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Equity investing through mutual funds
Spending of money ,time or any thing in hope of big rewords in future is called investment.So,if we spend a little money today to get a big amount of money in future ,it is investment .Rewards of investment depends on (1).amount of money to be invested (2)time period as for how many years the money would be invested and (3) instrument in which the money would be invested .Let us consider every on point of these three step by step.
(A) Amount of money- Equity investing in mutual fund scheme can be start with as little as 500 Rs .Generally the minimum amount for investment is 5000 Rs .You can deposit this amount of 5000 Rs by a single check ,or in lump sum monthly .When we deposit a certain amount e.g. 1000 Rs or 1300 Rs etc at every certain time period e.g. monthly ,every 3rd month or half yearly ,is called systematic investment plan (SIP) .
There are certain mutual fund scheme s cash deposition is not permitted .Only check or drafts are accepted for payment .So we have option to invest the amount either lump sum or in investments.
(B). Time -Time span is the most important investment .As the time period of investment becomes larger risk becomes less .Another thing ,the nature of compound interest provides us larger sum total return as the time go larger .Let us consider at following example-
A sum of 5000 Rs is invested in a mutual fund scheme where it is hoped that the scheme wouid give 18% yearly return . The sum total amount after various time span would be as following -
After 10 years the amount would be =26169 Rs.
After 20 years =136965 Rs .
After 30 years =716853 Rs.
Here ,we must have into consideration the inflation .It is our daily experience that as the time passes away ,the value of money decreases .You can not buy some amount of things for this amount before ten years This general rise in prices is called inflation .To consider the real return of investment ,we must have close eye into inflation .Historic inflation rate in india for last decade is about to 6% .At this rate of inflation ,value of money would be about to half after every 12 years .Using following formula-
Where, A=amount after certain period of investment
P=present value of investment
r= espected rate of return for certain time span
t=time span .
we can find out future value of our investment or value of investment comprative to today's value under efect of inflation .
Let us understand it by calculation .In the above example ,invest rate of 5000 Rs at 18% yearly return for 10 years would be calcuated as
Now,considering 6% inflation under account ,value of this 26169 in today's terms ,would be calculated as following-
10 years you would need 26169 Rs to buy as much things as you can buy for 14095 Rs today.
Here in this example ,9095 Rs is the real gain after a period of ten yrs.
(C)Instrument- Instrument means where the money is invested .As we can invest our money in bank ,fixed deposit (FD),shares or equity .in real estate etc.So,FD ,shares ,real estate and gold etc are the instrument of investment .Instrument has diffirent kinds of investment .Instrument has diffirent kind of risk factors.
It is our expectatiors ,risk bearing ability ,time span and amount of money which effects our investment dicission .
For example expectations for high return allow to investin equity or real estate ,the high return instrument .But real estate requires a certain big amount to beinvested .Equity investing does not require a big sum of money but market risk is involved with this investment