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  • Future Value: Concept and Calculation

    Future Value: Concept and Calculation

    The most frequent questions investors have are: how much will my investments increase over the next ten, fifteen, or any other years? Or, what will my assets be worth in ten years, and so on? This is where an investment’s future value comes into play.

    A rupee deposited today into a savings account could be worth more than a rupee in a year. How does that work? Your rupee makes money for that year, thanks to interest payments from the bank. The value of a rupee deposited today will therefore increase in the future; the same is true of investments.

    What Is The Future Value?

    Future value (FV) is the value of an investment at a future date on the basis of a presumed growth rate. The future value is significant to investors and financial planners, as they can approximate the worth of their present investment in the future.

    Estimating its future worth can be challenging depending on the type of asset. Moreover, a constant growth rate is assumed to estimate future value. For instance, when money is deposited in a savings account with a guaranteed interest rate, it is simple to calculate the future value accurately. However, investing in stocks or other securities with a more unpredictable rate of return might be more challenging.

    For example, future value can be used to estimate how long it will take a property buyer to save ₹100,000 for a down payment.

    Advantages Of Future Value

    1. Allows Planning

    A business or investor may be aware of their current situation and be able to make certain predictions about what will occur in the future. This way, they can plan for the future as they comprehend their financial situation. 

    1. Eases Comparisons

    Assume a potential investor weighs their options. One calls for a ₹5,000 investment that will yield 10% over the following three years. The other takes a ₹3,000 investment and yields 5% in year one, 10% in year two, and 35% in year three. Only by projecting future values and comparing the results will an investor be able to determine which investment has the potential to yield the highest returns.

    1. Easy to calculate

    Future value does not require complex math. Anyone can use future value as it relies heavily on estimates.

    Disadvantages Of Future Value

    1. Unrealistic

    Usually, future value assumes a steady growth rate. Only one interest rate is considered for computing future value. Even though variable interest rates can be used to assess future value, the calculations become more difficult and illogical. In reality, a situation might have various parameters because growth isn’t always linear or constant year over year, but just a streamlined formula that just considers rate.

    1. Inaccurate assumptions

    The calculations are merely estimates because the future value is predicated on assumptions about the future, which may or may not be accurate. For instance, the earlier computation of future value is useless if the market is unable to generate that projected return.

    1. Failed comparisons

    To compare the two projects, there are some restrictions. Consider the following scenario: An investor has the option of investing ₹10,000 for a predicted return of 1% or ₹100 for a predicted return of 700%. The first alternative may seem preferable if we were simply considering future value because it is higher; however, this ignores the initial investments.

    How To Calculate Future Value?

    Future value calculations are of two types:

    Future value of a lump sum: It represents the value of a single deposit acquired over time.

    Future value of an annuity: It is the value of a series of payments over time.

    Formula For Future Value (FV) of a Lump Sum

    FV = PV x (1+r)n

    PV = Deposit or present value

    r = Rate of interest over a period of time

    n = The number of periods

    Formula For Future Value (FV) of an Annuity

    FV = PMT x [(1+r)n – 1]/r

    PMT = Payment or contribution

    r = Rate of interest over a period of time

    n = The number of periods

    Examples Of Future Value

    The future value of an annuity formula can be used to determine how much a retirement account would be worth in 30 years if you contribute ₹2,400 per year (₹200 per month). Assume a 7% annual rate of return for this example:

    FV = 2,400 x [(1+0.07)30 – 1)]/0.07 

    = 2,400 x [7.612 – 1] / 0.07  

    = 2,400 x 94.461 

    = 226,706

    Although you would put in a total of ₹72,000 over the course of 30 years, due to the time value of money and the effect of compound interest, your account would be worth ₹226,706 (assuming an annual rate of return of 7%), or more than three times what you put in.

    Let’s say you wish to estimate the worth of a ₹1,00,000 investment after 10 years at a 12% return. ₹1,00,000 invested today at a 12% return over a ten-year period will be worth ₹3,10,585₹. Moreover, assume the rate of return you anticipate achieving your investment if you are not investing in a fixed return instrument.

    This can help you determine the future value of your objective. Let’s put it this way: if education inflation is 12% annually, how much would you pay for a computer course that costs ₹1,00,000 now after 10 years?

    Similarly, the final value of the monthly investment would be close to 16 lakh if you invested 10,000 each month for eight years, assuming 12% annual returns, exactly like we do SIP in a mutual fund.

    The mix of stocks, bonds, and other investments in your portfolio can also be determined using future value. A financial goal can be attained with less money invested if the rate of interest or return is higher. However, bigger returns typically come with a higher risk of losing money.

    The formula for future value can also be used to determine the future value of your present expenses. And once you have a general concept of the numbers to come, you may make investment plans appropriately.

    Conclusion

    All financial planning, from buying or leasing a car to choosing a business to invest in new machinery, is based on the time value of money. Time and money are affected by future worth. Making wise financial decisions can be aided by using future value and other metrics.

    FAQs

    Does future value include inflation?

    The rate of return on investment may also be affected by inflation adjustments. Even while it is possible to accurately forecast an asset’s future value given a stable interest rate, doing so is not always practicable.

    Is future value compound interest?

    The future value formula aids in figuring out the final sum, which accounts for the initial investment and all applicable interest. The “present value” of compound interest is the initial investment. The initial investment sum plus all interest is the “future value.”

    Why is future value important?

    Future value is important as it informs investors and other individuals about the future value of the current investment.

  • What is Risk Premium 

    What is Risk Premium 

    Introduction

    If you are investing in stocks or mutual funds, you should know all the factors affecting the trading. It is pertinent to learn about the company holding the shares and whether it is financially stable or not. Many models and processes are there for you to carry out successful trading. Similarly, the traders must follow several principles to increase the profit potential. Even when you seem to have losses in trading, it can be compensated for if the further movements are wise.

    Knowing the risk premium in detail is one such factor that lets you know which shares to invest in for higher returns. Risk premium will help traders to invest in assets with risks as the same will bring lucrative gains. This write-up will help you gain in-depth knowledge about risk premiums. Let’s dive deep into it.

    Understanding what is a risk premium

    When you invest in a particular stock or bond, there might be losses due to the declining market value. The investment return will provide you with the lost sum in such a scenario. This procedure is known as risk premium, which will always be over the value of the risk-free rate. If you understand what risk premium is, you will be able to know all the concepts of trading quickly. Usually, beginner-level traders go to invest in assets that have no risks. 

    After learning the procedures and techniques of trading, to some extent, you can start to invest in riskier assets. Only when you invest in such kinds of assets or shares can you expect a higher rate of return on the investment. To know the risk premium, the investor must first evaluate the expected return and risk-free return rate. If the rate of return falls below the risk-free rate, the risk premium will become negative. Basic knowledge about all this will help the investors to act wisely by investing in a guaranteed source. 

    Relation between Risk Premium and CAPM

    The investor can get the benefit by knowing the compensation for the loss and the return on investment. A model called the Capital Asset Pricing Model is used to find an estimated return, and it uses the risk premium to calculate the asset’s return value and the risk-free rate. 

    This CAPM needs a formula that uses the Beta value of the stock. On the other hand, you can calculate the risk premium by knowing the risk-free rate and excess return for the investment. For example, the estimated return will equal the risk premium if you invest in a risk-free asset. Similarly, when you invest in a risky trade with an 8 percent estimated return and a risk-free rate of 3 percent, the risk premium will sum up to 5 percent. This risk premium will make up for the loss. It finds a significant application in the CAPM formula. 

    Example of risk premium

    There are various citations for explaining the meaning of risk premium. It would be best if you calculate the risk premium by subtracting the risk-free rate from the expected rate of return, which will be the recompensation. 

    Let us assume a player in a game show is offered two options. He can opt for picking one of the two boxes with 10000 bucks, and the other box has no money. The other choice is that he can directly get 5000 bucks. In this example, if the player wants to win 10000 bucks, he must make a riskier decision as the probability of success is 50%. On the other hand, if the player gets 5000 bucks and leaves straight away, it is a risk-free option. The same criteria are applied to the concept of risk premium. To make the players choose the riskier option, the organizer may offer 3000 bucks if, unfortunately, the gamer opens the box having no prize. The 3000 bucks offered is known as the assured risk premium in the case of trading. 

    Market risk premium and its working

    The market risk premium works based on three components. They are:

    1. actual market risk premium 
    2. recorded market risk premium
    3. estimated market risk premium. 

    If you are investing, you will expect a higher amount than the investment. This expected gain is the actual market risk premium. The historical risk premium already recorded for the previous trading for the same instrument is known as the recorded market risk premium. The estimated market risk premium is the rate of return you expect more than the standard return. 

    Something called the S & P 500 is kept as the standard for deriving the historical market risk premium. The standard risk-free rate can be estimated by keeping bonds with no risks or lower risks, and a government bond can be used for this purpose. By applying the risk premium formula, you can be sure that at least a small return will be assured in case of a loss. 

    Final thoughts

    The risk premium can help only to a certain extent. If there is an unexpected fluctuation in the market value, you will not gain the expected risk premium. Therefore, only after knowing the basics of trading and gaining experience can you be sure about investing in risky assets.

    This article sums up the usage of risk premium, the example for understanding the risk premium better, and the working of risk premium. When you get into trading, you should apply the risk premium formula with other investment techniques. By just knowing the concept of risk premium, you will not be able to gain lucrative profits. 

    References

  • What is Health Insurance? Why Buy Health Insurance?

    What is Health Insurance? Why Buy Health Insurance?

    Health is one of the most critical aspects of your life because it is not only about you but also about your family and loved ones. So it is your duty and moral responsibility to act now to have a secure and healthy life. And health insurance is one of the most prevalent ways to do that.

    Whether you have been insured for years or are new to the game, understanding your policy is crucial for your health and wallet. This blog will provide a complete understanding of insurance for you, and you will be able to make better decisions while selecting the policy that best suits your needs.

    What is Health Insurance?

    Health insurance is a contract between an individual or group and an insurance company. The insurance company agrees to pay directly or through reimbursement if the insured person incurs certain types of expenses. These are called “medical expenses,” which are paid for by the insurer as defined under the policy.

    The amount paid will vary depending on factors including pre-existing conditions, age, gender, location, income level, occupation, etc.

    Purpose of Health Insurance

    Health insurance is an important decision and investment that you make now to secure your family and yourself from a financial crisis that may occur in the future because of any medical emergency. If you don’t have health insurance, you could face costly medical bills that can put your life on hold for months or even years.

    What is the Correct Age to Buy Health Insurance?

    Health insurance means that if any medical emergency occurs, then you have financial security at the time. You are never aware of what medical emergency you may get into in the future, so there is no specific time to invest in health insurance. If you are young and healthy and want to terminate your insurance at that point, now would be the right time to do that. It would help if you bought a health insurance policy as soon as possible. The sooner you get coverage, the better it is for your financial situation and your family’s health care needs.

    Points to Consider When Choosing Your Health Insurance Policy

    Health insurance is an investment and a plan you make for yourself or your family. It requires a lot of thought and research too. Apart from that, you must also follow several legal procedures and documentation. You need to consider some factors when choosing your health insurance.

    Why do you need health insurance? One may be struggling with a health issue right now or may want to be ready to deal with any in the future and not want to have financial problems because of the medical expenses.

    How much will it cost? It depends on the type of health insurance you have in your budget. Different companies have their own schemes to choose from. The best thing is that you can now check and compare the prices of various health insurance companies online.

    Understand the coverage of the plan:  The factors that determine the program’s scope will be discussed with you before making the final investment. Please read, understand, discuss, and then only make the decision.

    Types of health insurance policies available

    Health-related issues are on the rise, which means treatment costs are rising dramatically. As a result, there has been a rise in the demand for health insurance plans. A variety of health insurance policies available on the market might therefore relieve you of some of this additional financial stress.

    • Individual Health Insurance: It is a type of health insurance that covers only individuals, not families. It is different from group health insurance in that it provides coverage to the individual who pays for it but does not provide coverage to other family members.

    • Family Floater Health Insurance: Family floater health insurance is a type of health insurance that allows you to add your spouse or domestic partner as an additional insured. This means that if one member of the couple gets sick, they will be covered by both members’ policies.

    • Group Health Insurance: It is a type of health insurance that covers the medical expenses of an entire group of people. This includes employees, their spouses, and children, as well as retirees who are covered by the plan. Employers can offer group health plans or purchase them directly from insurers. 

    • Senior Citizens Health Insurance: As the name suggests, it is an insurance policy for senior citizens facing several health problems because of their  age. It might be for your parents or grandparents. This policy is being customized to meet the old age requirements. 

     

    • Maternity Health Insurance: This type of health insurance provides coverage for maternity services. It covers pregnancy, childbirth, and postpartum care. Most plans will also cover prenatal care.

    • Critical Illness Insurance: This type of life insurance pays out if you are diagnosed with a severe illness or injury. You can use it to pay for medical expenses, funeral costs, and other critical financial needs in the event of your death.

    • Top-Up Health Insurance: The term “top-up health insurance” refers to an indemnity policy that extends medical coverage beyond that of an individual’s primary health insurance or an employer-sponsored medical insurance plan. Even if a person’s regular health insurance policy has exhausted the amount insured, they can still get their medical expenses covered with this policy. 

    Compare types of health insurance plans: 

    Compare the types of health insurance plans used to compare benefits, costs, and coverage for various medical treatments and services. You may contact the health insurance plans to find out which one provides better coverage for your medical needs.

    What your policy won’t cover: Exclusions:

    Read the terms and conditions and discuss every aspect with your agent to clearly understand what points your policy won’t cover and to avoid any future issues at the time of emergency. Policies may differ depending on which company you choose, so read all the carefully written terms and conditions before making the final payment.

    How to buy your policy?

    You can buy your health insurance policy from the following places:

    • Insurance companies’ offices. You can also buy your health insurance policy online.

    • A Licensed Agent or Broker is authorized to sell health insurance policies in the state where you live and is licensed by the Department of Insurance in that state. 

    In conclusion,

     we’re sure you have understood health insurance’s importance and its fundamental aspects so far. Top-up medical insurance plans are a surefire way to bridge the financial gap between the actual cost of hospitalization and the coverage provided by your current policies. If you have an individual or group health insurance policy, a top-up medical policy may be an option for you.

  • Price-to-Earnings (P/E) Ratio

    Price-to-Earnings (P/E) Ratio

    While investing in the stock market, PE Ratio can be a very helpful financial tool as it helps to determine the comparative value of the stock of a company on the basis of the company’s share price and projected future earnings. It helps the investors to make an apples to apples comparison between two stocks of two different companies and make the right investment decision for them. A high PE Ratio suggests the positive growth of the company whereas a low PE Ratio suggests that the stock price is undervalued. PE Ratio is an easy tool and can be used widely to make better financial decisions.

    What is P/E ratio?

    The price-to-earnings ratio is the ratio for valuing a company on the basis of its current share price relative to its earnings per share. It is also known as the price multiple or the earnings multiple. P/E ratio is used to compare a company against its own historical record or to compare aggregate markets against one another or over time.

    P/E Ratio in Use

    The P/E ratio helps in standardizing stocks of different prices and earnings levels. It gives the investors insights if the stock of a company is overvalued or undervalued as compared to its earnings. The ratio measures the amount of money the market is willing to pay for its current state as well as prospective growth of the company. For example- If a company is trading at a high P/E ratio, the market thinks highly of its growth potential and is willing to spend more based on future earnings.

    High P/E Ratio

    Companies which have a high PE Ratio are often taken as growth stocks. This indicates a positive future performance, and investors have higher expectations of future earnings growth and are willing to pay more for them.

    The limitations to high PE Ratio is that the growth stocks are often higher in volatility, and this puts a lot of pressure on companies to do more to justify their higher valuation. Because of this, investing in growth stocks is seen as a risky investment. Stocks with high P/E ratios are considered to be overvalued.

    Low P/E

    Companies with a low Price Earnings Ratio are often taken to be value stocks. It means they are undervalued because their stock prices trade lower relative to their valuation. This pricing can be a great bargain and will prompt investors to buy the stock. And when the market corrects it, investors make a profit as a result of a higher stock price.

    Types of P/E Ratios

    P/E ratio can be calculated on a trailing/ backward-looking or forward /projected basis based on EPS that comes in two main options.                                                                                                   Trailing EPS number signals the company’s performance over the past 12 months.            The forward EPS is found in a company’s earnings release, which often predicts what it expects to earn in the future.

    P/E Ratio Formula and Calculation

    The formula and calculation used for this process are as under-

    P/E Ratio =Market value per share / Earnings per share

    To determine the P/E ratio, one must just divide the current price of the stock by the earnings per share (EPS).

    Example of the P/E Ratio

    As an example, let’s calculate the P/E ratio for Walmart Inc.

     As of Feb 3, 2021, when the company’s stock price closed at $139.55.2 The company’s earnings per share for the fiscal year ending Jan. 31, 2021, was $4.75, according to The Wall Street Journal

    Therefore, Walmart’s P/E ratio is $139.55 / $4.75 = 29.38.

    How to Use PE Ratios for Stock Market Investing?

    The price-to-earnings ratio, or pe ratio, is the most common way to value a stock. It’s also one of the concepts in finance that’s hardest to understand.

    There are pe ratios for individual companies and the market as a whole. The pe ratio for a company is usually written as price/earnings or p/e. For the market as a whole, it’s written as price/earnings-to-growth, or p/eg (though you’ll also see it written pe/e.g.).

    It works by taking the company’s stock price and dividing by its earnings per share (EPS), then multiplying by some growth rate. The result tells you how much you need to grow your earnings every year to justify the current stock price. If you don’t think the company will grow that fast, you should wait until it does before buying its stock.

    The best time to determine whether to buy or sell is when the stock gets close to its 52-week high.

    The price/earnings ratio is an economic measure of the relationship between the price of a share of stock and the earnings per share. It is calculated by dividing the current market price of a share by its earnings per share.

    Limitations of Price Earnings Ratio

    Finding the correct value of a stock cannot just be calculated using current year earnings. The value depends on all expected cash flows and earnings of a company in the future. PE Ratio is useful as it gives some understanding of the growth prospects in EPS and risk profile of the company. An investor must deeply study the company’s financial statements and use other methods for valuation to get a better picture of a company’s value and performance.

    Additionally, the Price Earnings Ratio can produce misleading results as when Negative EPS resulting from a loss in earnings will produce a negative P/E. An exceedingly high P/E can be generated by a company with close to zero net income, resulting in a very low EPS in the decimals.

    Conclusion

    So, PE Ratio is a very important financial term. It denotes the relative price of a stock of a company compared to its competitors. Understanding PE Ratio can facilitate your investment decisions.

     

  • Window Dressing in Accounting

    Window Dressing in Accounting

    The financial position of a company plays a crucial role for a company to expand its business and gain the trust of investors and other interested parties. When a company’s financial data appeals to them, it facilitates in growing or expanding the business to new heights. 

    What is Window Dressing in Accounting?

    If the financials of the company do not appear desirable or acceptable, the company’s management may manipulate the facts and figures mentioned in the financials using unethical methods, and this practice is voluntarily and intentionally carried out by the management. In accounting, such practices are known as window dressing. This assists management in gaining the trust of investors, shareholders, and users of the company’s financial statements.        

    The term “window dressing” refers to manipulation of accounts in a way that makes the financial statements appear better than they actually are. By painting a positive picture of the organization’s performance, window dressing essentially aims to deceive shareholders and investors. When portfolio managers try to boost a fund’s investment performance ahead of investor or shareholder presentations, this is known as window dressing. 

    It can be detected by carefully reviewing a company’s financial statements and looking for suspicious trades near the end of a quarter or fiscal year.

    How does Window Dressing in Accounting Work?

    Window dressing is described as “buying or selling portfolio securities shortly before the date as of which a fund’s holdings are publicly disclosed, in order to convey an impression that the manager has been investing in companies that have had exceptional performance during the reporting period” in relation to mutual funds by the Securities and Exchange Commission (SEC). 

    The SEC issued a rule requiring mutual fund companies to report their portfolio holdings at the end of each quarter in 2004 in response to numerous concerns about window dressing. This requirement allows investors to examine mutual fund holdings more thoroughly and frequently, which helps them better understand the performance of their investments. 

    But window dressing is still a possibility. For instance, funds may occasionally sell a stock that underperformed over the previous season in order to exclude it from their fourth-quarter report, only to repurchase it in the first quarter of the following year. Due to the high trading costs associated with this type of window dressing, investment returns suffer. 

    Purpose of Window Dressing

    To hide a company’s true financial situation and accomplish the following goals, businesses use window dressing: 

    • To demonstrate that the business’s finances are stable– Businesses are always looking to demonstrate that they are growing and stable. Window dressing helps to reassure lenders about the company’s financial stability. As a result, the company attracts lenders and investors and keeps its employees. 
    • Attract More investors– When a company’s performance is demonstrated to be positive, existing investors will continue to make investments in the business, and prospective investors will be more likely to do the same. The company will have more money coming in with the addition of new investors. 
    • Stock price growth – A variety of factors affect how much companies’ stocks are worth. One of them is how well the business is currently doing financially. The value of the stock price rises if the company continues to report rising net operating profits.
    • Masking poor management-  Management mistakes can have a negative effect on the company’s finances. Financial statements that appear impressive in some ways suggest that the company is well-managed while also hiding the fact that it is on the verge of insolvency. 
    • Tax Avoidance: Tax avoidance can be done by showing poor financial results. Management has the power to alter the result in a way that benefits the company, whether that means profit or loss.

     

    Methods of Window Dressing

    Cash/Bank Balance-  Delaying payments to vendors in order to have a large cash/bank balance at the end of the reporting period. Selling off the outdated assets to increase the cash balance and demonstrate a strong liquidity position. Since it is an older asset with more accumulated depreciation, the fixed assets balance will not change significantly at the same time.

    Inventory valuation- The amount of inventories recorded will have a direct impact on the company’s profits. Making adjustments in the value of inventories in order to boost or drop profits. The profits may rise or fall, depending on the type of valuation used.

    Depreciation Method- Similar to the valuation of inventories, when a business switches from an accelerated depreciation method to a straight line depreciation method, the expenses drop and the profits increase.

    Provisions: The concept of prudence in accounting requires recording expenses and liabilities as soon as possible, but revenue only when it is realised or assured. Excess provisions can reduce profits and the corresponding tax payment.

    Examples of Window Dressing

    Window dressing is most likely found in investment brokers and mutual fund companies. Mutual fund managers frequently sell off underperforming stocks and other investments near the end of a period and reinvest the proceeds in high-performing stocks. This way, new investors can see the portfolio of high-performing stocks and decide whether or not to invest. Obviously, this is a short-term strategy for inexperienced investors. Any knowledgeable investor will examine portfolio trends over time to determine whether the fund managers are investing wisely.

    For instance:  A fund that invests solely in S&P 500 stocks has underperformed the index. Stocks P and Q outperformed the overall index but were underweight in the fund, whereas stocks R and S were overweight but underperformed the index. 

    Now, to make it appear as if the fund had always invested in stocks P and Q, the portfolio manager sells stocks R and S, replacing them with and overweighting stocks P and Q.

    Conclusion

    In accounting, window dressing is a short-term strategy used to make financial statements and portfolios appear better and more appealing than they actually are. It is done to deceive investors about the true performance. It is an unethical practice because it involves deception and is done for the benefit of management. Window dressing can give the appearance of higher returns, but these strategies frequently simply postpone losses that will eventually occur later.



  • Swing Trading – Swing Trading Strategies

    Swing Trading – Swing Trading Strategies

    Please read this blog to learn about swing trading and its strategies. We will talk about five swing trading techniques commonly used by stock traders to identify a stock’s entry and exit points.

    What is Swing Trading

    Swing trading is the trading strategy that one can use while trading assets. The idea is to hold positions for one or more days and profit from the “swings” or the price fluctuations. Unlike the day trading strategies, the stocks are held for more than one day but shorter than buy and hold strategies that may last for several years.

    In swing trading, the trader relies on market volatility and liquidity and tries to capture the short and medium-term gains. Swing traders make their profits from the anticipated price movements of their trade. This trading strategy generally uses technical analysis. One can also rely on financial analysts, who study an asset’s momentum signals (highs and lows) for 52 weeks and give their buying and selling recommendations.

    Here are some key points that one must understand before swing trading:

    • It involves opening fewer positions, which have a higher potential of either gain or loss, as the prices can fluctuate substantially. One needs to analyze the patterns and price trends of the asset before investing.
    • The swing trading generally works on risk/reward ratios based on target profit and stop loss. Based on price fluctuations and technical indicators, one can either make a profit or a loss.
    • Typically, a swing trader holds the position for more than one trading session but not longer than a few months. Swing trading is generally a low-time commitment. During a volatile market condition, the trade may occur during a single trading session. But this is a rare situation; generally, the trade lasts for several weeks or months. 

    Let us now talk about some commonly used Swing Trading Strategies:

    • Fibonacci retracements:

      Fibonacci numbers are nothing but a sequence of numbers wherein the sum of the previous two numbers is the third successive number. When we use swing trading, we usually draw Fibonacci retracements by simply drawing the trend line between two extreme points.  Hence, the horizontal lines are drawn to show where the support and the resistance are likely to take place.  A series of at least six such horizontal lines at the Fibonacci level is drawn, which intersect the trend line.  Each level depicts a percentage. The most used Fibonacci retracements levels are 61.8 percent and 38.2 percentage.  Other levels are usually 23.6 percent, 38.2 percent, 50 percent, 61.8 percent and 100 percent.  

      Support and resistance triggers: 

      Support and resistance are nothing but a price level which helps the traders take a call on whether to sell or buy the particular stock!

      Support is usually defined as a point(price level) where the stock is expected to pause its downtrend movement as there is a demand for that stock. Resistance, on the contrary, is a point(price level) where the stock is expected to pause its current upward movement. The price level is where the stock might start falling due to selling interest. 

      Traders usually track the support and resistance triggers as an entry or an exit point from the particular stock. 

      Channel trading:  

      Channel trading is a strategy wherein you draw parallel lines following the resistance and support levels. These parallel lines are also called channels. Traders often buy or sell the stocks taking the help of these channels. They usually sell the stocks at the upper resistance level and hold the lines when the stock moves between the parallel trend lines. In case the price goes out of a trading channel towards the upside, it means that the stock will continue its upward journey. The stocks usually move upwards, downwards, or sideways on the chart. Generally, the traders buy the stocks at the lower support lines. 

      The technique allows traders to easily compare short, medium, and long-term trends during large periods. 

      Simple moving average (SMA) It is one of the strategies that traders use to ignore daily price fluctuations. A simple moving average is generally calculated using the average of different ranges of prices by the number of periods during that stage. The common simple moving average levels are 50-bar, 100-bar and 200-bar. The short-term level helps determine the short-term trends, the 100-bar helps to use the intermediate trend, and the 200-bar helps determine the long-term trend. In short, the simple moving average technique will tell you whether the stock price will continue to grow or go downwards.
    • MACD Crossover

      MACD, which stands for Moving Average Convergence Divergence, is an important swing trading strategy to identify the bullish and bearish trends in the market. Analysts use the MACD indicator to show the relationship between two moving averages, which is between slow-moving and fast-moving averages. Let’s look at the formula for calculating MACD. Analysts substrate the 26-bar levels from the 12-bar levels. The difference between the two levels is then depicted as a MACD line on a histogram.

       

    Let us now discuss some advantages and disadvantages of Swing Trading Strategies:

    • Compared to day trading, swing trading can see lesser but more significant profits as the position is open for a longer duration.
    • Since the trader stays longer in the market, price fluctuations can be pretty drastic. This means greater chances of loss and gain. If the market moves in the predicted direction, the trader makes a profit, or they’ll make a loss.
    • A swing trader can have a diverse portfolio of stocks, commodities, bonds, futures, currencies, and cryptocurrencies.

    Conclusion:

    Like any other trading strategy, swing trading strategies have associated risk factors, and one must carefully analyze the technical indicators before investing. One must set the parameters for market entry and exit. However, these swing trading strategies are relatively easier to understand and implement. 

  • SIP Mutual Funds: What is a Systematic Investment Plan (SIP)?

    SIP Mutual Funds: What is a Systematic Investment Plan (SIP)?

    There was a time when fixed income instruments such as bank FD were the popular choice for investing money. The intention was to gain stable returns with less risk. However, that was also when inflation and purchasing power were better than the present. If you invest in a bank FD today, it will take you years to double that amount. Also, when you achieve the target, it is possible that inflation may reduce its value. 

    So, what’s the solution here? Well, you can invest in the equity market to gain returns at par with inflation. We are not recommending you to avoid any investment instruments, including bank FDs, but it is always better to expand your investment portfolio and include equity. 

    If you are new to the investment or equity market, you can start with slow and steady steps by starting a SIP, also known as the Systematic Investment Plan in mutual funds. This article will cover everything you need to know about starting a SIP in a mutual fund and how it works. So, let’s get started! 

    What are SIP mutual funds?

    When you decide to invest in mutual funds, you have two options. The first one is to invest at once as a lump sum amount, i.e., Rs. 5,00,000 for 5 years in a mutual fund. The second option is to invest a fixed amount every month, i.e., Rs. 5,000 every month for 5 years. 

    The second option is called SIP. It is the most preferred way for most retail investors as they can save even a small amount and earn returns. In technical terms, a systematic investment plan is a fixed monthly investment in mutual funds which will earn you a return on the date of maturity. The maturity is decided by you; when you decide to withdraw money, it becomes your maturity date. 

    SIPs can also be done quarterly, semi-annually, or annually. However, monthly SIPs are the most popular option. You can start a SIP by investing a minimal amount of just Rs. 500 monthly. Also, you won’t have to always keep a constant watch on the market dynamics. 

    The main principle that you must remember about SIP mutual funds is that it is not a separate asset that you invest in but a medium to invest in mutual funds. 

    How do SIPs work?

    You can select a SIP from various investment platforms available online. It can be a direct investment–direct SIP or via a third party–a regular SIP. Let’s understand this example. You have a SIP of Rs. 2000 every month, which gets deducted on the 5th of every month. If you have set up an automatic transfer, it will directly get deducted from your linked bank account, or else you have to manually make the payment. 

    Once the payment is made and if it reaches the mutual fund house by 3:00 pm on the same day, you will be allotted units of mutual fund for that same day’s Net Asset Value (NAV). If it is after 3:00 pm, you will be allotted the next business day’s NAV.  Net Asset Value is the per unit price of a mutual fund. You can compare it with a per-share price. 

    When the NAV of a mutual fund increases, your SIP’s value increases, and that particular difference is your gain from the investment.

    How to invest in SIP mutual funds?

    The investment process for SIP mutual funds is as follows. 

    Decide the investment target

    Before investing in any financial instrument, you have to define a particular investment goal. It can be to save for a car or a house; anything you want. Once you decide that, conclude an amount you will be able to contribute monthly comfortably. 

    Decide on a mutual fund

    You need to find the mutual fund that matches your requirement in terms of goals, assets the fund invests in, the risk involved, charges associated with it, etc. There are N numbers and types of mutual funds in the market, from direct funds to hybrid and balanced funds. It is on you to select the one with the best suitability. Once you decide on a fund, also ponder upon the investment frequency you want to opt for. 

    Start investing in SIP

    This step is crucial as you have to actually put in money and start investing. You can open an account with your broker for investing in mutual funds or can also opt for an “execution only” investing platform. Before investing, look after the charges, fees, and exit load levied by mutual funds.

    What are the advantages of investing in SIPs

    • Your investment averages: SIPs let you invest during different time phases at regular intervals. So, the chances are that you may invest when the market is at pick and also when it is at an all-time low. This results in your NAV sums getting averaged over your investment tenure, reducing your overall cost. 
    • Secured investment: Your SIPs in mutual funds are managed by fund managers known for their credibility and the ability to make prudent investment decisions. They have years of experience and tools you don’t have, and thus it is a safer option to invest in the equity market than stocks. Investing in SIP mutual funds means delegating your portfolio management to an expert. 

    The benefit of compounding: Compounding is an important factor that helps your money grow in SIP mutual funds. Because you get interest income on all your monthly investments, it gets compounded and reaps you better returns. Also, you can start with a small amount to make it big.

    What is better: SIPs or lumpsum investment in mutual funds?

    A lump sum investment in mutual funds requires you to make a one-time deposit. While for SIPs, you make periodic investments in fixed amounts. There is no prudent choice here. It depends on the amount you have in hand to invest. If you have the money and can invest in one go, you should go for a lump sum. However, make sure that you enter the market in better condition, i.e., when it is low, to get more units at a fair price. 

    If you do not have the resources to make a huge investment, go for SIPs. This won’t require you to study the market or keep track of it because the fund manager will do that on your behalf. The only important thing here is to invest in whatever manner you can. 

    Conclusion

    Mutual funds are subject to market risk; thus, you need to have your own due diligence before making an investment decision. Compared to other equity investments, SIPs are safer and provide reasonable returns for you to keep your money afloat. You can easily invest a small amount for a long period and enjoy the upside with time. It is like investing the turtle in the race of turtle vs. rabbit. 

  • Topic: Factors to consider before investing in an Index fund.

    Topic: Factors to consider before investing in an Index fund.

    Keywords: index funds, best index funds for retirement, low-cost index funds

    Content Summary

    Index funds are portfolio investments that track a market as a whole in order to replicate the performance of the index. Often, index funds are passively managed portfolios in which the investment strategy is to replicate the holdings and return of a particular index. These funds are made up of other financial instruments and are often called index mutual funds. This post will help you understand what index funds are, the types of index funds, factors to consider when investing in an index fund, and who should invest in the index market.

    H1: What are Index funds

    Index funds are mutual funds that try to replicate the performance of a relevant market index, such as the Standard & Poor’s 500. The concept is fairly simple: the fund buys and holds a large number of securities in the index. The goal is to buy low and sell high, diversifying away from individual stock risk. The fund is then run by a professional manager who invests according to the strategy set forth by the index provider, such as Standard & Poor’s. Index funds are an appealing way to invest because they are inexpensive and have no minimum investment threshold. Usually, it mimics the performance of the index with minimal management costs and fees. In addition, index funds are usually considered ideal portfolio holdings for retirement accounts, such as a 401k. In fact, the majority of retirement accounts offer index funds as part of their core investments. Therefore, the best index funds for retirement should be part of a well-diversified core portfolio.

    H2: Types of Index funds

    When it comes to index funds, there are a wide array of index funds available to investors. Most index funds are categorized by their performance, asset class, and economic style.

    The following are some of the most popular types of index funds:

    1. Market Capitalization Index funds – Investors with a long-term investment view can benefit from greater exposure to a broad basket of small and medium-sized companies. Based on the market capitalization of the company, investors can make an informed decision.
    2. Earnings index funds – These funds are based on the principle profit and earnings of the underlying index companies. The growth indexes and value indexes are based on certain indices that have been created over time to match the valuation and return of the companies they track. Growth indexes refers to the companies with better growth prospects and expected profits, while value indexes represent stocks that are trading at a lower cost when compared with earnings.
    3. Bond-based Index funds – Bond indexes focus on the combination of the short, intermediate, and long-term bond maturities in order to match the return potentials of the index. This healthy diversification creates a portfolio that is able to produce steady revenues that can be used to reduce the risk of loss.
    4. Broad market Index funds – Broad market indexes are mutual fund that includes investments that track a large index that represents the market as a whole. This type of index fund enables the investor to give themselves the opportunity to be exposed to the attractiveness and potential of a broad range of markets. In addition, with the smallest expenditure ratios, the asset sales in this index are low and highly tax-efficient.
    5. Sector-based Index funds – These funds develop portfolios that are diversified by the sector of the market. They are an ideal investment for investors with a focus on a specific industry or area of business. It is important to remember that these funds are going to be highly correlated in terms of their performance with the sector.

    However, the types of index funds and who should invest in them vary. Before one invests in an index fund, it is crucial to understand the benefits and risks involved.

    H3: Who should invest in an Index fund?

    Well, if the fund is going to be used as the core investment of one’s retirement plan, then index funds should be considered. Index funds are ideal for this type of portfolio because they provide investors with a relatively high level of diversification, and they do not require a great deal of time or effort to monitor performance. In fact, when it comes to retirement plans, it is important to have as few securities as possible under management in order to avoid unnecessary costs and taxes. Therefore, the ideal investment is a well-diversified index fund that is going to perform reliably during down markets. In addition, an investor may want to consider an index fund because they have the potential for a higher return with less risk than actively managed funds.

    H3: Factors to consider before investing in Index funds

    In addition to the above background information, there are a few factors to consider before investing in an index fund. It is essential to take the time to understand the type of index fund that will best suit your situation. Some of the important considerations include:

    1. Financial goals – Before an investor begins the process of selecting an index fund, it is critical to set some financial goals. These goals, once set, will give the investor a clear idea of what they are trying to achieve through investing. This allows the investor to be more realistic in achieving the goal and maintaining the risk within their risk threshold.
    2. Risk – Once goals are set, it is important to manage the risk associated with an investment. This will help the investor set a certain price point or amount of risk that they are willing to accept. The low-cost index funds are a good way to allow the investor to stay within their risk threshold.
    3. Returns – The returns that an index fund can offer are one of the most important factors for investors. A reasonable return should be expected for the type of index fund and its corresponding market index during certain time frames. This will help investors to have a better understanding of the return potential of an index fund.
    4. Tax – It is important for investors to have a clear idea of the tax implications of their investment choices. This will help them to make the best decision when it comes to their tax obligations.

    5. Expense Ratio – It is important for investors to understand how much an index fund will cost them in terms of fees and commissions. This ensures that they are getting the most cost-effective and tax-efficient portfolio.

    Conclusion

    To sum up, an index fund is an excellent way for investors to achieve long-term returns with little risk. The low and inexpensive fees associated with this type of mutual fund make them ideal for long-term investment strategies. In addition, simple strategies of indexing and investing make it possible for investors to find funds that offer both low costs and great return potential without having to engage in a high level of research. Index funds are an excellent way for investors to grow their capital and take advantage of the benefits of a diversified, low-cost portfolio.

    Reference

  • NPV vs IRR

    NPV vs IRR

    Read this blog to understand the difference between NPV i.e Net present value and IRR i.e Internal rate of return, before making investment decisions using discounted cash flow methods. 

    Introduction:

    Simply put NPV stands for Net Present Value and is a capital budgeting technique that will help you determine the profitability of your investment. However, the Internal Rate of Return or the IRR is a financial matric to determine the estimated return that one can make from an investment. 

    Even though both NPV and IRR are used to determine an investment’s profitability, there are some fundamental differences between the two. In this blog, we will understand these differences in detail and clear some common misconceptions. 

    Let us first understand the definition of NPV and IRR, we will later discuss their formula and will walk you through some examples for a better understanding of the topic.

    Net Present Value (NPV)

    Net present value (NPV) tells us the potential value of an investment by calculating the difference between the net present value of cash inflows and the net present value of cash outflows over a specific time period. In simple words, NPV helps an investor predict if they can achieve their target yield from a prospective investment opportunity, by calculating the total value of an investment opportunity by discounting all the future inflows and outflows of cash to the present day. 

    Some Important points to note:

    • NPV takes into consideration the time value of money and helps you calculate the present value of all cash inflows and outflows in the future.

    • If the NPV of a project is positive, it simply means a positive return on your investment, thereby making the prospective project more attractive for investors. However, if a project has a negative NPV, it needs to be avoided.

    • In order to calculate the NPV, one needs to accurately estimate the future cash flows and also come up with the correct discounted rate, as these are important to access the profitability of a project.

    Net Present Value Formula :

    npv_formula

     

    Where,

    Cn = Stands for cash flows during a period (n)

    r = Stands for the discounted rate of return

    n = Stands for the time period, and

    N = Stands for holding period

    Limitations of NPV Calculation:

    • While calculating the NPV the duration of a project is not taken into consideration. As a result, when you compare two different projects with different tenure, NPV results may be biased towards the project having a longer duration.
    • It is hard for an analyst to calculate the future cash flows and discount rates with 100% accuracy.
    • The factors like the opportunity cost of a project and the scale of investment are not taken into account for the calculation of NPV.

    Let us now discuss the definition and formula for IRR

    Internal Rate of Return (IRR) Definition

    IRR is a financial metric that helps one calculate the profitability of future investments. For the calculation of IRR, the NPV of an investment is set at “zero”. In simple words, IRR is the percentage of money earned on an investment, just like the interest that one receives on a fixed deposit in a bank. IRR gives the investor a tool to compare the investment opportunities based on the yields they can produce. 

    Here are some key points that one must remember when calculating IRR:

    • The calculation of IRR does not take into consideration external factors like inflation, financial risk, cost of capital or risk-free rate.
    • IRR calculates the annual growth that a business can generate. It is ideal for comparing the projects based on their returns over time.

    Let us now take a look at the IRR formula:

     

    Where, 

    CFn = Stands for net cash flow during time period n.

    IRR = Stands for internal rate of return

    N = Stands for time period

    While calculating IRR using this formula, NPV is always taken as zero, all the cash outflows (like the intial investment in the project) are negative, whereas all cash inflows are shown as positive.

    Limitations of IRR

    • While calculating IRR the cost of capital is not taken into consideration. Cost of capital is the major factor to determine the returns on a project.

    • When comparing two projects using IRR, the size and scope of the project are not taken into consideration, it only takes into account the inflows and outflows of money.

    • The biggest hurdle in IRR calculations is that it assumes the investment of future cash flows at the same IRR. In reality these numbers are quite high.

    Now that we have talked about NPV and IRR, let’s understand which one is better in NPV vs IRR, while making an investment decision?

    Well both these capital budgeting techniques are widely used by investors while making an investment decision. IRR is better if you are comparing two or more projects or investment opportunities where it is difficult to determine the accurate discounted rate. However, one must use NPV when the cash flows are constantly flipping between the positive and negative, or when multiple discount rates need to be taken into consideration.

    Conclusion:

    Sometimes the results of IRR and NPV can be drastically different from one another. In such cases the experts don’t rely only on the IRR and NPV calculations, rather they combine the results of IRR with scenario analysis, which shows different possible NPVs based on several different assumptions.

    The IRR and NPV analysis is also done in conjunction with the Weighted Average Cost Of Capital (WACC) and the required rate of return, for further analysis.

    Sometimes when the projects have different time lengths, there may be issues in IRR calculations. A project having a shorter duration may have a better IRR compared to a project that has a longer duration and gives steady returns. In such cases, one must consider the ROI metrics before coming to a conclusion.

  • Mutual Funds: Definition, Types, and Returns

    Mutual Funds: Definition, Types, and Returns

    “Mutual Fund investments are subject to market risks, read all scheme-related documents carefully before investing.”

    Sounds familiar, doesn’t it? You must have heard this slogan multiple times on various platforms.

    As per the Association of Mutual Funds in India (AMFI), the Indian Mutual Fund Industry’s Average Assets Under Management (AAUM) stood at ₹37.37 Lakh Crore as of May 2022. It has seen an unprecedented rise from ₹6.99 trillion as of May 31, 2012, over 5 times increase in the last 10 years.

    Amidst the hustle-bustle of life, people find mutual funds investment as the most reliable gateway to creating wealth and securing the future. Let us understand the mutual funds meaning, types, and related aspects:

    What is Mutual Fund?

    A mutual fund is a collective investment scheme. A professional fund manager is the custodian of the fund portfolio. They collect capital from many investors and carefully invest in market-related financial assets, such as equity, bonds, short-term debt, and other securities to generate returns.

    Each mutual fund has a specific investment aim, depending on the distinct needs. After a certain period, cumulative gain or loss on the investment is proportionally shared among the investors. 

    How Mutual Funds Work?

    A mutual fund is an asset repository, collecting money from like-minded investors. Fund managers manage this aggregate pool of money to earn overall capital gains for the investors.

    Investors → Fund Managers  → Invested Securities  → Returns.

    Let’s break down this framework in detail:

    • Many investors invest their capital, creating a pool of sizable assets.
    • The fund managers choose securities to invest in at their discretion, aiming for maximum returns.
    • Invested securities generate returns depending on the market conditions.
    • Accrued returns are distributed among the investors proportionately.

    Mutual Fund Pricing

    We know mutual funds are a pool of securities, and each unit represents the pool. A mutual fund unit represents a part of the entire fund’s portfolio value. Following this, we can find the price of mutual funds per unit. 

    For example, a mutual fund scheme comprises 60% of equity stock, 20% of corporate bonds, and 20% of government bonds. It means all investors are the holders of securities in that fund, based on their investment amount.

    The most popular method of calculating a mutual fund’s price is NAV (Net Asset Value). It represents the market value per share or unit of a mutual fund. 

    NAV = (Total assets of the fund – total liabilities)/ Number of outstanding shares.

    Evaluate the NAV of a fund before entering into a mutual scheme. It gives the real-time value of the fund.

    Types of Mutual Funds

    There are various mutual fund schemes meeting the specific needs of different investors. Based on the structure, assets allocation, and investment goals, here are the major types of mutual funds:

    Based on Principal Investments

    Asset allocation plays an important role in determining investment strategy. On the basis of asset classes, the schemes are classified as:

    Equity Mutual Funds

    These mutual funds principally invest in equity shares. As per SEBI, the equity fund scheme must invest 65% or more in equity-related stocks or other equity assets. Equity mutual funds possess high volatility in risk and returns.

    Debt Mutual Funds

    Debt mutual funds invest in fixed income-generating financial instruments such as government securities, corporate bonds, T-Bills, Commercial Papers, and related money market instruments. It has a fixed maturity period, stable yield, and low risks.

    Balanced/Hybrid Mutual Funds

    A hybrid fund is a diversified grade of investments in two or more asset classes to strike a perfect balance between risk and return. In essence, it is a blend of both equity and debt-oriented investments. 

    Based on Market Capitalisation

    Market capitalization refers to the total value of a company’s outstanding shares in the equity market. Depending on the market cap, mutual funds are divided into three broad categories:

    Large Cap Funds

    As per SEBI, large-cap funds invest a minimum of 80% of their assets in the equity of top 100 companies in terms of market capitalization. Such investments are stable, have reliable brand recognition, a sustainable business model, and a sound balance sheet.

    Mid-cap Funds

    A mid-cap mutual fund predominantly invests its assets in the equities of mid-cap companies. According to SEBI, these companies rank between 101 and 250 according to market capitalization. It must have a minimum of 65% of the total assets in mid-cap stocks. Mid-cap mutual fund returns are usually higher than large cap, but also involve significant risks.

    Small-cap Funds

    Small-cap schemes invest at least 80% of their assets in small companies with less than ₹5,000 crore market cap and rank 250 or below in terms of market capitalization. 

    Over 90% of the listed stocks come under this segment. Small-cap companies follow aggressive strategies and offer unexpected returns with huge volatility.

    Flexi Cap Funds

    Flexi cap mutual fund invests in all companies across different market capitalizations. It allows investors to diversify their investment portfolio and gives them the flexibility to invest in all driving sectors of the economy.

    Here, the fund manager has enhanced investment options, allocating the assets across large, mid-cap, and small-cap companies. A flexi cap fund mitigates market risk and volatility by increasing the circuit of investment.

    Based on Sectoral Funds

    Sectoral funds or thematic funds are equity funds where assets are invested in different sectors of an economy, such as:

    Technology

    Funds are invested primarily in IT and software companies, allowing investors to reap the benefits of the rising technology market. For example, TCS, Infosys, Wipro, HCL, etc.

    FMCG

    In this sectoral mutual fund, fund managers invest most of the assets in the FMCG (fast-moving consumer goods) equities. It is one of the leading sectors in India with top players like HUL, Dabur, Nestle, Godrej, ITC, etc.

    Banking

    These funds are invested solely in the banking sector, the backbone of the financial industry. The banking ecosystem comprises public, private, and cooperative banks. Some popular banks are HDFC, SBI, ICICI, AXIS, and PNB.

    Automobile

    India’s auto sector has witnessed massive growth in recent years. Auto mutual funds invest in this industry, including automobile manufacturers and auto ancillaries. Maruti Suzuki, Tata Motors, Hero MotoCorp, and Mahindra & Mahindra are some big players in the auto sector.

    Energy

    Energy mutual funds invest their assets in stocks engaged in the energy sector and natural resources, such as oil, natural gas, solar, wind, and associated branches. Reliance Industries, Adani Green Energy, Tata Power, JSW Energy, ONGC, and NTPC are some leading giants in the energy industry.

    In addition, there are more sectoral mutual funds investments, such as infrastructure, agriculture, aviation, telecommunication, travel & hospitality, etc. People invest in their desired sector depending on its growth and expected returns. Sectoral mutual funds offer complete freedom to diversify investments and maximize gains.

    Tax Saving Mutual Funds (ELSS)

    Equity Linked Saving Schemes (ELSS) is an open-ended equity investment scheme. Under this, the fund pool is invested in growth-oriented equities and equity-related instruments.

    The investors who invest in ELSS funds are eligible for tax deductions under Section 80C of the Income Tax Act, 1961. The investment is subject to a lock-in period of three years. It is a reliable option to save tax and generate wealth in the long term.

    Index Mutual Funds

    An index fund is a passive investment scheme that focuses on portfolio diversification and provides returns proportionate to a specific index. The fund manager tracks the composition and performance of the underlying market index and allocates assets accordingly. Some popular indexes are Nifty 50, Nasdaq, BSE Sensex, Nifty Bank, S&P 500, and Dow Jones.

    How to Invest in Mutual Funds?

    A mutual fund offers both safety and diversity. That’s why it is a popular investment option for both amateur and experienced investors.

    Nowadays, investing in a mutual fund is simple and hassle-free. You only need the required essential documents during the KYC (Know Your Customer) process as per SEBI directives, including PAN card, bank details, and address proof. 

    Post KYC completion, you can invest in various funds through stock market brokers, banks, mutual fund distributors, registered investment advisors, or other financial intermediaries. 

    Here are some important points that will help you choose the best mutual fund as per your need.

    Mode of Investment

    Mutual funds offer practical investing options to meet individuals’ specific needs. You can either invest a lump sum amount or in a systematic investment plan (SIP). In lump sum, investors deposit the total assets in one go in the mutual fund plan. Whereas in SIP, the investors invest a fixed sum periodically.

    Purpose of Investment

    Your investment goal will provide clarity and help you select a mutual fund scheme best suited for you. For instance, loan down payment, annual trips, higher education, retirement, etc. So, depending on your goal, you can choose either short, medium, or long-term mutual funds.

    Maturity Period

    The maturity cycle is dominant in deciding the kind of mutual funds investors want to pick. As per the investment horizon, some investors opt for equity-based funds for the long term, while others go for debt or hybrid funds. 

    Risk Assessment

    There is a popular saying, “successful investing is all about managing risk, not avoiding it.” Each mutual fund is evaluated on the risk parameter and has categories such as high-risk and low or medium-risk. For instance, equity-based mutual funds involve greater risk than debt or hybrid fund schemes. So, risk analysis of mutual funds helps investors to make prudent decisions.

    Return on Investment (ROI)

    “Smart investment, better returns” is a rule that every investor should follow to allocate their assets sensibly. A comprehensive assessment of mutual fund schemes is necessary before investing, such as evaluating past returns, total asset allocation, and future prospects. The ROI associated with mutual funds is different depending on the type.

    Besides, investors need to pay heed to some additional factors before investing, such as the mutual fund NAV, experience of fund managers, tax consideration, expense ratio, size of the allocated assets, etc. So, evaluate every aspect to create a healthy habit of investing.

    Pros and Cons of Mutual Funds

    Just like every coin has two sides, a mutual fund scheme has advantages as well as disadvantages. Let’s have a look:

    Advantages

    • Portfolio Diversification: Mutual funds diversify an investment portfolio, as funds are invested in various stocks, which reduces the overall risk and offers significant yield.
    • Convenient and Affordable: Investing in a mutual fund scheme is incredibly simple and affordable. You can start investing from ₹500 per month with no upper limit. Small investors can easily invest and don’t have to buy high-value equities.

    Professional Fund Management: Allocation of a pool of funds requires professional knowledge and years of experience. Industry experts manage your mutual funds, constantly monitoring your investment and aiming for maximum returns.

    Disadvantages

    • Fees & Expenses: Mutual funds come with operational costs, i.e., expense ratios. In addition, there is also a provision for exit load. It means investors must pay certain charges if they withdraw their funds before maturity.
    • Lock-in Period: Some schemes offer entry and exit as per convenience, while others have lock-in clauses or fixed periods for some years, such as ELSS and other tax-saving mutual funds. It means investors cannot exit or liquidate their invested funds in case of urgency. 
    • Variable Returns: All the schemes are based on market conditions, so there is no fixed or guaranteed return. Investors should do proper risk analysis before investing and increase the probability of maximum returns.

    The Bottom Line

    Starting an investment journey is a perfect way to use your hard-earned money to create wealth. A healthy investment habit will help you multiply your assets. The mutual fund industry is witnessing remarkable growth. Over the years, it has become a stable ecosystem, with multiple investor-friendly options.