Mutual fund

Basics of mutual funds The article mentioned below, is for the investors who have not yet started investing in mutual funds, but willing to explore the opportunity and also for those who want to clear their basics for what is mutual fund and how best it can serve as an investment tool. Getting Started Before we move to explain what is mutual fund, it‟s very important to know the area in which mutual funds works, the basic understanding of stocks and bonds. Stocks Stocks represent shares of ownership in a public company. Examples of public companies include Reliance, ONGC and Infosys. Stocks are considered to be the most common owned investment traded on the market. Bonds Bonds are basically the money which you lend to the government or a company, and in return you can receive interest on your invested amount, which is back over predetermined amounts of time. Bonds are considered to be the most common lending investment traded on the market. There are many other types of investments other than stocks and bonds (including annuities, real estate, and precious metals), but the majority of mutual funds invest in stocks and/or bonds. TOP Working of Mutual Fund

TOP Regulatory Authorities To protect the interest of the investors, SEBI formulates policies and regulates the mutual funds. It notified regulations in 1993 (fully revised in 1996) and issues guidelines from time to time. MF either promoted by public or by private sector entities including one promoted by foreign entities is governed by these Regulations. SEBI approved Asset Management Company (AMC) manages the funds by making investments in various types of securities. Custodian, registered with SEBI, holds the securities of various schemes of the fund in its custody. According to SEBI Regulations, two thirds of the directors of Trustee Company or board of trustees must be independent. The Association of Mutual Funds in India (AMFI) reassures the investors in units of mutual funds that the mutual funds function within the strict regulatory framework. Its objective is to increase public awareness of the mutual fund industry. AMFI also is engaged in upgrading professional standards and in promoting best industry practices in diverse areas such as valuation, disclosure, transparency etc. TOP What is a Mutual Fund? A mutual fund is just the connecting bridge or a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. The mutual fund will have a fund manager who is responsible for investing the gathered money into specific securities (stocks or bonds). When you invest in a mutual fund, you are buying units or portions of the mutual fund and thus on investing becomes a shareholder or unit holder of the fund. Mutual funds are considered as one of the best available investments as compare to others they are very cost efficient and also easy to invest in, thus by pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. But the biggest advantage to mutual funds is diversification, by minimizing risk & maximizing returns. TOP Diversification Diversification is nothing but spreading out your money across available or different types of investments. By choosing to diversify respective investment holdings reduces risk tremendously up to certain extent. The most basic level of diversification is to buy multiple stocks rather than just one stock. Mutual funds are set up to buy many stocks. Beyond that, you can diversify even more by purchasing different kinds of stocks, then adding bonds, then international, and so on. It could take you weeks to buy all these investments, but if you purchased a few mutual funds you could be done in a few hours because mutual funds automatically diversify in a

predetermined category of investments (i.e. - growth companies, emerging or mid size companies, low-grade corporate bonds, etc). TOP Types of Mutual Funds Schemes in India Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position, risk tolerance and return expectations etc. thus mutual funds has Variety of flavors, Being a collection of many stocks, an investors can go for picking a mutual fund might be easy. There are over hundreds of mutual funds scheme to choose from. It is easier to think of mutual funds in categories, mentioned below. Overview of existing schemes existed in mutual fund category: BY STRUCTURE 1. Open - Ended Schemes: An open-end fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices. The key feature of open-end schemes is liquidity. 2. Close - Ended Schemes: These schemes have a pre-specified maturity period. One can invest directly in the scheme at the time of the initial issue. Depending on the structure of the scheme there are two exit options available to an investor after the initial offer period closes. Investors can transact (buy or sell) the units of the scheme on the stock exchanges where they are listed. The market price at the stock exchanges could vary from the net asset value (NAV) of the scheme on account of demand and supply situation, expectations of unitholder and other market factors. Alternatively some close-ended schemes provide an additional option of selling the units directly to the Mutual Fund through periodic repurchase at the schemes NAV; however one cannot buy units and can only sell units during the liquidity window. SEBI Regulations ensure that at least one of the two exit routes is provided to the investor. 3. Interval Schemes: Interval Schemes are that scheme, which combines the features of open-ended and closeended schemes. The units may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV related prices.

The risk return trade-off indicates that if investor is willing to take higher risk then correspondingly he can expect higher returns and vise versa if he pertains to lower risk instruments, which would be satisfied by lower returns. For example, if an investors opt for bank FD, which provide moderate return with minimal risk. But as he moves ahead to invest in capital protected funds and the profit-bonds that give out more return which is slightly higher as compared to the bank deposits but the risk involved also increases in the same proportion. Thus investors choose mutual funds as their primary means of investing, as Mutual funds provide professional management, diversification, convenience and liquidity. That doesn‟t mean mutual fund investments risk free. This is because the money that is pooled in are not invested only in debts funds which are less riskier but are also invested in the stock markets which involves a higher risk but can expect higher returns. Hedge fund involves a very high risk since it is mostly traded in the derivatives market which is considered very volatile. Overview of existing schemes existed in mutual fund category: BY NATURE 1. Equity fund: These funds invest a maximum part of their corpus into equities holdings. The structure of the fund may vary different for different schemes and the fund manager‟s outlook on different stocks. The Equity Funds are sub-classified depending upon their investment objective, as follows:
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Diversified Equity Funds Mid-Cap Funds

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Sector Specific Funds Tax Savings Funds (ELSS)

Equity investments are meant for a longer time horizon, thus Equity funds rank high on the risk-return matrix. 2. Debt funds: The objective of these Funds is to invest in debt papers. Government authorities, private companies, banks and financial institutions are some of the major issuers of debt papers. By investing in debt instruments, these funds ensure low risk and provide stable income to the investors. Debt funds are further classified as:
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Gilt Funds: Invest their corpus in securities issued by Government, popularly known as Government of India debt papers. These Funds carry zero Default risk but are associated with Interest Rate risk. These schemes are safer as they invest in papers backed by Government. Income Funds: Invest a major portion into various debt instruments such as bonds, corporate debentures and Government securities. MIPs: Invests maximum of their total corpus in debt instruments while they take minimum exposure in equities. It gets benefit of both equity and debt market. These scheme ranks slightly high on the risk-return matrix when compared with other debt schemes. Short Term Plans (STPs): Meant for investment horizon for three to six months. These funds primarily invest in short term papers like Certificate of Deposits (CDs) and Commercial Papers (CPs). Some portion of the corpus is also invested in corporate debentures. Liquid Funds: Also known as Money Market Schemes, These funds provides easy liquidity and preservation of capital. These schemes invest in short-term instruments like Treasury Bills, inter-bank call money market, CPs and CDs. These funds are meant for short-term cash management of corporate houses and are meant for an investment horizon of 1day to 3 months. These schemes rank low on risk-return matrix and are considered to be the safest amongst all categories of mutual funds.

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3. Balanced funds: As the name suggest they, are a mix of both equity and debt funds. They invest in both equities and fixed income securities, which are in line with pre-defined investment objective of the scheme. These schemes aim to provide investors with the best of both the worlds. Equity part provides growth and the debt part provides stability in returns. Further the mutual funds can be broadly classified on the basis of investment parameter viz, Each category of funds is backed by an investment philosophy, which is pre-defined in the objectives of the fund. The investor can align his own investment needs with the funds objective and invest accordingly.

By investment objective:  Growth Schemes: Growth Schemes are also known as equity schemes. The aim of these schemes is to provide capital appreciation over medium to long term. These schemes normally invest a major part of their fund in equities and are willing to bear short-term decline in value for possible future appreciation.
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Income Schemes:Income Schemes are also known as debt schemes. The aim of these schemes is to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited. Balanced Schemes: Balanced Schemes aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. These schemes invest in both shares and fixed income securities, in the proportion indicated in their offer documents (normally 50:50). Money Market Schemes: Money Market Schemes aim to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer, short-term instruments, such as treasury bills, certificates of deposit, commercial paper and inter-bank call money.

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Other schemes  Tax Saving Schemes: Tax-saving schemes offer tax rebates to the investors under tax laws prescribed from time to time. Under Sec.88 of the Income Tax Act, contributions made to any Equity Linked Savings Scheme (ELSS) are eligible for rebate.  Index Schemes: Index schemes attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE 50. The portfolio of these schemes will consist of only those stocks that constitute the index. The percentage of each stock to the total holding will be identical to the stocks index weightage. And hence, the returns from such schemes would be more or less equivalent to those of the Index.  Sector Specific Schemes: These are the funds/schemes which invest in the securities of only those sectors or industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of the respective sectors/industries. While these funds may give higher returns, they are more risky compared to diversified funds. Investors need to keep a watch on the performance of those sectors/industries and must exit at an appropriate time. TOP

Types of returns There are three ways, where the total returns provided by mutual funds can be enjoyed by investors:
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Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly all income it receives over the year to fund owners in the form of a distribution. If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also pass on these gains to investors in a distribution. If fund holdings increase in price but are not sold by the fund manager, the fund's shares increase in price. You can then sell your mutual fund shares for a profit. Funds will also usually give you a choice either to receive a check for distributions or to reinvest the earnings and get more shares. TOP

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Pros & cons of investing in mutual funds: For investments in mutual fund, one must keep in mind about the Pros and cons of investments in mutual fund. Advantages of Investing Mutual Funds: 1. Professional Management - The basic advantage of funds is that, they are professional managed, by well qualified professional. Investors purchase funds because they do not have the time or the expertise to manage their own portfolio. A mutual fund is considered to be relatively less expensive way to make and monitor their investments. 2. Diversification - Purchasing units in a mutual fund instead of buying individual stocks or bonds, the investors risk is spread out and minimized up to certain extent. The idea behind diversification is to invest in a large number of assets so that a loss in any particular investment is minimized by gains in others. 3. Economies of Scale - Mutual fund buy and sell large amounts of securities at a time, thus help to reducing transaction costs, and help to bring down the average cost of the unit for their investors. 4. Liquidity - Just like an individual stock, mutual fund also allows investors to liquidate their holdings as and when they want. 5. Simplicity - Investments in mutual fund is considered to be easy, compare to other available instruments in the market, and the minimum investment is small. Most AMC also have automatic purchase plans whereby as little as Rs. 2000, where SIP start with just Rs.50 per month basis. Disadvantages of Investing Mutual Funds: 1. Professional Management- Some funds doesn‟t perform in neither the market, as their management is not dynamic enough to explore the available opportunity in the market, thus

many investors debate over whether or not the so-called professionals are any better than mutual fund or investor him self, for picking up stocks. 2. Costs – The biggest source of AMC income, is generally from the entry & exit load which they charge from an investors, at the time of purchase. The mutual fund industries are thus charging extra cost under layers of jargon. 3. Dilution - Because funds have small holdings across different companies, high returns from a few investments often don't make much difference on the overall return. Dilution is also the result of a successful fund getting too big. When money pours into funds that have had strong success, the manager often has trouble finding a good investment for all the new money. 4. Taxes - when making decisions about your money, fund managers don't consider your personal tax situation. For example, when a fund manager sells a security, a capital-gain tax is triggered, which affects how profitable the individual is from the sale. It might have been more advantageous for the individual to defer the capital gains liability.

2. Best Ways to Plan for Retirement
Understanding Retirement Planning Retirement Planning refers to a process of saving money for the time when the paid work comes to a halt. It is the process of planning and analyzing your future monetary needs and the source from where you can earn that. You have to identify your expenses, sources of income, manage your assets and make apt arrangements for future cash inflows. How will you spend your time after retirement, where will you live, your style of living etc also forms a part of your retirement planning apart from the financial aspects. In order to remain financially independent even when the paid work ends, it becomes mandatory for you to plan your retirement. It is important for you to work out in advance if you have enough money before you retire and how you will improve your cash inflows after retirement. If you wish to follow your lifestyle of today even after your retirement it is important for you to plan your retirement today. It goes without saying that though for few of you, you will have pension rolling in after your retirement but just ponder will that be enough to suffice? If the answer is No, then get started today and work towards your retirement. Importance of Retirement Planning
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Retirement Planning is important as you would surely love to have money flowing in when you comfortably relax on a rocking chair heading towards your golden years. With age comes the uncertainty of financial security for yourself and your family and in most cases pension benefits are not enough to carry you forth. There comes the importance and need of planning your retirement.

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Your body is like any machine that undergoes wear and tear with time. Retirement Planning helps you to meet up those unanticipated medical expenses that may crop up in future. In case your health takes a worse turn while you are heading towards old age, it may become difficult for you to move on with your life without sufficient funds in your account. You need to well equip yourself with medical insurances etc so as to avoid your retirement income being eaten by medical bills. Retirement planning plays a pivotal role in estate planning. It is important for you to secure cash flows for future so that you do not have to liquidate your assets in future in order to meet your financial expenses. If you have planned your retirement in advance you can freely and lavishly spend for your children and grand children, retain that land with which you are so sentimentally attached and there is no fear of becoming a financial burden on your loved ones. We all resist change. But change is inevitable. While we you move towards your golden days, retirement planning helps you face any change or challenge that life may throw at you without any hitch. You can face any situation at any age when you are financially sound. If becoming completely dependable on the social security system after retirement is on your mind, think again. That‟s the worst road chosen. With social security system as ours it becomes mandatory for you to plan your retirement else there are every possible chances of outliving your money and working till you breathe your last.

Best Ways to Plan for Your Retirement
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Time factor plays the paramount role while you plan to build your nest egg. You need to consider the difference between your current age and the age at which you will retire in terms of years while you prepare your strategies for your retirement. If you have a good number of years in hand prior to your retirement then you are in a position to take up greater risks and diversify investments accordingly. While planning your retirement you should keep inflation in mind as it can prove to be a vital factor in your scheme of things. It is very much important to keep in mind your spending requirements. You need to understand your spending habits when you start to plan for your retirement. Your portfolio would largely depend on the way you spend and the expenses you incur. Many people feel that when you retire you will spend less than what you actually do now but they fail to consider that when you retire you will have additional 8-9 hours which you used to spend in office and now this time may be used in traveling, shopping or other activities that may prove expensive. You need to consider the after-tax rate of return while planning your retirement. You may outlive your income if this part is not analyzed properly. You can not ignore the fact that you are taxed on your returns according to the plans that you have chosen. So you need to keep a holistic approach while you move ahead with choosing your plans for future. Portfolio Planning is of paramount importance. You need to choose and prepare a portfolio that churns out capital gains for you in the long run. You need to think about the risk that you can take today so as to reach your future financial goals. You need to list out plans that may provide you with regular fixed incomes. Stable dividend paying stocks,

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small caps fund or international investments can be taken into considerations while you prepare your portfolio. Diversification of your money in different funds while you plan for your retirement will help you to churn capital gains with ease. A diversified portfolio would help you to sail smoothly in the highs and lows of the market. There are number of investment options available while you plan for your nest egg, few of them are 401(k)s, IRAs, life insurance plans, pension plans RRSPs, real estate etc. You can financially secure your loved ones even after you die by including life insurance covers and good estate planning. A roughly structured retirement plan can be balanced with a good estate plan. Do not ignore the magic of compounding. When you start saving early for your future, compounding of interest works wonders for you. Your money tends to grow steadily. You can turn to your IRAs that offer tax deferred growth on your money. You should also analyze it well when and how you need to pull back your retirement savings. Try reducing your unwanted expenses so that you are able to save. Flip through your passbooks to check how much you save each month. Don‟t get tempted to spend your saved amount. Invest your saved amount in order to churn out more money. Keep in mind that this saving is for long term usage. There is no harm in turning to a professional advisor if the need be in order to plan your nest egg but make sure you use your wits before taking decisions. Seeking advice will help but following blindly will not.

Retirement planning is one of the most important and crucial plans that we make for ourselves and our loved ones. You are a person who has walked with pride throughout your life. You would surely not want to become a financial burden on your children or family after you stop working. Rather you would want to enjoy your life more when you will retire as there will be no office rush, projects, deadlines and targets to bother you. Plan your retirement well in advance so that you are able to enter and suffice through your golden age comfortably and proudly.

Why is Long Term Investment Important?
Long Term Investments are those when you hold your stock, assets, bonds etc for a duration which is more than a year, may be ten years or something that you intend to hold for even much longer. If you are the one who is not running after quick returns then long term investments are your cup of tea. Long term investments grow substantially in good number of years and give you higher returns in the long run. However, long term investments demand a high level of commitment, discipline, effort and time but the result is worth the wait. Experts advise you to make long term investments as they help you to remain focused and disciplined and provide you with higher profits as compared to short term investments.

You have heard the story of the tortoise and the rabbit and you know it well that slow and steady wins the race. Same applies to long term investments. You may click on short term growing funds in order to make steady cash but if you go for long term investments you let the compounding magic work for you. Advantages of Long Term Investment
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It is not always possible to have high returns all the time. While you invest in short term funds it is not necessary that the fund in which you have invested will grow in the short span. On the other hand, if you go in for long term investment you will be able to sail through the highs and lows of the market and get substantial returns on your investments. Long term investments help you grow your money through the magic of compounding. The early you start the better for you. While playing in long term stocks, you do not get distracted by short term conditions. It is very difficult for you to predict the performance of market in short term whereas if you have a look at the performance of a stock over a period of time you will realize that the stock has showed upward movement. Long term investment helps you to build a diversified portfolio. It is important for you to accept that you are a human being and you cannot make right choices always and long term investment will help you run smoothly through the peaks and valleys of the market and also provide you with higher returns as you will have a good amount of varied options in your portfolio. If you keep updating your portfolio by getting rid of the nonperforming chunk and catching hold of the performing stocks you will be able to yield good returns. Long term investments offer lower risk as compared to short term investments. One wrong move in your short term investment and you are gone whereas when it comes to long term investment you can slowly and steadily choose your investment options which will at least leave you well-off and it will surely not be strenuous for you. Long term investment seems more direct and easy than day trading. Day trading requires a lot of caution and time. In case of long term investments, investors need to be proactive and is less cumbersome. You do not have to sit at the edge of your chair. Even passive investments prove to be convenient. Even if you have made a mistake while making investment decisions, long term investment gives you a chance to mend them. You have time at your disposal to rectify where you have gone wrong. You can make up for the bad year of performance of your stock easily in coming years. When you opt for long term investment your portfolio turnover comes out to be less as compared to short term investments where whatever you sell becomes subject to taxes. With long term investments at your disposal you can grow money through compounding and delay tax liabilities. If we talk about the commission expenses then it goes without saying that such expenses are far less in long term investments.

Experts do advise long term investments as they help you meet your long time financial goals. As you play in a diversified portfolio you are able to nullify the effect of a bad year of stocks

with the coming years. However, while you plan to invest for long term you need to analyze the time that you have at your disposal. You need to plan well in advance the amount you can spare, the years for which you can stay invested and whether you will require that money in the next few years or not. When you stay invested for long you do extend your risk to the following years but you indeed have a fair chance of rectifying your mistakes if you have landed yourself with a non-performing stock. Long term investments pay off well in long durations like five years or ten years or above. If in any year during this period your stocks fall, you need not panic because if you sell off your stocks while the market is low you are bound to lose but remember that the market cannot remain the same, it will surely recover and you can easily make up for the loss. Long Term Investment Options – Following are few of the options that are available for you to make long term investments:
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Equity Shares Mutual Funds Post Office Saving Schemes Bonds and Debentures Public Provident Fund Life Insurance Real Estate Commodities National Saving Certificates Fixed Deposits

Basic Investment Principles for Beginners
Investment is like planting a tree today so that in future you and your family may be able to enjoy its fruits and also be able to rest in its shade comfortably. You all know how important it is for you to provide financial security to your family and yourself. It is needless to say that all the hard work and effort that you put in from morning to evening in earning those dollars and rupees is aimed at providing your family and yourself a good standard of living and also securing future. The best way to manage your hard earned money is to invest it sensibly so that in future it not only helps you when in need but also multiplies itself in the due course of time. There cannot be a rule book that can guide you through with your investment planning and procedure but there are a few basic principles or guidelines that can help you to become a successful investor. These are:

1. Investing Early – It is always advisable to start investing as soon as you start earning. It is quite obvious that you may be able to invest say as little as Rs 500 every month but you should not forget that compounding earns you good margins even with small savings. This also cultivates a habit of investing regularly in a disciplined manner. It is also advisable to re-invest the interest that you earn and just wait and watch how magically it grows through compounding formula. 2. Analyze Yourself – This means it is important for you to identify the kind of investor you are. It is important for you to realize if you are the one who will get deeply involved in the art of investing and put in your time and energy in exploring every possible lucrative investing option thus earning higher returns, or are you an individual who will put in less effort and time and will be satisfied with a lower profit margin. 3. Know the Market in which you will Invest – It is important for you to gather as much information as possible about the scheme, plan or options in which you plan to invest. It is also important for you to take a glance at all the market players who are offering the same or similar schemes and plans and the returns or commitments that each one of them is giving. This will help you in cracking the most profitable deal for your investment. It is very important for you to understand completely the plan you are investing in, the player you are investing with and the returns you are aiming at. 4. Investment Goals – It is advisable for you to comprehend your goals pertaining to your investment. This would include the assessment of your current financial condition, the amount you can spare from your expenditure, time frame i.e monthly, quarterly, halfyearly etc, the kind of investment and also the kind of returns that you wish to have which again maybe based on your personal requirements like for a retired individual monthly credit of interest seems to be quite apt. 5. Diversification of Funds – As the famous phrase goes “You should never put all your eggs in one basket” it is very important for you to diversify your funds i.e do not put all your money in one particular scheme or plan. Always invest in a bouquet of funds in order to balance the risk. 6. Time Factor – When it comes to time, you need to keep in mind two factors related to time. First is the time when you enter the market and the second is the duration for which you play in the market. It is very difficult to anticipate the movements in the market. You need to be clear and specific about when you enter the market and for how long you have to stay there. 7. Long Duration Investment – It is always advisable to stay tuned in market for a longer duration. The duration of investment determines the risks and returns on your investment. It depends on you as to how much return you aim at and the risk you are ready to take. Generally if you stay invested for long duration, your risk gets balanced due to an average market condition thereby bringing better returns. Put it this way - it is important for you to analyze the risk that you can take.

8. Adopt a conservative approach when it comes to valuation of profits – you need to understand that you can not be overly optimistic about the investments you are making. You need to adopt a conservative approach while weighing your returns from a particular investment. It is very important to be cautious and careful while computing your future growth rates. 9. Hallo and Horn Effect – Do not get affected by the Hallo and Horn Effect. This means that you should not judge an investment plan or scheme merely on the basis of its past performance or solely because it benefited your friend so it will benefit you as well. You cannot totally neglect the past performance of the stock but you cannot predict the future of the same solely on past performance. 10. Don’t let one slump affect future prospects – It is very important to be cautious. So goes the famous phrase “once bitten twice shy” but it emphasizes on being cautious, learning from past experiences but it doesn‟t say that you will let one market slump hinder your long-term investment planning. Do not get discouraged by the bulls and bears of the market. 11. Once sold, it is gone – It is always advisable to let bygones be bygones. Once you have taken a decision of selling your stock, do not check the price of your stock once you have sold it. You have just started investing. It‟s a big life and a long game. “Ohhh I sold it…should have waited more.” This can always tickle your mind after you have sold your stock. But what if you had waited and the returns have been less than what you gained today? Seize the day and go ahead with no regrets. 12. Keep Patience – There are moments when we all run out of patience and when its money that you are playing with it is obvious to be anxious and be impatient. But keeping your cool will always help you to sail smoothly through the lows and highs of the market. 13. Monitoring your Portfolio – It is very important for you to keep yourself updated with the market scenario and keep a constant check on your portfolio. You cannot hold on to a stock forever. So keep updating your portfolio with the ever changing scenario of the volatile market. 14. Accept, you can not be right always – You need to accept this before you get started that you are a human being and you are bound to make mistakes. You can not always make a right decision for every investment that you make. The key is to make the best out of the right choice and to learn from the wrong ones. Financial Investment Options There are a number of financial investment options available in the market and you can pick and choose as per your requirement from the bouquet of options which are as follows –
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Equities Precious Stones Gold/Silver

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Bonds Mutual Funds Fixed Deposits Recurring Deposits Real Estate Insurance Plans

Investment Options in India
India Growth Story India has become one of the fastest growing economies. Investment growth is eventually linked to the growth of the economy. So most of the investors look for emerging markets where the growth rate is higher than the developed economies. As India is also a part of emerging market, most of the investors come with a question in mind “where to invest in India”. Investment Avenues Investment in India can be broadly classified into two categories- Risky asset class and Risk – free asset class. Risky Asset Class Direct Equities –it is a type of securities where the investor buys the ownership of company. Equities are tradable (bought & sold) in the Stock Exchanges. Equities can be a good investment option for a long term horizons as it beats all the asset class in terms of returns over longer time frame. This can be considered as one of the riskiest asset class as well. Equities are highly risky. The risk of loss of capital is very high. NRI can also explore this avenue for Investment by opening up a bank account and trading account in India. They can choose the option of repatriation of non- repatriation at the time of opening an account. Mutual Fund – A group of people pools the money and gives it to get it managed professionally. The investment avenue offers cost efficiency, professional management, Risk – diversion, Good regularity body. Mutual investment allows investor to start with minimum of Rs. 500. Like Direct Equities, NRI can also invest into mutual fund, it requires a bank account in India & KYC (Know Your Client) to invest in Indian mutual funds, mutual fund investment also offers option of repatriation of non- repatriation. Life Insurance – life insurance is a contract between a buyer and insurance company. Insurance company pays a predominant amount to the nominee in case of death of a buyer. The primary purpose of insurance is to protect the family (financially) in case of an event of death of the earning member of the family. Life insurance was a traditional product and it was giving fix returns of 6%- 7% until the introduction of Unit Linked Insurance Plan (ULIP). ULIP gives the benefit of risk cover as well as the returns of equity market as it invest the premium into equity linked instruments. Now, Insurance is also open for NRI investment. To buy insurance in India, NRI has to go through few

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formalities. NRI needs to submit Proposal from (available in prescribed format), Medical Report, and Proof of age and Income etc.
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Commodities – commodities has emerged as one the asset class in recent time. Government has allowed investment into listed commodities. Commodity trading is in its nascent stage in India. Currently, commodity trading is available in bullions, base metals and Agri commodities. Investor needs to open and account with the broker to trade in a commodity market. Commodity market is very risky. Investor with sound knowledge should only invest in commodities. As of now, NRIs are not allowed to trade in commodity market in India. Real Estate – Real estate is an ever green investment option in India. Most of the investor prefers investment into real-estate; it can be a residential or commercial property. The thumb rule of investment in real estate says investor should look at the property available at 15-20 Km away from the city with the time frame of 5- 7 Yrs. Real estate investment offers very low level of liquidity. It also generate higher rate of returns. NRI can also invest into Indian real estate. They can buy and own property in India, however, few Real estate Investment Trust are not open for NRI investment. Risk Free Asset Class Fixed Deposit - A fixed deposit allows investors to deposit money into bank/corporate for a specific period of time, which in return earns an interest. Rate of returns in fixed deposits are higher than bank saving account. An investment into 5 year fix deposit is eligible for tax benefit under section 80 C. maximum of Rs. 1, 00,000. NRI can also avail this facility and invest into Fix deposits offered by national as well as private banks NSC - National Savings Certificate (NSC) offers a fixed interest. NSCs are issued by the Department of Post, Government of India. NSCs are a practically risk free avenue of investment as they are backed by the Government of India. NSC is available at authorized post offices. NSCs have a maturity of 6 years. It offers a rate of return of 8% per annum. NSC is gives tax benefit under section 80 C. Minimum investment amount is Rs. 500. The option is not available for NRI‟s Investment. Post office – MIS – Post office monthly income Scheme is specially made for the purpose of providing regular pension to the investors. It offers 8% per annum, paid on monthly basis. Maximum limit for investment is Rs. 4.5 lakh and maturity period is 6 years. It can be prematurely enchased after 1 year but before 3 years at the discount of 2% and after 3 years at the discount of 1%. The option is not available for NRI‟s Investment. PPF - The PPF is a government backed, long-term small savings scheme of the Central Government. It was started with the objective of providing income security to the workers in the unorganized sector and self employed individuals in their old age. PPF offers interest rate of 8% per annum. PPF offers tax benefit under section 80 C up to Rs. 70,000. PPF has lock in of 15 Yrs. However, it allows withdrawing 50% of the balance at the end of the fourth year, proceeding the year in which the amount is withdrawn or the

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end of the preceding year whichever is lower. The option is not available for NRI‟s Investment.
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Bonds – Bonds is a form of lending money to government or company. In exchange, government or company pays fix amount of interest on principal. Corporate bonds offer higher returns compare to government bonds, because of the risk factor. Before investing into bonds, Investor should always look for the rating and the interest rate offered by the bond. NRI can also invest into Bonds. Generally issuer of the bond mention the eligibility criteria for investors, NRI can refer the offer document and invest into bond if they are allowed. Key takeaways before you take investment decision Risk Profile – chose the investment option based on your risk profile. E.g. A low risk investor should not invest into equities. He should look for the safe investment option. Risky asset class causes a loss of principal. Liquidity – Liquidity is also an important criterion for selection of Investment Avenue. E.g. an investor should not invest into PPF, if the need of money is arising in 3- 4 years time frame. Because PPF has minimum lock in of 5 Years. Time Frame – Investment in any of the asset class should be done with specific time horizons. E.g. for short term investment debt mutual fund or Fix deposit could be a good option, where as for long term horizon, real estate and regular investment into equities could be a good option. Taxation – Taxation kills the real returns of investment, investor should always look at the tax treatment of any investment before investing into it. E.g. an investment into fix deposit at 9% by an investor who fall under 30% tax bracket will yield 6.22% which is equivalent to current inflation rate. Eventually investor is not earning any returns post inflation. Taxation for NRI is a little difficult to understand. NRI should consult an expert before investing, which can eventually help to reap handsome post tax returns.

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Things to Remember While Selecting Your Financial Advisor
India is one of the countries with fast growing economy. This has made the country‟s financial scene extremely dynamic. Therefore, financial planning has become a specialised need of the hour. This need has led to mushrooming of financial advisors. Caution has to be exercised before choosing the financial advisor and there are a few parameters that will help in checking the credibility of such a person/firm.

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Whether your financial advisor is an individual or an institution, there are basic things to remember. For verifying if an individual is good enough to be your financial advisor ask the following questions:

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Does he have the right qualifications? Check if the person is qualified to be a financial advisor. For e.g. a person holding a CFP (Certified financial planner) is qualified to handle your finances. Does he have the requisite experience? A newbie to the business could use you as a learning tool. If you have the right knowledge and can guide him properly you could provide him the learning experience. Otherwise it is better to hire someone with at least 3-4 years‟ experience. Does he have the required infrastructure to provide service? He should have the right kind of resources to check the latest development and price movement and give timely advice viz-a-viz your portfolio. Liquidity is a crucial part of investments like mutual funds and redemptions, transfer etc. should be done at the appropriate time. Is he commission driven? If you are liquidating your bond investments and transferring it to mutual funds on the advice of your financial advisor try to find out if he is putting his „commission‟ interests as opposed to your interests. Similarly, if he asks you to put all your eggs in the same basket, he may be working in the interests of the mutual fund company (or the company in which he is advising you to invest). Is there any value addition by hiring him? You must analyse if the person you hired is giving you timely services and information regarding the maturity date of bonds and fixed deposits. Also keep a close watch if he is alerting you to pay your insurance premium and such. These are the value additions that he must do for the service charges paid by you. Are his advices in sync with your goals? Financial planners are meant to advise you on the best saving and investing options that suit your needs and future goals. Therefore talk to him and explain your goals and needs. For e.g. If you have embarked on a house buying project or planning for your retirement he must advice you on the best possible options that meet your requirement. Who to avoid: There are a number of advisors who make self-proclaimed predictions about the way they will help you make money in the market. Remember, no one can give guaranteed returns by investing or speculating in the market. Beware of people who tell you that they have studied the market inside out and will help you make quick money. People who sell only insurance policies will try to convince you that investing in insurance is enough. The mutual fund agents will convince you that investing in mutual funds will spread your risk and give you returns also. A wise decision in choosing a financial advisor would be to find one who knows about all the above avenues and much

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more. He will give you a complete insight into the risks and benefits of investing in each of the segments.
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What does fiduciary mean? A fiduciary means a planner who has pledged to act on behalf of the best interest of the client. This implies that the advice that they give you should meet your needs rather than their personal gains. Checking these aspects safeguards you against people who are out to make money without treating the clients‟ interest as priority. Check the credibility of the advisor: Do not fail to check the background of the person in whom you are going to trust your hard earned money. Check to see if there are any pending cases against them with any of the financial regulatory or the judicial court. Do not fail to ask for references and take help from other clients, if possible. In conclusion, you must first understand if there is a need for a financial advisor and then run the above checks before trusting your money with them.

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Do's and Don'ts in the stock markets
1. Ensure that the intermediary (broker/sub-broker) has a valid SEBI registration certificate.

2. Enter into an agreement with your broker/sub-broker setting out terms and conditions clearly.

3. Ensure that you give all your details in the 'Know Your Client' form.

4. Ensure that you read carefully and understand the contents of the 'Risk Disclosure Document' and then acknowledge it.

5. Insist on a contract note issued by your broker only, for trades done each day.

6. Ensure that you receive the contract note from your broker within 24 hours of the transaction.

7. Ensure that the contract note contains details such as the broker's name, trade time and number, transaction price, brokerage, service tax, securities transaction tax etc. and is signed by the Authorised Signatory of the broker.

8. To cross check genuineness of the transactions, log in to the NSE website (www.nseindia.com) and go to the 'trade verification' facility extended by NSE. Issue account payee cheques/demand drafts in the name of your broker only, as it appears on the contract note/SEBI registration certificate of the broker.

9. While delivering shares to your broker to meet your obligations, ensure that the delivery instructions are made only to the designated account of your broker only.

10. Insist on periodical statement of accounts of funds and securities from your broker. Cross check and reconcile your accounts promptly and in case of any discrepancies bring it to the attention of your broker immediately.

11. Please ensure that you receive payments/deliveries from your broker, for the transactions entered by you, within one working day of the payout date.

12. Ensure that you do not undertake deals on behalf of others or trade on your own name and then issue cheques from family members' / friends' bank accounts.

13. Similarly, the Demat delivery instruction slip should be from your own Demat account, not from any other family members'/friends' accounts.

14. Do not sign blank delivery instruction slip(s) while meeting security payin obligation.

15. No intermediary in the market can accept deposit assuring fixed returns. Hence do not give your money as deposit against assurances of returns.

16. 'Portfolio Management Services' could be offered only by intermediaries having specific approval of SEBI for PMS. Hence, do not part your funds to unauthorized persons for Portfolio Management.

17. Delivery Instruction Slip is a very valuable document. Do not leave signed blank delivery instruction slip with anyone. While meeting pay in obligation make sure that correct ID of authorised intermediary is filled in the Delivery Instruction Form.

18. Be cautious while taking funding form authorised intermediaries as these transactions are not covered under Settlement Guarantee mechanisms of the exchange.

19. Insist on execution of all orders under unique client code allotted to you. Do not accept trades executed under some other client code to your account.

20. When you are authorising someone through 'Power of Attorney' for operation of your DP account, make sure that:

21. Your authorization is in favour of registered intermediary only. authorisation is only for limited purpose of debits and credits arising out of valid transactions executed through that intermediary only.

22. you verify DP statement periodically say every month/ fortnight to ensure that no unauthorised transactions have taken place in your account.

23. Authorization given by you has been properly used for the purpose for which authorization has been given.

24. in case you find wrong entries please report in writing to the authorized intermediary.

25. Don't accept unsigned/duplicate contract note.

26. Don't accept contract note signed by any unauthorized person.

27. Don't delay payment/deliveries of securities to broker.

28. In the event of any discrepancies/disputes, please bring them to the notice of the broker immediately in writing (acknowledged by the broker) and ensure their prompt rectification.

29. In case of sub-broker disputes, inform the main broker in writing about the dispute at the earliest. If your broker/sub-broker does not resolve your complaints within a reasonable period please bring it to the attention of the 'Investor Services Cell' of the NSE.

30. While lodging a complaint with the 'Investor Grievances Cell' of the NSE, it is very important that you submit copies of all relevant documents like contract notes, proof of payments/delivery of shares etc. along with the complaint. Remember, in the absence of sufficient documents, resolution of complaints becomes difficult.

31. Familiarize yourself with the rules, regulations and circulars issued by stock exchanges/SEBI before carrying out any transaction.

Tutorial about Mutual Funds
What is a mutual fund?

A mutual fund is an investment that allows all investors access a well-diversified portfolio of equities, bonds or other securities. Each investor has a share in the gain or loss of the fund. Units are issued and can be redeemed as needed. The fund's Net Asset Value (NAV) is determined each day. They are the companies that receive your money and invest it in financial markets. It is an ideal tool for people who want to invest but fear the complexities of the markets or the arcane language experts use. The beauty of mutual funds is that a person with an investible surplus of a few hundred rupees can invest and reap same returns as anyone else.

What are the benefits of investing in mutual funds?

Following are the benefits of investing in mutual funds: Small investments: Mutual funds accept investments as low as few thousand rupees, which is invested across the markets. Such a spread is difficult for an investor to do. Professionalism: Professionals manage the money collected by a mutual fund. They analyze the markets to pick good investments. Spreading risk: An investor with a small amount of money would be able to invest in only one or two stocks / bonds, thus increasing risk. However, a mutual fund will spread its risk by investing in various sound stocks or bonds. A fund normally invests in companies across a wide range of industries, so the risk is spread. Transparency and interactivity: Mutual funds provide investors with information on the value of their investments. Mutual funds also provide complete picture of the investments made by their various schemes and the proportion invested in each asset type. Liquidity: Open-ended funds can be sold back to mutual funds at NAV based prices subject to exit loads and close-ended funds can be sold at the stock exchanges where they are traded. Choice: The funds can be picked from a wide array. This enables the investor to choose what suits him best according to his risk and return expectation.

Who regulates mutual funds?

All mutual funds are registered with SEBI and they function within the provisions of strict regulation designed to protect the interests of the investor. What are the different types of Mutual funds? Broadly the different types (and sub types) of MFs are: Equity Funds Sub-type Investments Made Diversified Across all industries Sector / theme specific In that particular sector or its allies such as infrastructure or energy or software Dividend yield In stocks which pay high dividend Debt Funds Sub-type Investments Made In

Income Fund / Long term bond Bonds of corporate, government and other issuers Short Term Income Fund / Short term bonds Issuers including corporate, government, banks Floating Rate funds Bonds whose interests are reset at preset time periods, like your floating rate housing loan interest is reset when interest rates go up or down Liquid / Liquid Plus Fund/ Very Short Term Bonds: Is an alternative to short term deposits Very short term bonds and money market instruments that mature within a year so that high liquidity can be had Hybrid Funds Equity oriented - Have an equity exposure of more than 60% rest in debt investments. Debt oriented - Have debt exposure of more than 50% rest in equities. Monthly income plans - Have equity exposure ranging from 10- 25% and rest in bonds.

What are the different plans that mutual funds offer?

The different plans available for the investors are: Growth - Distribution of profits (dividend) are not given out. Only way an investor can realise profits is through capital gain by selling the units. Dividend - There are two sub types in this plan: Dividend Payout - Dividend would be paid to the investor periodically depending on available surplus to distribute, either by direct credit or through a cheque. For example: If a fund declared Rs 2 / unit (20% dividend) and the investor has 100 units he gets Rs 2 * 100 or Rs 200 as dividend. Dividend Reinvestment: Dividend amount declared is used to buy more units of the fund. For example: A fund declared Rs 2 / unit and the NAV is Rs 12. If the investor has 100 original units and has opted for dividend reinvestment he will have: Rs 200/12 = 16.67 units. Total units after the dividend is reinvested = 100 original + 16.67 Units reinvested = Total 116.67 Units.

Investment & Portfolio Diversification
The famous phrase “Never put all your eggs in one basket” holds very true in case of your investments too. Portfolio diversification is a tool or a technique that helps you minimize your risk by investing in different schemes and plans. It‟s just like if you put all your eggs in one basket and if it drops, you may lose all of them. Similarly, if you invest all your savings in a particular plan or scheme and in case the market goes down you are bound to loose your precious money.

What works behind diversification of funds is the rational that those who diversify their investments earn, on an average, higher returns thereby reducing investment risks. Thus, it is always advisable to scatter your investments so as to avoid being hit adversely. Diversification helps you remain shock-proof - if one plan fails at least you have the other to save you from the blow. Undiversifiable and Diversifiable Risks Undiversifiable Risk – These are risks that cannot be eliminated through diversification as they are caused by factors like inflation, political instability, war etc. These are risks that an investor cannot overcome or reduce. Diversifiable Risk – These risks can be reduced or eliminated by using the technique of diversification of funds. In order to avoid these risks it is important to choose different funds so that market lows and highs do not affect all of them in the same manner. How to Diversify Your Portfolio 1. Investment Plan – Before you go around for any kind of investment it is important for you to have an investment plan that includes the tenure for investment, the minimum amount, returns expected and the mode of payment and return i.e monthly, quarterly, half-yearly or yearly. 2. Choose different Investments of low correlation- Correlation means the relationship between two schemes or plans. In simple words it means the interdependence of schemes in your portfolio. This means that you need to choose your investments that go up and come down at different times. This helps you to sail comfortably through the bulls and bears of the market. 3. Monitoring – It is mandatory for you to keep a close watch over your assets and keep rebalancing and monitoring your portfolio. The work of portfolio diversification does not end by simply selecting different options. It extends to rebalancing your portfolio by selling and buying. 4. Stay invested and watch out for new opportunities – It is important for you to keep yourself invested for a longer duration in order to reap good returns and also keep a close watch on the new opportunities coming your way. Search for new investments and get rid of the non-profitable chunk. 5. Investment Principles Work – Invest by following the investment principles. Merely going by predictions may land you in deep waters as no one can accurately predict the future. Create a quality portfolio and avoid being solely carried away by predictions. Where To Invest – As stated earlier, it is very important to ensure that your investments are spread across different schemes and plans. Correlation can particularly prove beneficial while you diversify your portfolio.

There are many such examples that can guide you through while you invest in different plans. One such example is that of equity and debt. It is worth noticing that equity and debt have a correlation. It is seen that whenever there is a rise in interest rates the earning from debt plans grow significantly whereas returns from equity investments drop. So while you see that the interest is on a hike it goes without saying that those who have more of debt in their portfolio will benefit more in comparison to those who have less debt and vice versa happens when interest rates go down. Here, if you have a diversified portfolio it will work well for you. Moreover, the high rated debt instruments come handy with almost zero risk. It is always advisable to create a combination of defensive stocks and high beta stocks in your portfolio. High beta stocks are ones that will fetch you a good growth when the market is at a rise but may become a pain for you during market slumps. They reap good but come with a considerable high risk. Stocks like that of FMCG and Pharmaceuticals are defensive stocks and trends show that they have been consistent with their performance in the market even when stock market has not been at its best. So using a combination of defensive stocks with high beta stocks may work well for those who like playing in equity. Those of you who have bought two mutual fund plans and feel you have diversified your portfolio; it is time for a reality check. This assumption does not hold well if you feel that selecting and investing in different schemes of mutual fund would lead to diversification of portfolio. What will you do if you opt for two different mutual fund plans that have number of common factors between them? Always look out for schemes which are well diversified in the same category. Assets like gold work in the interest of diversification of portfolio. It goes without saying that gold yields good returns even in hours of crisis. It is advisable to hold gold in your portfolio. Moreover, it shares a negative relation with debt and equity thus acting as asset for you when debt and equity both suffer a hit. It is important for you to understand that having a big portfolio will not help. It is important to balance it out with right choices. If you want to draw best from your portfolio make sure you follow the rule of correlation while creating your portfolio. Save yourself from Over-Diversification – It is very important to strike equilibrium in case of diversifying your portfolio. In order to create a diversified portfolio do not get so much carried away that you end up investing in too many assets, schemes and plans. You should not spread your money so thin that all the effort goes in vain. Over diversification may shield you from great losses but it would surely lead you to losing good gains. So while you create your diversified portfolio do keep in mind that you need to strike the right balance without over indulgence as too many cooks spoil the broth.

How to select Mutual Funds - By PV Subrahmanyam (www.subramoney.com)
Selecting a mutual fund for investing is a very important step indeed. It is not just important it is crucial. However it is the second step, not the first.

It is surprising at the number of people I meet or hear from - they all have same questions. So when they ask me 'How do we select a mutual fund?' for me it is an amusing question. So like all self respecting advisors I start with the dreaded line - "Well, it depends..." Then I ask them - "What are your financial goals, if any?". Now only if you have big long term goals does the choice of a mutual fund really matter. If you are investing for a short period of time - you are investing in say a liquid fund. It hardly matters in which liquid fund you invest the performance gap between two liquid funds is not so high. Choose the liquid fund with a high AUM (assets under management} - and one which gives good service in terms of redemption on the phone or net, or such considerations. However if you are looking for a longer term investment - which means you are looking to be invested for at least 8 to 10 years, you are looking to invest in equity mutual funds. This article is aimed at selecting a good equity mutual fund for a long term. 1. The most important first step is to have an investment goal. A fantastic fund selection done without having an investment goal is completely useless. You should know the reason for your investment, how long you can be in the investment, at what stage you will re-allocate, etc. before you make your first investment. 2. Your focus will lead to the correct asset allocation - the very important factor which will decide how much money you will put into an equity fund. 3. Do your homework: Buy large cap well diversified good quality funds. Do not buy opportunities funds, international funds, contra funds as a staple part of your portfolio. 4. All funds in India are no load funds - which means there is no sales cost. This is good and it means all your money gets invested. For a large cap equity fund, it may not make too much sense to pay somebody to pick the fund for you, try doing it yourself. 5. Have a demonic watch on the asset management charges. As a fund starts to do well, it should attract a lot of investors, and as its assets increase it should keep dropping its asset management charges. Look at well managed funds with charges below 1.9% p.a. - there are many. 6. Look at the portfolio turnover ratio - the greater the ratio, the more is your total cost. One cost which is not visible to the investor is the brokerage that the fund scheme pays. This is a function of the turnover of the portfolio. So a fund with a lower turnover would be incurring lesser costs. 7. The asset management company's team is important too! Look for experienced teams where the managers have gone through a few business cycles. Managers who have not seen a down market can be very myopic, and those managers who have been through a prolonged slow down very pessimistic. You need a nice blend in the team. 8. True to label: When you buy a large cap fund, you are buying a large cap fund, simple. If a fund says it is a large cap fund it should not be buying mid cap, small cap etc. just because large

caps are currently out of favor. It is your choice to be in a large cap fund and your fund manager should respect it. 9. Philosophy matching: Some fund houses are cooler and calmer compared to the others. See which philosophy suits you. For example Templeton says Franklin India blue chip is a 'growth' oriented, large cap fund, whereas Templeton India Growth fund is a 'value' oriented fund - see what suits you. Hdfc mutual fund on the other hand does not classify itself into 'growth' or 'value' labels. 10. Fund management is by a team or a star fund manager: Fund management is a part science and part art. The fund manager will surely leave a stamp, however, some fund houses have been able to create teams and systems to handle the departure of fund managers - this gives you greater peace of mind. A star fund manager could leave or even worse just drop dead - and you keep wondering 'now what'! Internationally and in the Indian context well performing funds (over say 10 years) have seen very stable management teams and CIOs. 11. Over extremely large periods of time it is really difficult to beat a well managed index fund. Currently all fund houses show schemes beating the index, but beware of mathematics! All fund houses put a small * and say calculation does not include loads. Do a small calculation if loads are included just too many schemes would have under performed the indices. So if you are not looking for too much excitement look for a index fund with fund charges south of 1% per annum. 12. Index funds with the Sensex as a benchmark are at least theoretically supposed to be more aggressive than an index fund with nifty as the benchmark. Frankly it does not matter - if in doubt split your investment amount. The co-relation between nifty and Sensex is quite high. 13. When selecting a large cap equity fund choose ones with as broad a benchmark as possible. It is better to choose a fund with CNX 500 as a benchmark rather than say the Sensex. Fund managers may have a greater flexibility between large caps, small caps, etc. 14. Do not chase performance. The fund which has performed well in one quarter may not perform well in the next quarter. Funds with a good long term top quartile performance is far superior than to a fund scheme which has one top position and one bottom position. Remember long term investing is like running a marathon - stamina is more important than speed. 15. At the top in the well run large cap funds are Hdfc top 200, Dsp top 100, Principal Large cap fund, Franklin India blue chip, and Hdfc Equity fund come to attention. This list is not exhaustive and many fund distributors and banks have their own favorites. This list passes the test prescribed above - of good consistent returns, good long term performance, team going through a bull phase and a bear phase, true to label, etc. Importantly as the fund size has increased these schemes have reduced the asset management charges and thus improved the total return to the investor.

How to select a mutual fund…..part 1
http://www.subramoney.com/book-written-by-me/ Here is part 1 of an article I wrote for Money Mantra… How to select a good mutual fund. Selecting a mutual fund for investing is a very important step indeed. It is not just important it is crucial. However it is the second step, not the first. It is surprising at the number of people I meet or hear from – they all have same questions. So when they ask me „How do we select a mutual fund?‟ for me it is an amusing question. So like all self respecting advisors I start with the dreaded line- “Well, it depends…..‟ Then I ask them – “What are your financial goals, if any?”. Now only if you have big long term goals does the choice of a mutual fund really matter. If you are investing for a short period of time – you are investing in say a liquid fund. It hardly matters in which liquid fund you invest – the performance gap between two liquid funds is not so high. Choose the liquid fund with a high AUM (assets under management) – and one which gives good service in terms of redemption on the phone or net, or such considerations. However if you are looking for a longer term investment – which means you are looking to be invested for at least 8 to 10 years, you are looking to invest in equity mutual funds. This article is aimed at selecting a good equity mutual fund for a long term. 1. The most important first step is to have an investment goal. A fantastic fund selection done without having an investment goal is completely useless. You should know the reason for your investment, how long you can be in the investment, at what stage you will re-allocate, etc. before you make your first investment. 2. Your focus will lead to the correct asset allocation – the very important factor which will decide how much money you will put into an equity fund. 3. Do your homework: Buy large cap well diversified good quality funds. Do not buy opportunities funds, international funds, contra funds as a staple part of your portfolio. 4. All funds in India are no load funds – which means there is no sales cost. This is good and it means all your money gets invested. For a large cap equity fund, it may not make too much sense to pay somebody to pick the fund for you, try doing it yourself. 5. Have a demonic watch on the asset management charges. As a fund starts to do well, it should attract a lot of investors, and as its assets increase it should keep dropping its asset management charges. Look at well managed funds with charges below 1.9% p.a. – there are many. 6. Look at the portfolio turnover ratio – the greater the ratio, the more is your total cost. One cost which is not visible to the investor is the brokerage that the fund scheme pays. This is a function of the turnover of the portfolio. So a fund with a lower turnover would be incurring lesser costs.

How to select a mutual fund – Part 2
http://www.subramoney.com/book-written-by-me/ Continuing yesterday‟s post 7. The asset management company’s team is important too! Look for experienced teams where the managers have gone through a few business cycles. Managers who have not seen a down market can be very myopic, and those managers who have been through a prolonged slow down very pessimistic. You need a nice blend in the team. 8. True to label: When you buy a large cap fund, you are buying a large cap fund, simple. If a fund says it is a large cap fund it should not be buying mid cap, small cap etc. just because large caps are currently out of favor. It is your choice to be in a large cap fund and your fund manager should respect it. 9. Philosophy matching: Some fund houses are cooler and calmer compared to the others. See which philosophy suits you. For example Templeton says Franklin India blue chip is a „growth‟ oriented, large cap fund, whereas Templeton India Growth fund is a „value‟ oriented fund – see what suits you. Hdfc mutual fund on the other hand does not classify itself into „growth‟ or „value‟ labels. 10. Fund management is by a team or a star fund manager: Fund management is a part science and part art. The fund manager will surely leave a stamp, however, some fund houses have been able to create teams and systems to handle the departure of fund managers – this gives you greater peace of mind. A star fund manager could leave or even worse just drop dead – and you keep wondering „now what‟! Internationally and in the Indian context well performing funds (over say 10 years) have seen very stable management teams and CIOs. 11. Over extremely large periods of time it is really difficult to beat a well managed index fund. Currently all fund houses show schemes beating the index, but beware of mathematics! All fund houses put a small * and say calculation does not include loads. Do a small calculation if loads are included just too many schemes would have under performed the indices. So if you are not looking for too much excitement look for a index fund with fund charges south of 1% per annum. 12. Index funds with the sensex as a benchmark are at least theoretically supposed to be more aggressive than an index fund with nifty as the benchmark. Frankly it does not matter – if in doubt split your investment amount. The co-relation between nifty and sensex is quite high. 13. When selecting a large cap equity fund choose ones with as broad a benchmark as possible. It is better to choose a fund with CNX 500 as a benchmark rather than say the sensex. Fund managers may have a greater flexibility between large caps, small caps, etc. 14. Do not chase performance. The fund which has performed well in one quarter may not perform well in the next quarter. Funds with a good long term top quartile performance is far superior than to a fund scheme which has one top position and one bottom position. Remember long term investing is like running a marathon – stamina is more important than speed. 15. At the top in the well run large cap funds are Hdfc top 200, Dsp top 100, Principal Large cap fund, Franklin India blue chip, and Hdfc Equity fund come to attention. This list is not exhaustive and many fund distributors and banks have their own favorites. This list passes the test prescribed above – of good consistent returns, good long term performance, team going

through a bull phase and a bear phase, true to label, etc. Importantly as the fund size has increased these schemes have reduced the asset management charges and thus improved the total return to the investor. 16. Invest only by the SIP mode especially if you are investing for a period of say 5 years. If your investment horizon is upwards of 7 years even a lump sum would do – but seeing ones portfolio hurts!

How to design a SIP portfolio
At FundsIndia.com, we provide an online investment platform, and we offer free advisory services. One of the most frequent advisory questions that we get from our investors is typically this - "I can save x thousand dollars every month. I would like to invest in mutual funds through SIP. Please suggest some funds for me". We are delighted to get such mails because systematic investments in mutual funds are the best way to turn savings into efficient investment vehicles. In this article, let me talk about a simple method to construct a good SIP portfolio. 1. First, decide upon the asset allocation - By asset allocation what I mean is how much money goes every month into what kind of mutual fund. It is possible to get very complicated with this, but to keep it simple you can focus on just three types of funds - large-cap oriented funds, small/mid-cap funds and debt funds. A typical allocation would be 50% in large-cap oriented funds, 20-30% in small-mid/cap oriented funds, and the rest in debt funds. To ensure stable and optimal returns, every SIP portfolio should have some debt fund component in it. It can just be a small portion - 20-25% of the monthly investment, if your portfolio is an aggressive portfolio for the long term.

2. Second, decide upon the number of schemes in your portfolio - Given the fact that we have three prime asset classes as above, your portfolio should have at least three schemes in it. On the upper side, it should not have more than seven-eight schemes. More than that, and your portfolio becomes difficult to track and manage. Ideally, a portfolio would have five schemes - four equity schemes, and one debt scheme.

3. Third, decide on the schemes - this is the last thing to do while designing the portfolio, not the first. Once you know what kind of schemes you are looking for and how many of each kind (from steps 1 and 2 above), this step becomes a simple choice. You can go to research websites like valueresearchonline.com or Mint 50 and look at their top rated funds. You can simply pick one or two in each class that you are interested in and you'll have your portfolio ready! Let us take a simple example and walk through the process to illustrate. Suppose you want to invest Rs. 10,000 a month in a moderately risky portfolio of mutual fund schemes for the next 35 years. We can decide to go with a 70% equity, 30% debt portfolio. In equity, we can decide to have 50% large-cap oriented allocation and 20% small-mid-cap oriented allocation. We will need two large-cap oriented schemes (Rs. 2,500 each), one small/mid-cap scheme (Rs. 2000) and one debt scheme (Rs. 3000) to invest in.

Number of schemes Large-cap equity 2

Asset class

Total SIP amount Rs. 5,000

Scheme choices HDFC Top 200 DSP Blackrock Top 100 Birla Sunlife Frontline Equity Reliance Regular Savings - Equity ICICI Discovery DSP Blackrock small and midcap fund Templeton India Short term Income fund

Small/Mid-cap equity Debt

1 1

Rs. 2,000 Rs. 3,000

Sample SIP portfolio We see that we can choose two funds from the top rated funds in each of these categories. For large-cap oriented funds, from DSP Blackrock Top 100, HDFC Top 200, Birla Sunlife frontline equity and Reliance regular savings fund - equity; for small/mid-cap funds, from ICICI Discovery and DSP Blackrock Small Midcap fund; for debt funds, Templeton India Short term income fund. As we can see, putting together a well-diversified, balanced portfolio such as this is very easy. A regular, systematic investment done for the long run in such a portfolio would be a great way for investors to convert their monthly savings into a great investment portfolio. Happy investing!

Risks of Mutual Fund investing
Could you lose money if you invest in mutual funds?

Yes, most mutual fund products (except capital guaranteed funds) have underlying assets (Equities, Bonds etc.) that fluctuate on a daily basis. Hence capital loss due to lower prices of the underlying assets or default on bonds is possible. Investing according to an asset allocation plan, having enough exposure to other capital guaranteed investment such as FDs, Government Guaranteed bonds etc., can to a large extent mitigate these.
Are there any risks involved in investing in mutual funds?

You may have seen commercials of mutual fund schemes that end with a disclaimer: "Mutual fund investments are subject to market risks ... ". This is true. Like any non- guaranteed financial instrument there are various risks involved in investing in mutual funds such as: Price Risks: Fall in the prices of the underlying shares/bonds lead to a lower NAV. Liquidity Risks: Markets being shut for a long period could lead to the suspension of repurchase / redemption of investments. Default Risk: Bonds of a particular company defaulting on repayment affecting income/debt/hybrid funds.

Credit Risk: Bonds of a particular company being downgraded by the rating agencies cause lower prices. The best thing about mutual fund is that in reality most if not all financial instruments carry these risks but public is ignorant about it. For example, bank deposits are guaranteed only up to one lakh rupees. Company FDs carry default risks. Price risk is the only additional risk of investing in a MF. This is true for any investment that has a market price (Real estate, Shares, Gold, etc.,).

If there are risks with mutual funds, can only people with high-risk tolerance invest in it?

No. The biggest risk is not investing at all, as inflation erodes the value of money and the future looks far from certain. Hence proper risk taking and planning are essential. There are ways and means to mitigate the risks:
  

Have equity MF exposure within your risk tolerance. Ensure debt MF exposure is well spread out. Have adequate exposure to debt assets outside of MFs such as FDs, Govt bond such as PPF, POMIS, NSC, RBI Bonds etc.