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5 reasons why you should invest in Mutual Funds

Jun 8, 2018 / Pratibha Chakrabarty | 127 Downloaded | 6602 Viewed | |
Picture courtesy - UNSPLASH

‘I want 1 crore after 20 years by investing a sum per month, how much should I invest and where?’

‘I want to retire by the age of 40, which is in 15 years, how do I go about the investment from today?’

‘I am a 16 year old student; I want to start investing, what should I do?’

The questions above and others along a similar pattern are the ones an advisor, a finance content writer or anyone in this stream answers regularly because people, in general, have similar doubts regarding investing their savings. Whether it is an estimate of the SIP corpus after a period of time, or the achievement of a financial goal or the planning of an expensive future event, every investor wants a definite idea of how and where they can land up in the perfect place with their investments.

The idea of ‘perfect place’ is, in fact, very abstract and definitely not exact, in case of investing in an instrument like Mutual Funds. It is because nobody can predict exactly how much money an investor will make after a given point of time by investing in a particular fund of an AMC. However, an estimated prediction can definitely be made with an assumed rate of return, adjustment of the inflation, financial tools and expert advice.

Depending on this estimate, if an investor finds it feasible according to his/her risk appetite, he/she should go forward with the investment. ‘No risk, no gain’ policy is followed here because at the end of the day, Mutual Funds are not your regular bank account deposits which give a safe and fixed rate of return but there is no chance of creating wealth from such sources or achieving financial goals.

Having said all of the above, we need to understand, that though risky, each element of investing in a Mutual Fund, can be tailor made according to the attitude of the investor, like the risk element (as told before) can also be customized as to how much risk he/she will be able to take.

When we buy a product or service, we are not aware of how it will function till the end of its lifetime. When we eat a burger or any food item, at a new restaurant, we are not aware of how it will taste. When we make chapatt is for the first time, we do not understand whether it will turn out round in shape or not.

In a similar fashion, when we purchase units of a Mutual Fund scheme of any AMC, we do not know the exact results of it after a period of time but with recommendations, advice, study, we can definitely choose the right one suiting our needs, just like we would go about choosing a restaurant, product or service. Hence, though the decision involves slight risk, it gives us lot more reasons to choose it for having the best results in future.

In the reasons given below, we are referring to purchase of Mutual Funds as visiting a restaurant for simplification of ideas and better understanding of the explained concepts. These references are taken because when told in layman’s terms, a larger audience can fathom the words and apply the knowledge on a practical basis. Though a lot of these reasons can be listed, here are five broad reasons why one should invest in Mutual Funds:

Diversification

A Latin Proverb says, ‘Do not commit all to one boat’

When one walks into a restaurant, there are several choices in the dishes that can be ordered according to the taste of the customer. Similarly, there are several choices in mutual funds when one opts for investing in Mutual Funds, like equity funds, balanced funds, debt and liquid funds etc. and an investor can choose one of these according to his/her risk taking appetite and the investment needs.

Suppose, an investor can take high risk, so he/she can choose to invest in various equity mutual funds but the same risk gets diversified as equity investments are meant for the long term. If an investor wants to take the least risk and invest for a couple of days, liquid funds is a good option where an annualized return of 6 to 6.5% can be expected.

Now, choosing of debt, equity and hybrid etc. is the selection of the broad category for investment, after which comes the question of sub categories. This means that you want to have burger in a food joint but whether you want to consume veg burger, fish, chicken or any other type of burger, depends on your taste. Here is where you need to choose whether you want to go for large cap equity mutual funds or mid and small cap equity mutual funds which will determine the scale of companies wherein your money will be invested through MFs. In short, by investing in different categories of mutual funds, you can diversify the risks involved.

Suggested reading - The holy grail of investing: Diversification

Investment in Equities

Wealth creation in the long term is no longer a challenge due to the option of investment in equity Mutual Funds which gives an investor direct access to the equity shares listed companies across different sectors and market capitalization segments. It is always advised by financial planners to invest in equity MFs for not lesser than five years as the returns from such investments depend on the market trends and long term would only enhance the position of an investor in terms of the returns.

Hence, if an investor is patient with his/her equity investments and takes this step with the expertise of a financial advisor, wealth creation can be done easily. Historical data shows that, equity is the best performing asset class over a long investment period.

For example – BSE Sensex has given around 11.66% annualized return in the last 20 years compared to fixed deposit where the average return during this period would not be over 8%! Likewise, if you see the return of top equity mutual funds in India, the last 20 years average return of top schemes would be over 15%! Therefore, by investing in equities through equity mutual fund route you can meet your long term financial goals as the returns are much superior over other asset classes. You must read here – Equity is the best performing asset class in the long term: Myth or Truth

In case you are interested to know, how to get more returns from your mutual fund investments do check the link

Systematic Investments

Warren Buffet has said, ‘Never depend on a single income, make investment to create a second source’.

When financial plans are done in a systematic, timely manner, it can reap benefits, like no other form of investment. But, one needs to be patient and wise with every step of the process, which more often than not, investors are not and that can lead to incurring of losses.

When we go to fine dining restaurants, it takes time to churn out the fancy dishes for which the order has been placed because, they unlike, fast food joint dishes, are customized according to the customer under the culinary expertise of experienced chefs. Similarly, it takes times to create wealth through investments. The two big advantages of systematic investing are that, it makes market timing (buying low and selling high) irrelevant.

It is not possible to predict accurately how markets will behave. By investing at a regular frequency, e.g. weekly, fortnightly, monthly or even daily one is invested both at the high and the low levels of the equity market. SIPs work well in volatile markets by averaging the rupee cost of the investment.

The other benefit is that you can save systematically in a fund which suits your risk profile. For example – if you are low risk taker, you can invest in debt funds. But, if you can take high risk you can invest in a variety of equity mutual funds.

May I suggest reading SIP in mutual funds and its benefits

Let us show a picture of the estimated value of money that can be earned through SIPs. Let us say, a person invests 20,000 INR from his income in a monthly SIP in a disciplined manner for a period of 10 years. If we take the assumed rate of return to be 12% here, the SIP corpus comes up to a sum of over 46 Lakhs an invested sum of 24 Lakhs over 10 years. This is based on calculation through a SIP calculator which can predict the estimated future value of your investments. Please check this https://www.advisorkhoj.com/tools-and-calculators/systematic-investment-plan-calculator

The point that I am driving here is that, the growth of the sum in the example is definitely pretty high and such growth can be achieved only with good advice, patience and the right scheme choice.

While talking about SIPs, I request you to read this interesting topic – Which is the best date to do your mutual fund SIPs

Expert Fund Management

Someone is sitting in the shade today because someone planted a tree a long time ago – Warren Buffett.

When you walk into a restaurant for the first time, you don’t trust the taste or quality of food immediately, do you? It is through regular visits that the trust builds. Similarly, it is through regular interactions and suggestions that an investor builds trust in a fund manager. By investing in mutual funds, you can leverage the experience and expertise of fund managers who are expert and experienced in picking the right instruments for your mutual fund scheme portfolio. Fund managers assist investors with their investments with the well laid out investment processes and research which ultimately helps the investors achieve their investment objectives without hiccups.

Tax Efficient

The hardest thing to understand in the world is the income tax - Albert Einstein

Investors often ignore the impact of taxes while making investment decisions. Taxes reduce the net returns on investments, and therefore, investors must keep a bird’s eye on the effect of taxes in investments.

If you have invested in equity or equity oriented mutual fund schemes, short term capital gains (investment held for less than 12 months) are taxed only at 15% plus applicable Cess. Long term capital gains (investment held for more than 12 months) of up to Rs 1 Lakh is completely tax free. However, if the long term capital gains are in excess of Rs 1 Lakh in a year, it is taxed at 10% plus applicable Cess.

However, if you have invested in non-equity mutual funds, the short term capital gains (investments held for less than 36 months) is taxed at the rate of income tax slab applicable to the investor and the long term capital gains (investments held for more than 3 years) is taxed at only 20% after allowing indexation benefit.

While investing in various mutual fund schemes, investors must focus on the post-tax returns and compare the same with post-tax return of other investment options like, fixed deposits o postal investments etc. Generally, investments in fixed investment options are taxed at the income tax rate applicable to the investor and tax is deducted at source (TDS)on the gains/ interests as applicable.

Conclusion

The right blend of ingredients with culinary expertise of chefs gives the perfect dish to a customer. Similarly, the right blend of choice of Mutual Fund schemes, advice by a mutual fund advisor and determination of the portfolio can lead to achievement of financial goals through investment in Mutual Funds. One should definitely try this form of investment for having a secure financial future.

I haven't been as wild with my money as somebody like me might have been. I've been very safe, very conservative with investments. I don't blow money. I don't have a ton of houses. I know things can go away. I've already had that experience - Jim Carrey

Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.

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