Monday, July 15, 2019

All You Need to Know About IPOs

What is an IPO?

Initial Public Offering (IPO) is the process by which a company issues its share to the public for the first time. It is a route adopted by the promoters of companies to receive funds (capital) from the (primary) market to meet the business purposes. Upon the conclusion of IPO process, shares are listed on the stock exchange(s). Once listed, shares can be traded in the open market.

The process of raising the capital through primary market is regulated by the Securities and Exchange Board of India (SEBI) (Issue of Capital and Disclosure Requirements) Regulations, 2018. Some of the key steps in launching an IPO include:

All You Need to Know About IPOs

1. Filing of ‘Draft Offer Document’ with SEBI –

i. Once a company decides to come out with an IPO, it needs to prepare an elaborate offer document. This document contains information about the company such as its business and operations, promoters and management, financials, purpose(s) for which IPO proceeding will be used, etc. However, it does not contain date of opening and closing of the issue. This document is filed by the SEBI registered merchant banker, appointed by the company with SEBI for its vetting. 

ii. Regarding the price of the shares, there are two options available to company. It may either decide the price of the shares itself or let the market forces decide the final price of issue. The first approach is known as ‘Fixed Price Issue’ and second is known as ‘Book Building Process’. 

iii. In the book building process, the merchant banker decides a floor price (or minimum price) and cap price (or maximum price). The interested public may offer / bid for the shares of the company as per the given price band. 

iv. The ‘Draft Offer Document’ is known as ‘Draft Prospectus’ in case of a fixed price issue. In a book building issue, it is known as ‘Draft Red Herring Prospectus’ (DRHP). Nowadays, most of the companies do not fix the price of shares themselves; rather they adopt book building process, which is actually a demand and supply based price discovery mechanism. 

2. SEBI reviews the DRHP (or Draft Prospectus) and communicates its observation(s), if any to company. Company is required to provide required clarification / further information to SEBI and make required changes in the DRHP. 

3. After receiving SEBI’s clearance, company finalizes the dates of opening and closing of issue and mentions the same in the document. Now, the document is known as ‘Red Herring Prospectus’ (RHP) or Prospectus, as the case may be. The issuer company needs to file RHP / Prospectus with the concerned ‘Registrar of Companies’ (ROC). 

4. After filing of the RHP / Prospectus with ROC, the company puts the issue in the market; means invites public to invest in the shares of the company. The interested public / investors may apply for the shares through any registered stock broker or online. Many of the banks enable their customers to apply for the IPO through the net banking facility also. 

5. Once the issue closes, the company allots the shares to applicants. Successful applicants are issued shares in paper form or demat form, as per the option selected by them. If the IPO was through a book building process, the final issue price is decided by the company on the basis of bids (offers) received from different applicants. 

6. After allotment of shares, company files a ‘Final Prospectus’ with concerned ROC. After completion of certain formalities, the Stock Exchange(s) makes the shares available for trading on their platform.

Why do companies come out with an IPO?

Some of the major reasons for a company to come out with an IPO include:

Raising capital

Capital is the most basic element any business requires to grow. Scaling-up a business requires large amounts of investment in establishing or expanding manufacturing capabilities, research and development, new product development, geographic expansion, etc. IPO helps company to get the capital it is looking for, generally at lower cost than the borrowed funds.

Financial prudence

There are number of sources from where the business can start such as borrowing from banks, private loans and seed capital from venture capital firms. As the business grows, it makes financial sense to retire some of these debts. An IPO is one way to convert this debt to equity or an exit strategy for venture capital firms to recover their investment

Visibility and credibility

Getting listed on a stock exchange, post IPO gives visibility and lends credibility to the company. This facilitates access to new customers and markets thus contributing to the top line of the company.

What is an FPO?

Follow-on Public Offer (FPO) is issue of further shares to the public by a listed company. An FPO is made by company to raise funds for a special requirement like acquiring another company or to fuel its diversification, expansion or growth plans.

What is an OFS?

An Offer for Sale (OFS) is an offer to sell the shares by an existing shareholder of the company to the public. Therefore, it does not result in increase in the capital of the company. Only the shareholders change. This is a common route adopted by the government to divest or reduce its holdings in Public Sector Units. 

IPO as well as FPOs may be for fresh shares or existing shares.

What is a Rights Issue?

When a company offers fresh shares to its existing shareholders in proportion to their holding of old shares, it is known as Rights issue. Offer document of such issue is known as ‘Letter of Offer’.’ 

Composite Issue involves issue of fresh shares to public and rights issue by a listed company.

Things to look at before investing in a Public Issue

Offer Documents are published to enable prospective investors to take a decision on whether or not to apply for the issue. It contains detailed information about the company, its business, people, projects and future prospects. Generally, the offer documents are quite big, running into more than 100 pages, typically. While all the sections are important, there are few, mentioned below, which needs special attention from an investor’s point of view.

Risk factors

This is a commentary on the internal and external risks faced by the company. It details the industry landscape including the current competitors, prospective disruptors and future contenders. It also covers the regulatory and policy-related aspects that could affect the future of the company.

About the company

This section covers the details of about the company including its history, business operations, business model and strategy as well as its competitive strengths. It also talks about the promoters, management and board of directors of the company and their compensation as well as corporate structure, subsidiaries and related party transactions.

Financial information

The financial health of the company is a key factor in making an investment decision. This section reveals the company’s historical performance and includes the Balance Sheet and Profit & Loss Statement. Pay special attention to the company’s capital structure and debt levels to gauge its financial wellbeing and future prospects.

Legal issues and contingencies

This is a listing of all outstanding litigations and material developments related to the issuing company and its subsidiaries as well as the promoters of the group and their business interests. Any issue that jeopardizes the fundamentals of the company or risks continued operations is a red flag.

What do you need for investing in an IPO / FPO?

Applying for an IPO or FPO has two key pre-requisites:

1. Bank Account

Payment for all the public issues needs to be paid through an instrument ‘Application Supported by Blocked Amount’ (ASBA), which in turn requires you to have a bank account. You need to have sufficient balance in your bank account, sufficient to enable your bank to debit your account to extent of amount you have applied for.

2. Demat Account

You need to have a demat account to keep the shares once they are allotted to you. You need to mention details of your demat account (DP ID and Client ID) in the IPO application. As per recent amendment in Companies (Prospectus and Allotment of Securities) Rules, 2014, all the issues of unlisted public limited companies will be compulsorily in demat form. 

In case you do not have a demat account, you can open the same with any SEBI registered Depository Participant.

How to apply for an IPO?

1. Fill up the IPO form and submit it to any authorized stock broker or Syndicate bank. 

2. Submit online application through your bank or RTA’s website.

What care should be exercised while making online application in IPO?

  • Mention correct details of your demat account (DP ID and Client ID).

  • Specify the number of shares you want to apply.

  • Mention the price for your bid - In case of a book-building IPO, you need to mention the price (between floor price and cap price) at which you are willing to purchase the shares. Incase you are willing to pay the market determined price, you may select ‘Cut off’ price in the application.

  • Multiple bids: Investors are permitted to make up to three bids for an IPO. This allows you to hedge your risks and increase your chances of getting an allotment at the desired price. It is important to remember that permission is upto 3 multiple bids and not multiple applications.

  • Verify your order before final submission of the form.

  • Withdrawal of application: Applications can be withdrawn or cancelled at any time before the issue closes.

For retail / small investors, it is better to obtain professional advice before taking an investment decision.

Common reasons for rejection of an IPO application of an investor

Below are some common reasons for the rejection of an IPO application:-

  • Absence of or incorrect DP ID / Client ID on the application

  • Absence of or incorrect PAN on the application

  • Mismatch in the name of the applicant as per demat account and PAN card
  • Insufficient funds in the bank account

  • Multiple application by the same investor

  • Applying for a lower number of shares than the minimum requirement

  • Bids lesser than the floor price or more than the cap price

  • If application is in excess of Rs.2,00,000 and is applied in retail investor category

Will I get the shares for sure if I apply?

Applying for shares in IPO / public issue does not guarantee the allotment of shares. Whether you will get shares or not and how much, are dependent on two things – how much is the demand in the category you are applying and some luck. In case of over subscription (that is demand of shares being much more than the shares being offered by the issuer company), you may get shares less than what you apply for or may be nothing. The formula for allotment of shares is decided by the Registrar to the Issue, as per applicable guidelines.

How would I know that I have got the shares?

There are two ways. First you would get an allotment advice from the registrar to the issue, post allotment, mentioning the shares applied for and shares allotted, among other things. Most registrars now send email / SMS alerts also upon the completion of allotment process. Another way is to check balance in your demat account, on the next day of allotment of shares by the company.

Will I get money back if I do not get any share?

One major benefit of ASBA facility is that your application money remains in your bank account, till you get the shares. In case, you are not allotted any share or get lesser number of shares than you have paid for, the money to that extent is released by the banker.

Benefits of investing in IPOs

Get a head start

IPOs provide investors with an opportunity to become early shareholders in good companies that demonstrate a potential for growth. The stock price of companies with strong fundamentals will rise in future thus making your investment worth your time and money.

SEBI provisions permit issuer to offer a discount which typically could be up to 5% on the floor price. For retail investors, this offers a direct advantage to get shares at a lower price.

Level playing field

An IPO is one of the few investment avenues that offer a level playing field for investors of all shapes and sizes. The pre-determined price or a price band for bidding applies to all investors alike. Additionally, unlike the secondary market, the information about the company that is available to the public is the same as it is for institutional investors, making it the best opportunity to get in.

Best practices for investing in IPOs

Do not borrow funds to invest in an IPO

While IPOs sound lucrative as a short-term investment opportunity, it is not advisable to borrow money to invest in an IPO. At the end of the day, an IPO is an equity investment, so all market-related risks also apply to it. IPOs do not guarantee any returns or even an assurance about the post-listing trading price. Unless if you have sufficient funds to invest in an IPO, it is advisable to avoid investing in IPOs through borrowed funds.

IPO strategy and investment horizon

Your strategy to invest in an IPO needs to be based on your investment objective and time horizon. ‘Flipping’ is a strategy that involves selling the allotted shares on the listing day itself to profit from listing of shares at a higher price. However, if share gets listed lower than the bid price, investors would have to bear the losses if he sells. It is best to decide in advance the level / time, when you must exit from the share.funds.

No investment on the basis of tips / insider information

Never ever base your investment decision on ‘tips’ from friends or hearsay recommendations by your brokers. While, it is OK to seek professional help from qualified advisors or experts, you must do your homework. Ultimately, it’s your money. Another thing to avoid is investing on the basis of ‘insider information’. Insider information is information which is generally not available publically. Any transaction undertaken on the basis of such information is illegal.

All that glitters is not gold

The IPO process involves a lot of promotions using advertisements as well as opinions shared by so-called market experts and thought leaders. While it is not possible to ignore all the noise; as an investor, it is your responsibility to conduct your own research and separate the substance from the noise before taking a decision.

Myths about IPOs

All IPOs offer high returns

There is no guarantee that investing through IPO would essentially result in gains. It is possible that issue may open at a discount upon its listing or it may not attain the price level expected by you for the expected time horizon.

A company floating an IPO must be financially strong

Though there are several SEBI specified norms pertaining to the financial performance of companies intending to go public, there are numerous technicalities involved. Companies usually float an IPO after reaching a certain maturity in business and raise funds for expansion and growth. However, some companies may do it at a very early stage or even to stay afloat. 

Always look at the offer document to understand the purpose of the IPO. If it is to pay off debt or to meet the capital shortfall in ongoing operations, it is going to put money at relatively more risk.

If an IPO is oversubscribed, it must be good

Oversubscription is often touted as a key parameter of an IPO’s prospects by those who are selling it. As with any investment, stay away from the herd mentality and rely on your own homework and professional advice.

Some terminology used:-

1. Abridged Prospectus is an abridged version of offer document in public issue and is issued along with the application form of a public issue. It contains all the salient features of the prospectus. 

2. Prospectus is an offer document in case of a public issue which has all relevant details including price and number of shares. This document is registered with ROC before the issue opens in case of a fixed price issue and after the closure of the issue in case of a book built issue. 

3. Shelf prospectus is a prospectus which enables an issuer to make a series of issues with in a period of 1 year without the need of filing a fresh prospectus every time. This facility is available to public sector banks, schedule banks and public financial institutions. 

4. Greenshoe option is a price stabilising mechanism in which the underwriters are permitted to buy additional shares at the offer price subject to a cap of 15% of the issue size. These shares are used to stabilise the price in case of over-allotment.

Suggested Resources for reference

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Wednesday, July 3, 2019

7 reasons why you should Invest in Mutual Funds

02 July, 2019

Still on the fence on whether Mutual Funds are the best choice for you? Here are 7 reasons that may help you decide. 

Earn. Save. Spend. This is the cycle of money that we live by every month, if not every day, of our lives. By now, we’re sure you know the importance of saving. Perhaps, you’ve even realized the significance of investing. If not, here’s a quick primer - when you save, your money sits idle. When you invest, your money multiplies. 

Your investment choice can, obviously, significantly impact the rate at which your money compounds. While there are enough opinions on what you should be doing with your money, here are 7 reasons why mutual funds should definitely be a part of your wealth building portfolio.

7 reasons why you should Invest in Mutual Funds

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1. Higher returns:

Isn’t this what all of us seek from our investments? Mutual funds provide the right avenue for investing in a variety of market-linked instruments, which have time and again delivered superior returns compared to other traditional investment options. Debt funds have consistently beaten Fixed Deposit (FD) returns, and with bank interest rates going south, they present a good investment choice for investors with lower risk appetites. For the more adventurous investors, equities (shares) present a great investment avenue, for higher, inflation-beating returns. And investing in equities through mutual funds is an excellent way to enjoy the higher returns, but with much lesser risk, thanks to rupee-cost averaging, portfolio diversification and many other factors. Data reveals that equity funds have delivered around 11-15% returns over the last 10 years. With inflation averaging at 4-6%, you could get a head start on your savings, by identifying and investing in the right mutual funds today.

2. Professionally managed:

Mutual funds are professionally managed by fund managers, whose every day job is to track the markets and manage investments. Fund managers identify the winning stocks to buy, when to buy them, and more importantly, when to sell them. They spend hours analyzing the performance of companies, and if they fit the fund they manage. What’s more, all mutual funds are governed by SEBI, the industry body, and are highly secure and transparent. So, while earning is your job, investing it wisely and delivering high returns is the fund manager’s job.

3. Disciplined investing:

Habits are hard to break. Which is why we are advised to inculcate good habits? And what better habit could there be, than investing for your secure future? When you start a Systematic Investment Plan (SIP) in a mutual fund, you are committing to invest a certain amount on the same day of the month, consistently for a certain number of months/ years. Such a commitment instills in you the discipline to take a productive action towards your future. It becomes a fixed component of your monthly spend, around which all other expenses have to be factored. Your disposable income will be that which is left, after your mandatory expenses and investments are done.

4. Less/ No lock-in:

Almost all your traditional investing instruments come with long lock-in periods, which make it hard for you to get your money out, in times of emergencies. Mutual funds, on the other hand, broadly come with less, if not no, lock-in periods. Most funds do not have a lock-in period and give you the flexibility to redeem your money when you need it. Even tax-saving Equity Linked Savings Schemes (ELSS) come with a short lock-in of only 3 years. So you are saved the hassle of fixed, long lock-in periods, as seen in other investment options. Having said that, experts recommend that a fund should not be redeemed until the goal for which it was started is fulfilled, as the longer you stay invested, better are your chances for higher returns. 

5. Fund as per your profile and goal:

Within the world of mutual funds there is a wide variety of investment choices to pick from - equity funds, debt funds, liquid funds, tax-saving funds etc. So, depending upon your profile, goal and preference, there are various funds that are ideal for you. Unlike a PPF or an NSC, where the rules are already laid down for you, here you can choose what type of fund you want, how long you want to stay invested, how much you want to invest, and much more. Just like how a tailor-made outfit is often a better fit for you than a ready-made garment, a personalized mutual fund portfolio with the right advisor is the best fit for your goals.

6. Diversification:

We’ve all heard the adage “Don’t put all your eggs in one basket”. This is the premise of diversification. It means spreading your investments across asset classes and stocks, to reduce your risk. With mutual funds, you get the advantage of default diversification, as your fund manager invests across a variety of stocks. Sudden changes in one stock, are likely to be balanced out by the performance of other stocks in the fund. It is an ideal way to get a taste of the equity markets with lesser risk. Of course, it is important to not invest all your money in one mutual fund, and further lessen your risk by diversifying across different types of mutual funds. Consult your financial advisor on how to balance your portfolio by selecting the right mutual funds.

7. Convenience;

And finally, investing in mutual funds is now a piece of cake. The whole process is offered online by many players in the industry. Starting a SIP or making an investment can be done in a matter of few clicks. Even tracking the performance of your investments can be done easily online. You can set up a bank mandate for monthly investments and set your SIPs on auto-pilot mode, so that you are even saved the hassle of manually investing every month. The SIP amount is automatically debited every month from your account. In short, mutual funds today, provide the right ground for investing with the least effort, and with the potential for maximum returns.

For Complete Information About Leading Mutual Fund Advisor Thane, Contact Nidhi Broking Services Pvt. Ltd. On 022 - 2530 3690 / 022 - 2530 1134 Or Email Us At -

Wednesday, June 26, 2019

India becomes investment darling for sovereign wealth and pension funds

26 June, 2019

Wealth and state pension funds are expanding their horizons to private markets, to complement an existing focus on stocks and bonds.

Sovereign wealth funds are piling into India, buying stakes in everything from airports to renewable energy, attracted by political stability, a growing middle class and reforms making it more enticing for foreigners to invest. Wealth and state pension funds are expanding their horizons to private markets, to complement an existing focus on stocks and bonds. Almost every jurisdiction in the western world is raising the bar for entry for foreign investors but in India it's the other way round. There's also the attraction of the demographics and a lot of assets that sovereign funds like, such as infrastructure, where there's a huge appetite for foreign funding. 

India becomes investment darling for sovereign wealth and pension funds

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Indian Prime Minister Narendra Modi's election win last month consolidated his Hindu nationalist party's power base and is expected to stimulate further foreign investment. Foreign institutional investor flows into Indian equities are $11 billion year-to-date, surpassing the total annual tally in each of the four previous years and setting 2019 on course for the highest annual inflows since 2012. India's benchmark BSE Sensex has soared nearly 10% year-to-date.  


The attention sovereign funds are giving India is like that they have paid to China. Private equity deal activity in India surged to $19 billion in 2018, the highest level in at least a decade, according to PitchBook data. Sovereign wealth funds and pension funds participated in about two-thirds of that amount. Among recent deal, Singapore's GIC sovereign wealth fund and the Abu Dhabi Investment Authority (ADIA) this month agreed to make a further investment of $495 million in renewable energy firm Greenko Energy Holdings, which has wind, solar and hydro projects. India is widening its use of solar and wind energy to help reduce its reliance on fossil fuels.

In April, ADIA and India's National Investment & Infrastructure Fund (NIIF) agreed to buy a 49% stake in the airport unit of Indian conglomerate GVK Power & Infrastructure. Another wealth fund is in talks on an infrastructure investment, while Canadian pension funds are seeking similar deals. Canada Pension Plan Investment Board and GIC earlier this year participated in a $145.8 million buyout of Oakridge International School, an operator of schools in India.

ADIA, the world's third-biggest sovereign wealth fund, which has been investing in Indian equities and fixed income for years, has broadened its focus to include asset classes such as infrastructure, real estate and private equities. Its increased interest in India is driven by the country's strong growth potential, positive demographics and continued economic development. More than half of India's 1.3 billion population is aged under 25.The push comes as India and the United Arab Emirates seek to strengthen economic and trade ties.


Regulatory reforms are also bolstering sentiment and drawing in wealth funds. Indian-based fund managers were from this year licensed to manage foreigners' portfolio holdings in the country, where previously such assets had to be managed outside India.

Bankruptcy resolution rules introduced in 2016 helped pave the way for ADIA's $500 million investment earlier this year in a distressed debt fund. The investment was seen as an effort to launch a secondary market in India's mountain of distressed debt and help ease the burden on local banks.

Omprakash Shahi,
Managing Director,
Nidhi Broking Services Pvt. Ltd.

For Complete Information About Investment Planner in Thane, Contact Nidhi Broking Services Pvt. Ltd. On 022 - 2530 3690 / 022 - 2530 1134 Or Email Us At -

Tuesday, June 25, 2019

Systematic Withdrawal Plan (SWP) in Mutual Fund

25 June, 2019
Mutual fund investors are opting for Systematic Withdrawal Plans to meet monthly cash flows and this is emerging as a preferred mode as compared to dividend.

Best Mutual Fund Advisors in Thane
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1. What is a Systematic Withdrawal Plan (SWP)?

Systematic Withdrawal Plan (SWP) is a facility by which investors can withdraw a fixed amount from a mutual fund scheme. The frequency of withdrawal could be monthly or quarterly, though the monthly option is most popular. Investors can customise cash flows they can withdraw just a fixed amount or even opt to withdraw just the capital gains on his investments.

2. How can an investor start one?

A SWP can be started any time. It can be done while making the first investment. If you are an investor in a scheme. You can just activate the SWP option in the scheme, whenever you feel the need to simply fill out an instruction slip with the AMC stating the folio number, the withdrawal frequency, and date for the first withdrawal and the bank account to credit the proceeds.

3. Why is SWP finding favour with financial advisors now?

Dividend is subject to a dividend distribution tax, while capital gains up to Rs. 1 Lakh in a financial year, are tax free in the hands of an investor. In addition, dividend cannot be guaranteed by a mutual fund and is subject to market movement, distributable surplus and profits made by a scheme. As compared to this, SWP is more reliable than a dividend and is set up by the investor himself.

4. What are the tax implications in a SWP?

SWP is periodic withdrawal, which translates into redemption of units from the scheme. Hence, the tax treatment of each withdrawal will be the same as is applicable to equity and debt funds. Hence, for units where the period of holding has not crossed 120 months for equity-oriented funds, investors will have to pay a short term capital gains tax.

For debt funds, there will be a tax liability (short-term capital gains on holding for less than 36 months and long-term capital gains on longer holding periods). In addition, investors also need to factor in the exit load of the scheme. If it is from an equity fund which has a 1 % exit load before the end of one year, the investor will have to bear the same.

For Complete Information About Systematic Withdrawal Plan (SWP) in Mutual Fund,Contact Nidhi Broking Services Pvt. Ltd. - Best Mutual Fund Advisors in Thane, On 022 - 2530 3690 / 022 - 2530 1134 Or Email Us At -

About Systematic Investment Plan {SIP}

22 June, 2019
Lately, SIP mutual funds have become the talk of the town. Investors seem excited and are eagerly venturing into this option over the traditional bank fixed deposits. Especially those investors who want to enter stock markets but don’t have the required time are aggressively investing in SIP mutual funds. And why not; after all equity is asset classes which can help you generate wealth over the long term. SIPs are actually an ideal way to invest over a one-time investment. That too when it comes to mutual fund investing, you get multiple advantages from all corners. SIP mutual funds not only help to become rich but also create a win-win situation for the investor.

Let’s know how it is an ideal investment option.

Mutual Fund Consultant and Advisor Thane

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1. Develop the habit of saving

One of the crucial advantages of SIP is that it helps to build the habit of saving and investing simultaneously. It inculcates a feeling of commitment in the investor because you have to keep aside a fixed amount each month for investment purposes. Additionally, as the amount to be set aside is very nominal i.e. as low as Rs 500 to Rs 1000, you don’t feel the burden on your shoulders. SIPs have helped to change the entire perspective towards saving and investing. You don’t postpone your decisions to a future date and are in a better position to start investing as soon as possible.

2. Achieve financial objectives

If you don’t have a plan, then it becomes quite difficult to achieve the things you want in life. A similar situation happens in case of life goals also. You may have thought of buying a house or going on an exotic vacation. But you don’t know how to realise your dreams. In this scenario, SIP mutual funds help in ways more than one. Whether it is a short-term or long-term goal, SIP can make things possible. Since the whole process of SIP is so much goal-oriented and disciplined that it keeps you on the right track. You are able to achieve your goals in the expected time. Moreover, in case of a majority of open-ended funds, you enjoy a lot of liquidity. This allows you to withdraw your investments during emergencies.

3. Lower cost of investment

It is fairly ok to have wealth creation expectations from your investment. Especially, in case of equity investments you got to have a robust strategy to make money. Yet another less complicated way of making money is to lower your overall costs involved in investment. SIP mutual funds enable this in a streamlined fashion through the process of rupee-cost averaging. In this, the fund manager keeps buying units of the said mutual fund scheme with your monthly SIPs irrespective of the state of stock markets. Hence, during slump more units are bought and during rally lesser units will be bought. In this way, your average per unit cost of investing reduces dramatically. Moreover, you are freed from the worries of timing the market.

4. Enjoy power of compounding

Compounding happens when you earn interest on the interest already generated. In this, both of your initial investment and interest earned on it are used to find out the interest for the next periods. When you invest in SIP mutual funds, you enable power of compounding to work on the invested money. Thus, you are able to earn higher returns as you move ahead in your investment journey. Compound interest makes your money grow faster because interest is calculated on the accumulated interest over time as well as on your original principal. Compounding can create a snowball effect, as the original investments plus the income earned from those investments grow together. 

Compounding works well when you stay invested for longer period of time. It is because of this reason that even smaller amounts like Rs 500 invested every month turns into a big corpus after some point of time. That’s why it is always beneficial to start investing as early as possible. Compounding interest is interest calculated on the initial principal, which also includes all of the accumulated interest of previous periods of a deposit or loan. Interest can be compounded on any given frequency schedule, from continuous to daily to annually. When calculating compound interest, the number of compounding periods makes a significant difference. Compound interest is calculated by multiplying the initial principal amount by one plus the annual interest rate raised to the number of compound periods minus one.

Albert Einstein states "Compound interest is the greatest wonder in the world. He who understands it earns it...he who doesn't pays it."

5. Advantage of diversification

You should keep all your eggs in the same basket. Same principle applies in investing also. Instead of putting all your money in one asset, you need to assign it in different asset classes. If it’s within same asset class like equity funds, you need to own at least 4-5 different equity funds in your portfolio. This mechanism is known as diversification. It involves spreading your investment amongst multiple securities to reduce the risk of fluctuations in returns. While investing in SIP mutual funds, you get the advantage of diversification. With a nominal amount of Rs 500, you are able to get a wider exposure across asset classes, sectors, industries and market capitalizations. In this way, your firm-related risks are reduced which enhances your chances of wealth creation.

Mutual Fund Consultant and Advisor Thane

For Complete Information About Systematic Investment Plan, Contact Nidhi Broking Services Pvt. Ltd. - Mutual Fund Consultant and Advisor Thane, On 022 - 2530 3690 / 022 - 2530 1134 Or Email Us At -