Mutual Funds – The Wealth Creator
First
and most important thing to understand is “what is mutual fund?”. In simple
words Mutual Fund is the pool of investments. We all give the money to a fund manager who is professionally
educated and efficient in this particular field of Investment. They work on to
create money for you and themselves too. Yes, Mutual fund is volatile; but you
can always decide which fund to choose as per your needs. There are some with
negligible volatility and some are of very high volatility. Let’s talk on that
later, before this we should know how secure is this? Mutual Fund is considered
one of the safest place to invest your money, due to the simple reason that
they must follow the guidelines of RBI and SEBI. And the breaking of law in
this matter attracts a hefty punishment plus the fund manager would not be
getting job in this field ever again. Thus, safety should not be issue; the
companies will not just vanish with our money.
Let’s
come to the point of volatility also knows as Market risk in this case. From
lowest to the highest volatility the fund types would be Debt Funds (Liquid
Funds, Ultra Short-Term Funds, Short Term Funds), Hybrid Funds (MIP, Balanced),
and Equity Funds (Large Cap, Diversified Funds, Mid Cap, Small Cap, Theme
Funds, Sectorial Funds, and more.). Now depending on the need i.e. your goals
and the time horizon, it is decided that which fund would be best for you and
would fulfill your goals. Again, this thing is may differ from advisor to
advisor, depends on their perspective of understanding your needs and their
knowledge of products/ funds. This is what you should judge if the advisor is a
good one or not. Ask your questions, get your doubts clear then only start
investing through that advisor. It’s the financial planning and there is no
room for error in this. A simple error can jumble up all your financial plans
and goals, so it should not be taken lightly. SIP’s can also be used to
overcome the volatility of the market and make returns.
On
Television, news, radio channels, scheme booklets there is a warning written “Mutual Fund Schemes are Subjected to
Market Risk, please read the offer document carefully”. This is true,
but with a condition; if you don’t have a proper knowledge of what you are investing
in, the horizon for which the scheme should be chosen and if the volatility of
the scheme is unknown. If you know these things and be patient, the things will
turn out in your favor. There are some funds which work only when the
particular type of company/sector performs, some grow slowly, some fluctuates
at a faster pace. So, as per your risk appetite and the time the choice of fund
is very important.
Debt Funds are the funds where you park
your money and they provide returns approximately equal to the FD/ RD rates or
a bit less. But gives you the facility to withdraw money whenever you want and
how much you want (less or equal to what is the current value). Again, the type
of debt fund is chosen depending on your minimum time horizon. If the money is
kept in it for more than 3 years, then it also attracts the Indexation benefit.
But for that horizon this fund is not advisable.
Equity Funds are the funds which are
dependent on the share market. And depending on the choice of shares the NAV
(Net Asset Value) of the fund varies. This is the fund which gives you higher
returns, your wealth creator, retirement planning, tax saver and more... This
fund is never advisable for small term. Except the one-time investment, SIP is most recommended in these funds.
Best thing is that little by little a hefty amount is invested which would help
you reach your goals faster.
Hybrid Funds are the funds where some
percentage of your money is parked, and the left is invested in the share
market. i.e. this fund is the mixture of both Debt and Equity Funds. Which
produces an average return which is more than debt and usually somewhat less
than Equity.
Entry
and Exit load are two things that also plays a role. There is no Entry load in
the Mutual Funds now. But there is exit load depending on the scheme. For
example: The normal Equity funds have exit load before 1 year, Retirement
have Exit load before the age of 60. Some funds have lock in time to which is
properly written in the offer document and can be checked online too. For
Example: Retirement have lock in of 5 years, Tax Saver has lock in of 3
years, there are many closed ended funds that keep on coming up with a usual
lock in period of 3-4 years. In the lock in time the amount cannot be
withdrawn, where as in the exit load you can exit the scheme by paying the
nominal specified exit load.
More
you put in, more it gives you. And after share market this is the best place
you need to invest your money in. Share market is not advisable to everyone as
it needs more of a knowledge, amount, time and a stomach which can bear the
hit. Basic strategy is to never invest the amount which hinder your daily life.
When you are earning decent enough, you should spare at least 25% for your
investments, which would be approx. 50% of the money which would be left after
fulfilling all your basic needs. That would be a basic calculation but not
suited for everyone. Changes from person to person depending on the place they
live in, their life style, responsibilities and more.
“Saving
the money is important, but if we can create wealth with the same amount.
Wouldn’t it be better?”
Never
ever compare the investment/ the saving with your job/ business. These are done
for some other goals, for protection, for your old age, for new home, car,
higher education of children. Many time it wouldn’t be possible to take out
money from the business or your job amount may not be sufficient to do
something very important and you may lose the golden opportunity.
Think
about FUTURE. Let your future-self thank you for what you do today.
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