What is a Mutual Fund?

A Mutual Fund is a body corporate registered with the Securities and Exchange Board of India (SEBI), that pools up the money from individual / corporate investors and invests the same on behalf of the investors /unit holders, in equity shares, Government securities, Bonds, Call money markets etc., and distributes the profits. In other words, a mutual fund allows an investor to indirectly take a position in a basket of assets. Why has the concept of mutual funds taken so long to pick up in India? Even in the US the concept of mutual funds has started picking up only in the last decade. This whole process of investor education and investor awareness takes a lot of time. But Indian investors are now beginning to understand the benefits of investing through the mutual funds route and hence the collections are beginning to pick up. What is the Regulatory Body for Mutual Funds? Securities Exchange Board of India (SEBI) is the regulatory body for all the mutual funds mentioned above. All the mutual funds must get registered with SEBI. The only exception is the UTI, since it is a corporation formed under a separate Act of Parliament. How do mutual funds diversify their risks? Financial theory states that an investor can reduce his total risk by holding a portfolio of assets instead of only one asset. This is because by holding all your money in just one asset, the entire fortunes of your portfolio depend on this one asset. By creating a portfolio of a variety of assets, this risk is substantially reduced.

Can mutual funds be viewed as risk-free investments? No. Mutual fund investments are not totally risk free. In fact, investing in mutual funds contains the same risk as investing in the markets, the only difference being that due to professional management of funds the controllable risks are substantially reduced What are open-ended and closed-ended mutual funds? In an open-ended mutual fund there are no limits on the total size of the corpus. Investors are permitted to enter and exit the open-ended mutual fund at any point of time at a price that is linked to the net asset value (NAV). In case of closed-ended funds, the total size of the corpus is limited by the size of the initial offer. What is SIP A Systematic Investment Plan (SIP) is a disciplined way of investing, where you make regular investments according to a set calender you create.

Advantages of SIP

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 that long term benefit as well.

3. Helps you build for the future: Most of us have needs that involve significant amounts of money, like childs education, daughters 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 that 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 lions share of the investment booty vis--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 only 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 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. 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 1) Its an experts field. Lets leave it to them Management of the comment by the professionals or experts is the single of the pass advantages of investing by the mutual fund. They continually lift out endless investigate upon the company, the attention as great as the manage to buy to illustrate ensuring sensitive investment. Secondly, they continually lane the market. Thus for most of us who do not have the preferred imagination as great as have been as great bustling with the goal to persevere enough time as great as bid to investing in equity, mutual supports suggest an tasteful alternative. 2) Putting eggs in opposite baskets Another value of investing by mutual supports is that even with tiny amounts you have been means to suffer the benefits of diversification. Huge amounts would be compulsory for an sold to grasp the preferred diversification, that would not be probable for most of us.

Diversification reduces the altogether stroke upon the earnings from the portfolio, upon comment of the detriment in the sold company/sector. 3) Its all pure & well-regulated The mutual comment attention is great regulated both by SEBI (Securities as great as Exchange Board of India) as great as AMFI (Association of Mutual Funds in India). They have, over the years, introduced regulations, that safeguard well-spoken as great as pure functioning of the mutual supports industry. This creates it safer as great as available for investors to invest by the mutual funds. 4) Market timing becomes irrelevant One of the greatest difficulties in equity investing is WHEN to invest, detached from the alternative vast subject WHERE to invest. While, investing in the mutual comment solves the emanate of where to invest, SIP helps us to strike the complaint of when. SIP is the trained investing irrespective of the state of the market. It to illustrate creates the market timing all irrelevant. And currently when the markets have been high, it might not be advantageous to dedicate vast sums during the single go. With the subsequent 2-3 years seeking great from Indian manage to buy indicate of view, the single can design vast earnings through unchanging investing. 5) Does not aria the day-to-day finances Mutual supports concede us to invest really tiny amounts (Rs 500-Rs 1,000) in SIP, as opposite incomparable one-time investment required, if you were to buy without delay from the market. This creates investing simpler as it does not aria the monthly finances. It, therefore, becomes an preferred investment choice for the small-time investor, who would differently not be means to suffer the benefits of investing in the equity market. 6) Reduces the normal cost In SIP you have been investing the bound volume regularly. Therefore, you finish up shopping some-more series of units when the markets have been down as great as NAV is low as great as reduction series of units when the markets have been up as great as the NAV is high. This is called rupee-cost averaging.

Systematic Investment Plan (SIP) Disadvantages

SIP returns are lower in consistently rising markets: Imagine this situation Its New Year eve of 2009 and your rich uncle impressed by you & your cousin gifts both of you Rs 1 Lac. You both being financially prudent want to grow this windfall. You approach a financial planner and as every good planner would, he recommend you to invest in NIFTY BeeS using SIP. So you follow him and plan investment in 12 monthly SIP installments while your cousin puts his entire money as lump sum investment in the same NIFTY BeeS. Who do you think made more money by 2010 New Year eve? Your cousin would

have around Rs 1.72 Lac while you would have Rs. 1.37 Lac. So your cousin gained 25% more just by doing lump sum. Lesson Learned: SIP is a good way to invest but occasional lump sum investment when the markets are highly undervalued adds to your gains. Limited options of dates: For a SIP in Mutual Fund you need to decide a date in advance when you like to do your SIP and give an ECS mandate for the same. Most of the MFs have limited option (mainly 1st, 5th, 7th, 10th, 15th, etc). So you tend to invest in multiple mutual funds on the same date. You want to lessen your risk by spreading your SIP in the entire month by choosing different dates for different funds. Way out: For funds having an online option you can do SIP yourself but without emotions coming into play or second option is do SIP with fundsindia.com that provide SIP on all dates. Fixed Amount: There are times when you feel that markets are undervalued and you want to invest more but then in SIP only a predetermined fixed sum gets invested. Same is the case when you want to invest less, you cant do it. Way out: Try VIP (Value Averaging Investment Plan). Stopping intermediate payment: It may so happen that you got an emergency or have a major expense this month and so you dont want to invest. But with SIP this is not possible; if theres money in your bank it will get debited and invested. The only way out is to cancel the SIP which can be a nightmare if you have a lot of SIPs and also when you want to start again you need to go through all the formalities to start the SIP. Also for cancellation you need to inform 2 weeks in advance and even then you may not be sure that SIP would not be debited. Lot of delay between actual application & start/stop of SIP: I feel this is very irritating and you may miss one monthly installment; MF houses need at least a month to start a SIP and around two weeks to stop your SIP. I think its the time they should try to come up with quicker processing of SIPs. Does not suit people with unpredictable cash flows: Think of someone who doesnt have a predictable cash flow like a self-employed professional. He wont be able to do SIP as he would be unable to commit a fixed sum every month.

What is ULIP.?
Unit linked insurance plan (ULIP) is life insurance solution that provides for the benefits of risk protection and flexibility in investment. The investment is denoted as units and is represented by the value that it has attained called as Net Asset Value (NAV). The policy value at any time varies according to the value of the underlying assets at the time. In a ULIP, the invested amount of the premiums after deducting for all the charges and premium for risk cover under all policies in a particular fund as chosen by the policy holders are pooled together to form a Unit fund. A Unit is the component of the Fund in a Unit Linked Insurance Policy. The returns in a ULIP depend upon the performance of the fund in the capital market. ULIP investors have the option of investing across various schemes, i.e, diversified equity funds, balanced funds, debt funds etc. It is important to remember that in a ULIP, the investment risk is generally borne by the investor. In a ULIP, investors have the choice of investing in a lump sum (single premium) or making premium payments on an annual, half-yearly, quarterly or monthly basis. Investors also have the flexibility to alter the premium amounts during the policy's tenure. For example, if an individual has surplus funds, he can enhance the contribution in ULIP. Conversely an individual faced with a liquidity crunch has the option of paying a lower amount (the difference being adjusted in the accumulated value of his ULIP). ULIP investors can shift their investments across various plans/asset classes (diversified equity funds, balanced funds, debt funds) either at a nominal or no cost.

What are the Features of ULIP

1. 2. 3. 4. 5. 6. 7. 8. Medium Term to Long Term Investments Fund Management Expenses will be less (1.5%) Entry load will be high Insurance Maturity Amounts are Tax Free in the hands of the investor (In India) Not much of varieties are available In General ULIP Products has min of 3 years lock in period Value based investment Need to explain the benefits of the investor and make them understand about hidden charges and benefits involved 9. Investor who would like to protect his life / health and also make some money, can invest in ULIP

What are the benefits you get from ULIPs? Now you are aware about some of common charges and costs associated with ULIPs, let us look into the main benefits you get by investing in ULIPs. As you know ULIPs gives both risk cover and investment options but in fact the benefits are much more then this, some of them are listed below; y Flexibility y Exposure to Markets y Diversified Investment Portfolio y Transparency y Tax benefits Flexibility The main benefit you get from ULIPs is that it provides flexibility in your investment. ULIPs give you the flexibility to change your life cover. As you can change the sum assured at the time of policy inception. So you can increase the sum assured as and when you need .ULIPs also gives you a facility to choose the fund for your investment according to your investment preferences and needs. Exposure to Markets

When you invest in ULIPs you are exposed to the stock markets which other traditional policies like endowment, term policy doesnt provide. You are given lots of options under ULIPSs to choose from equity, debt and balance funds. You can opt for any of the above on the basis of your risk profile. Diversified Investment Portfolio The money you invest in ULIPs will be in turn invested in various securities and it diversifies your portfolio. As you know it gives you a package of investment which relieves you from investing in Insurance and Mutual Funds separately. Transparency ULIPs offer complete transparency which makes working of ULIPs clear to you. The portfolio or your fund can be viewed by you whenever you want. Here in ULIPS your can know where and how the money paid by you in form of premium is invested unlike other insurance policies. In most of the ULIPs you are given an option to stop premium payment after 3 years but in other insurance policies failure to pay premium leads to lapse of policy. Tax benefits As you know ULIPs have life insurance component attached with it, which gives you income tax benefits against your ULIP premium payment by the way of deduction and exemption both. Investment in ULIP saves Tax under section 80c up to Rs. 100000. The returns you get are also tax free except pension plans.

Multiple investment options ULIPs offer variety than traditional life insurance plans. So there are multiple options at the individual's disposal. ULIPs generally come in three broad variants: Aggressive ULIPs (which invest 80%-100% in equities, balance in debt) Balanced ULIPs (invest around 40%-60% in equities) Conservative ULIPs (invest upto 20% in equities) Although this is how the ULIP options are generally designed, the exact debt/equity allocations may vary across insurance companies. A ULIP policyholder has the option to invest in a variety of funds, depending on his risk profile. If one does not have the appetite to invest in equity, they can choose a debt or balanced fund.
So we think that after reading this article you will not be in dilemma about your investment decision. Here in this article we have tried to give you all the basics and costs and benefits of ULIPS. Kindly get back to us in case of any queries related ULIPs.

Disadvantages of Investing in ULIP

Insurance, Mutual Fund Investments February 15th, 2010

Yes, you should never invest in ULIPs as it is neither an insurance plan nor a mutual fund scheme. It is a mix of both which is sold to people via agents. It is very easy to make money in Unit Linked Insurance Plan if you are the agent otherwise you are bound to lose money in it. Let us have a look at some of the things you should consider before buying an ULIPs:
y

One should keep insurance and investments away from each other. Take a term insurance and invest in mutual funds.

y y y y y

You lose a lot of amount as entry load in ULIPs which take a minimum of 5 years to recover. Mutual Funds are completely transparent whereas ULIPs are not. If you want to really benefit something out of ULIPs then you have to invest in it for 10-15 years. The insurance part of the ULIP costs too much. Premium allocation charge, mortality charge, fund management charge and many more hidden costs are very high

Why ULIP & why MF? Now let us compare ULIP and MF based on certain well known facts: 1. Insurance Cover ULIPs provide you with insurance cover. But MFs dont provide you with insurance cover. So it is better to prefer ULIPs because in MFs you will get the return only if you contribute during a period. 2. Entry Load ULIPs generally come with relatively high entry load. For different schemes, this may vary. MFs have a small entry load of a maximum of 2.5%. But now SEBI has banned charging entry load on Mutual Funds. Here MFs have a huge advantage. 3. Maturity ULIPs normally come with a maturity of 5 to 20 years. That whatever money you put in, most of it will be locked-in till three years. Tax saving MF (Popularly called as Equity Linked Saving Scheme or ELSS) comes with a lock-in period of 3 years. Other MFs dont have a lock-in period. ULIPs do allow you to take money out prematurely but they also put penalties on you for doing that. 4. Compulsion of Investing ULIPs would normally make you pay at least first three premiums. MFs dont have any compulsion on future investments. If you have invested in a MF this year, and in the next year you dont have sufficient income or money to do investments you can decide not to make any investments. Also if you notice that the MF that you invested in is not giving good returns as compared to some other Funds scheme, you can choose to invest in some other MF. 5. Tax Saving ULIP come under 80C and can save you tax. Returns in the both form of investments are tax free. But in MF you dont have any Tax benefit, only if you are investing in Tax Saving MF you will get the Tax Benefit. But here it has a lock in period of minimum 3 years. 6. Market exposure ULIPs give you both modest and aggressive exposure to equity market. Debt and Liquid MF let you invest with low risk, but they dont give you tax benefit. ULIPs need not be aggressive in equity exposure. That is ULIPs need not keep more that 60% of their funds in equity market. ULIPS also allow you to change your equity market exposure. Thus it can help you to time the market and still give you tax savings. If a MF has a less than 60% exposure to equity market the returns from it are not tax free. Thus you dont get to take a conservative stand on returns. 7. Flexibility of time of redemption ULIP will get redeemed on maturing. Premature redemption is allowed with some penalty. In ELSS premature redemption is not allowed. For an open ended scheme one can redeem the MF anytime. This is mainly useful if the market is down at any time. In case of ELSS you can wait till the market comes up again and then redeem them.

In spite of the seemingly comparable structures there are various factors wherein the two differ. In this article we evaluate the two avenues on certain common parameters and find out how they work.