The buzz around tax and investments starts
every year around January. We are well aware of the many means of investments,
but still, at this crucial time, we tend to make mistakes by putting all the
money either in one instrument or investing in a scheme that do not give us
cost-effective returns.
If we are considering to build a fortune that
keeps on multiplying, then Mutual Fund is the best bet. To know more about this
profitable scheme, let’s see the conversation between two friends, Aishwarya
and Laxmi.
Aishwarya: Hello, Laxmi. How are you?
Laxmi: I am good. Just this mutual fund thing
has put me in a fix. Different people different suggestions.
Aishwarya: Oh!! Then let’s discuss this and
clear your doubts.
Laxmi: I am confused as to which investment
scheme will be best-suited for me. Many have suggested that mutual funds is the
ideal scheme. I even goggled. But, I need expert advice on this plan.
Aishwarya: Let me tell you mutual fund is an
investment instrument that enables you to invest hassle free. You can start
with an amount as small as 500 rupees per month.
Laxmi: Is it the ideal option for me?
Aishwarya: Of course, it is one of the best
options for both salaried as well as people who want to invest a lump sum
amount.
Laxmi: Please tell me more features about this
plan.
Aishwarya: You can invest a fixed amount, say
1000, every month in mutual funds. This is known as SIP (systematic investment
plan). You can go for long-term plans like for 5 years, 10 years, or even
perpetual. Perpetual SIPs have no ending date. It continues forever. Choose the
suitable plan, the amount you want to invest, fix a date (mainly at the start
of the month when you have your salary/enough funds), and your SIP will get
started. The best part is you can discontinue or increase/decrease your SIP
anytime as per your wish.
Laxmi: I can stop anytime means? Is it
possible? How?
Aishwarya: I think you have confused SIP
investment with EMI. See EMI is your liability that will have to fulfill.
However, SIP is a means of creating wealth, which is voluntary. You can stop
your SIP midway as your money is not locked in the mutual fund unless of course
in a tax saving mutual fund, where it's locked for a period of 3 yrs. This is
the lowest among other tax saving instruments.
However, exit load is levied in some cases
when an investor takes out the money before the stipulated time frame. The main
motive is to discourage investors from redeeming their money for some emotional
reason.
Laxmi: Which scheme would yield higher
results, SIP or a lump sum?
Aishwarya: In some cases, SIP has outperformed
while at other times, lump sum investment has scored higher. Both types give
good returns. However, lump sum beats SIP when the market is continuously
soaring high. On the other hand, SIPs provide the best results in the case when
the market falls initially and recovers subsequently. The safest way would be
to keep regular SIP investment in mutual funds and top up your investment with
a lump sum amount when the market falls.
Laxmi: Where to start?
Aishwarya: First, choose a plan from the
options. If your focus is long-term investment to grow your wealth over time,
and you do not require money in between, then go for the growth option. Keep in
mind that you have to have tolerance for risk and a holding period of five to
10 years in this plan. If you want some part of the money invested to return to
you in the form of dividends, like regular income, then go for the dividend
option. These funds safeguard your wealth in a falling market and hence, are
best-suited for risk-averse investors. Value funds deliver a superior
risk-adjusted return in the long run as the funds are mainly invested in stocks
which are undervalued. Funds like opportunities invest in companies which can
withstand the changing economy. Many times fund managers invest in companies
that are not in good shape currently but have the capacity to outperform in in
the coming future. This is known as contra fund.
You can also opt for multi-cap/flexi-cap;
large cap; mid-cap; and small/micro-cap funds. These are dependent on market
capitalization. Cap here means the total share of products available for
trading by its present price.
Laxmi: Ok. I got to know that mutual funds
promise high returns. Is it true?
Aishwarya: Yes, you heard that right. There
are two types of mutual funds, equity and debt. Returns defer depending on
which fund you choose among these. Equity mutual funds have proven to be best
than every other asset class in the long-term. They have provided huge earnings
beating inflation. In the last two decades, equity mutual funds have given
returns in the range of 14-18% per year. In the case of debt mutual funds,
returns in the range of 9-11% are promised depending on the type of debt fund.
The returns are higher by around 2-4% than the other fixed asset instruments
like PPF or FD.
Laxmi: What to do if I face any issues?
Aishwarya: It's simple, just register for free
on SEBI which takes care of all your complaints and grievances online. SEBI
regulates the stock market and develops SCORES (SEBI Complaints Redressal
System). You can file complaints against the brokers, depositories, registrars,
transfer agents, mutual funds, portfolio managers, and even against the stock
exchanges.
Laxmi: That sounds simple. Ok. Now tell me
which mutual fund is the best?
Aishwarya: That depends on your goals and your
investment style. Just research the risks associated and the returns promised.
Hope I have been successful in clearing most of your doubts.
Laxmi: Yes, you have. Wow, I feel lighter now.
At least I got to know the basics of mutual fund and why many people are for
this. Thanks a ton, Aishwarya for helping me out.
Aishwarya: No problem. I am happy that I was
of any help to you.
For the best mutual funds for short term as well as long term contact Go4Wealth.
