Not a Fund Investor yet? Four mental hurdles to overcome!!

Mutual funds have come a long way in India. From being a single player industry for almost 23 years, it has 32 players today. Investors have a wide variety of schemes as well as fund houses to choose from. In fact, it will not be wrong to say that mutual funds are fast emerging as an ideal investment option for investors with different risk profile, investment objectives and time horizon. The only thing an investor needs to do is to pick a few funds of the shelf and achieve his investment objectives, both short-term as well as long-term.

Today, mutual fund industry manages assets worth Rs. 3,50,00 crore. If one were to compare it with the bank deposits, the industry has a long way to go. At the same time this gap signifies the potential that this investment vehicle has to grow going forward. As making money grow at a healthy real rate of returns i.e. returns minus inflation becoming increasing difficult through traditional instruments, more and more investors are likely to adopt the mutual fund route for investing in various asset classes.

Though mutual funds have proved their worth the world over, there are certain perceptions that have stopped investors from investing through this wonderful investment vehicle. Let us analyze some of the reasons due to which investors have failed to entrust their hard earned money to mutual funds and also discuss as to how these common mental hurdles can be overcome:

I don’t have the capacity to take risk of investing in mutual funds

Though over the years mutual funds have expanded their product line to suit just about any and every type of investors’ needs, a section of investing public still feels that mutual funds invest only in equities and hence are a risky proposition. The fact, however, is that mutual funds offer many options for conservative investors too. There are income funds, liquid funds, floating rate funds, capital protection funds, derivative funds and Fixed Maturity Plans (FMPs). While some of these are excellent options for parking short-term funds, others can be an important tool to practice asset allocation. Then, there are Monthly Income Plans for those who do not mind some exposure to equities to improve overall returns.

• Why FMPs are more lucrative than Bank FDs?

Therefore, it is wrong to think that mutual funds are meant only for those who can take risk. Besides, the tax efficiency of mutual funds makes them even more attractive option.

• How to optimize your tax using mutual funds?

Why should I invest in equity funds when I can earn better returns by investing directly in the stocks?

Yes, it is true that if one has the capability to select the right stocks and the ability to monitor and analyze the impact of various events on the growth of the companies in the portfolio, the returns can be better compared to a diversified vehicle like an equity fund. However, it is also true that if the stock selection is not good, one gets exposed to much higher risk compared to an equity fund.

It is a known fact that investing in equities requires skills both in terms of stock selection as well as monitoring the progress of the companies included in the portfolio. The stock prices move to anticipate events as well as reflect current events. Therefore, considerable research is carried out trying to forecast the performance of the economy, an industry and a particular company. For someone who is not familiar, it can be quite overwhelming to manage a portfolio of stocks.

That’s why a fund manager, who has access to in-depth research, is able to make rational decisions about which stock to include in the portfolio and which to sell. Besides, investing in a mutual fund rather than directly in stocks has many other advantages. Apart from being an easy method of investing, it is much easier to track performance as one has to track only one price i.e. NAV instead of several stock prices.

Besides, mutual funds offer a wide variety of equity funds ranging from diversified to specialty funds enabling investors with different risk profiles to choose the right ones and achieve their investment objectives. Even for aggressive and knowledgeable investors, there are plenty of options like sector funds, thematic funds, contrarian funds and exchange-traded funds. Therefore, mutual funds can play an important role even for hard-core equity investors as they allow them to balance risk and reward while designing their portfolios.

I don’t want to lose my peace of mind by moving money from the bank and /or bonds to mutual funds.

Investors often feel that it is much safer to invest in banks, insurance or bonds than in mutual funds. The fact, however, is that mutual fund industry is a very well regulated one and that should be a big comfort for investors. The regulations governing the industry are well defined and also SEBI is doing a great job of monitoring and ensuring that schemes are managed on a day-to-day basis in the interest of investors.

Besides, there are trustees who have the responsibility of safeguarding mutual fund assets on behalf of the unit holders. Their other main duty is to ensure that the trust is managed within the terms of the trust deed. Some of the other responsibilities of the trustees are appointment of an asset management company approved by the board, to float schemes for the MF and manage funds mobilized under the schemes. The trust deed clearly spells out the duties and the responsibilities of the trustees.

One of the major benefits of investing in mutual funds is the wealth of information that they provide to existing as well as prospective investors. Taken together, the various reports provide investors with vital information regarding the financial status and the manner in which the fund is managed. In fact, MF prospectus, annual reports and performance statistics are key sources of information most investors can use for selection and monitoring process. To a new investor, all this information may seem overwhelming. However, regulations governing the industry have standardized the reports. Once one knows where to look for information, the location will hold true for all the funds.

Remember, banks and insurance companies can go bankrupt, but by definition, mutual funds cannot.

I am not familiar with mutual funds

No doubt, most investors who have been investing in traditional instruments over the years are not very sure as to how a mutual fund functions. Mutual funds provide a simple way to access different asset classes in a very simple and easy manner. In fact, mutual funds are investor friendly as they provide the best in terms of variety, flexibility, diversification, liquidity as well as tax benefits. Besides, through MFs investors can gain access to investment opportunities that would otherwise be unavailable to them due to limited knowledge and resources. Another important point is that MFs themselves are accessible to investors of varying income levels. One can begin an investment programme with as little as Rs.50 or Rs. 100 in certain cases. However, a successful mutual fund investing requires time commitment. A serious investor needs an option that will last longer than a week, a month or a year.

All those investors who have stayed away from investing in this wonderful investment option called mutual funds; there is a need to reconsider their decision. Today, mutual funds have the potential to fit into everybody’s portfolio. So, go ahead and experience the world of mutual funds. If you select the right options, all your dreams can become a reality.

Click Here for the latest NAV's

How to Fund you Goals smartly??

You have saved and invested wisely towards your financial goals. As you move closer to a particular goal, you need money to fund the same and it is imperative that you have chalked out a strategy of withdrawal or payout.

You will have several options to do this and is largely dependent on the financial goal and whether the payouts are onetime or ongoing.

One Time Payments

1. Sell all investments and move the investments in either a Floating Rate Fund or a Fixed Maturity Plan. It is advisable to move your equity funds into a Fixed Maturity Plan or Floating Rate Funds atleast 12 months before you are to incur an expense towards a major goal. (eg. Funding your child’s education, making down payment for a property). Now this is not a standard and would depend on various factors like whether the market is overvalued or undervalued, is it in a corrective phase or an upward phase, and the prevailing situation at that point of time.
2. Sell Investments in a staggered manner depending on the market situation at that point of time. Suppose you need the payout over a period of 5 years for annual vacations. The amount that you require after 5-6 years (i.e. for the 4th or 5th Annual Vacation) can still be in equity and the amount that you need in the next 3 years can be withdrawn and kept in Floating Rate Funds. Here it will make more sense to start moving the investments gradually. This would again be based on your risk tolerance and your ability to sleep well during market upswings and downswings.

Ongoing Expenses (Monthly Income)

1. If the goal is monthly income on retirement, then besides pension, part time income and other guaranteed income from bonds, Senior Citizens Schemes, Post Office Savings, PPF Withdrawals and Monthly Income Plans, you should take out a certain portion of your equity investments based on your need on a systematic basis every month and leave the rest of the money invested in more conservative equity options such as Balanced Funds, Large Cap Stocks, Diversified Equity Large Cap Funds, High Dividend Yielding Stocks and Dividend Yield Funds or other hybrid options .

This can be achieved with a Systematic Withdrawal Plan. With a Systematic Withdrawal Plan you can withdraw a prefixed amount every month from your mutual fund investments. This amount can be a fixed amount every month like Rs 10000 or whatever capital appreciation has happened in that month or quarter (Generally capital appreciation options are offered every quarter). So for example if you invest Rs 15 lakh and wish to withdraw around Rs 10000 per month, you have 2 choices either withdraw a fixed amount of Rs 30000 (or say Rs. X) every quarter or whatever appreciation has happened in a quarter. The appreciation withdrawal option also acts as an automatic profit booking mechanism. If there is no appreciation in a quarter then there is no payout made to you. However if you compulsorily need a payout every month opt for the fixed option.

The tax implications for both options are different and will be based on whether the payout comes from your principal or from capital appreciation. If the payout comes from capital appreciation, then the payouts that come in the first 12 months will be subject to Short Term Capital Gains Tax of around 10% whereas the payouts that come from capital appreciation after 12 months are tax free as per current tax laws.

An important decision to be made here is the payout ratio so that there is enough money to meet your needs as well as grow the corpus. If you withdraw a huge amount from your payouts initially and if the returns are not high in the initial period or the market tanks, then your corpus will not last a long time. If your payout rate is 8% and your investments grow at 9% compounded, then you will never run out of money but if your payout ratio is high at around 15% and if you are earning around 8%, then your money will last only 10 years.

Consider an example of a Systematic Withdrawal Plan:

1. Initial Investment: Rs 15 lakh
2. Date of Investment: April 1, 2002
3. Amount of Withdrawal: Rs 10,000 (This person receives a pension and income from Bonds. He needs to supplement this income by another Rs 10000).
4. Date of First Payout: May 1, 2002
5. Total Amount Withdrawn till date: Rs 1,20,000 (per year) *5 years = Rs 6,00,000

The table below gives the present value of the investment for different schemes after withdrawal of a fixed amount every month.

Scheme	Amount	Amount	Present Value (Rs)	Yield
	Invested (Rs)	Withdrawn (Rs)		(%)
Reliance Growth (G)	1,500,000	600,000	14,645,832	61.41
Reliance Vision (G)	1,500,000	600,000	12,261,256	56.18
SBI Magnum Contra Fund (G)	1,500,000	600,000	11,233,343	53.83
SBI Magnum Global Fund (G)	1,500,000	600,000	10,601,850	52.20
HDFC Equity Fund (G)	1,500,000	600,000	8,063,147	44.74
HDFC Top 200 (G)	1,500,000	600,000	7,985,792	44.49
DSP ML Opportunities Fund (G)	1,500,000	600,000	8,275,409	45.43
Franklin India Bluechip (G)	1,500,000	600,000	6,728,373	40.06
Franklin India Prima Plus (G)	1,500,000	600,000	7,009,048	41.10

You will not get such returns from investments going forward but even if one were to assume a decent rate of return in line with corporate earnings and GDP growth, you will do well during your golden years.

What if the investment was done in April 2006 before the May Crash?
Even if you had done the lump sum investment in April 2006, and withdrawn Rs 10000 every month, your current value in these schemes would have been

Scheme	Amount	Amount	Present Value (Rs)	Yield
	Invested (Rs)	Withdrawn (Rs)		(%)
Franklin India Bluechip (G)	1,500,000	120,000	1,627,238	15.74
Franklin India Prima Plus (G)	1,500,000	120,000	1,742,659	23.02
HDFC Equity Fund (G)	1,500,000	120,000	1,646,297	16.95
HDFC Prudence Fund (G)	1,500,000	120,000	1,680,568	19.11
HDFC Top 200 (G)	1,500,000	120,000	1,607,055	14.47
Reliance Growth (G)	1,500,000	120,000	1,659,441	17.83
Reliance Vision (G)	1,500,000	120,000	1,632,983	16.15
SBI Magnum Global Fund (G)	1,500,000	120,000	1,693,975	19.95
SBI Magnum Contra Fund (G)	1,500,000	120,000	1,668,583	18.35

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To Know more:http://moneycontrol.com/easymf

New to Mutual Funds?? Read This..

First time investors in Mutual Funds act in the face of imperfect information and often get overwhelmed by uncertainties characterizing the investment situation. But there’s more to Mutual Fund investing than market timing.

First things first..

The first thing an aspiring unit holder must do is to establish what type of portfolio he wants to build. In other words, to decide the right asset allocation. Asset allocation is a method that determines how you invest your money in different investments with the proper mix of various asset classes. Remember, the type or class of security you own i.e. equity, debt or money market, is much more important than the particular security itself.

The popular thumb rule for asset allocation says that whatever the investor’s age, he should keep that percentage of his portfolio in debt instruments. For example, if an investor is 25, he should have 25% of his investments in debt instruments and the rest in equity. However, in reality, different circumstances and financial position for each individual may require different allocation. Portfolio variable is another factor that one needs to understand to practice asset allocation. These are age, occupation, number of dependants in the family. Usually the younger you are, the more riskier the investments you can hold for getting superior returns.

How to pick the right fund/s?

Next, focus on selecting the right fund/s. The key is to select the fund/s based on their investment philosophy and consistency in terms of returns. To ensure you are selecting the right type of funds that are appropriate for your needs, consider following:

• Determine what your financial goals are.
• Are you investing for retirement? A child’s education? Or for current income?
• Consider your time frame. Do you need money in three months time or three years? The longer your time horizon, the more risk you may be able to take.
• How do you feel about risk? Are you in a position to tolerate the ups and downs of the stock market for the possibility of higher returns? It is necessary to know your own risk tolerance. It can be a guide for choosing the right schemes. Remember, regardless of the potential returns, if you are not comfortable with a particular asset class, you should consider other options.

Fund Candy Diversified equity funds Index funds Opportunity funds Mid-cap funds Equity-linked savings schemes Sector funds like Auto, Health Care, FMCG, IT, Banking etc. Balanced funds for those who are not comfortable with 100% exposure to equity If selected properly, these equity and equity-oriented funds have the potential to deliver returns that could be far superior to other asset classes.

Remember, all these factors will have a direct impact on the fund you choose and the return that you can expect to get. If you are a long-term investor with some appetite for risk and are looking for returns to beat inflation, equity funds are your best bet. MFs offer a variety of equity and equity-oriented schemes (See table ‘Fund Candy’). For a beginner, it makes sense to begin with a diversified fund and gradually have some exposure to sector and specialty funds.

Investment Strategies that will help you make the best of your MF Investment and Traps that you should avoid.

Keeping track..
Filling up an application form and writing out a cheque is not the end of the story. It is equally important to keep an eye on how your investments are performing. While having a qualified and professional advisor helps both in terms of making the right decision as well as measuring performance, it makes sense to know how to do yourself with a little help from these sources:

Fact sheets and Newsletters:
MFs publish monthly fact sheets and quarterly newsletters that contain portfolio information, a report from the fund manager and performance statistics on the schemes managed by it.

Websites:
MF web sites provide performance statistics, daily NAVs, fund fact sheets, quarterly newsletters and press clippings etc. Besides, the Association of Mutual funds in India, AMFI, website, contains daily and historical NAVs, and other scheme.

Newspapers:
Newspapers have pages reporting the net asset values and the sales and redemption prices of MF schemes besides other analysis and reports.

Remember, it is very important for you to be well informed. To achieve this, you need to spend a little time to understand and analyze the information to enhance the chances of success. Even if you spend one percent of the time that you spend on earning money, it’ll be a good beginning. Above all, take help of a professional advisor to select the right fund as well as the right mix of one time investment, SIP and the STP.

To know more, visit:http://moneycontrol.com/easymf

Basics of Mutual Funds

Net Asset Value or NAV

NAV is the total asset value (net of expenses) per unit of the fund and is calculated by the AMC at the end of every business day.

How is NAV calculated?

The value of all the securities in the portfolio in calculated daily. From this, all expenses are deducted and the resultant value divided by the number of units in the fund is the fund’s NAV.

Expense Ratio

AMCs charge an annual fee, or expense ratio that covers administrative expenses, salaries, advertising expenses, brokerage fee, etc. A 1.5% expense ratio means the AMC charges Rs1.50 for every Rs100 in assets under management. A fund's expense ratio is typically to the size of the funds under management and not to the returns earned. Normally, the costs of running a fund grow slower than the growth in the fund size - so, the more assets in the fund, the lower should be its expense ratio.

Load

Some AMCs have sales charges, or loads, on their funds (entry load and/or exit load) to compensate for distribution costs. Funds that can be purchased without a sales charge are called no-load funds.

Open- and Close-Ended Funds

1) Open-ended Funds At any time during the scheme period, investors can enter and exit the fund scheme (by buying/ selling fund units) at its NAV (net of any load charge). Increasingly, AMCs are issuing mostly open-ended funds. 2) Close-Ended Funds Redemption can take place only after the period of the scheme is over. However, close-ended funds are listed on the stock exchanges and investors can buy/ sell units in the secondary market (there is no load).

Important documents

Two key documents that highlight the fund's strategy and performance are 1) the prospectus (legal document) and the shareholder reports (normally quarterly). To know more,visit:http://moneycontrol.com/easymf

7 Good reasons to invest in SIP's

Fact No. 1: Over a long term horizon, equity investments have given returns which far exceed those from the debt based instruments. They are probably the only investment option, which can build large wealth. Fact No. 2: In short term, equities exhibit very sharp volatilities, which many of us find difficult to stomach. Fact No. 3: Equities carry lot of risk even to the extent of loosing ones entire corpus. Fact No. 4: Investment in equities require one to be in constant touch with the market. Fact No. 5: Equity investment requires a lot of research. Fact No. 6: Buying good scrips require one to invest fairly large amounts.

Systematic Investing in a Mutual Fund is the answer to preventing the pitfalls of equity investment and still enjoying the high returns. And it makes all the more sense today when the stock markets are booming. (Also Read - 5 corners of a sound Investing Strategy)

1. It’s an expert’s field – Let’s leave it to them
Management of the fund by the professionals or experts is one of the key advantages of investing through a mutual fund. They regularly carry out extensive research - on the company, the industry and the economy – thus ensuring informed investment. Secondly, they regularly track the market. Thus for many of us who do not have the desired expertise and are too busy with our vocation to devote sufficient time and effort to investing in equity, mutual funds offer an attractive alternative. (Read more - The Investors biggest Dilemma)

2. Putting eggs in different baskets
Another advantage of investing through mutual funds is that even with small amounts we are able to enjoy the benefits of diversification. Huge amounts would be required for an individual to achieve the desired diversification, which would not be possible for many of us. Diversification reduces the overall impact on the returns from a portfolio, on account of a loss in a particular company/sector.

3. It’s all transparent & well regulated
The Mutual Fund industry is well regulated both by SEBI and AMFI. They have, over the years, introduced regulations, which ensure smooth and transparent functioning of the mutual funds industry. This makes it safer and convenient for investors to invest through the mutual funds. (Check out - Foolproof strategies to maximize your profits)

4. Market timing becomes irrelevant
One of the biggest difficulties in equity investing is WHEN to invest, apart from the other big question WHERE to invest. While, investing in a mutual fund solves the issue of ‘where’ to invest, SIP helps us to overcome the problem of ‘when’. SIP is a disciplined investing irrespective of the state of the market. It thus makes the market timing totally irrelevant. And today when the markets are high, it may not be prudent to commit large sums at one go. With the next 2-3 years looking good from Indian Economy point of view, one can expect handsome returns thru’ regular investing.

5. Does not strain our day-to-day finances
Mutual Funds allow us to invest very small amounts (Rs 500 – Rs 1000) in SIP, as against larger one-time investment required, if we were to buy directly from the market. This makes investing easier as it does not strain our monthly finances. It, therefore, becomes an ideal investment option for a small-time investor, who would otherwise not be able to enjoy the benefits of investing in the equity market.

6. Reduces the average cost
In SIP we are investing a fixed amount regularly. Therefore, we end up buying more number of units when the markets are down and NAV is low and less number of units when the markets are up and the NAV is high. This is called rupee-cost averaging. Generally, we would stay away from buying when the markets are down. We generally tend to invest when the markets are rising. SIP works as a good discipline as it forces us to buy even when the markets are low, which actually is the best time to buy. (Read more - Invest wisely and get rich with equity MFs)

7. Helps to fulfill our dreams
The investments we make are ultimately for some objectives such as to buy a house, children’s education, marriage etc. And many of them require a huge one-time investment. As it would usually not be possible raise such large amounts at short notice, we need to build the corpus over a longer period of time, through small but regular investments. This is what SIP is all about. Small investments, over a period of time, result in large wealth and help fulfill our dreams & aspirations.

Small investments at lesser risks? Go the SIP way

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You can invest in mutual fund with a minimum of Rs 50. ICCI Pru has recently launched a micro SIP with a minimum investment of Rs 50. Reliance SIP starts from an investment of Rs 100. While there is no lock-in period in many schemes, lock-in period for Reliance micro is five years. Generally, the entry loads for the SIPs are 2.25 per cent, a three per cent exit load is charged if you exit from the ICICI Prudential micro SIP scheme before five years. SIP is good for those who can't invest big amounts. If you look at the returns given by the top five equity diversified funds in the past two years, returns from SIP have been 5 per cent to 11 per cent lesser than returns from non-SIP or investment in a lump sum. SIP is a good way of investing small sums with minimum risk involved.

Excerpts from CNBC Awaaz�s exclusive interview with Dhirendra Kumar, CEO, Value Research Online:

Q. Does SIP give you same benefit through market ups and downs?

A. If you invest lump sum in a market, you generally have a harrowing time managing anxiety levels when the market shakes. If you invest methodically and invest over a long time on a regular basis, you can start with a small amount. It also helps investor remain focused.

Q. Should one go for existing or new fund when one invests in mutual fund through SIP? While only existing funds allowed SIP earlier, new funds have now started giving the option of SIP from start.

A. My advice is to go for existing funds, which have been tried and tested. Although track record doesn't mean much to investors, performance of the fund can be taken into account while choosing a fund. To make money from equity, you choose a good fund. As new fund doesn't guarantee good performance, it is better you go for an old fund. At least it is easy to know track record of an old fund.

Q. Subscription limit of SIPs has been brought down from a minimum of Rs 500 to Rs 50 per month by the mutual fund companies. What kind of value should an investor expect when he or she invests a small amount?

A. One should not look at it in terms of value. In fact, SIP has democratised mutual funds. Earlier not everybody could afford to invest in mutual funds. Now everyone can participate in the market. When you invest in micro SIP, your focus will not be on daily returns and you are likely to get good returns in four to five years. Until now the mutual funds have been viewed as an opportunistic investment, but with the launch of micro SIP, investors will see it as a medium of small saving also.

Q. Should one invest in SIP when the Sensex is moving up?

A. SIP is for those who get bothered with the share market ups and downs and therefore are not able to start investment in the market. I suggest don't bother about market ups and downs and invest regularly and select a good fund.

Q. What is the impact on the SIP returns of the falling NAVs of the mutual funds when the market goes down? Is the magnitude of the impact on the SIPs same as that on the lump sum investment in mutual funds?

A. When the market falls, the NAV or value of the mutual fund also comes down. But for SIP investor, it is a good medium of anxiety management. For regular investors, it is good in the sense that they can buy at lower rates when the market is at a low. However, it is not so good if you have to withdraw money in next two months and the market falls just around that time. So it is important to plan your withdrawals.

Q. What is the difference between micro SIPs and SIPs?

A. If one withdraws money from SIPs of small amounts (micro SIPs), one has to pay an exit load of 3 to 4 per cent. I think it is good in a way because it prevents investors from withdrawing money early and therefore from losing on the benefits. However, there is no compromise on liquidity as you can withdraw money at any time. So on paying an exit load, one can always withdraw money from the SIP. I don't think it is a big deterrent.

Q. When does the SIP become free from capital gains tax? Is there no capital gains tax in mutual funds after one year?

A. Same tax laws that apply to equity investments, apply here too. Unless your investment is one-year old, you have to pay 10% capital gains tax on the investment. So you have to give tax on the gains from new investments and not on the old ones.

In order to free your investment in one-year SIP from capital gains tax, one has to give it two years so that the last installment of the investment also becomes tax-free. In nutshell, all units from investment in SIPs will become free from capital gains tax after one year of investment. So your entire money will become tax free if you stay in it for two years.

Q. I want to invest Rs 2,000 in mutual funds through SIP. Where should I invest keeping in mind my target of Rs 25 lakh for a 20-year period?

A. Don't get bogged down by ups and downs of the market and stay focused. Review all your investments after one or two years. HDFC's equity, Franklin's Prima Plus, Reliance Vision fund, Prudential Power Fund are among good equity funds. If you have to invest for ten years at the end of which you require 25 lakh, put in at least Rs 3,000 to Rs 5,000 through SIP. However, there is no guarantee that you will get this amount.

Q. I want to invest Rs 5,000 in a mutual fund but prefer to have more than one fund instead of putting all the money in a single fund. Is it a good decision or should I diversify amongst many funds?

A. Though it is a good decision to diversify, don't go for sectoral and thematic funds. Choose two good diversified equity funds and put in 2,000 each and third could be a good mid cap fund in which you can invest Rs 1,000. Don't invest in one fund family.

As far as achieving adequate diversification is concerned, choose three to five funds and not beyond it. here you can also benefit from the expertise of different fund managers.

Q. I want to invest in Magnum Tax saver for three years through SIP. At the time of redemption, can I withdraw money every month like in case of SIP or I have to withdraw the entire amount after three year? And when should one sell mutual fund?

A. There should be only two reasons for selling a mutual fund -- either when you need money or when you are not happy with its performance. However, don't sell a fund if it has under performed for two to three months. However, you can regularly sell it.

Magnum Tax saver is a good fund, an aggressive one. It has performed very well in the past 3-4 years. If you invest regularly and withdraw the money once it is three year old.

Q. What should be the ideal time for starting an SIP?

A. It depends on the kind of time horizon you have. But you should stay invested for at least three years and further keep it for one to two years in order to take its full benefit. You may not experience full market cycle in a time less than that.

Dreaming big to become rich

There is a proverb which says,If you want your dreams to come true, don't sleep. In reality most of us dream big and then go to sleep. We dream of creating wealth, we dream of luxuries in life we want lots of riches but unfortunately we do not stay awake to plan for those dreams and make them reality we just daydream about them. There is difference between dreaming and daydreaming. Someone who dreams has desires, aspirations, ambitions etc. On the other hand a daydreamer only builds castles in the air.

First step to realize any dream is to crystallize it. It is not good enough to say I want luxury car. It is important to be specific I need luxury car worth Rs 10 lakh after 6 years. Similarly, do not have it in the back of your mind to save money for your son's marriage. List it down. Clearly state how much funds you wish to spend on your son's marriage. Also note down approximately after how many years he is likely to get married. In case of marriage it is difficult to gauge exact age when marriage will take place but we can always have a ballpark number of years after which marriage will take place.

Having crystallized dreams next step is to create reserve for those other events that can upset our plans to reach those dreams. Events like job loss, temporary migration due to natural catastrophe etc. Suppose if we have not made provision for these events and if they occur then they will deplete funds, which has been created for our dreams. Job loss, temporary migration etc. are events for which no formal insurance is available. Therefore set aside contingency reserve.

After creating contingency reserve, we should evaluate our existing insurance. First verify whether we have sufficient health insurance because if we have ignored health insurance for family while saving for our long-term goal and suddenly someone from the family falls ill, we will erode our savings, which was initially being set for our dreams. After obtaining sufficient health insurance we should also focus on disability and life insurance. Lastly, protect our property our house, car, jewelry etc. by buying relevant insurance.

After we have ensured that there are sufficient provisions to withstand perils that may cross us, while we are moving ahead in our journey to reach our dreams, we should move to savings and investing.

Do you know the biggest hurdle, which stops us from saving sufficient amount for our dreams? OURSELVES. Our habits of procrastinating and spending are the biggest barricades in making us reach our goals.

Sooner we start walking on our path to reach dream destination, by regularly saving and investing, faster we will reach. We should not procrastinate. Also stay focused on to our dreams. If we lose focus, we will start utilizing our hard earned money into other unnecessary expenses and not realize our dreams.

Don't just dream about future, plan for it. Remember famous saying .If you fail to plan, you plan to fail.

Mutual Fund Advantages

Why should I consider Investing in Mutual Funds?

	Mutual funds hire full-time, high-level investment professionals. Funds can afford to do so as they manage large pools of money. The managers have real-time access to crucial market information and are able to execute trades on the largest and most cost-effective scale.
	Mutual funds invest in a broad range of securities. This limits investment risk by reducing the effect of a possible decline in the value of any one security.
	A mutual fund let's you participate in a diversified portfolio for as little as Rs.5,000/-, and sometimes less. And with a no-load fund, you pay little or no sales charges to own them.
	You own just one security rather than many; yet enjoy the benefits of a diversified portfolio and a wide range of services. Fund managers decide what securities to trade, collect the interest payments and see that your dividends on portfolio securities are received and your rights exercised. It also uses the services of a high quality custodian and registrar in order to make sure that your convenience remains at the top of our mind.
	In open-ended schemes, you can get your money back promptly at net asset value related prices from the mutual fund itself.
	You get regular information on the value of your investment in addition to disclosure on the specific investments made by the mutual fund scheme.

Tax saving through Mutual Funds

Mutual Funds by their very nature are not tax saving instruments but investment products that may offer tax concessions. But the question is whether these should be looked at as tax saving instruments?

Moneycontrol tells you how to kill two birds with one stone - how to optimize tax while getting the best from mutual funds.

Equity Linked Savings Schemes (ELSS) Are Strong Favorites:

ELSS schemes give twice the benefit as compared with diversified equity schemes. They give you tax sops on investments and are also exempt from long term capital gains tax. (Also read - How does an MF investor stand to gain now?)

These are special equity funds, which have to invest at least 80% of their corpus in equity, and investments are locked in for a period of 3 years. Investments can get you benefits under Section 80 C i.e. investments of upto Rs 1 lakh in such schemes can be reduced from your gross income.

Hemant Rustagi, CEO, Wiseinvest Advisors believes that ELSS is the best example of an investment option that provides you a very simple way of investing in stock market and save taxes while doing so. “Being equity oriented schemes, ELSS have the potential to provide better returns than most of the options under section 80C. Also, as per the current tax laws, an ELSS investor is not only entitled to earn tax free dividend but also the long term capital gains are not taxable”, he adds.

	Absolute Returns
ELSS	3 Year	5 Year	Assets (Rs in cr)
Magnum Tax Gain Scheme	836.6%	603.1%	464.02
HDFC Long Term Advantage	530.0%	805.9%	348.39
HDFC Tax Saver	562.7%	692.9%	323.28
Pru ICICI Tax Plan	602.9%	671.2%	280.96
Franklin India Tax Shield	390.9%	424.4%	236.51

But should an investor go the whole nine yards and put in the entire permissible amount of 1 lakh in ELSS? Probably not!

Ranjeet Mudholkar, Head - Certified Financial Planners Board, cautions that Sec 80 C covers your principal on housing loan, PF, pension plan, life premiums, so only what is left after that can give you a benefit if invested in ELSS.

All Smiles From Equity Funds:

Apart from ELSS schemes, diversified equity schemes are a good investment considering that capital gains in equity funds below one year are taxed at a rate of 10% and over a year are tax-free. This option can be best excercised using a Growth Plan offered by mutual funds. The primary objective of a Growth Plan is to provide investors long-term growth of capital. (Also read - Mutual Funds: Your best personal Portfolio Manager)

Dividend paid in Dividend Plans is tax free, and no distribution tax is deducted. However, every time we buy or sell equity shares a Securities Transaction Tax, STT, of 0.25% is paid and further when you redeem your investment, again STT is deducted from your redemption price.

So what strategy will help to reduce the burden of STT to the minimum possible extent?

Investment expert Krishnamurthy Vijayan advises to choose the dividend option, while it remains tax-free. “Though both decisions are by and large tax-neutral, your STT will go down if your profits have already been taken out by you in the form of dividend”, he adds.

	Absolute Returns
Equity Diversified Scheme	3 Year	5 Year	Assets (Rs in cr)
HDFC Equity Fund	453.50%	645.50%	2,657.90
Reliance Growth Fund	664.50%	1010.60%	2,496.41
Franklin India Prima Fund	578.10%	933.60%	2,418.55
Franklin India Bluechip	384.30%	428.70%	2,107.56
Reliance Vision Fund	461.80%	931.40%	1,694.92

Debt Funds Can Benefit From Indexation:

Debt funds have lost their sheen thanks to falling interest rates and paling tax sops when compared with equity schemes.

Any fund wherein the average holding in equity is 65% (as per Budget 2006) or below is treated as a debt fund. If you invest for less than 1 year in the growth option of a debt fund, you will have to pay Capital Gains Tax on your "profits" at the rate at which you pay income tax on your income. But, if you stay invested for over a year, you can either pay 10% tax on the profits or pay 20% after reducing the rate of inflation (indexation benefit). So if you are invested for three or four years, your tax may become much, much lower than 10%.

Nevertheless for the risk averse, there are ways to reduce the tax burden on returns.

Investors can also benefit from double indexation benefit (when you invest late in one financial year say on March 28, 2005, and redeem early in the next financial year say on April 2, 2006, you use the index of both Financial Year ending March 2006 and March 2007 to get this benefit for as little as 366 days) provided the two financial years' index adds up to more than 10%. (Also read - How to ride the rising interest rate tide?)

In the dividend option, dividend is tax free in your hands. But the dividend distribution tax deducted at source also comes out of your NAV. So you end up paying a tax of 10%. Further any increase in NAV over and above the dividend distributed, is taxed as in the case of the growth option.

Vijayan advises most debt fund investors who have a reasonable horizon to invest for at least one year or more, in any case and choose the growth option, since by and large this would prove most tax efficient for retail investors in the lower tax brackets.