‘Mutual Funds Sahi Hai’ is a tagline which we have been hearing very frequently nowadays. One often wonders what is so “Sahi” in mutual Funds and what are its rewards. Before we delve into that, let us first understand the basics of a Mutual Fund -
What is a Mutual Fund?
A Mutual Fund is a professionally managed investment vehicle that collects investor money and trades in diversified holdings like stocks, bonds and money market instruments. All the profits or losses resulting from the Mutual fund are mutually shared by all the investors according to their proportionate investment due to which the fund is called “Mutual”.
Primary Advantages of Mutual Funds:
Professionally Managed: As stated in the definition above, Mutual funds are managed and operated by experienced Fund Managers. Their valuable insights & research would enable them to invest in the right asset class which otherwise would be difficult for retail investors due to limited knowledge. This way, the money is put into goods use by the Mutual Fund houses and would help achieve relatively better returns than direct investments.
Risk Diversification: Mutual Fund houses invest in a combination of asset classes thereby reducing the risks to a great extent. Due to exposure being spread across various assets & securities, non-performance of a particular segment will not destruct the value of the investment.
Tax Deduction Benefits: Investment in various ELSS (Equity-Linked Saving Schemes) are eligible for tax deduction under section 80C of the Income Tax Act.
SIP (Systematic Investment Plans): An investor need not necessarily have a high income in order to invest into mutual Funds . The SIP facility enables investors to contribute small amounts periodically. This is specifically helpful for those investors who cannot invest huge sums at once. For instance, an amount as low as Rs. 500 can be invested periodically by an investor thereby giving low income groups access to various financial instruments.
Transparency: Information regarding the fund manager, investment objective, strategies, returns, risks, etc are publicly available.
'Mutual Fund investments are subject to market risk. Please read the offer document carefully before investing' are disclaimers associated with every Mutual Fund. What does this actually mean for investors? –
This is basically a statutory requirement intended to communicate risks that mutual funds may face. Risks maybe related to equity market performance, exchange rate of the currency, bank interest rates among others. Fund Managers would try to mitigate maximum risks by reshuffling portfolios, but there is always an underlying risk due to the market volatility and quality of Fund Managers. Hence, it is very important to invest in the right Mutual Funds. However, as your money is invested across various stocks, drop in the prices of a couple of stocks will not affect an investor as much. Hence, the chances of obtaining profit from mutual funds are high compared to other types of investments.
Another common oversight amongst investors is investing in multiple related mutual funds assuming they are diversifying which is not actually the case. Hence, a thorough research is essential before investing in mutual funds to avoid such oversights. Also, investing in a sector specific fund attracts more risk than a balanced fund.
Every individual has various goals in life – to buy a car, buy a house, children’s education & marriage, international holidays and more importantly, retirement. One can invest in Mutual Funds to achieve any of these short-term or long-term goals. Goal based investment helps one to be systematic, disciplined, focussed and unaffected by any short term volatility
LONG TERM INVESTMENT GOALS (RETIREMENT):
Retirement in simple terms is the withdrawal from one's position or occupation or from one's active working life and is just about the last thing on the minds of those in their 20’s. However, investing for retirement is never too early. One does realise the importance of it but not the urgency of it. Starting to invest for retirement early in life is a brilliant financial move. The reason being the magical word “Compounding” – the ability of an asset to generate earnings, which are then re-invested to generate their own earnings.
IMPORTANCE OF RETIREMENT PLANNING:
The below points highlight the importance of retirement planning and building a corpus to help you lead a comfortable stress-free retirement –
Self Sufficiency: Retirement is that point in life wherein the regular fixed income seizes to exist. The question that arises at present is, “Will you have adequate funds to provide the kind of retirement lifestyle you envision?” For this purpose, it is your compounded money that will come into play and allow you to lead the lifestyle you envision not requiring any aid, support or interaction.
Medical Emergencies: With increasing age, come more health problems. Medical Expenses can make significant damages to your wealth post retirement. Failure here could lead to liquidation of assets as well thereby reducing your net wealth.
Fragmentation of Families: It is vital to plan your retirement without any help from your family. Our country is witnessing a cultural change which too would compound by the time of retirement. Nuclear families are getting more and more fragmented.
The above explanations have spelt out the basics of Mutual Funds and also highlight the essence of investing in Mutual Funds to meet short term and long term goals.
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