Understanding Mutual Funds

A Mutual Fund is a pool of investments from many people looking for high returns. These pools of investments are managed by professionals called Fund Managers who are experienced and knowledgeable persons about the various markets and its performance. These Fund Managers decides where all to invest this pool of fund so that maximum profit is made avoiding risks as much as possible.

The investors are given units or shares proportional to the amount they have invested in the fund. The Fund manager passes on the gains and the loss of the fund to the investors through these units. When the fund profits on its investments the value of the fund  increases, consequently increasing the value of the units (NAV: Net Asset Value) or shares held by the investors. The opposite happens when the fund faces a loss.

Where Does Mutual Funds Invest?

The risk of a Mutual Fund depends on where it decides to invest. Most Mutual Funds are considered risky because the fund managers invest mostly in equities and commodities, which are considered high risk assets. However, investing in these risky securities is the only way a fund manager could make the kind of gains that brings a broad smile on the investors’ face.

There are mutual funds that invest in less risky assets such as government bonds, debentures, company bonds, and also money market instruments. These funds are a whole lot safer but they do not yield as much as you would like to. After some time you may think it is better to invest in a bank fixed deposit than in a low risk mutual fund.

Ways You Get Income from Mutual Funds

So, just how exactly are you supposed to get income from investing in these funds? Well there are three usual ways.

The first way is from the dividends and interest from shares and bonds. You are aware that the Fund Manager invests our money in equities and bonds which he thinks will bring in the profits. The companies whose shares our fund manager bought give dividend to its share holders occasionally. In addition, the bonds also give returns to the bond holders – our mutual fund in this case- in the form of interest. Our Fund Manager transfers these incomes to the investors of the fund.

Sometimes Fund managers decide to sell the securities for a profit, when its price has increased. The fund manager gives the gain the Fund receives by selling these securities to the unit holders or investors of the fund.

At other times the fund manager decides not to sell these securities and thus the value of fund keeps increasing, which means that the units or shares has increased in value. If you need income you can sell these units and cash in on the increased value of the funds.

Why Do We Recommend Mutual Funds

When we say to invest in something that seems risky it could either mean we are out to ruin you or it might mean we have seen something special in it and wants you to enjoy it as well. Anyway, you decide for yourself why we recommend investing in Mutual Funds by going through these points.

Managed By Experts: The first and foremost thing, which makes investing in mutual funds worthwhile is that this fund is managed by experts in the field, whose reputation and future lies in making profits for you.

Unless you are a fund manager yourself you never can gain the insight and knowledge about the diverse markets like those who run a Mutual Fund. They are updated about everything pertaining to the markets. Therefore if you need to make money you got to face risk. And if you are ready to face risk, the only place that lowers the risk and maximizes your profit is a Mutual Fund.

High Returns: The gain from a Mutual Fund is more or less than what is received from directly investing in equities. Moreover, the risk is lowered because experts manage your fund. The fund manager makes sure to invest in low risk instruments as well, to lower the risk. Imagine the amount of risk and stress you will be taking if you decide to invest in equities directly. With such volatility in markets it is highly likely that you cannot withstand the onslaught unless you are really experienced.

Diversification: Another advantage of Mutual Funds is that the fund manager invests in diverse instruments. This helps to spread the risk and maximize our profits. By diversification the risk is considerably lowered. Only a fund manager knows how well to diversify across different instruments and markets to maximize the gains.

Need Less Capital: If you are a small time investor, it would be difficult to enter the market and still more difficult to last in the volatility of the markets. However, Mutual Funds allow you to invest in markets with a far less capital than is usually required when directly investing in these markets. This helps even those who have lower income to enjoy the benefits of investing in equities and bonds. Additionally, many mutual funds offer systematic investment plans, through which you can invest through monthly installments.

Regulated by SEBI: Every Mutual Fund is regulated strongly by SEBI. The SEBI has stipulated many guidelines about how a Mutual Fund should function so that the interests of the investors are paramount. This blocks any effort from the part of the fund manager to take unnecessary risks and jeopardize the investors’ money. The transactions are highly transparent and you can easily know where your money is invested. This gives credibility to the Mutual funds that you invest in.

Option to Choose: Mutual funds are of many types and fund managers provide many schemes from which to choose. You can choose a mutual fund according to your preferences for risks, financial instruments, withdrawal etc.

From reading these points, we bet you have come to the conclusion that Mutual Funds are not as bad as it is portrayed out to be. Anyway, before investing in any mutual fund, read instructions carefully and understands the risk involved and the many options available to you. Invest wisely!

Related posts:

1. SIP, STP and SWP- the Jargons in Mutual Funds Explained
2. 4 Mutual Fund Categories to Help You Choose the Right One
3. Don’t Miss Investing in Gilt Funds Now for Better Returns

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Your banks just won’t encourage you to prepay your loan even if you have the means to do it. So, if you are planning to close your loan by prepaying, just think over it twice because what await you will be prepayment fines and loads of paper works. Hey, your life just got worse.

So, why does your bank dislike prepayment? This is because if you prepay your loan, their income flow is blocked. If your loan was for ten years, imagine the income that they would lose if you prepay the amount after five years. Your bank will also lose on five years of interest.

Things You Need to Know about Prepayment

If you are planning to prepay your loan, here are the things that you should be aware before doing so.

Prepayment Charges: Actually the bank imposes a penalty if you want to prepay the loan. It might be 0.5% to 2% of the remaining unpaid loan amount. If you try to close the loan early on, then the percentage of loan outstanding will be huge and you would incur a loss by prepayment.

Interest Rate: Mostly interest rate is the main factor for considering prepayments. If the interest is higher then we must be paying that amount for the loan. It would seem profitable to pay of the loans when interest rate is considerably lower. However, your decision must not depend solely on the interest rate. It must be based on the prepayment charges, the loan tenure and the amount outstanding.

The major part of EMIs for the first years is used to pay the interest on the loan. Towards the latter period we start paying the principal amount. Our saving comes if we can avoid paying the interest. Therefore if we prepay towards the end we would be paying the principal that we must pay anyway. Besides, the banks charge a penalty which adds to the loss.

Tax Benefits: These housing loans have a tax benefit. If you prepay the whole amount much earlier, you cannot enjoy the tax benefits that come under Section 80C. Therefore, before prepaying take this in to account and see if prepaying your loan is beneficial than the tax benefits you get from it.

Ownership: The major advantage of prepaying your housing loan is that you get possession of the house. You get to be the owner a bit earlier. More than a prestige issue, this helps you to re-sell it or take further loan for any immediate expenditure etc.

Prepay Partly: You can prepay in lump sum or you can pre pay partly. One advantage of prepayment through parts is that every prepayment goes into paying your principal amount. Once this principal is reduced the amount you need to pay as interest also goes down.

Before deciding to prepay your loan just weigh all your options. See if you are actually losing by it. Do not take just one factor while deciding to prepay. Consider the costs involved from all possible sides then take your decision. If you are planning to take a house loan make sure you take it from a bank that do not have prepayment charges or a bank that doesn’t over penalize you for prepayment of your loan.

Related posts:

1. Credit Card Woes; Why Gold Loan is Better than Personal Loan for Repayment?
2. Small Banks Woo Major Banks’ Customers with Interest Hike on Savings
3. The 5 Things You Should Know Before Availing a Gold Loan

------------------------------------------------------------------------------------------------------------------------------------------------ Another great post from:Money Guide India. Read the original version at: Why Banks Hate Loan Prepayment?. ------------------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------------------ Like this post? Why don't you subscribe for more? Here is the subscription link. ------------------------------------------------------------------------------------------------------------------------------------------------

The quickest way to get the highest returns is by trading in Stock Market, Commodity Market and Forex Market, which are risky. Then there are the other high return options which might not be the quickest way to make money, but it is surely safe. They are mutual funds, real estate and derivatives.

Quick Ways to Make Money in India

Stock Market: To make big money on stock market you need to know how to perform better than the market. It means that if the index rose by 20% within 6 months your portfolio must rise by more than this rate. Only trading on sure stocks is the way to do it. However, don’t go for pure gambling without any ounce of knowledge regarding the company you are trading in.

Within a year a market may rise rapidly, come back to the position it was, or slip down further. However, we must see to that our portfolio is always rising. Some say it is better to follow the market, but in that case what is the use in taking the huge risk. If you are willing to take risks then try to beat the market. However, don’t over do it, because sometimes it is wise to learn from the market movements.

Never trade too much. It is only going to profit your broker. Responsible trading is called speculation. Speculation is not gambling and it is sure to give you good profit within a short time provided you do your homework well. That means you must learn about the company you are trading in.

Commodity Market: This is a highly inflammable market. There is potential to make big money overnight and also the potential to wipe all our investments in one moment. During 2010-11 commodity market turnover rose by 50% from the previous year with a whopping Rs. 112.52 trillion.

Commodity markets trade in gold, copper, gasoline and agri-products. They are future contracts which promise the seller to buy their commodity at a specified price after a stipulated time. Some of the Commodity brouses are the NCDEX, MCX etc.

Individual commodities like gold, silver or agri products like wheat, coffee, jute etc. can rise rapidly and fall suddenly. The volatility is very huge. Trading in commodities after thorough study can bring in huge returns.

Forex Market: This market deals in currency trading. It depends on the valuation of Indian Rupee with some of the international currencies. At present trading is with 4 international currencies which are the U.S. Dollar, the Euro, Yen, and the British Pound.

MCX-SX is the exchange for trading in currencies, which was started in 2008. The average daily turnover was Rs 18, 359 crore in March of 2011. Bulk investments are needed to make huge profits in currency trading. This is one disadvantage of currency trading.

Ways to Make Better Returns Safely

Mutual Fund: We have discussed many times about the working of mutual funds; why it is safe to invest in it than investing in stock markets directly. They provide returns which are more than 20%. Mutual funds invest in stock markets and are managed by people who know it well. Therefore, they play it safe and won’t promise us more than a fixed amount of profit.

Real Estate: Investing in property by buying and value addition of that property could fetch us a handsome return in a limited time. The rate of return is around 30%. However, if our property is located near a place where the next big thing in business or infrastructure is coming up then profits could exceed that limit. One important benefit in investing in real estate is that property always has an intrinsic value, which will never go below a certain price.

It is estimated that the real estate sector will grow to $90 billion by 2015. About 80% of the investments come from housing and 20% investments come from commercial buildings.

When you make money within a very small time span, you must know two things. The first thing is the Short Term Capital Gains Tax. The income that you get within a year is taxed according to the tax rules in India. Short term capital gain tax attracts 15% of the returns you get. Keep this in mind when going for returns in the short run.

Now that you get an idea to make money in the short run why wait?

Related posts:

1. Direct Tax Code: Eroding Investment Options for the Common Man

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However, there are some things you need to know before running head over heals to the nearest bank, to take a gold loan.

1. Interest Rates

The first thing that comes to our mind when going for a loan is the interest rate charged. Does a Gold loan provide better interest rate than personal loans? And if they do, from where should we take it; banks or NBFCs?

The answer is that gold loans charge less interest rate than personal loans and it is better to take it from a bank because NBFCs charge higher rates. While banks charge around 12% to 15% for gold loans, NBFCs charges are usually high. It may vary from 12% to 22%. Some times it may rise to about 33%.

If the purity of gold is high then interest rates are lowered. Besides, if you pledge a high amount of gold with respect to the loan taken then they will charge you less interest.

2. Credibility of Banks

If you are dealing with NBFCs and other smaller players in gold loan, you should be very cautious. You must check if these institutes are genuine or not. Make a background study about the NBFC and see if these institutes have come under any allegations or investigations.

Do not believe what they say in their ads. They could say they are the best in the world even if it has only one office and that too located in your vicinity. Check if they have a considerable asset back up and track their performance over the years.

3. Loan Amount is Lower than Gold Amount

One major defect of gold loans is that we do not get the full amount for the gold we have pledged. Most NBFCs and banks provide 70% to 85% of the gold amount as loan. However if the loan amount is 50% or less then we can negotiate on the interest rates charged. It will be favorable to us.

4. Repayment and Default

Loan tenures differ among different banks and NBFCs. Sometimes it is for 12 months and at other times it is for one month. Certain banks like SBI stipulate that a small amount of principal must be paid along the interest. NBFCs usually expect interest to be paid every month and in the end the principal is paid to retrieve the gold.

If you have ever defaulted on a bank or NBFC, don’t go there to pledge your gold. They could appropriate that gold for the earlier payment you are supposed to make.

5. How Gold Prices are Calculated

There are many ways in which banks and NBFCs calculate the price of gold you pledge. Some NBFCs and banks have a fixed price and revises it every 6 or 12 months. Others take the last two weeks’ price and average it to get at the price of gold. Many other companies just take the international rate on that particular day. These companies provide loan on how they calculate the price of gold. So it is important that you learn which is profitable to you.

Gold loans are more suitable in most ways, especially when you need a small amount of money. Gold loans have no or very little processing fees and it doesn’t take more than one day to get your loan. The lender usually does not check if the borrower is credit worthy and the procedures are also very simple.

Related posts:

1. Credit Card Woes; Why Gold Loan is Better than Personal Loan for Repayment?
2. In Need of Money? There are Better Options than Personal Loan and Credit Cards
3. Five Things You Never Knew about Fixed Deposits

------------------------------------------------------------------------------------------------------------------------------------------------ Another great post from:Money Guide India. Read the original version at: The 5 Things You Should Know Before Availing a Gold Loan. ------------------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------------------ Like this post? Why don't you subscribe for more? Here is the subscription link. ------------------------------------------------------------------------------------------------------------------------------------------------