How to make money from Mutual Funds?
You may take a lot of care deciding what to invest in and when to do so. Most people, however, are clueless on when to get out. Many investors worry only about investing their hard earned money. What they ignore in this entire process is a second issue that plays a very important role.
This is about the appropriate time and route for withdrawal of the funds for this is a key determinant of the extent of returns that a person will finally take home. Most investors are clueless on this issue.
In your quest for investing, you should select a systematic investment plan (SIP) while investing your money in mutual funds. This allows for a systematic approach in the investment process reducing your overall investment risk.
The question that will arise for most investors is whether there is a correct way in which one can withdraw the funds and hence reduce risk on this front too?. There is no clear answer on this one but there are a few strategies that people can follow in this regard. Here we shall look at a few such strategies that are most commonly employed.
The Trigger Options
One of the popular strategies is to sell the holdings after one has earned a specific percentage return. Thus for example an investor might say that I will withdraw the money on my holdings when the returns touch, say, 40%. This will mean calculating the exact NAV for this purpose so when it touches the desired level one can sell off the holdings and take the money out.
The danger in trying to do this monitoring is that one can forget about putting the transaction through when the desired situation is reached. This can result in a situation where an opportunity would be lost if the benefit at a particular time period is not grabbed. Such a discipline is also difficult to implement especially when there is a bullish sentiment all around.
Investment advisers suggests the way to tackle such a situation is using the trigger options. Under such options provided by specific mutual funds one can set a specified trigger limit and the amount will be redeemed when the level is hit.
This removes the burden from the shoulder of the investor in trying to ensure that a particular level of return is protected for them.
For example in the case above an investor can give instructions that the investment should be redeemed when the gains hit 40% and in such a situation when the desired level is reached the trigger option will come into effect by itself and the transaction put through.
Systematic Withdrawal Plan (SWP)
Another option that the investors can use is that of a systematic withdrawal plan (SWP). In this there is a specified sum that is withdrawn each month from the available units. Due to this there is a regular outflow of funds for the investor regularly over a period of time.
One must be very careful about the fund for which such an option is exercised. Undertaking a SWP for a debt scheme and an equity scheme is not the same thing in terms of features. The way this feature works is that one could have an investment of say Rs 1 lakh in a fund.
The investor might say that I will put in a regular withdrawal of Rs 5,000 per month. What actually happens is that units equal to the specified amount are withdrawn each month. This works well in debt oriented schemes where there is regular appreciation so the withdrawal is at or around the appreciation level.
Systematic Transfer Plan
Several investors use a variation of this when they ensure that s specified sum is transferred each month from one scheme to the other. This is known as a systematic transfer plan (STP). Under this system specified units are redeemed form one scheme and these are then taken to some other scheme. This is nothing but following the same principle of ensuring that a regular sum is taken out each month.
Overall, you can use any of these or a mix of these options depending upon your need. That would be the way out for investors while deciding on an exit strategy. Remember, anyone can buy an investment but it’s knowing when to sell it that makes you rich!
He has authored several analytical articles on personal finance in The Times of India and The Economic Times. Being a finance geek and having been involved with internet since the early days of the medium, he was a great help and source of guidance while formulating personalmoney.in. You can know more about Manish at ManishMisra.com
Disclaimer : Manish has agreed to write in his personal capacity. Views, opinions expressed in his articles are his own and do not necessarily reflect the views of his employer.PersonalMoney.in