What is SIP & How does SIP Investment Work in India?

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What is SIP & How does SIP Investment Work in India?

What is SIP?

Systematic Investment Plan (SIP) is a simple and convenient method for investing in mutual funds. It provides a way of investing a fixed amount of money in any particular scheme of mutual fund at a pre-defined regular interval of time. If you still wonder what is SIP or what is sip in mutual fund; it can be simply explained as a planned tool for investment in which a particular amount is deducted from the account of the investor and is invested in the mutual fund scheme chosen by the investor. The time interval at which the money is being invested in the mutual funds can be daily, monthly, quarterly or half-yearly.

Among the mutual fund investors, SIP has become very popular gradually because of the investing discipline it instills in an investor. Moreover, you do not need to worry about the volatility in the market and the timing the market when you are investing through SIP mode. You can make an easy entry into the investment market by starting a SIP. It is always advisable to start your SIP investment at an early age to reap the benefit of power of compounding.


Perks of SIP

Now that you know what is SIP or what is SIP in mutual fund, let us have a look at the few perks of an SIP investment.

  • Rupee Cost Averaging
This is one of the best features of SIP investment. SIP is a “way” of investing in a mutual fund in a disciplined manner such that irrespective of the market situation, one keeps investing a particular amount of money at a predefined date. So, if the market is high, you would get lesser number of units and vice versa. In this way, you eliminate the concept of timing the market and keep investing irrespective of the market situation. Thus, the average cost of investing becomes lower than bulk investing at any point in time, because you invest when the market is high as well as low and thus the average cost of units gets spread over time. This helps in smoothening out the short-term fluctuations in the market for the portfolio.

  • Power of compounding

If you continue your SIP investment for a longer period, you will start earning returns on the returns of your investments. This can help you accumulate a healthy corpus over the long term

  • Time- saving investment option

SIP investment is a time- saving option and if you are choosing to carry out all the procedure online, it is even more time saving and convenient.

  • Stress- free

Since the market fluctuations do not hamper SIP investment it is a stress- free option for the investors.

  • Flexible and affordable

SIP is a flexible and affordable investment option as the minimum amount to start a SIP is Rs.500 and you can go on increasing your investment as your income increases with time. Also, there are no charges for starting or stopping a SIP investment.


Now since we have discussed in length about what is sip investment, let’s take a real-life example to see how SIP can be used to achieve different financial goals:

Rohit, a 33-year-old software engineer by profession who lives with his wife and a son. The two most important goals for Rohit are: to save for his son’s higher education and retirement. Rohit has been investing in conventional products like Bank Fixed Deposits in order to achieve these financial goals.

But somehow, Rohit realized that his earnings from the FDs may not be enough for him to achieve his financial goals. The major cause of this shortfall is inflation. The real return he gets on his investments after deducting the inflation rate is very low.

So, what should be Rohit’s approach in order to get high returns but without being affected by the fluctuations in the market? One of the good options here is to invest in an equity mutual fund through a SIP. This will help him in achieving his long-term financial goals and will also induce financial discipline into his life.

Now, let us have a look at how does mutual fund SIP work and how does SIP work in India.


How does SIP work?

As said earlier, SIP functions on the principle of regular investments. Now the question arises how does SIP work in India? By starting a SIP, you are investing a defined quantity of money into mutual funds at pre-defined intervals. Your savings account will be debited with that particular amount of money for your SIP on your instruction.

After the payment of the SIP is done, the AMC, Asset Management Company or the Mutual Fund house shall assign you with a particular number of units from the selected mutual fund scheme of yours. This assignment of units depends on the NAV or the Net Asset Value for that particular day of the scheme which you have chosen. As you go on paying the installment amount for SIP, you go on adding more units of your scheme.

When the market fluctuates, i.e. when the market is up you get less units for your money paid for SIP whereas more amounts of units can be purchased when the market is down. A major feature of SIP is rupee cost averaging. With help of a SIP, you can lower down your investment’s average cost and risk reduction for your investment can be possible by wisely spreading the price of your purchase over time.


How to start SIP investment?

We have answered what is SIP and what is SIP investment. But, before you actually start investing in SIP, you need to ascertain important things like your financial goals, tenure of your investment, your risk appetite, etc.

First, you have to decide about your long-term financial goals. The next important step is to decide on the timeline i.e. by when you would need money to achieve these goals. This timeline once decided will be the tenure for which you will be investing in a SIP. Then, the next vital step is to decide on the amount of money to be invested. You can use a SIP calculator available online to find out the amount of money you need to invest regularly to achieve your goals. Finally, when the amount and tenure are all decided, you can go ahead and consult financial experts to know about the various mutual fund schemes available and choose an appropriate one for you.

In the next step, you need to submit your KYC. If the online method of submission is being selected then you can submit the details digitally as well. Mandatory documents like PAN card, address proof, and an identity proof need to be submitted along with the KYC (Know your Client) form. Post this, you will have to complete the IPV procedure i.e. In-person verification. You can again do this in two ways i.e. by visiting the office and submitting the necessary documents or by attending a video conference call using a webcam. This is a part of the KYC process for authentication.

Once your KYC is complete, you need to submit the mutual fund application form along with the cheque of your investment amount and the SIP form at the nearest office of a mutual fund house, distributor or an agent. Moreover, you can start your own SIP online as well. You can get details on all plans and schemes on websites like IndiaNivesh and you can easily start the SIP online, provided your KYC is already done. Else, it needs to be completed first, before starting to invest.

SIP is a great and extremely convenient way to start investments in mutual funds. Once you completely understand the basics, you can easily realize your different financial goals with help of SIPs.

 

 

Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.


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Equity Shares: Features, Advantages and Types of Equity Shares

In the world of finance and investment, we often use the word ‘equity shares’. In fact, it is a part of everyday discussion among investors, stock market analysts, newspapers, business magazines, etc. Whether you term it shares, stocks or ordinary shares, they are all one and the same. For companies, equity shares are the biggest source of finance which helps them expand and grow. The concept of equity shares is wide and there are many types of it. To begin with, let us understand the meaning of equity shares.Equity Shares MeaningEquity shares are the shares that the companies issue to the public for long term financing. Legally the equity shares are not redeemable in nature and that is why they are referred to as long term source of finance for a company. The investors of the equity shares have the right to vote, share the profits and claim the assets of the company. The value of equity shares is expressed in the various term like par value or face value, book value, issue price, market price, intrinsic value and so on.Let us now learn about the features of equity shares.Features of Equity Shares• Equity shareholders have the right to vote on various matters of the company.• The management of the company is elected by equity shareholders.• The equity share capital is held permanently by the company and returned only upon winding up.• Equity shares give the right to the holders to claim dividend on the surplus profits of the company. The rate of dividend on the equity capital is determined by the management of the company.• Equity shares are transferable in nature. They can be transferred from one person to another with or without consideration.The above mentioned are few of the features of equity shares. Let us now learn about the advantages of equity shares.Advantages of Equity SharesFrom the Shareholder’s Point of View:• Equity shares are liquid in nature and can be sold easily in the capital market.• The dividend rate is higher for the equity shareholders when the company earns high profits.• The equity shareholders have the right to control the company’s management.• The equity shareholders not only get the benefit of dividend but they also get the benefit of price appreciation in the value of their investment.From the Company’s Point of View:• Equity shares are the permanent source of capital for a company.• There is no requirement of creating a charge over the assets of the company when equity shares are issued.• The liability of the equity shares is not required to be paid.• The company does not have any obligation to pay dividend to the shareholders.• The credit worthiness of the company increases among the investors and creditors when the company has a larger equity capital base. The above mentioned are the advantages of equity shares to both the shareholders and the company. Let us now learn about the types of equity shares.Types of Equity SharesAnyone who makes an investment in equity shares or monitors the functioning of the company must know about the various types of equity shares. The equity shares are presented in the liability side of the balance sheet and they are classified in the following types. • Authorised Share CapitalAs the name suggests, authorised capital is the maximum amount of capital that a company can issue. The authorised limit can be increased after seeking permission from the respective authorities and paying fees. • Issued Share CapitalOut of the authorised share capital, the capital which the company offers to the investors is termed as issued share capital. • Subscribed Share CapitalSubscribed capital is a part of the issued share capital that investors agree and accept. • Paid Up CapitalPaid up capital is a part of the subscribed capital for which the investors pay. In general, the companies issue the shares to the investors after collecting all the money in one go. Therefore, it is not wrong to say that subscribed and paid-up capital is the same thing where the company collects all the money and issues shares. However, conceptually the paid-up capital is the amount of capital that the company invests in the business. • Right SharesWhen you make an investment in equity shares and the company issues further shares to you, it is termed as the right shares. The right shares are issued to protect the ownership of the existing investors. • Bonus SharesBonus shares are issued by the company to its investors in the form of a dividend. • Sweat Equity SharesWhen the employees or directors perform their job well in terms of providing know-how or intellectual property rights to the company, the company issues sweat equity shares to them as a reward. The above mentioned are the different classes of equity shares. Now let us learn about the various types of equity share prices.Various Prices of Equity Shares• Par or Face ValuePar or face value represents the value of shares recorded in the books of accounts. • Issue PriceThe price at which the shares of the company are offered to the investors is called the issue price. In most of the new companies, the face value and the issue price of a share is the same. • Share at Discount and Share Security PremiumWhen the company issues its shares at a price which is lower than its face value, the deficit amount is termed as a discount. On the other hand, when the company issues its shares at a price which is higher than its face value, the excess amount is termed as premium. • Book ValueBook value is the balance sheet value of shares. The formula to calculate the book value is as follows; Paid Up Capital + Reserves and Surplus – Any Loss / Total Number of Equity Shares of the Company • Market ValueWhen the company is listed on the stock exchange, the price at which the shares of the company are traded is termed as the market value of the shares. The stock market value would differ with the fundamental value of shares because in both the cases different sentiments affect the stock value. • Fundamental ValueFundamental value or intrinsic value of the shares is determined on the basis of the fundamentals of the company. This value is mostly required during mergers and acquisitions. The above mentioned are the different types of prices of equity shares. When you make an investment in equity shares, you purchase the shares from the stock market at market value. If you are looking to make an investment in equity shares, you may seek help from a well-established broker like IndiaNivesh Ltd. who can help you make an investment in shares at the right valuations.     Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.

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Difference between Equity shares and Preference shares

The financial world consists of both the debt market as well as the equity market and every corporate needs to raise capital by issuing shares, which could be in the form of equity shares, preference shares, etc. However, the prime reason for one to invest in the volatile share market over its debt counterparts is the sheer joy of overperformance.So, when you consider long-term investment, equity investments turn out to be one of the most profitable ones. Sure, there is the risk of prices going high enough to bring an ear-to-ear smile and low enough to make you regret your decisions at times. But over a considerable period, you could walk away with good returns.When we discuss shares, there are two types of shares that one can choose between, equity shares and preference shares. But before you can start investing, the most obvious question to ask would be what are equity shares and preference shares.The DefinitionEquity shares and preference shares are quite similar, yet different in the way they function and offer you returns. When you own equity shares of a company, the dividends are subject to how the company is performing. And at times, you might not even receive any dividends. This is one major difference between equity shares and preference shares. With preference shares, the company is bound to pay you dividends, since the amount is fixed but not with equity shares. - Equity SharesWhen you hear the word shares, people almost always refer to equity shares or ordinary shares. With equity shares, a company offers you partial ownership and thus, involves a lot of business risk. The members, who own equity shares, also acquire the right to vote for critical decisions in the company. These decisions may include electing a new leader, acquisition, merger, etc. And they play a crucial role in raising capital for the company. Equity capital forms the basic foundation of the company and its creditworthiness. The dividends or payouts to equity shareholders predominantly depend on the earnings of the company. Once the company has settled all other claims and expenses, it will pay its equity shareholders.- Preference SharesBetween equity shares and preference shares, it is the latter that offers a certain source of income. With preference shares, a company promises its shareholders a fixed amount as dividend. And the preference shares take precedence over ordinary shares or equity shares.They also have an edge over equity shareholders when it comes to repaying of capital. Since the rate of dividends is fixed, it is usually compared with debentures. Salient Differences between equity shares and preference sharesNow that we are aware of the definition of equity shares and preference shares, we can delve into the major differences. Here are some of the key differences when it comes down to equity shares vs preference shares.- Preference shares have specific rights over ordinary shares or equity shares of a company. - Preference shareholders do not have any rights when it comes to voting, whereas equity shareholders do. However, under a few circumstances, preference shareholders can gain the right to vote. For instance, if there hasn’t been dividend payment in over two years. - Preference shareholders do not reserve any claims to bonus shares, while one of the biggest merits of equity shares includes them having access to bonuses. - Preference shareholders have the right to receive dividends, but equity shareholders do not have any such rights. A dividend is paid out only if the company makes a profit to distribute. - Also, in a given year, if a dividend is not paid out to preference shareholders, the same would be accumulated and needs to be paid out later. However, the same is not true for equity shareholders. If a dividend is not declared for equity shareholders, the same does not accrue. - One of the limitations of preference shares is that shareholders do not have any claims in the management of the company, whereas equity shareholders do. - Preference shareholders can convert their shares to equity shares, but the reverse is not possible.Other than the salient differences, there is some outright difference between equity shares and preference shares which are worth mentioning. Here are some additional equity shares vs preference shares pointers that you should be aware of.- The basic descriptionOne crucial equity shares and preference shares’ difference is that equity shares are the foundation of a company, while preference shares give shareholders an edge over ordinary shares. It is offered to banks or large corporates when the company needs funds.It is one of the biggest merits of preference shares that a company receives funds whenever additional capital is required.- The rate of dividendThe dividend paying rates of equity shares and preference shares may differ a bit. While there isn’t any fixed rate for paying dividends to equity shareholders, preference shareholders do receive dividends at a fixed rate, which is predefined and can be a nominal value of the share price.The rate of dividend for equity shareholders is decided by the Board of Directors after evaluating the company’s performance in the previous financial year.- Issuance of sharesIt is mandatory to issue equity shares of a company to go public while issuing preference shares is not mandatory under the Company’s Act 2013.- TradingYou can easily trade equity shares in the capital market, whereas you cannot trade preference shares. This makes them less liquid as compared to equity shares. Thus, the preference shares do not see any price appreciation or depreciation as the equity shares do. Investors do have the option to sell back the preference shares to the company.- CategoriesAnother equity shares and preference shares difference come in the form of types. Since equity shares do not have any type, they are normally known as ordinary shares. On the other hand, the different types of Preference Shares include non-participatory or participatory, cumulative or non-cumulative, convertible or non-convertible and so on.- CostThe low cost of the equity shares makes them accessible by small investors. On the contrary, the higher price tags on the preference shares make them ideal for medium to large investors.- LiquidationIn the event of liquidation, the preference shareholders will have the first right to receive any kind of payment after the company’s creditors are paid. While equity shareholders have rights on the assets of the company once all the pending payments are complete. - RepaymentOne of the limitations of equity shares is that a company is not liable to repay the equity shares to its holders, whereas they must repay their preference shareholders.As discussed in the beginning, equity shares and preference shares are similar yet quite different. Equity shares and preference shares both allow you to own a piece of the company but in various other aspects. So, preference shares are a mix of equity shares and debentures.The crux of the story is that there are many choices available to invest. However, investing should be done after understanding the instruments and, as per your goals. At IndiaNivesh, we use extensive research to help you achieve your financial goals. Equity investing requires in-depth understanding, analysis, and periodic reviewing. Our team uses one of the best proprietary equity research to make your investment a fruitful one.     Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.

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