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Investment DecisionsInvestment refers to the accumulation of some kind of asset in hopes of getting some future return from that. In other words, it is the use of money to generate income or capital growth.
Typically investment involves using financial resources to purchase a machine, building or other assets which in turn over a period of time will yield returns to an organization.
Investment decisions are made by investors and investment managers. These decisions are more on instinct than on information. While making an investment decision we should have well formulated and doable choices, consequences should be well understood and well explored and finally comparing the full array of costs and benefits of the proposed decisions giving an assurance of profitable results.
When to Buy
Does timing matter Are your returns from a mutual fund influenced by when you invest On the face of it, the answer is a resounding yes, but theres more to this issue. Its elementary maths that you will make money from an asset if you sell it at a price higher than you bought it all. And the lower the price you bought it, the higher the gains. An asset class like equity, whose prices rise and fall constantly, offers many such price points for entry.
Even if you buy at what seemingly low price, you still have to ride the upward move, which might take time playing itself out. Its actually difficult to time the market and to quantify what impact an event will have on prices. Its truly been said that time is a good ally to have by your side in investing matters.
The best time to invest in equity fund is when valuations are low, provided you are willing to wait and put up with phases of non performances. If the underlying fundamentals of the market and the companies are sound, sooner or later this strength will find its way into share prices and boost your schemes NAV.
The best time to invest in debt funds is when a cut in interest rates is around the corner. The inverse relation between interest rates and security prices pushes up NAV of debt fund.
Whom to Buy from
Distributors such as agent, banks, and stockbrokers are present in much greater number, which makes them the much preferred option amongst investors. Agents are one stop sellers of financial products and they operate from multiple locations. They score over mutual funds on convenience, choice and quality of service. The wide reach of banks has enabled them to emerge as major distributors of mutual funds. In terms of services, banks are a notch below agents because agents give personalized service but banks cant afford to do so. There are stock brokers also who combine the attributes of agents as well as banks. Certified financial planners are independent professionals trained to advise on all personal finance matters. They sell financial products and charge for their service. These days internet is also used for transactions of mutual funds. The usage of Internet is sure to increase with Net connectivity and investor acceptance. Fund houses like Franklin Templeton and Prudential ICICI let you buy and sell units of their schemes through their websites. You just need to have a net banking account with them. Few financial portals like myrisis.com and online trading portals like icicidirect.com also sell units of mutual funds. Closed end schemes are traded on some stock exchanges.
How to Choose a Fund
The first choice to make is which category of scheme to
invest in. each kind of scheme invests in a particular kind of securities, which determines how much risk it entails and how much returns you can expect. Ensure that these match your investment objective and risk profile. Once you know the kind of scheme you wish to invest in then ask for the intermediary to present you with a handful of options. Ask your agent for the offer document that tells you all that you need to know about the scheme. Also ask for fund fact sheet for the last performance and portfolio.
Before moving ahead ask yourself the following questions,
* Does the funds objective match yours
* Is it a good performer
* Does it have a good portfolio
* Does it have a diversified investment base
* Are its expenses within limits
* Is its load structure reasonable
Which Plan to Investment In
The next decision you need to make is when and in what form would you like to receive your share of the gains made by it. Your choice of plan should primarily by driven by your reasons for investing in a scheme. This mostly boils down to whether you want to receive your gains periodically or as a lump sum sometime down the line.
Tax should be your second consideration. Each plan has some implications, which change from time to time, often disturbing the position of parity. So two plans might offer identical benefits but one might be more tax-efficient than the other, which gives it an edge.
There are basically four investment plans on offer and you can easily switch across them, any time, mostly free of cost. Two of them Growth and Dividend are basic plans. The other two Dividend Reinvestment and systematic withdrawal plan are tax efficient variants of the two basic plans.
Growth Plans
In growth plan the gains made by your scheme remain with it, and are reinvested by it. The appreciation in value gets reflected in the form of a rising NAV
Dividend Plans
A dividend plan distributes periodically the gains made by it to unit holders. The gains are distributed in the form of dividends, which are declared, as a percentage of the unit per value.
Dividend Reinvestment Plans
A dividend reinvestment plan actually combines features of both the dividend plan and the growth plan. And for all practical purposes, in times when the tax incidence on growth plan is higher than the dividend plan, it works as a tax efficient alternative to the growth plan.
Systematic Withdrawal Plan
These are an alternative to dividend plans in times when dividends plans are more taxing than growth plans.
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