Agreeing, Mutually: A Guide to Mutual Funds
In a world where relatively young people are selling their startup for millions, many of us are left wondering how we can go about building our fortune.
Mutual funds are a simple and hassle free way of achieving your long term financial goals.
In a world where relatively young people are selling their startup for millions, many of us are left wondering how we can go about building our fortune. For time strapped individuals, investing in mutual funds may be a great way to build wealth for the long term, if you invest in a disciplined and consistent manner.
The best way to get started with mutual fund investing is through a monthly installment termed as Systematic Investment Plan (S.I.P.). You can get started with as little as ₹2,000 a month and increase the monthly installment as per your income.
One of the foremost advantages of mutual funds is that they let you reap rewards in the stock market while minimising the risk that is traditionally associated with investing in the stock market. Mutual fund managers are specialists and diversify their investment portfolio by not being over exposed to any particular sector. As an individual investor, you would need a large investment amount in order to adequately diversify your investment between different asset classes.
A fund for every need
A primary criticism of Mutual Funds is that they do not provide an investor flexibility as all major investing decisions are taken by the Mutual Fund manager. This is not true as you can choose between varieties of Mutual Funds when you decide to invest. Equity oriented mutual funds are for investors who have a large risk appetite and would like to invest in the equity market. Debt-oriented Mutual Funds are for risk averse investors who prefer government bonds with stable returns.
Sector funds typically invest in a particular sector like real estate, energy etc. These funds allow investors to gain benefits of developments in a particular sector. For investors looking for tax benefits, the Equity Linked Savings Scheme (ELSS) is a good investment option. Unlike other investment schemes like Personal Provident Fund which offer tax returns but have a long lock-in period, the ELSS option has a minimum opt-in period of only three years.
Flexibility
If you are considering investing in a Mutual Fund but are concerned about committing for the long term, there is no reason to fret. You can exit from a mutual fund at any point of time without incurring any penalties. Another important aspect is to choose the right mutual fund. Once you have narrowed down on whether you are looking for equity or debt you can choose a mutual fund after considering the following factors. Before choosing any mutual fund you should identify your financial goals clearly.
For example, if you’re 25 and want to build a retirement corpus as well as plan for expenses of your children, an Equity Mutual Fund will be ideal since Equity provides high long-term returns. On the flipside, if you are 45 and relatively well-settled financially, a debt fund will help you get decent returns without an exposure to the risky Equity Market. Another option is the Hybrid Fund which invests in Equity as well as Debt markets. A Hybrid Fund can provide high returns without the risk.
Look out for
All this being said, there are some key factors you should be looking out for when you choose a Mutual Fund company. Check the average returns of the fund for the last 5-10 years, since the best funds tend to provide consistent returns over a long time period. You should also identify a fund with low management fees since this will increase your overall returns in the long run. Online websites like ‘valueresearch’ provide comprehensive analysis of different mutual funds and can aid you in conducting research before investing.
Get Started
Investing in Mutual Funds has never been easier. You can apply for a Systematic Investment Plan (S.I.P.) for a Mutual Fund investment with a simple Bank Mandate and the money will be deducted from your account every month. If you’re a young professional and are serious about building your financial assets, you should get started with Mutual Fund Investments right away. The automatic monthly investments will go a long way in helping you build a corpus of savings.
From the October 2018 issue of FHM India.
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