Common Answers to Common questions.-8

What are close ended funds and open ended funds?

The funds which accept subscription initially and do not accept any fresh investment is known as closed ended funds. This underlines the fact that close ended funds have specific time frame and limit the amount they accept. Does this mean that you will not be able to invest in close ended funds or the amount invested initially is also locked in for a fixed period? No. What it implies is that the fund will not be issuing additional units during the period in case of redemption of units. The periodicity of redemption and the frequency of declaration of NAV is detailed in the offer document, provided at the initial time of the offer. Normally the units are listed in the stock exchanges for instant liquidity. There are also funds which restricts the redemption, by redeeming them only during certain periods.

Common Answers to Common Questions-7

SIP explained further

Your cheques are cashed and you are allotted units based on the NAV of that date. Thus the cost of one unit of your savings at the end of the third month is not the NAV of that date, but the average price at which the units were purchased earlier. Thus you stand to benefit in the case of increasing NAV. Even in case of falling NAVs, the fall in value of your investments is not the same as that of fund, but slightly lower, as you would have been accumulated more units for the same amount of investment. Thus whichever the direction your fund goes, you stand to benefit in the case of systematic investment, as the strategy you have adopted is known as Value Averaging.

Common questions and common answers-6

What is systematic investment plan?

You are used to these SIPs . They were called as recurring deposits. Similar to such recurring deposits, systematic investment plans calls for periodic investments at regular intervals.
In India, mutual funds decide the date on which the periodical investment will be made. It may be a fixed date on each month.

For example Sundram-BNP Paribas has the dates: 1,7,14,20 and 25th of every month. You can choose any date convenient to you.
Birla sun life has first, tenth and twentieth day of a month or of quarter as the date 0f your savings plans.
In all SIP, you provide a post dated cheques to the fund to be presented.

Common Answers to Common Questions-5

What is the best way to save ?

Savings is known as habit. Hence if you form a habit of savings, then you are bound to reap the rewards. When we accept savings as a habit, we do not emphasise on the quantum, but regularity. Habit always refers to systematic and regular way.
To those, who still live under controlled economy age, investment in mutual fund is unthinkable. They have to test waters. To experience the risk-reward theory, I always suggest them investment in mutual funds. Depending on their risk profile I choose the fund. The method I always advocate is SIP. Systematic Investment Plan besides making savings a habit oriented one, also ensures value averaging.