This is the market revolutionary change happened, achieved fame and many of us heard of it without knowing much about it.
Unfortunately, many new investors seem to be under a misconception that it is a type of mutual fund. A Systematic Investment Plan is not a type of mutual fund; it is a method of investing in a mutual fund.
Here's to coming to terms associated with mutual funds. There are two ways in which we can invest in a mutual fund.
Ø A one-time outright payment
If we invest directly in the fund, we just hand over the cheque and we get our fund units depending on the value of the units on that particular day.
Let's say we want to invest Rs. 10,000. All we have to do is approach the fund and buy units worth Rs. 10,000. There will be two factors determining how many units we get.
a) Entry load
This is the fee we pay on the amount we invest. Let's say the entry load is 2%. Two percent on Rs. 10,000 would Rs. 200. Now, we have just Rs. 9,800 to invest.
b) NAV
The Net Asset Value is the price of a unit of a fund. Let's say that the NAV on the day we invest is Rs. 30.
So we will get 326.67 units (Rs 9800 / 30).
Ø Periodic investments or SIP (Our present area of concentration)
This is referred to as a SIP.
That means that, every month, we commit to investing, say, Rs. 1,000 in our fund. At the end of a year, we would have invested Rs. 12,000 in our fund.
Let's say the NAV on the day we invest in the first month is Rs. 20; we will get 50 units.
The next month, the NAV is Rs. 25. We will get 40 units.
The following month, the NAV is Rs. 18. We will get 55.56 units.
So, after three months, we would have 145.56 units. On an average, we would have paid around Rs. 21 per unit. This is because, when the NAV is high, we get fewer units per Rs. 1,000. When the NAV falls, we get more units per Rs. 1,000.
Other important points relating to SIP-
§ Exit load - An exit load is a fee we pay at the time of selling the units, just like the entry load is a fee we pay when we buy the units.
Initially, funds never charged an entry load on SIPs. Now, however, a number of them do. We will also have the check if there is an exit load. Generally, though, there is none. Also, if there is an entry load, an exit load will not be charged. An exit load may be charged if we stop the SIP mid-way. Let's say we have a one-year SIP but discontinue after five months, then an exit load will be levied. These conditions will wary between mutual funds.
§ Periodic Investments - If we do a onetime investment, the minimum amount that we have to invest is Rs. 5,000.
If we invest via an SIP, the amount drops. Each fund has their own minimum amount. Some may keep it at least Rs. 500 per month; others may keep it as Rs. 1,000.
§ Frequency of investment - It would depend on the fund. Some insist the SIP must be done every month. Others give us the option of investing once in three months or once in six months. They also give fixed dates. So we will get the option of various dates and we will have to choose one. Let's say we are presented with these dates: 1, 10, 20 or 30. We can pick any one date. If we pick the 10th of the month, then on that day, the amount we have decided to invest in the fund has to be credited to our mutual fund.
§ Nature of payment - We can opt for the Electronic Clearance Service from our bank; this means the mutual fund will, as per our instructions, debit a certain amount from our account every month. Let’s say we have a SIP of Rs. 1,000 every month and we have chosen to invest in it on the 10th of every month. Under this option, we can instruct our mutual fund to directly debit our bank account of Rs. 1,000 on the due date. If we don't have the required money in our account, then for that month, no units will be allocated to us. But, if this continues periodically, the mutual fund will discontinue the SIP. We need to check with each mutual fund what their parameters are.
Alternately, we can give cheques to our mutual fund. In this case, they may ask for five Post Dated Cheques upfront with our first investment. Since these cheques are dated ahead of time, they cannot be processed till the date indicated.
§ Duration of investment – one have to state whether we want it for a year or two years, etc. If, during the course of this period, we realize we cannot continue with the SIP, all we have to do is inform the fund 15 days prior to the payout. The SIP will be discontinued. We can continue to keep our money with the fund and withdraw it when we want.
§ Type of funds that offer SIP - All types of equity funds (funds that invest in the shares of companies), debt funds (funds that invest in fixed-return investments) and balanced funds (funds that invest in both) offer a SIP.
Liquid funds, cash funds and floating rate debt funds do not offer an SIP. These are funds that invest in very short-term fixed-return investments. Floating rate debt funds invest in fixed return investments where the interest rate moves in tandem with interest rates in the economy (just like a floating rate home loan).
§ Tax implications - Let's say we have invested in the SIP option of a diversified equity fund. If we sell the units after a year of buying, there is no need to pay capital gains tax. If we sell if before a year, we are required to pay capital gains tax of 15%.
Let's say we have invested through a SIP for 12 months: January to December 2009. Now, in February 2010, we want to sell some units. The system of first-in, first-out applies here. So, the amount we invest in January 2009 and the units we bought with that money will be regarded as the units we sell in February 2010.
For tax purposes, the units that we sell first will be considered as the first units bought.
· How can be SIP is different and help full when compared to regular method of investing in mutual fund- When we buy the units of a fund, we may do so when the NAV is really high. For instance, let's say we bought the units of a fund when the bull Run was at its peak, leading to a high NAV.
If the market dips after that, the value of our investments falls and we may have to wait for a long while to make a return on our investment. But, if we invest via a SIP, we do not commit the error of buying units when the market is at its peak. Since we are buying small amounts continuously, our investment will average out over a period of time. We will end up buying some units at a high cost and some units a lower price. Over time, our chances of making a profit are much higher when compared to an one-time investment.
About Me
Monday, September 20, 2010
Friday, September 17, 2010
Asian equities edge upwards
Buying continues in regional benchmarks except China
Asian markets edged higher though shares in China continued to ease on liquidity worries. Commodity prices were stronger today as the dollar eased to a five week low against the Euro and risk appetite mostly stayed firm ahead of the weekend on steady cues from over night US markets. Economic data in the US, especially weekly jobless claims, continue to impress with unexpectedly small increase. US First-time Jobless Claims Slide To Lowest Since July, making the stocks encounter a poor manufacturing data in the form of the Philadelphia-area manufacturing index. The Dow gained 22.10 points or 0.2 percent to end at 10,594.83.
The Japanese stocks closed in green as exporters continued to gain from a frail undertone in the Japanese Yen and broad gains in the regional markets. Positive closing on Wall Street in the previous session also pushed up the index linked counters. The intervention of the Japanese monetary authorities to cap the freakish gains in the local currency against the US dollar have continued to keep the Yen lower, extending its drop from a 15 year high. The benchmark Nikkei 225 Index cloaked a gain of 116.59 points, or 1.23%, to 9,626, while the broader Topix index of all First Section issues added 7.38 points, or 0.87%, to 852.
The Australian market also gained, adding to recent gains as commodity prices stayed firm following the drop in US dollar and strong risk appetite. There was no activity on the economic front and traders mostly followed the commodity prices to push up the stocks ahead of the weekends. The benchmark S&P/ASX200 Index gained 33.60 points, or 0.73%, to end at 4,640 points, while the All-Ordinaries Index closed at 4,685, adding 35.10 points, or 0.75%.
Chinese markets plummeted though, adding to the latest losses as hefty selling in financials and heavyweight stocks hurt the sentiments. Traders continued to fret over the credit conditions in the economy and the recent revival in the inflationary expectations is also keeping the gains mostly limited in the stocks off late even as the rest of the world rallies. The Shanghai Composite Index fell for its third straight day to 2,598.7 points, after slumping nearly 2% in last session.
In Mumbai, the key benchmark indices regained strength in late trade to settle near day's high, with index heavyweights leading the rally. Firm global stocks and data showing heavy buying by foreign funds recently, underpinned sentiments. Hopes that the central bank may be nearing a pause in its current tightening cycle, also aided the rally on the domestic bourses. The BSE 30-share Sensex was provisionally up 200.52 points or 1.03% to 19,618.01. The barometer index today, 17 September 2010, struck a 32-month high.
In other markets, Hang Seng index in Hong Kong gained 1.30%, TSEC index in Taiwan added 0.72 % while Straits Times index in Singapore edged higher by 0.30%. Dollar eased to five week low against the Euro before cutting losses while DOW futures also come off after gaining 100 points in the session. Crude oil futures are back above $75, currently quoting at $75.04, up 47 cents on the day. Gold also rallied to fresh highs above $1280 per ounce.
Asian markets edged higher though shares in China continued to ease on liquidity worries. Commodity prices were stronger today as the dollar eased to a five week low against the Euro and risk appetite mostly stayed firm ahead of the weekend on steady cues from over night US markets. Economic data in the US, especially weekly jobless claims, continue to impress with unexpectedly small increase. US First-time Jobless Claims Slide To Lowest Since July, making the stocks encounter a poor manufacturing data in the form of the Philadelphia-area manufacturing index. The Dow gained 22.10 points or 0.2 percent to end at 10,594.83.
The Japanese stocks closed in green as exporters continued to gain from a frail undertone in the Japanese Yen and broad gains in the regional markets. Positive closing on Wall Street in the previous session also pushed up the index linked counters. The intervention of the Japanese monetary authorities to cap the freakish gains in the local currency against the US dollar have continued to keep the Yen lower, extending its drop from a 15 year high. The benchmark Nikkei 225 Index cloaked a gain of 116.59 points, or 1.23%, to 9,626, while the broader Topix index of all First Section issues added 7.38 points, or 0.87%, to 852.
The Australian market also gained, adding to recent gains as commodity prices stayed firm following the drop in US dollar and strong risk appetite. There was no activity on the economic front and traders mostly followed the commodity prices to push up the stocks ahead of the weekends. The benchmark S&P/ASX200 Index gained 33.60 points, or 0.73%, to end at 4,640 points, while the All-Ordinaries Index closed at 4,685, adding 35.10 points, or 0.75%.
Chinese markets plummeted though, adding to the latest losses as hefty selling in financials and heavyweight stocks hurt the sentiments. Traders continued to fret over the credit conditions in the economy and the recent revival in the inflationary expectations is also keeping the gains mostly limited in the stocks off late even as the rest of the world rallies. The Shanghai Composite Index fell for its third straight day to 2,598.7 points, after slumping nearly 2% in last session.
In Mumbai, the key benchmark indices regained strength in late trade to settle near day's high, with index heavyweights leading the rally. Firm global stocks and data showing heavy buying by foreign funds recently, underpinned sentiments. Hopes that the central bank may be nearing a pause in its current tightening cycle, also aided the rally on the domestic bourses. The BSE 30-share Sensex was provisionally up 200.52 points or 1.03% to 19,618.01. The barometer index today, 17 September 2010, struck a 32-month high.
In other markets, Hang Seng index in Hong Kong gained 1.30%, TSEC index in Taiwan added 0.72 % while Straits Times index in Singapore edged higher by 0.30%. Dollar eased to five week low against the Euro before cutting losses while DOW futures also come off after gaining 100 points in the session. Crude oil futures are back above $75, currently quoting at $75.04, up 47 cents on the day. Gold also rallied to fresh highs above $1280 per ounce.
Are insurance companies in India listening to the customers?
Life insurance companies in India are realigning their business models as the new regulations on ULIPs have shaken them out of their comfort zones.
The IRDA has done several things in response to mis-selling of ULIPs – increased the policy lock-in period of ULIPs, asked insurers to guarantee a certain return in some categories of ULIPs, and put a cap on the portion of premium that insurers can deduct as upfront charges.
ULIPs account for 50% of the business of life insurers. The cap on up-front charges means that ULIPs have become cheaper, hence more attractive for customers. Since insurance companies were using 40-50% of the first year’s premium as charges primarily for paying the agents, the new regime will mean lower commissions for insurance agents.
Insurance companies are worried about this. They are highly dependent on individual agents for selling policies, though many private companies have also been pushing bancassurance. So the focus of their marketing strategy, to a very large extent has been the agents rather than the end customers themselves.
The competitive intelligence efforts of insurance companies have centred around the channel strategies of their competitors – commissions on various products, discounts on group insurance schemes, promotional activities, etc.
A pitfall of concentrating on what the competition is doing, is that companies come up with me-too products. It is easy to spot this trend in India. Customers are forced to pick from a bunch of similar products, and pretty much rely on the advice of the agent to do so. Many of my otherwise informed friends have bought insurance this way.
As far as the end customers are concerned, the industry has focused on “educating” them. The rationale being that insurance penetration in India is low because consumers don’t understand insurance.
Perhaps the current shake-up is a good opportunity for companies to take a hard look at whether their products really meet the needs of Indian customers. And this is less straight forward that it seems. The imagination of most customers is limited by the products they have seen so far. Perhaps it is time to get to the need behind the need (which is indeed likely to be different for different customer segments), and offer appropriate innovative products to the customers.
If insurance companies can come up with offering that meet their customers’ need, they will not be dependent on the agents to push their sales.
The IRDA has done several things in response to mis-selling of ULIPs – increased the policy lock-in period of ULIPs, asked insurers to guarantee a certain return in some categories of ULIPs, and put a cap on the portion of premium that insurers can deduct as upfront charges.
ULIPs account for 50% of the business of life insurers. The cap on up-front charges means that ULIPs have become cheaper, hence more attractive for customers. Since insurance companies were using 40-50% of the first year’s premium as charges primarily for paying the agents, the new regime will mean lower commissions for insurance agents.
Insurance companies are worried about this. They are highly dependent on individual agents for selling policies, though many private companies have also been pushing bancassurance. So the focus of their marketing strategy, to a very large extent has been the agents rather than the end customers themselves.
The competitive intelligence efforts of insurance companies have centred around the channel strategies of their competitors – commissions on various products, discounts on group insurance schemes, promotional activities, etc.
A pitfall of concentrating on what the competition is doing, is that companies come up with me-too products. It is easy to spot this trend in India. Customers are forced to pick from a bunch of similar products, and pretty much rely on the advice of the agent to do so. Many of my otherwise informed friends have bought insurance this way.
As far as the end customers are concerned, the industry has focused on “educating” them. The rationale being that insurance penetration in India is low because consumers don’t understand insurance.
Perhaps the current shake-up is a good opportunity for companies to take a hard look at whether their products really meet the needs of Indian customers. And this is less straight forward that it seems. The imagination of most customers is limited by the products they have seen so far. Perhaps it is time to get to the need behind the need (which is indeed likely to be different for different customer segments), and offer appropriate innovative products to the customers.
If insurance companies can come up with offering that meet their customers’ need, they will not be dependent on the agents to push their sales.
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