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Clarification regarding Equity SIP mutual fund for a period of 5 year

My mother is drawing karnataka state government family pension from state bank of india, muddebihal-586212 she is willing to give a gift for my son who is studying IInd standard in future for which she is willing to save the money of Rs.5,000/- every month in equity mutual fund for a period of 5 year. Please suggest me whether we can expect a return of 20% to 25% on equity for a period of 5 year whether we can withdraw from the scheme after completion of 3 year is permissible. Which is your good mutual fund performing consistently and yielding a good return to the investors and in which your mutual fund we have to invest the money whether nomination facility is there and how we have to pay the money on monthly basis. Which company mutual funds do you suggest. At the time of withdrawal any income tax is deducted. Whether you will assure us a minimum return of 20% to 25% is possible mutual fund. Whether any charges in this amount of Rs.5,000/- will be deducted on monthly basis or on yearly basis. Please clarify our doubt that will help us to take the decision immediately?

Apr 4, 2016 by Chandrashekhar Rathod, Hyderabad  |   Mutual Fund

You should understand that, mutual funds are subject to market risks. Returns are not assured in mutual funds. Though equity mutual funds have given 20 – 25% annualized returns in the past, historical returns, by no means, can assure future returns. To see historical returns of different equity fund categories, please go to our MF Research Section. You should remember that, if you want to get 20 – 25% return on your investment, when the risk free return is around 7.5 – 8%, you have to take risks. Over a 5 year investment horizon, equity mutual funds, can give good investment returns. There are several reasons why we can expect returns to be good from equity mutual funds:-

1. Equity as an asset class provides higher returns compared to other asset classes over a long investment horizon.

2. The equity market has corrected by 15% from its all time high. Therefore valuation of many stocks are looking attractive, if one has a long investment horizon.

3. The macro-economic fundamentals of Indian economy look strong. Though corporate earnings in the previous financial year was disappointing, it is expected to pick up this financial year. The India growth story is still intact. In fact, global fund managers have identified India as the bright spot amongst emerging economies.

4. Inflation has come down. The Government has reinforced its commitment to fiscal consolidation in this Budget. This has set the right conditions for the RBI to reduce interest rates over the coming quarters and years.

5. The global commodity prices seem to have bottomed out, which is a good signal for equity markets.

Therefore, we can expect equity mutual funds to do well in the future. Coming to your other questions, in all mutual funds you can have nomination facility. Since your son is a minor, he needs to have guardian, as far as nomination is concerned. You or your wife can be the guardian to your son. You can invest on a monthly basis, by starting a Systematic Investment Plan (SIP) in a mutual fund scheme of your choice. The money for investment in the mutual fund scheme will be automatically debited from your bank account through an ECS every month, from your mother’s bank account. Your mother has to provide her bank account details in the SIP application form. You can withdraw your money from your mutual fund investment, either partially or fully by redeeming units of the mutual fund, at any point of time. However, if you redeem your investment within the exit load period, which is 12 to 18 months from the time of each investment instalment, exit loads may apply. Exit load is usually 1% of the redemption value. The exit load will be deducted from your redemption proceeds. If your investment period is more than 12 months, your returns will be entirely tax free. No charges will be deducted from your investment amount. The entire amount will be invested in units of the mutual funds of your choice. The expense of the fund will be reflected in the net asset value of the unit. So for example, if the expense ratio of a fund is 2.5%, then the net asset value of the unit will be lower by 2.5% than what it would have been based on the value of the underlying assets.

To identify suitable equity mutual fund schemes for your mother’s investment for your son, please go through the following articles, and make a decision that is most suited for your needs, in consultation with a financial advisor, if required.

Best mutual fund consistent performers in 2015: Large Cap Funds

Best Small and Midcap Mutual Funds: Consistent performers for investment in 2015

Best Diversified Equity Mutual Funds: Consistent Performers for investment in 2015

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