you to achieve your financial goals in life and live in solace.
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IV - Choosing the right mutual fund schemes for SIPs

Well, let us primarily tell you that there are no special mutual fund schemes for SIP investing. So, selecting an appropriate mutual fund scheme for your SIPs is very crucial. While some may say I can simply do that going by mutual fund ratings. But the fact is, you cant have blind faith to star ratings, as they are often provided taking into account only few quantitative parameters (such as returns, risk, Management) etc., thereby ignoring the qualitative parameters. Also, given the fact there are host of mutual fund schemes available in the markets, the skill of selecting the wealth creating mutual fund schemes cannot be ignored. Hence, one must take into account the following points while selecting mutual fund schemes. average AUM (Assets Under

Performance
The past performance of a fund is important in analysing a mutual fund scheme. But just going by the past performance would not be the right way to go about selecting a mutual fund scheme. It indicates the funds ability to clock returns across market conditions. And, if the fund has a wellestablished track record, the likelihood of it performing well in the future is higher than a fund which has not performed well.

QUICK READ Selecting Mutual Funds: Performance 1. 2. 3. 4. 5. 6. 7. Comparative study Time Period Returns Risk Risk-adjusted returns Portfolio Characteristics Portfolio turnover

Fund Management Costs 1. 2. Expense ratio Exit load

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Under the performance criteria, one must take into account the following: 1. Comparison: A funds performance in isolation does not indicate anything. Hence, it is crucial to compare the fund with its benchmark index and its peers, so as to construe a meaningful inference. Again, one must be careful while selecting the peers for comparison. For instance, it doesnt make sense comparing the performance of a mid-cap fund to that of a largecap. Remember: Dont compare apples with oranges. 2. Time period: Its very important that you have a long-term horizon if you are looking at investing in equity oriented mutual funds. So, it becomes important for you to evaluate the long term performance of the funds. However this does not imply that the short term performance should be ignored. Besides, it is equally important to evaluate how a fund has performed over different market cycles (especially during the downturn). During a rally it is easy for a fund to deliver above-average returns; but the true measure of its performance is when it posts higher returns than its benchmark and peers during the downturn. Remember: Choose a fund like you choose a spouse one that will stand by you in sickness and in health.

3. Returns: Returns are obviously one of the important parameters that one must look at while evaluating a fund. But remember, although it is one of the most important, it is not the only parameter. Many of us simply invest in a fund because it has given higher returns. In our opinion, such an approach for making investments is incomplete. In addition to the returns, one should also look at the risk parameters, which explain how much risk the fund has taken to clock the returns.

4. Risk: The term risk simply refers to the possibility of the outcome being different than the expected one. When the outcome is different from the one expected, it is referred to as a deviation. Risk in a mutual fund scheme is measured through the statistical measure called Standard Deviation (SD or STDEV) (see definition below).

It is very vital to evaluate a fund on risk parameter because it will help to check whether the funds risk profile is in line with your risk profile or not (is it suiting your willingness to take risk). For example, if two funds have delivered similar returns, then by sheer prudence, you should invest in the fund which has taken less risk i.e. the fund which has a lower SD.
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5.

Risk-adjusted return: This parameter measures the returns generated by the fund for the

risk taken, and is evaluated through a statistical measure called Sharpe Ratio (SR) (see definition below). It signifies how much return a fund has delivered vis--vis the risk taken. Higher the SR, better is the funds performance. For evaluating mutual funds, it is important to take this parameter, because it reveals whether a fund is justifying the risk taken. 6. Portfolio Concentration: This parameter reveals the over-exposure of a mutual fund to a particular company or a sector. By over-exposing a fund to a specific stock or a sector, the fortune of the fund will be closely linked to the stock and / or sectoral bets taken by the fund. Funds that have a high concentration in particular stocks or sectors tend to be very risky and volatile. Hence, one should invest in those funds where the top 10 stocks do not exceed 50% of the funds assets. 7. Portfolio turnover: This parameter measures the frequency with which stocks are bought and sold. Higher the turnover rate, higher the volatility. It is noteworthy that the fund might not be able to compensate the investors adequately for the higher risk taken. So, by judging this, you can come to know how frequently the fund manager changes his stock bets. You should ideally invest in a fund, with a lower portfolio turnover ratio, as this exposes you to lower volatility.

Fund Management
This is one of the qualitative parameter, while selecting funds for wealth creation. The performance of a mutual fund is largely linked to the fund manager and his team. Hes the guy whos managing your money invested in mutual funds, so knowing his experience in fund management will be valuable. Its imperative that the team managing your fund should have considerable experience in the field of fund management and equity research, in order to deal with market ups and downs. You should not go by star fund manager. Simply because the fund manager who is employed with an AMC today, might quit tomorrow; and hence the fund will be unable to deliver its star performance without its star fund manager. Hence, your focus should be on the fund houses that are strong in their systems and processes.

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Remember: Fund houses should be process-driven and not star fund-manager driven. 1. No. of schemes to fund manager ratio: Many mutual fund houses frequently launch too many similar products, so that they could gather more Assets Under Management (AUM). This eventually leads to the fund manger being over-burdened in managing these multiple mutual fund schemes, which can result in lower efficiency of the fund manager on focusing on the need of his investors. Hence, it becomes imperative to select a mutual fund house where, the fund manager is not over-burdened; otherwise this might just take a toll on the funds performance.

Costs
If two funds are similar in most contexts, it might not be worth buying the high cost fund if it is only marginally better than the other. The two main costs incurred are:

1. Expense Ratio: Annual expenses involved in running the mutual fund include
administrative costs, management salary, overheads etc. Expense Ratio is the percentage of assets that go towards these expenses. Every time the fund manager churns his portfolio, he pays a brokerage fee, which is ultimately borne by you as investors in the form of an Expense Ratio. Hence, a higher churning not only leads to higher risk, but also higher cost to the investor.

2. Exit Load: Well, thats the price which you pay while exiting from your funds, within a
particular tenure; most funds charge if the units are sold within a year from date of purchase. As exit load is a fraction of the NAV, it eats into your investment value. Hence, one should invest in a fund with a low expense ratio and stay invested in it for a longer duration.

And which option - Growth option or Dividend option is the right one?
Well, to go for a growth option or a dividend option is completely need based, depending upon what your financial plan calls for.

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If you are in need of regular tax free cash flows (in the form of dividend) or want to book profits at regular intervals, then you should be going for the dividend option. There are two variants to the dividend option which are: Dividend Payout Option: Under this option, regular cash flows will be paid to you in the form of dividends (either through cheques or ECS (Electronic Clearing Service) credit), which in a way will enable you to liquidate profits. Dividend Re-investment option: Under this option instead of receiving dividend cheques, the dividend amount declared by your mutual fund scheme, will go in buying additional units of the same scheme (where you are invested), and youll continue to book profits and keep re-investing them in the same scheme. In case of growth option, you would not stand to receive any dividends; instead continue to enjoy compounded growth in value of your mutual fund scheme, subject to the investment bets taken by the fund manager. Now among the factors listed above (for selecting mutual fund schemes), while few can be easily gauged by you, there are others where information is not widely available in public domain. This makes analysis of a fund difficult for you and this is where the importance of a mutual fund advisor comes into play. Today, there are several mutual fund research houses too which are engaged in the business of providing mutual fund research services at a fee. But, it is noteworthy that selecting the right mutual fund research house is very vital to create wealth over the long-term. A mutual fund research house which provides absolutely independent and unbiased mutual fund research services taking into account quantitative as well as qualitative parameters can only do wonders to your investment portfolio.
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REGULATORY FACTS The capital market regulator SEBI (Securities and Exchange Board of India) banned entry load from August 1, 2009 thereby destroying the commission

oriented model followed by mutual fund advisors, and persuaded them to follow the fee based model (investors pay a advisory fee to mutual fund advisor) of doing business. This was done with the intention making advisors more

accountable and responsible for what they are advising to investors. SEBIs objective was to do away with the earlier model, where mutual fund schemes were sold on an ad-hoc basis by advisors, in order to earn more commissions from Asset Management Companies (AMCs).

Going one step forward, if one wants the right mutual fund schemes which are well researched in an unbiased way, you may also select to do a SIP in a Fund of Fund (equity FoF) scheme. Under the FoF scheme, your money is invested by the fund manager in various funds, thus facilitating you to diversify across mutual funds and fund management styles there under. You have an option of investing in equity FoF, hybrid FoF (having a mix of both equity and debt mutual funds) and / or debt FoF. It offers you the following advantages:

Risk: The risk associated with such funds is theoretically much lower, than conventional mutual fund schemes (which invest your money in stocks). However, while investing in such schemes one should study whether the FoF scheme, is investing in the AMCs own funds/schemes or also invests in mutual fund schemes, from other AMCs as well. This check can be performed by studying the investment mandate of the FoF scheme, and it is important to study this, as ideally there should not be much concentration towards schemes from the same AMC. Cost: Your cost of investing can significantly come down. Instead of investing say Rs 2,000 each in 5 schemes i.e. Rs 10,000 totally; you can invest the desired amount in one scheme. FoF provides you an opportunity to be invested in all the schemes at a fraction of the original cost. Convenience: Yes, this is another area where FoF scores high. You are spared the bother of tracking the performances of various schemes. Also you don't have to churn your portfolio. Moreover, if the equity markets hit a rough patch while the debt markets start looking up, you won't have to reduce the holding in equity funds and invest in debt schemes; the fund manager from his FoF will do the needful. Also the fact that your portfolio is not tampered implies that the incidence of tax (capital gains) is also avoided. At present FoF are categorised under debt schemes for the purpose of taxation and hence taxed accordingly (20% on long-term capital gains with indexation benefit or 10% without indexation benefit).

But, given the advantages of FoF too, it is noteworthy that while selecting the right FoF scheme your advisor / mutual fund distributor or the mutual fund research house can be of great help in providing the right advice.

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V - Debunking some common myths about SIP investing

Incorrect information sometime shared by your friends and broker, often blinds our ability to understand things in the right perspective. Very often investors live under some delusion, as their thoughts are influenced by the incorrect information their friends and brokers share. Some of the myths which investors have about SIP investing are:

1. Only Small investors go in for SIP Please note that SIP stands for Systematic Investment Plan (SIP) and not Small Investors Plan. Hence, it is incorrect to be under the illusion and arrogance that SIP, is meant only for small investors. Remember those good old days, where our parents subscribed us to a good, regular saving habit by buying us a piggy bank, where we all saved some money every day or week or month to build a corpus at the end of a particular period. But the fact was the regular deposits in your piggy bank, did not earn a rate of return. In case of SIPs (Systematic Investment plans) too, if you go by the same logic of the piggy bank, you would realise that your money saved in a systematic manner may be daily, monthly, quarterly, for a said tenure (period of SIP) will help you to build a corpus earning a rate of return, in order to attain your financial goal. 2. Rupee cost averaging can be done in a stock itself then why SIP? Its noteworthy that, certainly you can bet on equity, but diversification through mutual funds would help you to reduce the stock specific risk which you are exposed in direct equity (stocks). Moreover, as per the market cap bias (i.e. large cap, mid cap and small cap) which a fund follows, you can also strategically structure your portfolio depending upon your risk appetite. Similarly, you can structure your portfolio on the basis of the style (viz. value, growth, blend, opportunities, flexi-cap, multi-cap etc) of investing followed by the mutual fund. And by adopting the SIP mode of investing for mutual funds, youll benefit from rupee cost averaging and compounding.

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Remember a SIP experimented on single scrip, can expose you to more volatility unlike SIP in mutual funds which reduces the risk, due to diversification provided by mutual funds. 3. SIP mutual funds are different from lump sum mutual funds Well many have this illusion. The fact is, there are no special schemes for SIP investments. SIPs are just a mode of investing. You can enrol for a SIP in any mutual fund scheme, but ideally you should select a mutual fund taking into account the qualitative parameters such as investment processes and system, fund managers experience, uniqueness of the products etc., along with quantitative parameters such as returns, risk, average AUM (Assets Under Management), liquidity, expense ratio, portfolio characteristics etc. Remember, theres more than just a return while selecting a mutual fund scheme for your portfolio. 4. Lump sum investments cannot be done in a scheme, where a SIP account exists It is noteworthy that SIP, is just a mode of investing in mutual funds. Hence, pumping a lump sum amount to a mutual fund where your SIP exists is possible. So, say you have a SIP of Rs 1,000 going on in a mutual fund scheme and suddenly you have a surplus of say Rs 50,000, then you can pump a lump sum amount to your ongoing Rs 1,000 SIP account. 5. Ill be penalised if I miss one or two SIP dates As seen earlier, while enrolling for the SIP mode of investing you are required to provide your ECS mandate form along with the common application form. Your SIP details (as selected) are already mentioned in the ECS mandate, thus your bank at regular SIP dates keeps debiting the SIP amount in favour of the fund where you have opted a SIP. Hence, the question of missing dates doesnt arise. Now for some reason if you are not maintaining a balance in your bank account for your SIP to be debited, you would simply miss that SIP instalment, but your SIP account will remain active and further SIPs (subject to your bank balance) will be debited to your bank account. So, its not like the EMI (Equated Monthly Instalment) of your loan, where you miss an instalment; you are penalised. Remember, SIP infuses discipline in investing and is entirely at your free will. 6. Ill accumulate through SIP and liquidate through SWP during retirement. Well, if you adopt this financial planning strategy, you are bound to face nightmares during your retirement. It is noteworthy that, as you approach retirement your appetite for risk reduces, as your
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number of years of earning life decreases. Hence having savings lying in equity mutual funds during retirement years can be risky. In order to maintain a lifestyle post-retirement, you should transfer your savings to low risky asset classes such as debt and cash from a high risk asset class like equity. Remember to adopt the right strategy while planning your finances think wise! 7. Markets are too high to start a SIP Well, if thats what you think, then you should be starting a SIP immediately. Thats because as the market corrects you would by accumulating more number of units, with every fall in the NAV, thus enabling you to lower you average purchase cost. And, as the markets, post the correction surge once again, you would gain as the yield will work to be higher. Remember by adopting the SIP route for mutual fund investments, you are shielding your portfolio against the wild swings of the markets. Dont unnecessarily try to time the markets as it is not always possible. 8. In a tax saver SIP entire money can be withdrawn after 3 years In case of a SIP in tax saving mutual funds (commonly known as Equity linked Saving Schemes ELSS), very often a delusion exists that, the entire investment in a tax saving mutual fund can be withdrawn once the lock-in period is over. But thats not the case! The fact is: your every instalment of SIP should have completed the lock-in tenure. So if you put in Rs 5,000 through SIP in the month of October 2011, the lock-in period for only 1 instalment (i.e. October 2011) will get over on October 2014. While other SIP instalments need to complete 3 years as well.

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VI - Your take-home points

Now that we have debunked some common SIP myths, and obtained knowledge about the advantage of SIP investing, one must take note of the following thumb rules: Save regularly Stick to your asset allocation and invest regularly Create a corpus (by investing regularly) for fulfilling your dreams Dont time the markets, instead take a SIP

Do enough research before, investing in a mutual fund scheme Select a dividend or growth option as per your needs Do not stop a SIP, in between as by doing so you may not be able to make regular investment and enjoy the power of compounding

How should I register for a SIP?

You can either opt for the traditional off-line mode for investing, where you approach your mutual advisor / distributor who assist you in doing the following: Select a mutual fund scheme Fill in completely the original copy of the initial application form mentioning the name of the scheme Fill in completely an ECS mandate form by mentioning (or post-dated cheques) the SIP amount, SIP date and SIP tenure Hand over the forms (as mentioned above) to the Registrar and Transfer Agents (RTAs) / AMC. Alternatively, you can also register for the online transaction platform(s) as provided by the AMC(s) where one can do SIP investments, through the IPIN (Internet Personal Identification Number) provided by the AMC and follow the procedure as made available on their websites. Generally the procedure followed for online SIP registration is:
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 Fill in an online registration form (which will eventually generate a folio number) Select the folio number in which you wish to invest systematically Enter the IPIN (as provided by the AMC) Select the scheme where you wish to invest Fill in an online form mentioning the SIP date, SIP amount and SIP tenure and register A transaction Identification number will be generated (which should be noted by you) Selecting your bank from the list of banks, where you will be re-directed to your banks website whereby you can add your AMC / mutual fund house to the list of billers using the transacting Identification number generated above.

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VII - Annexure
SIP Returns by popular mutual fund schemes
Scheme Name Quantum LT Equity (G) Franklin India Bluechip (G) Sundaram Select Midcap (G) Fidelity Equity (G) HDFC Top 200 (G) DSPBR Top 100 Equity-Reg (G) ING Midcap (G) UTI Mastershare (G) Birla SL Frontline Equity-A (G) Reliance Equity Adv-Ret (G) Kotak Opportunities (G) IDFC Imperial Equity-A (G) SBI BlueChip (G) Baroda Pioneer Growth (G) Average 1-Yr SIP Return (% CAGR) 11.51 6.95 0.81 2.79 4.78 9.71 6.27 1.31 0.95 4.65 2.88 0.22 4.51 -2.79 3.90 2-Yr SIP Return (% CAGR) 5.90 3.52 -0.81 0.99 1.42 4.45 0.84 0.21 -1.37 0.41 -1.56 -1.76 -1.55 -5.89 0.34 3-Yr SIP Return (% CAGR) 15.28 11.01 10.75 10.35 10.21 9.99 9.63 7.14 6.86 6.41 6.34 4.49 4.39 1.53 8.17 5-Yr SIP Return (% CAGR) 15.64 11.64 11.89 11.04 12.65 10.97 7.60 7.95 9.39 7.25 7.20 5.24 5.78 9.56

(Source: ACE MF, Personal FN Research) Performance as on March 09, 2012

Note: Personal FN does not recommend that the reader transact in any mutual funds without doing the necessary research. The aforementioned table does not represent the recommendation of Personal FN. Readers are requested to consult their advisors / financial planners before investing.

The table above explains the CAGR (Compounded Average Growth Rate) generated by SIPs in various kind of mutual funds, under the respective time frames.

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DEFINITIONS Mutual Fund A mutual fund is an investment avenue that enables a collective group of individuals to: i. Pool their surplus funds and collectively invest in instruments / assets for a common investment objective. ii. Optimize the knowledge and expertise of a fund manager, a capacity that individually they may not have iii. Benefit from the economies of scale which size enables and is not available on an individual basis.

Equity mutual funds These funds invest in equity shares. These funds may invest money in growth stocks, momentum stocks, value stocks or income stocks depending on the investment objective of the fund.

Debt funds mutual funds These funds invest money in bonds and money market instruments. These funds may invest into long-term and/or short-term maturity instruments.

Active mutual funds These funds are actively managed by the fund manager, where he effectively picks up stocks with the intention to beating the returns of the benchmark chosen to track the mutual funds performance. In the process of achieving this objective the fund manger may take stock specific bets and adopt fund management style as he deems fit.

Passive mutual funds These funds try to mimic the returns of the benchmark index, wherein the fund manager replicates the stocks of the benchmark index and maintains same weights as those followed in the benchmark index.

Net Asset Value (NAV) NAV is the sum total of all the assets of the mutual fund (at market price) less the liabilities (fund manager fees, audit fees, registration fees among others); divide this by the number of units and
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you arrive at the NAV per unit of the mutual fund. Simply put, this is the price at which you can buy / sell units of a mutual fund scheme.

Standard Deviation (SD or STDEV) SD is the measure of risk taken by, or volatility borne by, the mutual fund scheme. Mathematically speaking, SD tells us how much the values have deviated from the mean (average) of the values. SD measures by how much the investor could diverge from the average return either upwards or downwards. It highlights the element of risk associated with the fund. The SD is calculated as under by using average returns of the scheme i.e. Net Asset Value (NAV).
STDEV = SQRT [(Sum ((Returns Average Returns) ^ 2)) / (N 1)]

Where: STDEV = Standard Deviation SQRT = Square Root Returns = Point to point rolling returns on absolute basis (which can be daily, weekly, monthly, quarterly, annual) Average returns = Mean of all point to point rolling returns on absolute basis Sum = Addition or summation N = Number of occurrences Sharpe Ratio (SR) SR is a measure developed to calculate risk-adjusted returns. It measures how much return you can expect over and above a certain risk-free rate (for example, the bank deposit rate), for every unit of risk (i.e. Standard Deviation) of the scheme. Statistically, the Sharpe Ratio is the difference between the annualised return (Ri) and the risk-free return (Rf) divided by the Standard Deviation (SD) during the specified period. Sharpe Ratio = (Ri-Rf)/SD. Higher the magnitude of the Sharpe Ratio, higher is the performance rating of the scheme.

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Compounded Annual Growth Rate (CAGR) It means the year-over-year growth rate of an investment over a specified period of time. Mathematically it is calculated as under:

Absolute Returns These are the simple returns, i.e. the returns that an asset achieves, from the day of its purchase to the day of its sale, regardless of how much time has elapsed in between. This measure looks at the appreciation or depreciation that an asset - usually a stock or a mutual fund - achieves over the given period of time. Mathematically it is calculated as under: Ending Value Beginning Value x 100 Beginning Value

Generally returns for a period less than 1 year are expressed in an absolute form.

General Disclaimer: This communication is for general information purposes only and should not be construed as a prospectus, offer document, offer or solicitation for an investment or investment advice.

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Contact us
Head Office

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