Investing

Benjamin Franklin said that God helps those who help themselves, which is to say if we want financial freedom, we need to act on it ourselves. After assessing and planning we need to invest our money. To start with, we must contemplate where and how to invest our money. We must first follow an asset allocation plan, which can be formulated depending on our circumstances discussed previously. Let us assume we have Rs. 1, 00,000 and we need to invest it.. An asset allocation plan sample is given below:

AAP

30% Equities
50% Bonds
20% Cash equivalents

i.e we need to invest Rs. 30, 000 in equities, Rs. 50, 000 in bonds and Rs. 20,000 in cash equivalents. We then need to find the best mutual funds in various categories and spread our investments across them. This helps us look at an option such as:

Asset Allocation	Company	Amount (in Rs.)
Equity fund	ABC	15,000
	XYZ	15,000
Bond fund	MNC	25,000
Bank fixed deposit	ABC	25,000
Cash fund	FGT	25,000

Fund ranker and fund selection provided in this site helps us to select the funds to invest. This completes our investing as per the aap.

Once we have decided on what mutual funds to invest in we need to do the following steps

1. 1. Fill up the relevant forms online/get the forms from the funds and fill them up
2. 2. attach self attested PAN card copy if the amount to be invested is more then 50000 Rs
3. 3. Also go through KYC Registration once to comply with Anti Money Laundering Act.,
4. 4. Complete the payment required online if submitting offline attach a cheque and submit in the mutual funds office
5. 5. You should get a statement through email or snail mail 3-4 days after you invest please keep the same for future reference.

Mutual Fund And Its Advantages

A mutual fund (MF) 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.

MF's 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 benefit 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.

The advantages of Mutual Funds are as follows:

• Small investments: Mutual funds accept investments as low as few thousand rupees, (even a few hundred rupees if you invest monthly) which is invested across the markets. Such a spread is difficult for an investor to copy.
• Professionalism: Professionals manage money collected by a mutual fund. They analyse the markets to pick good investments. Mutual fund managers have the benefit of both good experience and world class processes to select the best possible investment.
• 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.
• Regulation: MFs are regulated by SEBI and have to adhere to stringent auditing by SEBI once in six months, moreover MFs also have internal audit controls.
  
  

MFs Vs Direct Investing

MFs	Direct Investing
Diversification  Hassle free  Cost effective  More opportunities to participate in IPOs etc. Convenience at a lower cost. Mitigation of risk.	Flexibility to take concentrated bets in few stocks/sectors.  Customised to our needs.  Flexibility to buy small/mid-cap stocks. Higher return potential, Higher risk.

Types of Mutual Funds

There are broadly three types of mutual funds. Most of the funds are a combination or variation on these.

Type of Mutual Fund	About the Fund
Equity Funds	Invest in stocks of various companies. Have the potential to give higher returns over long-term. Are risky.
Debt Funds	Invest in bonds issued by Govt of India, corporate and banks. Are less risky compared to equity funds. Yield lower returns. Are good as a diversification tool. Are tax efficient compared to fixed deposits.
Hybrid Funds	Are a mixture of both equity and debt in various proportions.

Taxation
Tax Benefits

Heads of Income	Tax applicable
Dividends: Are tax-free in the hands of investors. Income received in respect of units of a mutual fund specified under Section 10(23D). Dividend Distribution tax on mutual funds.	Exempt from income tax in India. Subject to paying distribution tax in debt-oriented schemes.
Sale of units: Depending on the period of investments, long-term or short-term capital gains and tax thereon are applicable on redemption. Long-term capital asset: Units of a scheme held as a capital asset, for a period of more than 12 months immediately preceding the date of sale. Short-term capital asset: Other cases.	Long-term capital gains tax rate. Short-term capital gains tax rate.
Equity Oriented Schemes (a) Long Term Capital Gains (b) Short Term Capital Gains	Tax Free 15%
All Other Schemes Long Term Capital Gains Short Term capital gains	20% with indexation or 10% without indexation whichever is less. Normal rates applicable to the investor as per his or her tax slab.
Securities Transaction Tax (STT)   1 Purchase of an equity share in a company or a unit of an equity oriented fund, where (a) the transaction of such purchase is entered into in a recognised stock exchange; and (b) the contract for the purchase of such share or unit is settled by the actual delivery or transfer of such share or unit. 0.125% 2 Sale of an equity share in a company or a unit of an equity oriented fund, where (a) the transaction of such sale is entered into in a recognised stock exchange; and (b) the contract for the sale of such share or unit is settled by the actual delivery or transfer of such share or unit. 0.125% 3 Sale of a derivative, where the transaction of such sale is entered into in a recognised stock exchange. 0.017% 4 Sale of unit of an equity oriented fund to the mutual fund. 0.25%

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 and banks
Floating Rate funds	Bonds whose interests are reset at preset time periods, like our 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

1. Equity oriented – Have an equity exposure of more than 60% rest in debt investments.
2. Debt oriented – Have debt exposure of more than 50% rest in equities.
3. Monthly income plans- Have equity exposure ranging from 10- 25% and rest in bonds.

2. Commodities funds- They invest in metals , energy, agricultural commodities , .

 

5.   Real estate funds – Yet to be launched in India.