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Mutual Funds - The Power of Automatic Investing
One of
the easiest and most efficient ways to invest in mutual funds is through
Automatic Investing. Often referred to as Rupee-cost averaging, Automatic
Investing is a simple term for a type of mutual fund installment-purchase plan.
We recommend it as one of the best ways to grow your investment over time.
Automatic investing is especially valuable for the investor who wants to get
started in investing, but doesn't have a large lump sum to invest. As an added
benefit, many companies at this site reduce or waive the initial investment
requirement when an automatic investment is established.
Automatic Investing works particularly well if you fear that you might buy a
mutual fund at its peak, just before the stock market and your fund shares head
into a slump. It provides a disciplined way to invest a portion of income at
regular intervals without trying to guess when the market is at a high or at a
low. It protects you from extreme fluctuations in the market. And, its effect on
your investment's growth over time can be nothing short of amazing.
Using this strategy, you buy a fixed rupee amount of mutual funds on a regular
basis, usually monthly or quarterly. In this way, you will purchase a larger
number of shares when the price is low and a smaller number of shares when the
price is high. When the time comes to sell -- and assuming that the price when
you sell is higher than the average cost for your monthly purchases you show a
profit.
Regular investments of Rs.100 purchased a total of 44 shares in this simplified
illustration. As the fund's price fluctuated between Rs.10 and Rs.12.50 a share,
more shares were bought as the price declined. The investor earned a 10% profit
although the initial and closing net asset values were the same, because its
average cost per share was lower than the final value per share.
The
primary benefit of rupee-cost averaging by participating in an Automatic
Investment Plan is that your shares will always have an average cost lower than
the average of the prices at which they were purchased. With it, you are
investing for the long term and counting on the upward trend in the stock market
over time. There is no complicated analysis of the economy, the markets or
interest rates. You simply invest a fixed amount on a regular basis no matter
what the share price is doing.
More importantly, you begin a disciplined investment plan that helps to ensure
the long-term growth of your portfolio.
Rupee-cost averaging does not ensure a profit, protect against a loss in
declining markets or against a loss if you stop the program when the value of
your account is less than its cost. You should consider your financial ability
to continue making purchases through periods of low price levels. There is no
method of investing that can guarantee a profit if you should decide to sell at
the bottom of the market, but the potential for high return on your investment
is increased with your long-term commitment to rupee-cost averaging.
A special attraction of no-load mutual funds is the ease with which you may make
additional periodic investments in small rupee amounts, without a sales
commission each time. You can arrange to have automatic monthly withdrawals from
your bank account made directly into your fund account. By automatically
transferring Rs.100, Rs.200 or more monthly, you buy shares using rupee-cost
averaging and set aside savings that can grow over time.
Automatic Investing is one of many customer service features fund companies
provide and it's one of the simplest ways to achieve the benefits of rupee-cost
averaging.
Liquidity: Speedy Cash for Your Shares
Mutual funds should make it as easy to get your money back as it is to put it
in. Liquidity is an important feature of mutual funds.
When you're ready to sell your investment, it is easy to redeem your mutual fund
shares.
Most money market mutual funds (and some other fixed-income funds) offer check
writing privileges. The fund provides you with checks that you may draw against
the value of the shares in your account. You may write a check payable to
yourself and deposit or cash it at your bank, or you can use it to pay your
monthly mortgage and other bills and continue to earn dividends on your funds
until the check clears the mutual fund.
If you own shares of a stock fund and a money market fund that both belong to
the same family of funds, the fund probably offers a telephone exchange
privilege. This enables you to telephone the fund and ask that a certain rupee
amount of shares be redeemed from your stock fund. The fund has seven days to
transfer it into your money market fund (the transaction normally takes three or
four days). You may then write a check against the money market fund, in effect
gaining immediate access to the funds in the stock fund.
Many funds offer wire redemption, which enables you to have the proceeds of
shares you sell deposited directly into your checking account through the bank
wire-transfer system.
Some mutual funds require redemption requests to be in writing, accompanied by a
signature guarantee. This policy is designed to protect consumers by preventing
unauthorized or fraudulent transactions. Signature guarantees can be obtained
from any commercial bank. If your savings bank cannot provide a signature
guarantee, ask for a corresponding commercial bank that can.
Beware of any charges or expenses your fund levies at redemption. The prospectus
clearly outlines such fees. |
