How to start Mutual Fund - Part 2

Today i would like to mention about few easy and cost effective method to start a Mutual Fund. Those who haven't read my previous post about the same topic can read in the following link. http://mytipstowardswealthy.blogspot.com/2010/09/how-to-start-mutual-fund-investment.html

1) As mentioned in Part 1 select the best Mutual Fund based on star rating from the site http://new.valueresearchonline.com/

How to get KYC Status VERIFIED ?

From January 1, 2011, it is mandatory to be KYC [Know Your Client] compliant to start new SIP/STP or do any additional purchase of mutual fund units as per the circular issued by SEBI. Here are the formalities to complete the KYC procedure.


1) Download the KYC form from the following link
http://www.cvlindia.com/downloads01.html

How to make 10 lakh in 5 years ?

This is in response to a question from one of the mytipstowardswealthy blog reader.

"How can I make 10 lakh in 5 years to use as a down payment for my new apartment. I can take calculated risk. I want to know how much i want to invest now to meet this goal ?"

I just try with the compound interest calculator. As per my analysis there are two methods to achieve this goal.
1) Invest Lump-sum
2) Invest via SIP

Growth Vs Divident Option

Most investors has the common confusion in selecting a proper option while starting Mutual Fund investment. Mainly there are three options
1. Growth
2. Dividend
3. Dividend Reinvestment.

What a small investor may do under this market condition ?

For the last one month markets are doing extremely well. The main reason is that more than $10 billion of foreign institutional investor [FII] money has come in the past seven months only. Also the corporate earning are growing at a compound annual rate of 25% in the next few years.

So my concern is:
1. What a small investor may do under this market condition ?

Best Mutual funds

I just made a search for Best Equity Diversified funds, for Large Cap, Mid Cap and Multi Cap in the following websites

1. http://www.valueresearchonline.com/
2. http://www.moneycontrol.com/
3. http://www.mutualfundsindia.com/

Here are the results i got.

Mutual Fund Types - Investment Parameters

Tthe mutual funds can be broadly classified on the basis of investment parameters. Each category of funds is backed by an investment philosophy, which is pre-defined in the objectives of the fund. The investor can align his own investment needs with the funds objective and invest accordingly.

Mutual Fund Types - Nature

Based on NATURE mutual fund are of 3 types

1. Equity fund
2. Debt funds
3. Balanced funds

Mutual Fund Types - Structure

Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position, risk tolerance and return expectations etc. thus mutual funds has Variety of flavors, Being a collection of many stocks, an investors can go for picking a mutual fund might not be easy. There are over hundreds of mutual funds scheme to choose from. It is easier to think of mutual funds in categories, mentioned below.

Based on the STRUCTURE mutual fund are of 2 types.
1. Open - Ended Schemes
2. Close - Ended Schemes

Mutual Fund Basics.

If you are new to mutual funds or already started mutual funds without understanding the basics this article is exclusively for you.

First of all lets get familiarize where mutual fund houses are investing our money. They are investing our money into bonds and stocks.

1. Bonds
Bonds are basically the money which the government or a company may lend. Here the the government or the company will return an interest on the borrowed money. Bonds are usually done for a predetermined duration of time. Bonds are considered to be the least riskiest and less return means of investment method on the market.

2. Stocks
Stocks represent shares of ownership in a company. Examples of public companies include TCS, Reliance, HDFC etc. Stocks are considered to be the most common owned investment traded on the market. Since they fluctuate a lot they used to give more return and also most riskiest means of investment on the market.

Securities and Exchange Board of India – SEBI.
SEBI is the regulatory authorities who formulate policies to protect the interest of investors in Mutual Funds. It notified regulations in 1993 (fully revised in 1996) and issues guidelines from time to time. It is these regulations that control mutual funds promoted by public or by private sector entities even including those promoted by foreign entities. SEBI used to approve the Asset Management Company (AMC) and they will manage the funds by making investments in bonds or stocks.

Association of Mutual Funds in India (AMFI)
The AMFI reassures the investors in units of mutual funds that the mutual funds function within the strict regulatory framework. Its objective is to increase public awareness of the mutual fund industry. AMFI is also engaged in promoting best industry practices and updating professional standards  in diverse areas such as transparency, valuation, disclosure  etc.

Mutual Fund Working
A mutual fund allows investors to put their money with a predetermined investment objective. Each mutual fund will have a fund manager who is responsible for investing the accumulated money into specific securities (bonds or stocks). When we invest in a mutual fund, we are buying units hence becomes a shareholder of the typical fund.

For long term goals [> 3 yers ] mutual funds are considered as one of the best available form of investment. They cost efficient and also easy to invest in. Thus by putting money in a mutual fund, investors can purchase bonds or stocks with much lower trading costs than direct investment into stock market.

We can say the the main attraction to mutual funds is diversification performed by an expert fund manager, by minimizing risk and maximizing returns. Here the we are not paying the price for taking the risk, but are getting all the benifits of diversification done by the fund manager.

Diversification
Diversification is simply spreading out your money across different types of investments. Proper diversification reduces risk up to certain extent. The most basic level of diversification is to buy multiple stocks rather than just one stock. Mutual funds are set up to buy many stocks. Beyond that, you can diversify even more by purchasing different kinds of stocks, then adding bonds, then international, and so on.

If we try to do this ourself,it may take weeks to buy all these investments. But if we purchase a few mutual funds or set SIPs it could be done in a few hours. Here mutual funds automatically diversify our money into a predetermined category of investments (i.e. - growth companies, emerging, large size ,mid size companies, low-grade corporate bonds etc).

How to Start Mutual Fund investment ?

Many of my friends have investments in ULIPs, Pension plans, Life insurance endowment plans, Chit funds, FDs etc. I have a lot of online friends too which are investing in Mutual Funds, Stocks, ETFs, etc. Why is this difference in approach towards investmets?

I think the difference is because there are many agents and even our own relatives who are forcing us to invest in ULIPS, Pension plans and endowment policies, because they are getting hectic commission. But no one is there to direct us towards mutual funds since SEBI banned the entry load for MFs. If you are a fresh investors in Indian Mutual fund, then this article is exclusively for you.

1. How to Select a Best Mutual Fund ?
The first step of buying a mutual fund is to select a good mutual fund scheme, which itself is a tedious job. If you are not able to take a calculated decision, take the help of a good financial advisor. For others my advice is to visit Valueresearchonline.com website. This website is considers as an unbiased mutual fund rating agency.

a.First choose open ended funds

b.Select equity diversified category
 
c.Select 3/5 year return.

Now we can get a list of the Top 10 funds. From that select the 4 or 5 star rated mutual funds. The good thing here is that these people have done all the hard work to rate the best performing mutual fund. They are rating the funds based on past performance, performance with benchmark, performance with peers, fund manager, advanced portfolio stats and many more. So we don’t have to analyze all the above factors.

2. How to Buy Mutual Funds DIRECT + Online ?
We need to buy and sell MFs through the fund houses like HDFC, Reliance, DSP BR, IDFC, Birla Sun life, BNP Pariba etc. They are called AMCs [Asset Management Company]. Just search the web via Google and find out the website of the selected fund house or AMC.

Now download the MF application forms like
a. SIP form
b. ECS form
c. Online PIN request form etc.

Fill up those forms completely. Don't leave any questions blank, fill up PAN number, Nominee, Bank account number, E-mail ID, Signatures, and even the Bank IFSC code, SIP start date, end date, office telephone numbers etc.

SIP Registration date or SIP starting date = form submitted date + 30 working days.

Also DONT forget to mention the Broker code as DIRECT on top of the SIP enrollment form. If any of your friends have a broker code, put that code so that they will get a trail commision.

Most fund hose have tie ups with CAMS or Karvy which are mutual fund distribution house. In that case you go to the nearest CAMS/Karvy branch and submit the

a)Duly filled Application forms.
 
b)Crossed check for the first installment
 
c)Self attested copy of PAN card

Other wise go to the fund house directly. They will immediately return back an acknowledgement receipt. Now with in few weeks you will get an acknowledgement from the fund house with an alloted folio number, and online PIN number.

Don't worry the above steps are just one time hard work with respect to a fund house. With the folio number and PIN number you can purchase / redeem any number of funds with the fund house just by the comfort from our home. Here the main advantage is that we dont have to pay any commision to any broker or Bank for the monthly SIPs and no need of any demat account.

3. How to Buy Mutual Funds Broker + Online?
I am not joking, till now I dont have an online demat account. I always use the offline method to get folio number and then enjoy the online benefits. But now a days, most of the investors have an online demat account and they can buy the mutual funds online. Here are the list of some of the online demat services.

a. Sharekhan,
b. Indiabulls,
c. ICICIDirect,
d. Kotak Securities,
e. SBI Online Demat,
f. Motilal Oswal

Here we can place the MF purchase order, start SIP, stop SIPs online. The major disadvantage here is that we have to pay commission for even monthly SIPs to the broker. Some brokers may avoid commission for high volume investments. So for small investors the offline method will be more suitable.

My Systematic Investment Plans (SIP)

I started my SIPs with HDFC, IDFC, Reliance.

I have selected 4 funds

1) HDFC Tax Saver – G ( Growth Option ) - Large Cap
2) HDFC Top 200 – G ( Growth Option ) - Large Cap
3) IDFC Premier Equity Plan A – G ( Growth Option) – Mid Cap
4) Reliance Regular Savings Fund – G ( Growth Option) – Multi Cap

All are Equity Diversified 4-star and 5-star rated funds as per http://new.valueresearchonline.com/.

First one is ELSS to save Tax using Section 80C. Both 1, 2 can be considered as Large Cap Funds. 3rd  one is  Mid Cap and 4th one is Multi cap. All are having good track record and are also well managed funds during the last 3/5 years.

Till now its not clear whether DTC will consider ELSS as EEE[exempt, exempt, exempt from taxes]. If government made it EET then I will consider investing into Tax Saver only till March 2011. Any way I am planning to keep HDFC Top 200 for a long time somewhere between 20 to 30 years.

I am using the Investment Ratio as follows
Large Cap 60%
Mid Cap 30%
Multi Cap 10%

So I am balance with reference to investment ratio wise as well as AMC wise. The large cap funds will provide stable growth while the Mid cap funds provides aggressive growth and the Multi cap provides a balanced growth. Altogether my portfolio is Large Cap shifted and hence can be considered as a stable portfolio.

I may be using 3rd and 4th funds for my medium term goals after 5 years and 1st and 2nd funds will be used for long term goals. Since I have 5-20 years time horizon equity will be the best method to invest my money.

So here are my first steps to attain financial freedom. I hope others who have similar objective can get an idea how to invest money from this page.

Happy Investing !!