Sunday, 7 April 2013

Wealth Creation through Mutual Funds

I was thinking once it would be better to invest directly in equities than invest through Mutual Funds because of their expensive loads. But one cannot time the entry and exit and closely follow all the scrips that we have selected endearingly once. 

To know more you may watch the slides entitled Advantages of Mutual Funds

We generally buy and hold blindly and blissfully unaware of what is actually going on the value of our portfolio we have created.  One day we wake up to find our portfolio having lost its value considerably following the trend in global markets. 

 Then I came to know about as to how a Systematic Investment Plan is the best way to invest into Mutual funds.

Though it is advisable to buy any investment low and sell high, it is almost impossible to time the markets on a regular basis. The only way you can overcome this is to follow the Systematic Investment Plans (SIPs) route. 

An SIP does not offer assured  profit or protection against a loss but the chances of making a loss through an SIP over a longer period of time is almost negligible. In general, systematic investment plans have been identified as an apt method for wealth accumulation. 

Under the SIP the investment is spread over a period of time. A pre-determined amount is periodically invested into a mutual fund scheme. The number of units that accrue to you on each periodic investment are a function of the then prevailing net asset value (NAV) of the scheme you have opted for. By using this technique, SIPs make  the volatility in the market work in your favour. 

More units are purchased when a scheme's NAV is low and fewer units when the NAV is high. As a result, even if the market is falling or rising, the average per unit cost price in a SIP will always be less than the average per unit sale price. Therefore, the average unit cost is lower than average unit price irrespective of market rising or fluctuating. This happens because you get the advantage of buying more units when the market is low and averaging out the purchase price. 

Following points are to be kept in mind:  

  1. Ascertain your investment horizon. 
  2. Decide on the periodicity of investment. 
  3. Determine the amount you can comfortably invest in a SIP periodically. 
  4. Pick a scheme according to your risk profile. Invest for long term.
  5. Keep free balance in your account to the extent of SIP amount. However absence of balance may lead to rejection that particular instalment.  But subsequent instalments can continue.
  6. You may modify or cancel the SIP at any point of time.  

Mukundan SN, CFA, CFP --  Personal Finance and Retirement Planner.  Mututal fund advisor
Mob:  9789098720.   email: