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Category: Personal Finance (page 1 of 2)

AIFW Personal Finance Planning Steps

Here is Personal Finance Planning steps that would help you in managing your finances. These Personal Finance Planning Steps are from the Personal Finance Guru Ashal himself.

How many of you do agree that your personal finance life is cluttered, complex, aimless?
Answer in only one word.Either Yes or No.
Thanks to everyone who answered.
Congratulations to all who answered ‘NO’. You people are having control of your financial life. Congratulations to all, who answered ‘YES’. Thanks for accepting that you need to take actions to control your financial life.
Action plan. Here it goes. It’s not only for YES, even NO can fine tune their lives. Now here are steps to get control of your finances.

  1. Make a list of all your investment and assets and liabilities. Once it’s done, reply in your own YES.
  2. Step 1 was about knowing, where do you stand today in terms of your assets , investments and liabilities. Are you having a positive net worth or a negative net worth?
    Here goes, Step 2.
    If not listed already, list down all your bank accounts and decide to cut down your total no. of Bank accounts. Once identified, mark the activity as 2. Done.
  3. Here comes the step no. 3. Identify your emergency corpus is in place or you are working on it with a plan. Say having 6-9-12 months’ expenses equal money to be kept as Emergency corpus. Mark your step as 3.
  4. Here comes step no. 4. Write down all your future goals. Put them in different time frames say, 0-2Y, 3-5Y, 5-10Y, 10Y and beyond. Put value for each goal, assuming if this goal is yo be done in 2017. Compare the combined number of all goals with your net worth, calculated in step 1.
    Now inflate your numbers for actual consumption years like 2020, 22, 25, 30 & so on.
    Mark this activity as step 4.
  5. From the comparison of your net worth and current cost as well as future cost of goals, you are aware now that there is a shortfall of money. This short fall is to be filled by your Term Plan. Identify your term plan need and purchase adequate term plan, if not done already. Marked your step as 5.
  6. Here comes the next step. Step no. 6. Please identify your health insurance need and make sure your personal policy(ies) covering you, your family and parents is(are) in place. If not purchased already, sort out your insurer today and purchase. Mark it as 6.
  7. Here comes Step no. 7. Go back to your goals counted in step 3, calculate, how much do you need to invest on monthly basis for each individual goal, at different rates. Say 4% rate for a 0-2Y goal. 5-6% rate for 3-5Y goal. 6-8% rate for 5-10Y goals and 8-10% rate for 10+Y goals. Mark your step as 7.
  8. Now moving to Step 8. Based upon your goals, decide your asset allocation between Debt, Eq and cash. Select investment instruments accordingly. Mark your step as 8.
  9. Here is the step no. 9. Write down your Will. Mark it as 9. Done.

So here is list of steps you can take to plan your personal finances.

Headlamp types and Portfolio Types

Portfolio Types like Headlamp Types

(Image Credits: Team BHP)

The headlamps of vehicles come in 2 varieties, one is reflector types and other one is projector type. In reflector type the reflector reflects light falling on it, by light source. The light source is infront of it, and reflector arrangement is nothing but concave mirrors sitting behind the light source. They reflect light falling onto road, giving illumination for the rider. In case of projector beams they instead of reflecting, concentrate the beam onto road. Here instead of mirror a lens is used. The lens makes it important for the light source to be behind it. These 2 are major lighting techs we have.  Similar to these lighting types we do have portfolio types mimicking them. You can call these as diversified folio and other as concentrated folio.

Portfolio Types: Diversified Folio

Like the name suggests, In diversified type portfolio each stock you select has bearing on performance of the folio. Like reflectors which is nothing but set of mirrors aligned in particular fashion, each selected stock has its impact on folio.  In reflectors placement of mirrors has bearing on where light will fall. Similarly individual weights matters in diversified folio. The diversified folio places too much emphasis on selecting a stock and weight assigned to it. If one is able to get good set of stocks and able to assign proper amount of weights to it, he will be able to get decent gains from this folio. Failing it – will make a subject of mimic in office. Most investors normally fall in this category, and fail it too. And by far this is very difficult thing to do also as one needs to keep a close eye on weights of all the stocks.

Portfolio Types: Concentrated Folio

In this folio, you select the universe/market/index first. In a projection beam its the light source which is chosen first. Once the universe is chosen, you run a formula on it based on your criteria. In a projection beam where it is focused matters most. Similarly what kind of theme you are focusing matters most for the formula. If the lens is small, and shortlisting criteria is too tight, then lesser light is coming out, hence lesser stocks to invest is coming out. If lens is too large, then out coming light is spread too thinly. Similarly if formula is too lenient, it will throw out a large number of stocks, which wont have any meaningful concentration in portfolio performance.

A simple thumb rule to know folio type is, if you are able to define theme of a portfolio with ease, then the folio constructed by you is concentrated one. For example, if one is constructing folio on faster growth sectors of past 2 years then that list will not include HDFC Bank, as banking sector has lots of duds which bring its performance down compared to other 4 growth sectors namely FMCG, Auto, Pharma and IT (PS: Sectors referred here are lifted from Nifty Growth Sector Index, which is an index which focuses on fastest growing sectoral indices and picks top 4 sectors).


Here I have explained to you the 2 broad ways to select stocks. The thing with both is, they are mutually exclusive. If you are picking stocks individually then your folio is a diversified one, if you are using screener with a formula then your folio is a concentrated theme based folio. Failed diversified folio are called as Dhobi list folios. Failed concentrated folio ca be called as burnt theme. Hope you have done proper homework while investing otherwise you can share your investment experience on AIFW, serving as reminder of being a pig.

How to wolf down a laddoo and financial emergency.

Financial Emergency and Laddoo

(credits: Manjula’s Kitchen)

Financial Emergency is like a laddoo, if swallowed like a novice, its going to be your undoing. Thats why you normally get gyany responses like “bite only as much as you can chew” etc.. To get rid of half gyan you have accumulated through the years this post tells you “how to wolf down a laddoo”. The principles are applicable for financial emergencies too ūüėČ .

Steps to wolf down laddoo and financial emergency:

First, be aware of your limitations. If you dont have large mouth, then you cant wolf down a whole laddoo. Similarly if you dont have large emergency corpus, you cannot say “Its clobbering time!!!” to a financial emergency. There will be numerous thumb rules on this,  Some will be stating  3 month income, some may tell based on health insurance covers etc.. After all people have multiple thumbs then their thumb rules is expected to be plural. Hence the factors to follow will be. Bigger the corpus is better. Life experience determines the size of corpus.

Your life experience determines the size of your emergency corpus.

Second, Swallow it whole if you can. If the laddoo is smaller than than area available in your mouth, you can swallow it whole, if bigger then you need to chew a part of it. One of the caveat here is that a laddoo cannot occupy the whole space available in your mouth, that would not leave any room for it to be crushed. Same way go for a credit if financial emergency is bigger than your emergency corpus, otherwise swallow it whole. The thing to be noted here is that, minimum balance restrictions should not get broken in process of doing so.

Third, Crush it. Many people often get into josh and leave the laddoo as it is, and try swallowing. A whole laddoo is bigger than food pipe hence it does cause trouble if left as it is. So  go and crush it with impunity.  Similarly a financial emergency should be crushed into smaller chunks.

Finally, slowly digest it over the course of time. Once laddoo is crushed in mouth you can slowly relish it. Similarly after financial emergency is over, the corpus too needs to be restored back into shape.

Tax Saving is icing on the cake, not the cake in itself.

-Ashal Jauhari (Asan Ideas for Wealth)

Animals of Stock Markets

In context of stock markets you would have heard the presstitutes talking about Bulls, and Bears. But the 2 of them are not the only animals of the stock markets. There are lot more and have associated behavior with them. This post is to show you the classic behavior shown by these animals of stock markets, your fate will end up like these if you copy them.

  1. Bulls: This famous animal is said to cause the prices to rise. The attack strategy of this animal i.e. throwing up with horns, is also the reason to give that name. When a stock is in bull run its prices rise rapidly. Here the person who is bullish expects the price to rise in future, hence he buys now with intention of selling it at later date with decent profit. During bull run its better to have a deep look at market’s expectation and fundamentals. If you are a trader then a definitive signal bull run like bullish engulfing pattern, hammer pattern must be expected.In bull markets its the greed which is at play.
    Bulls normally go Long, raising prices. But important aspect to note of these bulls are – they sell when their streak is broken i.e. when bears take charge.
  2. Bears: This is another famous animal which swipes down the price. Its rumored that the name bear came from Bear Skin Jobbers who sold the hides before they had possession of it. The bear indulges in activity called short selling. They sell the shares first in expectation that prices will decline, and cover their position when prices drop, making decent profit for themselves. Here the person doing short selling is said to be bearish in his outlook. In bear market a look at fundamentals throws up lots of opportunities for investors as prices are cheap in this market. For traders good signals like shooting star, bearish engulfing are supposed to be seen. In bear markets its unrestricted fear is at play.
    Bears always work with definitive strategy as they are predator class animals. Since bears sell even before they have requisite stock with them, they have to cover their position by trading day’s end if they are doing intraday, or before date of expiry. This covering of positions by bears cause small rally, which is explained next.
  3. Dead Cat Bounce: This is a metaphor to short covering rally. if you pick a dead cat and throw it against a surface, it will bounce but still its dead. This small up surging rally is also called as sucker rally, as pigs gets on board.
  4. Pigs:This animal is classic. Investors of this behavior are major revenue sources of bulls and bears. Pigs go overboard with their risk appetite¬†and embrace risk with both hands. Pigs often times become impatient, and greed / fear overruns their decisions . These people invest without doing any due diligence, and invest on hot tips. They also throw statements like “Equities are for the long term” and many times sell it after a year of purchase. Pigs are those who mistime or totally ignore their sell calls, often times disregard their asset allocations, and don’t have proper controls over their portfolios. For that reason only there is quote dedicated to these in wall street.

    Bulls make Money, Bears make Money, but Pigs get slaughtered.

    Pigs normally watch business news channels, sites for hot tips. They often times enter market either during bull run or sucker rallies (a.k.a dead cat bounce). Their exit is often at start of a bull run or in the bear attacks after getting bruised badly or becoming impatient.

  5. Chicken: This animal is opposite of pig. pigs embrace risk whereas chickens are so afraid of risk of volatility, they put all their money in debt instruments, Bank and Corporate FD’s. Their overarching need for capital protection makes them totally overlook the threat of inflation and also the need to make profits. Its because of their fear, chickens get fried.
  6. Ostriches: Ostriches buries their heads in sand when it senses danger. Similarly investors stop looking at their portfolio and ignore any news about it during bad times and hope that their portfolio hasn’t been hit badly. Since these investors dont have any mechanism to get news, they are not able to take advantage of the situation. Though this behavior works out well in bear markets making this as habit will be detrimental to their portfolios if markets are infested by predators.
  7. IPO Stag: This animal doesn’t care about bulls and bears ruling markets. They buy into shares during IPO’s and sell it immediately when trading commences to make a quick profit by way of rising stock prices. This process is called as¬†staging, flipping, and the traders who do this are called as stags. Stags have one major risk that is – they get predated if the stock instead of rising on day 1 starts falling.
  8. Wolves: This animal is out right predator. The name is given to those powerful individuals/group of individuals who resort to clearly unethical and criminal means to make money. Some examples for these are Jordan Belfort on whom wolf of wall street movie was made, Harshad Mehta, Ketan Parekh. Their tactics can be like¬†wolf-hunting to drive the company’s share price to 0. Whenever a stock fraud comes into light we often see such rapacious and ferocious individuals behind it.
  9. Dogs and Cats: This name is used for stocks which clearly speculative in their profits and margins, sales etc.. ¬†Its also metaphor to stocks which fall under dog quadrant BCG matrix. Often times analysts say “in bull run even dogs and cats are going up” which means worthless stocks are also going up. This metaphor implies not to be confident of our stock picking skills as everything is in profit. These stocks can also be categorized as “Shit Cap“.
  10. Hound Dogs: This distinction is given to people who’s investment methodology revolves around dividends. Dogs of Dow is one such investing methodology where stocks are purchased based on their top 10 dividend paying companies. Dog is also said to be stock which falls under dog quadrant of BCG matrix, but it also get mixed with cats. May be NSE’s Dividend Opportunities Index tracker can be given this distinction too as its list of top 50 dividend paying stocks.
  11. Lame Duck: A Trader who is poor trader and has accumulated ¬†lots losses or a trader who has defaulted on his loans by not covering his positions is called as Lame Duck. In wild, ducks which fall out of of their group because of being slow waddle and dont know what to do. An investor or trader who has no idea about his portfolio, where its going, is called as lame duck. This kind of investor says “Equities are for long term” and hold suzlon.

These are various animals of stock markets and classic behavior associated with them. Its not a bad thing if you had been like any of these animals and shown classic behavior of them. Its only wrong, if you are stuck in that mindset and not willing to grow. So learn and grow.

Some of Personal Finance Acronyms

Personal Finance Acronyms

Personal Finance Acronyms

Many times you would have come across personal finance acronyms on leading personal finance group on Facebook “Asan Ideas of Wealth” and couldn’t make head or tail of it. Here is list of personal finance acronyms/catch words and their expansion/meaning.

  1. CRATONCorpus Ready At Time Of Need. In simple words money should be available when your goal arrives.
  2. MDBSC*My Dull and Boring SIP’s will Continue (*t&c apply). This means keep running your SIPs till its review is due.
  3. RIPFPIRemember, Its Personal Finance, hence Personalized It. This means what works for one will not work you, you need to personalize the solution.
  4. KISSKeep It Simply Simple. This means dont over complicate your personal finance plan, and let it be simple.
  5. Nike“Just Do it”. This means after you have taken pains to chalk out the plan, just implement the plan instead of ratifying it.
  6. Hero Honda“Fill it, shut it, forget it”. This is similar to KISS, This means plan it in such a way that it doesn’t require excessive evaluation to keep it running.
  7. PFRNOTINCTBPersonal Finance Rule Number One: There Is Nothing Called The Best. This acts like a barrier from over planning. It acts as a reminder that you can never get best possible solution, best in past may not be best in future too.
  8. PWFCFTGPlease Wait For Clarifications From The Government. This is newer entrant which warrants the person to wait till clarity emerges instead of jumping the ship prematurely.
  9. EMOEEither Money Or Experience / Earn Money Or Experience. This is result of any financial actions you undertake. For example: My dabbling in Nifty Alpha 50, didn’t make much money but gave me great deal of experience. Here is article I wrote about it.
  10. QSQTQuarter Se Quarter Tak. This view is often  to take a dig at people who focus on short term things. ex: Pigs(read this to know more), MSM aka Presstitutes. Long Term investors need not focus too much on quarterlies.
  11. LMTSLast Minute Tax Saver.  This refers to people who start their tax planning efforts always in the months of  Jan, Feb and March. They are also considered as vulnerable savers because in a rush they buy worthless products like endowment plans etc..
  12. NMNHNo Money, No Honey.  A bad situation one faces in financial matters and on the foundation which the entire field of goal based investing stands on. NMNH in investing is some times good as it stops the urge of you to spend in markets. NMNH during retirement is the thing that forces many to invest and beat inflation. In simple words one is investing to avoid NMNH situation.

There are also some industry standard terms, for that you can go through Getting Started with Mutual Funds to get birds eye view of mutual fund industry.

how I did, selecting mutual fund for the 1st time?

I started off my journey into equities by directly plunging into direct equity. It started off with random stock picking and hoping for miracle to make money (not the recommended way). One day I got a mail from my broker where they told about various investment products one of which was mutual funds. Luckily on the same day Uma Shashikant madam shared article by Pattu sir which was also on selecting mutual fund. That roused my interest in mutual funds as it was more easy money – just pick the right one and be done with it.

How I went on Shortlisting & Selecting Mutual Fund?

There are various ways to shortlisting and selecting mutual fund. I used pattu sir’s guide to shortlist the funds(here is the link to it). While I was selecting mutual funds, I had no clue about ABC’s of these ratios, only gut feeling was the guide.

Here is screen shot of how I shortlisted the balanced funds.

Shortlisting and Selecting Mutual Fund

The shortlisting of fund to invest happened on Value Research Online. Since I was not convinced of efficacy and workings of star ratings, I didn’t bother to look at them. I started off compiling all these data points in excel. After collecting the data selecting mutual fund out of it was breeze.

The thumb rules I followed were

  • 5 year and 10 year returns must be higher.
  • Lower the standard deviations better.
  • Lower beta is better.
  • Alpha should be higher.
  • R-squared must be higher.
  • Higher Sharpe Ratio is better.
  • Higher Upside Capture ratio is good.[updated]
  • Lower the Downside Capture ratio better.[updated]

These thumb rules are sufficient to pick a fund of choice but blind follow of them is certainly not going to make you good picker. So here is small explanation of what these risk measures mean.

Measures of Risk:

  • 5 and 10 year returns as usual is the rate at which the fund increased its value in past 5 year and 10 years. Simple stuff, 5y returns of 20% mean in past 5 years the fund has increased its value by average 20% every year.
  • Standard Deviation measures how much the returns have varied from average. Higher standard deviation means the returns achieved had lots higher up surges and lower crashes in its returns.
  • Alpha measures difference between average return of benchmark and average return of the fund. If Tata Balanced¬†has alpha of 10 means that Average Returns of Tata Balanced¬†– Average Return of Crisil Balanced Index¬†is 10.
    Fund's Alpha = Fund's Average Returns - Benchmark's Average Returns
  • R-Squared¬†measures level of benchmark index hugging. R-Squared of 86% or 0.86 means fund has increased/decreased its return 86% of the times when the benchmark has increased/decreased its return.
  • Beta compares volatility of benchmark and fund. A beta of 1 means that fund increased by 1% when benchmark increased by 1% and decreased by 1% when benchmark decreased by 1%. Lower beta means fund is less volatile than benchmark index and is good thing. Give importance to beta only if R-Squared is higher than 85%.
  • Sharpe ratio states the risk adjusted return. Higher the better.
  • Upside capture ratio tells how the fund has has performed when its benchmark index was rising. For example if BSE 200 rose by 100 points in past month HDFC Top 200 rose by 110 points in same period then its upside capture ratio for past month was 110. Since its above 100, its better. Above 100 upside means fund has out performed index in a rising market.
  • Downside capture ratio tells how much the fund fell when its benchmark index was falling down. Suppose Nifty fell by 100 points but the Franklin Bluechip fell only 60 points then the downside capture of Franklin blue chip is 60. ¬†Lower downside is more desirable feature as it doesn’t erode unrealized value when index is falling down.

Do go through this article by pattu sir which visualizes various mutual fund risk measures.[Visualizing Mutual Fund Volatility Measures]

My journey into Nifty Alpha 50

Nifty 50 logo

While browsing my Google Now feed I came across an article by pattu sir for Index funds. The indices mentioned there captured my attention and It sparked off curiosity in knowing more about those indices. I searched about those indices in various places places like a boy searches for a girl. The search throw up more interesting results about the index with its mind blowing outperformance of Nifty 50. The more I dug deeper more interesting it began to get. Read on my 2 month  journey into Nifty Alpha 50.

Khoj of Nifty Alpha 50

Though the spirit was kindred by Pattu sir, the official journey began with a google search on CNX alpha stocks (now its known as Nifty Alpha 50). The search landed on Nifty’s Strategy Indices page, I immediately downloaded the list of stocks, methodology and fact-sheet of that index. In this phase I was in data gathering mode. I collected all that info I could.

After it, I tried to understand the methodology of preparing the Nifty Alpha 50 index, The fact-sheet of that Nifty Alpha 50 index.¬†Initially it all sounded Greek to me. I started off asking questions in AIFW if I didn’t understand. Questions were technical like how Beta gets calculated?, what is R^2? etc.

Once I had a firm grip on the subject I jumped in with smaller purchases. I kept a close eye on all the announcements of NSE, I still visit NSE’s¬†Press Releases section even now. The keen focus on press releases helped me to know the stocks that would get booted out of index bit early(Ex: The October month press release stated Gujrat Pipav Port, Motherson Sumi and 8 other would be booted out of index by 25 Oct and I could prepare for that to be done in my tracker too).Once I got comfortable with Index I started off with smaller purchases. Even though the the index had bigger stocks like MRF, Page & Eicher, I didn’t backed off I moved on. My initial plan was purchase 1 shares of all the constituents first and then start balancing it.

Growing Me alongside Nifty Alpha 50

The nifty alpha 50 is the fastest growing index among the NSE Indices. Being the fastest growing index I had to challenge myself to increase my knowledge along side this index. I set myself on the knowledge growth by going through each concept about the index and trying to understand what it was, how it was done and to some extent why it was done the way it was done(You can also check out what? how? why? framework I use).

Returns of Nifty Alpha 50 and other NSE indices.

I started off to learn the various concepts like free float market cap, R^2, Beta on the old trusted guard investopedia. I did asked questions on statistical analysis in AIFW too. The other source where I learned things was NSE’s Index Concepts section. I did learn some things practically too ¬†specially the concept of Bid Ask Spread when trying to trade.

The practical learning of Bid Ask Spread was revealing as it shed light on costs I would incur for bigger purchases of stocks like MRF, Page and Eicher.  Trading costs estimates of this index was higher and I decided to hop onto  discount broker. This decision cooled of my costs significantly. If I had pay 0.5% of 40,000 as brokerage, it would come to a whopping brokerage of 200 rupees. So the cost cooling did gave a huge benefit for me. Apart from costs the price of acquisition also played vital role.

To further optimize my entry into stock I started off with technical analysis.I learned the technical analysis on investopedia. The core reason why I resorted to technical analysis was to get the entry into a stock correct. I learned out various charting and oscillators like RSI. This focus on technicals helped me immensely in not paying too high price for a stock.

These various connections of technical analysis, managing costs, understanding of markets increased my mental connections. This interlinking of concepts is like drawing a rangoli in my mind. By learning new things the rangoli expands from 3 x 3 into 4 x 4 and higher. Also my focus on this index is not shutting off my investments in  Mutual Funds at all.The SIP will run their due course. To me this tracking Nifty Alpha 50 is like journey, when I reach the same point as I started, I will be much wiser from the experience. Even though the sum total of this exercise is zero.

Man with Gold, makes Golden Rules of life.

– PV Subramanyam (www.subramoney.com)

Other than investing more and staying invested for a long time, man will do anything to get a better return.

-PV Subramanyam (subramoney.com)

Getting Started with Mutual Funds

Over the course of time,I am having lots of people asking me lots of basic questions about Mutual Funds. Since I have less time go through each of their questions repeatedly,¬†here is some info to help you in getting started with mutual funds. PS: I learned all this by actually going through the process of account opening with AMC, hence don’t consider me as an expert, I am just sharing my learning.

Organizational View

Lets get started with organizational view of Mutual Fund Industry. These are players in mutual fund industry.

  • The Mutual Fund Company is called as Asset Management Company or AMC for short. Ex: HDFC MF, ICICI Prudential AMC, Franklin Templeton, DSP BlackRock etc…
  • You¬†can become customer of AMC by approaching them directly¬†at their branch or can approach them via¬†Advisers/Distributors (similar to insurance agents. Some examples are Finqa, Funds India, Funds Supermart, Scrip Box).
  • The connecting link between you and AMC is called as RTA (Registrar and Transfer Agents).¬†The RTA’s job is to communicate ‘how much money you have put in?’/ ‘how much money you have redeemed?’ to the AMC. The monthly account statements of purchase and redemption are also sent by these RTA’s only. (Some of the RTA’s are CAMS, Karvy etc..)
  • To become customer of Mutual Fund, a person is supposed to complete “Know Your Customer”(KYC) formalities. To avert duplication of efforts of doing KYC with each AMC, Indian govt set up a special agency called KYC Registration Agency (KRA). Once you are registered with any one of KRA’s, you can show the registration letter to bypass KYC formalities being done at other AMCs. If you approach AMC directly then AMC itself will register you with a KRA (if you are not registered).
  • The AMC’s have one union of them called as Association of Mutual Funds of India (AMFI). This organization has a platform called MF Utility that allows you to create a centralized account for all your MF Investments.
  • There is regulator for these AMC’s. its SEBI – Securities and Exchange Board of India.
  • A newer platforms have emerged which allow one to invest in direct plans of the funds. These Direct Plan Portals instead of getting commissions from AMCs, they bill you directly. This direct billing helps in suggesting you best plans for your needs, where as advisers suggest only plans with higher commission to them.

So these are list of players in MF Arena. As an investor you are probable to run into only AMC, RTA, Direct plan portals and Advisers.

Getting Started with Mutual Funds: Approaching the AMC

Once you have selected which fund to invest, you can either approach an Adviser or AMC to invest.

  • After due KYC and registering Formalities are done, your Folio is created by AMC. This folio is like customer account. All the investments you do with the AMC has to be put into these folios only.The folio can be opened by either approaching Advisor or RTA or AMC. (Ex: If I am customer of ICICI Prudential and HDFC AMC’s, then I will have open 2 folios. One will be with ICICI and 2nd with HDFC. Also to open these folios I can either approach the AMC or their RTA or any of their advisors.)
  • Within this folio, a separate account is created for each of your mutual fund investments. (Ex: If I invest in Franklin Bluechip and Franklin Taxshield, then I will have 2 accounts to hold units of Franklin Bluechip and units of Franklin Taxshield.)
  • Whenever we invest in a fund, we purchase units of that fund in a predetermined price. The purchase price is called NAV (Net Asset Value) of that fund. The NAV is determined at the end of the day and that is the reason why account statements of investments come 1 day after the investment. Also NAV is determined after the various fund expenses are deducted.

Various Flavors of Mutual Funds

Each mutual fund has various sub-types of it to cater to various classes of investors. The various plans are

  • Growth Plan: Under this plan the NAV keeps on increasing as the dividends are not declared by AMC. Due to non-declaration of dividends this plan has the fastest growth.
  • Dividend Payout Plan¬†(aka Dividend Plan): Under this plan AMC ¬†declares dividends regularly and pays it to registered bank account of unit holders. On the date of declaration of dividend the NAV is reduced by dividend amount. Ex: If HDFC Prudence declares dividend of rs 4 per unit on 1st March then its NAV on 1st will be 4 rs less than 28th Feb’s NAV.
  • Dividend Reinvestment Plan: This plan is similar to dividend plan, but instead of paying dividends, more units of the same fund are purchased. Ex: If fund I had invested declares dividend of 4 rs per unit(me holding 100 units will get me 400 rs dividend). Lets assume the NAV of fund was 40 after declaration of dividend. instead of paying me dividends worth 400 rs, the fund would ¬†add 10 more units to my account. So technically Dividend reinvestment is like growth plan itself.

The above plans namely Growth, Dividend, and Dividend Reinvestment are actually sub-plans of Direct and Regular Plans.

  • Direct Plan: To opt for this plan you have approach AMC or its RTA or atleast their Web portal. Its not possible to invest in this plan from any other places. This plan will have comparatively higher NAV than regular plan as the agent commission is not there.
  • Regular Plan: When you invest via an adviser or even your stock broker, then you get only this plan. This plan has slightly lesser NAV than direct plan as your agent is entitled to get commission from your investments. (SEBI has restricted the commission to be <1%)

In totality there are 6 types of sub-plans under each MF.

  • Direct Growth plan
  • Direct Dividend plan
  • Direct Div Reinvest plan
  • Regular Growth plan
  • Regular Dividend plan
  • Regular Div Reinvest plan

The various ways of investing in a Mutual Fund

Once you have decided which fund to invest and which sub-plan to invest, you will have various methods available under your disposal to invest in that fund.

  • Lump Sum Purchase: In this method you directly approach the AMC or RTA or Adviser write a cheque for large amount, (or login to their web portal and click on Buy button) and make a purchase. The AMC will consider it as “Initial Purchase” if you are investing in that fund for the first time and create account for it under the folio. The subsequent purchases are called as “Additional Purchase” and units are deposited into that account. This transaction is considered as one off transaction and AMC will not repeat it automatically. (Ex: If I write a cheque for HDFC Prudence Fund immediately after creating my folio, then its considered as Initial Purchase.)
  • Switch: In this method you switch units of one fund into another fund. In this transaction the AMC will calculate total value of your first fund, deducts any charges on it, based on remaining value it purchases the units of 2nd fund. This transaction is considered as one off transaction and AMC will not repeat it automatically. If you switch all the units of the fund, its considered as complete switch and 1st account get closed after switch transaction is completed. The other type of switch is called as partial switch where only some of the units are switched.
  • SIP (Systematic Investment Plan): In this method you create a mandate with AMC to debit your bank account regularly for purchasing units of¬†fund of your choice. Once SIP is registered the AMC will regularly deduct money on predetermined SIP dates. SIP deductions are like LIC policy deduction, or Bank RD deductions, your account automatically gets debited monthly or quarterly based on SIP mandate.SIP’s are recurring transaction AMC will keep deducting money till the SIP duration expires. (Ex: If I set up a ¬†500 rs SIP with Franklin Bluechip for duration 12months and set SIP date as 7th Monthly, on 7th of every month my bank account automatically get deducted 500rs for the purchase of Franklin Bluechip units.)
  • STP (Systematic Transfer Plan): This method is similar to SIP but instead of debiting the bank it debits another fund. This transaction is like automated partial switch transaction. Like SIP this is also a recurring transaction. (Ex: If I set set up 500 rs STP of Franklin Bluechip to Franklin Smaller Companies Fund, every month Franklin Bluechip Units worth 500rs get switched into units of Franklin Smaller Companies Fund.)

Like investments one off lump sum withdrawal is called as Redemption, regular withdrawal is called as SWP (Systematic Withdrawal Plan). Hope this helps you in understanding MF landscape. Do Post your questions in comments section.

Investing in mutual funds is like selecting life partners.

One of approach is fill it with One Night Stands ‚Ĩ( i.e. putting into top rated funds ) here it’s important to have state of the art monitoring strategies. Here understanding the events is important.

Other one is to select Soulmate ( i.e. fund which can perform consistently ) here it’s important to get the fund to invest right. Here understanding the working of the fund is important.

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