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Confused about how SIPs work? Here are the benefits of investing through this mode

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Generally, it has been noticed that investors try to co-relate between these two words – mutual funds and SIPs and gets confused that how systematic investment plans, also called SIPs, actually work and make your investments profitable. Therefore, before making any investment, you as an investor should understand what a mutual fund is and how doing systematic investment planning helps you to achieve your financial goal over a period of time.

To understand how SIPs work in mutual funds, let us first briefly know what mutual funds itself stand for. A mutual fund is a financial instrument, which comprises of several schemes where you pool your money along with other investors’ money, which then gets invested in stocks or bonds or a mix of the two (both stocks and bonds), depending on the type of mutual fund scheme you choose.

The total investment made by a mutual fund, either in stocks/bonds, is then divided into units. You get units, based on the proportion of your investment (money you invest in the mutual fund).  The value of the mutual fund is measured by its Net Asset Value (NAV). This is the value at which you (investor), buy and sell mutual funds.

Systematic Investment Plan and its working mechanism

SIPs are a method of investing in mutual funds. You invest a certain pre-determined amount at a regular interval in the mutual fund. This might be once each week, once each month or once in a quarter. If you have given ECS mandate, money will be automatically debited from your bank account and invested in the mutual fund scheme of your choice. Units of the mutual fund scheme are allocated based on the NAV (Net Asset Value) of the scheme for that day.

How are SIPs related to mutual funds?

C.S. Sudheer, founder, indianmoney.com, said mutual funds are a professionally managed trusts, where money invested by you and other investors are pooled and invested in stocks, debt or a mix of stocks and debt, depending on the type of mutual fund. SIPs are just a method of investing in mutual funds and to understand better, one should know these difference between mutual fund and SIPs:

=> Mutual funds are an investment. SIPs are a method of investing in mutual funds.

=> Though SIPs are often associated with mutual funds, you can even invest in stocks through SIP.

=> SIPs are like EMIs you pay on loans but in the opposite direction. “Just as you pay EMIs each month towards loan repayments, in much the same way, SIPs are a method of investing regularly in a mutual fund,” he added.

How you get benefited from SIP?

It is a smart and hassle-free method of investing in mutual funds. Through SIP you can invest a certain, fixed, pre-determined amount at regular intervals of time like once a week, month or quarter. Doing so, SIPs give you the twin major benefits of rupee cost averaging and the compounding benefit:

Rupee Cost Averaging: With SIPs you don’t have to time the market. Rupee cost averaging helps you avoid the guessing game. SIPs encourage regular investing in mutual funds and your money fetches more units if NAV is low and fewer units if NAV is high. SIPs are an excellent way of investing, especially when markets are down, as you accumulate more units which help build a sizeable corpus with time.

Power of compounding: If you invest in mutual funds via SIPs the returns you get earn returns and this is the compounding benefit. SIPs encourage long-term investing in mutual funds as earnings get re-invested giving even higher returns.

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What investors in the UK are talking about, when they aren't talking about Brexit

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I’ve been working from London this fall. The idea is to get new perspectives and experience another way of life. That means black cabs on the wrong side of the road. Pubs on every corner. Football, not football. And hopefully, different views on markets and investing.

My notebook is filling up from investment conferences and meetings with asset managers. Below are some items that I’ve highlighted.

One-way street

Attending investment events, it’s struck me that few of the analysts and portfolio managers around me have ever experienced a sustained period of rising interest rates. Rates peaked in 1981, which means even grizzled veterans like me have only seen yields decline (I started in 1983). Those who started in the last 10 years only know low single-digit rates.

This trend has meant decades of good bond returns and a constant tailwind for interest-rate sensitive securities, including stocks in the financial, utility and real estate sectors. But rates have been rising for two years now, which suggests a new paradigm.

Pricing anomalies

The U.S. stock market has looked relatively expensive for some time, but the value-oriented managers I’ve met have a different view. Anne Gudefin, CEO of London-based Velanne Asset Management (manager of our Global Equity Fund), points out that the S&P 500’s high valuation is misleading. It’s skewed by high price-to-earnings multiples on the well-loved growth stocks, including the FAANGs. Meanwhile, there are bargains to be had in the ignored or even hated sectors like healthcare, asset management, (non-Netflix) media and oil services.

With the recent market weakness, there may also be bargains emerging in the consumer area, but the tone in London toward these sectors has changed. In previous visits, I was barraged with managers touting the power of global brands. Their thesis was that the big consumer companies were unstoppable and worth paying a premium for.

It now appears the bloom is off the rose. Analysts are questioning that view in face of changing distribution channels (on-line), influencers (social media) and a growing number of craft and local offerings. They’re asking how the mega brands will adapt.

Strong get stronger

In one presentation, an analyst pointed out that recessions shift the power from weak hands to strong hands. He was referring to the fact that profitable companies with strong balance sheets can use tougher times to consolidate the industry and improve their competitive position.

Fortunately, or unfortunately depending on your perspective, he also noted that the mighty weren’t fully rewarded during the 2008 financial crisis. The capital market declines were sharp but short, so marginal players were able to survive with the help of central bankers (low interest rates) and governments. We’ll have to wait until the next slowdown to fully test the analyst’s theory.

A big, growing world

When emerging markets managers talk about the opportunities in Asia, it provides much needed perspective. While we focus on pipelines, U.S. and Ontario politics, and Brexit, a big chunk of the world is in growth mode.

Consumption in China, India and the rest of Asia is in a strong, upward trend. The expanding middle class is moving from buying basics to spending on discretionary items (vehicles, travel, experiences). The use of technology is ahead of the western world in many areas due to a lack of legacy systems. Government policies are becoming more business friendly in large countries like India and Japan. And trade within Asia now is almost double that of North America and Europe combined.

When economists and commentators agonize over whether China is growing at 6.5 or 6.7 per cent, I can’t help but think they’re missing the forest for the trees.

Emerging opportunities

And finally, I’m hearing that the areas in the stock market with the most opportunity are in those forests. One manager described valuations in Asia as being at “distress levels.” A number of managers told me their emerging market portfolios, which include South America and parts of Europe, are as cheap as they’ve ever been. Uncertainty around trade has severely hit both the stocks and currencies in the developing world.

Hmmm, it’s becoming clear where my wife and I should camp out next.

Tom Bradley is President of Steadyhand Investment Funds, a company that offers individual investors low-fee investment funds and clear-cut advice. He can be reached at tbradley@steadyhand.com

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Investing for all seasons

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It’s been a strong year for investment trust initial public offerings (IPOs), with 15 by the end of October amounting to £2.61bn, according to the Association of Investment Companies (AIC). These have been followed by a further two in the first half of November – M&G Credit Income Investment Trust (MGCI) and Gresham House Energy Storage Fund (GRID), which each raised £100m – and more are expected between now and the end of the year. But a key differentiator between what has been coming to market this year and many of the issues of the past decade is that a number of the launches have a growth rather than income focus, and invest in equities rather than high-yielding alternative assets.

The most obvious example is Smithson Investment Trust (SSON), which raised £822.5m, making it the largest ever launch of a UK-domiciled investment trust, beating Woodford Patient Capital Trust’s (WPCT) £800m launch in 2015. Smithson invests in small and medium-sized companies listed globally with a market capitalisation at the time of investment of between £500m and £15bn.

Other equity-focused launches include Mobius Investment Trust (MMIT), which raised £100m, albeit short of its £200m target, and AVI Japan Opportunity Trust (AJOT), which raised £80m to invest in Japanese smaller companies.

However, these aren’t traditional equity funds. Mobius Investment Trust is focusing on companies with the potential for operational, financial, and environmental, social and governance improvements. AVI Japan Opportunity targets what it describes as overcapitalised small-cap Japanese equities, whose managements it will engage with and help to unlock value for shareholders. This will be along the lines of the activist approach that its manager, Asset Value Investors, has been taking with some of the holdings in another fund it runs, British Empire Trust (BTEM).

But perhaps the most striking example of a recently launched investment trust that is more than a regular equity fund is Baillie Gifford US Growth Trust (USA). It invests in US equities, but at the end of September had seven unlisted investments accounting for 5.9 per cent of its assets. This may not sound much, but it is very likely to rise.

Baillie Gifford says: “We have observed that, increasingly, companies in the US are choosing to remain private for longer, and as such the public equity markets do not offer the full spectrum of growth investment opportunity that we have previously enjoyed. The trust’s ability to invest up to 50 per cent of its net asset value (NAV) in unlisted equities at the time of purchase gives us the flexibility to invest in what we believe are the exceptional growth companies in the US, whatever their listed status.”

Looking beyond listed equity markets has so far been beneficial to another trust Baillie Gifford runs – Scottish Mortgage Investment Trust (SMT). It recently reported that between when it started investing in unquoted investments in June 2010 and the end of September 2018, this segment of its portfolio has made an impressive return of 419 per cent, well ahead of FTSE All-World Index’s return of 163 per cent over the same period.

A number of other existing trusts ranked in mainstream investment trust sectors have an allocation to unquoted assets, notably Woodford Patient Capital Trust in the UK All Companies sector, F&C Investment Trust (FCIT) in the Global sector and Fidelity China Special Situations (FCSS) in Country Specialists: Asia Pacific. Lindsell Train Investment Trust (LTI) and Chelverton Growth Trust (CGW), meanwhile, hold stakes in the unquoted management companies that run them.

An increase in exposure to unquoted investments, in both new and established investment trusts, is not something to be complacent or even necessarily pleased about, as we pointed out in last month’s IT Geek column. Unquoted investments are very high risk – they can make great returns, but they can also make very great losses, and are a lot less transparent than listed equities.

Scottish Mortgage Investment Trust’s managers responsibly point out that they “are keen to set realistic expectations for Scottish Mortgage’s own shareholders. Overall [we] would suggest that, if anything, the results from investing in such companies so far for Scottish Mortgage have been unduly good. Just as with the publicly listed holdings, some will not work and a number may fail outright. Only a handful will really drive the returns.”

What this all underscores is the evolving nature of investment trusts. If a new fund comes to market it has to have a unique selling point, because if you want basic equity exposure these days you can get it very cheaply via an exchange traded fund (ETF) or tracker fund, in some cases for an ongoing charge of less than 10 basis points a year. And if you want actively managed exposure to mainstream equities there are thousands of existing funds and investment trusts offering this, some of which have very strong performance records and competitive charges, meaning they are unlikely to be outdone by any new entrant.

As an investor, it is no bad thing to have increasing options with which to diversify your portfolio, meaning you really can have investments for all seasons. The downside to this is the increasing complication of investment trusts, so that more than ever before you have to do very thorough due diligence before you invest. We have always said at Investors Chronicle that investment trusts are for the discerning investor, and you now have to be very discerning.

Investment trusts have always required more due diligence and background research than open-ended funds. For example, they typically trade at discounts or premiums to NAV, which could have an influence on when you buy and sell their shares. And they can gear – take on debt to invest more in markets than their assets amount to. This can boost their returns in rising markets, but compound their losses in falling markets, so you need to know if a trust has gearing, how much it is and have a high enough risk tolerance to take on this added liability.

Trusts also have generally less prescriptive investment limits and rules than open-ended funds, and their closed-end structure means they can invest in illiquid and higher-risk investments – a reason why they are able to look beyond plain vanilla equities.

The increasing complications and potentially higher risks of investment trusts don’t mean you should avoid them, though, especially as some investment trusts hold lower-risk assets, don’t gear and are conservatively managed. Our professional investor picks, for example, always include a number of suggestions for wealth preservation. But you should still be prepared to go the extra mile and do all the research necessary to understand exactly how a trust works and what it invests in before you commit money to it.

Even more importantly, as with any investment, an investment trust should fit in with your asset allocation – the range of assets you have decided is appropriate for trying to meet your financial goals. So, for example, although investment trusts with substantial allocations to unquoted investments are higher risk, if you have a long-term investment horizon, a high risk appetite and are looking for growth, they could account for a small part of your portfolio.

One of the reasons why we put together an investment trust special each year is to help you narrow down appropriate investment choices for the asset allocation you have decided is appropriate for your needs. These articles include a number of suggestions from professional investors and analysts, because the insights from these sorts of investors can be a useful addition to the fact-find that you undertake yourself. But while these can be part of the information you build up to get an idea of whether an investment trust is right for you, it should never be a substitute for your own thorough research.

For all the features in our Investment Trust special, click below: 

Around the world in eight investment trusts

IC investment trust income portfolios: 12 months on

The most recommended investment trusts

Get the most out of UK smallers by picking the right investment trust

Investment trusts: Professional picks 2018

Investment trust IPOs over the first 10 months of 2018

IPO Amount raised (£m) AIC sector
Marble Point Loan Financing (MPLF) 148 Sector Specialist: Debt
Augmentum Fintech (AUGM) 94 Sector Specialist: Tech, Media & Telecomm
Baillie Gifford US Growth Trust (USA) 173 North America
JPMorgan Multi-Asset Trust (MATE) 93 Flexible Investment
Life Settlement Assets (LSAA) 134 Sector Specialist: Insurance & Reinsurance Strategies
Gore Street Energy Storage Fund (GSF) 31 Sector Specialist: Infrastructure – Renewable Energy
Odyssean Investment Trust (OIT) 87 UK Smaller Companies
Ashoka India Equity Investment Trust (AIE) 46 Country Specialists: Asia Pacific
Hipgnosis Songs Fund (SONG) 202 Sector Specialist: Tech Media & Telecoms
Tritax EuroBox (EBOX) 300 Property Direct – Europe
Trian Investors 1 (TI1) 271 Sector Specialist: Financials
AVI Japan Opportunity Trust (AJOT) 80 Japanese Smaller Companies
Ceiba Investments (CBA) 30 Property Specialist
Mobius Investment Trust (MMIT) 100 Global Emerging Markets
Smithson Investment Trust (SSON) 823 Global Smaller Companies
Total 2612  

Source: AIC

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Where the super wealthy are investing their money

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Ultra-wealthy investors aren’t bullish on the markets but they are well positioned to “weather the storm,” according to Michael Sonnenfeldt, founder of investment club Tiger 21.

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In the third quarter, Tiger 21 members moved more capital into real estate and private equity, according to its latest asset allocation report. The network, which is made up of more than 600 entrepreneurs from every industry, has $60 billion in assets.

Real estate accounts for 28 percent of its allocation, while 24 percent is in private equity.

“You want to be defensive, but in a low-risk environment you still have to take risk. So you are going to take risk where you have expertise: owning buildings, building small businesses,” Sonnenfeldt told CNBC’s “Power Lunch” on Thursday.

Members have also cut back on fixed income, only 9 percent of the club’s allocation, because of concerns about rising interest rates. It has 23 percent of its money in public equities, 5 percent in hedge funds and 10 percent in cash.

Sonnenfeldt said the members meet and try to figure out what is happening in the markets, businesses and the economy, and they’ve noted a shift from monetary policy to fiscal policy.

However, “normally when you have that shift, and the market always gets choppy when that happens, you don’t have a trillion-dollar deficit against wanting to have more infrastructure,” he added. “One or the other wins out. So when you add that and China … our members are concerned.”

When it comes to investing in public stocks, the wealthy turned to names such as Apple, Amazon, Facebook and Berkshire Hathaway.

While tech has taken a beating lately, Sonnenfeldt said tech stocks are “unique because of their scalability.” Amazon, which fell into bear market territory earlier this week, is still up 37 percent year to date. Apple, which also tumbled into a bear market on Wednesday, is up more than 12 percent so far this year.

Sonnenfeldt called Apple “rock solid” and said of Amazon, “Where else can you get a shopping center on a desk? It’s still the best place to do it.”

However, he conceded that Facebook is now facing some headwinds thanks to recent hits to its reputation and the possibility of regulation. On Wednesday, The New York Times released a bombshell report that detailed how the company avoided and deflected blame around its handling of Russian interference in the U.S. election and other problems.

When it comes to Tiger 21’s favorite sector, health care is the “gift that keeps on giving,” Sonnenfeldt said.

“If you cure cancer, in good times and in bad, you’re going to have a winner,” he said.

Plus, there is “huge wealth” in the U.S. and people will pay to improve the quality of their lives, he said.

— CNBC’s Stefanie Kratter contributed to this report.


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