Investment Risk & Growth question

Mutual Fund
Mutual funds are mainly two categories such as open-end funds and closed-end funds. Open-end mutual funds can invest by an investor on the net asset value (NAV) of the end of the day. One purchases units in open-end mutual funds from the mutual fund house itself or one of its agents. One can also invest through NSE.
An investor can earn money through mutual funds on his or her investments in two ways: dividend income and capital appreciation. An investor while investing in a mutual fund selects an option of whether to take dividends in physical mode or reinvest them in funds or choose the growth option to appreciate the NAV of the fund. In other words, investment in a mutual fund gives capital gain/ loss and dividends to its investor. When funds grows year after years, they are declared as dividends to the funds holders.

Investors should stay away from sectoral and thematic mutual funds and invest in diversified mutual funds through a systematic investment plan (SIP) and a systematic transfer plan (STP) which are the safest bet at present.

The following illustrates how SIP work in an uptrend and down trend market:
Table-1
Month NAV in Rs per unit of Mutual Fund
Uptrend Down trend
Jan 10.00 10.00
Feb 10.80 9.50
March 11.90 9.00
April 12.60 8.00
May 14.50 7.90
June 15.00 7.00
July 16.90 6.00
Aug 17.50 5.90
Sep 17.80 5.00
Oct 18.00 4.90
Nov 18.10 4.50
Dec 18.50 4.20
Total price 181.60 81.90
Average price 15.13 6.83
Percentage on average price (%) 51.33 -31.75
Based on the above analysis if one invests one unit of equity oriented mutual fund in the month of January with a NAV of Rs.10, it becomes 85% growth in the month of December in an uptrend market and a 58% loss in a down trend market. However, the average unit price (NAV) will be Rs.15.13 and Rs.6.83 in an uptrend and down trend market respectively through SIP. It is clearly shown that SIP investment is better than a one-time investment as percentage of loss is minimized during the down trend. Loss incurred is only 31.75% through SIP against 58% through one-time investment in a down trend and vice versa.
Investment through SIP ensures discipline investment regardless of the volatility of the market movement. This helps an investor average his cost through market cycles and create a big corpus to achieve his or her goal without taking too much risk in the long run. One can invest a fixed amount in a mutual fund regularly such as daily fortnightly, monthly and quarterly in SIP.
Tips for mutual fund investment:
• Before investing any unit in a mutual fund watch the track record of AMC. It is important that a consistent fund create more return over the long run than a new fund.
• For the first time one must start from balance funds having equity of 65% or more.
Tax Benefit:
Dividend earning by an investor from the unit of mutual funds and shares is tax free as per the prevailing income tax act. One can enjoy capital gain tax from holding shares and mutual fund units for 12 months. In that case the capital gain arises is not taxable as it is treated as a long-term asset.
All SIP investments are treated individually for tax purposes. If one sells now, profits from equity investments that are more than a year old are treated as long-term capital gains and are exempt from tax. However, gains from SIPs made in the past 11 months will be taxed at 15%. Profits / gain from SIPs made over a year for a debt fund or gold fund or balance fund , which has less than 65% of their corpus invested in equities, will be taxed at 10% (or 20% after indexation) and short-term profits will be added to the annual income and will be taxed at the applicable rate.
On the other hand, those who choose dividend payout options and earn yearly/quarterly dividends on investment are exempted from income tax, as dividend tax is already paid by the mutual fund.
INVESTMENT… RISK & GROWTH - A guide for investors about investment vehicles