- A mutual fund is the trust that pools the savings of a big number of investors who share a common financial goal.
- Every one with an investible leftover of as little as a few hundred rupees can invest in Mutual Funds.
- The money thus collected is then invested by the fund manager in different types of securities. These could range from shares to debentures to money market instruments, depending upon the scheme’s stated objective.
- It gives the market returns and not assured returns. In the long term, market returns have the potential to perform better than other assured return products. Mutual Fund is the one of the most cost efficient financial products.
As the value of securities in the fund increases, the fund’s unit price will also increase. There would be capital appreciation when you sell your available units at a price higher than the price at which you bought.
By way of Income Distribution:
The fund passes on the profits from distributable surplus it has earned, in the form of dividends in two ways, Pay Out or Reinvestment.
As the value of securities in the fund increases, the fund’s unit price will also increase. You can make a profit by selling the units at a price higher than at which you bought. Although – Mutual Fund does not guarantee the same or does not guarantee returns.
What is a Stock?
A stock is a general term used to describe the ownership of any company. Stock represents a claim on the company’s assets and earnings. As you acquire more stock, your ownership stake in the company becomes greater. Shares, equity, or stock, all basically means the same thing.
The stock market is the market in which shares of publicly held companies are issued and traded either through exchanges or over-the-counter markets. It is a place where shares of publicly listed companies are traded.
What is a Mutual Fund?
A mutual fund is a collective investment that pools together the money of a large number of investors to purchase a number of securities like stocks, bonds etc.
- Interest on RD or FD is taxable in the hands of the interest receiver. it also attracts TDS provisions under sec 194A of the Income Tax Act, 1961. As a result, though you see an interest rate of around 8 to 9% per annum on the FD / RD amount, you end up getting lesser than that since the interest rates are pre-tax. Your actual return post tax (which should matter to you since that is your actual inflow of cash) would drop down to a range of 5.5 to 7.5 % approx. depending upon your tax slab. Take out inflation from this and you are left with a real return of 0.5 to 2.5%.I assume you won’t be happy after reading this.
- SIP for 3 years would give you an compounded annualised growth rate (CAGR) of around 10–12% depending upon the fund you chose for the SIP. In some exceptional cases, the SIPs tend to give more than 15% CAGR. But let’s keep a precautionary outlook and assume a return rate of 10% (Almost all SIPs will give you that much CAGR). Take out inflation and you are left with a real return of around 5–7%.Much better isn’t it? And the added benefit? The gain you would make from the sale of the units of the fund you chose would be non-taxable under the Capital Gain tax provisions of the Income Tax Act, 1961.
- MF for 3 years.This is your best bet to earn even more than 17% CAGR if you are smart in picking your investments. The diversification in your portfolio will help you increase your returns. Again, it is tax free. And taking out inflation, you get a real return of at least 10%.Now, that’s cool, isn’t it?
Parameters you should consider Investing in mutual Funds:
- Understand your Risk Profile
- Know your financial goals
- Choose your category of funds
You might be thinking which fund? We at Swaraj Wealth suggest you the best fund depending on your profile and financial goals.
Below we have some suggestions:
Equity linked savings scheme (ELSS) , these are the favorites of most retail investors. The reason is that the investment is eligible for tax deduction under Section 80C of the Income Tax Act. These are diversified equity funds with a three-year lock-in and are the first choice of many first-time mutual fund investors.
Systematic Investment Plan:
It is an Investment vehicle offered by mutual funds to investors, allowing them to invest small amounts periodically instead of lump sums. The frequency of investment is usually weekly, monthly or quarterly.
Fixed income funds:
Fixed income investments generally pay a return on a fixed schedule, though the amount of the payments can vary.
Equity Mutual funds would give you 10% to 14% annual returns and are ideal for a period of more than 5 years.
- The amount invested in tax-saving funds/Equity Linked Saving Schemes (ELSS) and some Retirement Funds is eligible for deduction under Section 80C upto a limit of Rs.1,50,000/- (in a financial year)
- Dividend from Mutual Fund Schemes is Tax-Free in the hands of the Investor/recipient. Dividend from Equity Oriented Mutual Fund Scheme doesn’t attract Dividend Distribution Tax whereas Debt Oriented Mutual Funds attract Dividend Distribution Tax.
- Long Term Capital gain (After 365 days of investment) from Equity Oriented Mutual Fund Scheme is Tax Free u/s 10(38). Short term Capital Gain is taxed @ flat 15%.
- Long Term Capital gain (After 3 Years of Investment) from Debt Oriented Mutual Fund Scheme has benefit of indexation and net gain will be taxed @ 20n % flat. Sort Term Capital gain from Debt Oriented Mutual Fund Scheme will be taxed as per income tax Slab.
Market risk: At times the prices or yields of all the securities in a particular market rise or fall due to broad outside influences. This change in price is due to ‘market risk’.
Inflation risk: Synonym to ‘loss of purchasing power’. Whenever the rate of inflation surpasses the earnings on your investment, you have the risk that you’ll actually be able to buy less, not more.
Credit risk: In short, how stable is the company or entity to which you lend your money when you invest? How certain are you that it will be able to pay the interest you are promised, or repay your principal when the investment matures?
Interest rate risk: Interest rate movements in the Indian debt markets at times can be volatile leading to the possibility of large price movements up or down in debt and money market securities and thereby to possibly large movements in the NAV.
Other risks associated are:
Changes in the government policy
Mutual Funds are versatile, diversified, professionally managed, low expense, and regulated. Even Warren Buffett himself suggests that most investors should just pick a low cost mutual fund and ride it for the long term.
- Need of money and no alternative source of getting it.
- When taxation period of fund is over.
- When the fund with weak basics under performs for a considerable long time.
- When the market is high and you want to lower your risk profile slowly.
- When you don’t know when to invest. Valuations may be expensive in one month & cheap in another month. SIP averages price of shares, which reduces the risk of getting shares at high valuations.
- SIP pays best returns when you have chosen longer period for investment.
- SIP is a good way to invest your savings out of your monthly income regularly into market. It inculcates habit of saving and investing.
- When you have a regular source of income, then SIP is best way to invest your money at regular intervals.
Lump sum is better when:
- When you can analyze, and invest amount at a time when valuations of shares are cheap. It helps getting shares at a low price which obviously increases returns.
- When you have received a lump sum amount and your financial goal is decided, its better you invest the money as lump sum.
SIP or Systematic Investment Plan is the most popular tool of investing money, where you invest a small amount at regular time intervals. The money invested is funneled in stock markets and generate returns over time. It is one of the easiest ways to as you can start from as low as INR 500 and it also inculcates the habit of saving money.
It is a flexible and easy investment plan: your money is auto debited from your bank account and invested into a specific Mutual Fund scheme. You are then allocated a certain number of units based on the NAV of the day.
Every time you invest money, additional units of the scheme are purchased based on that day’s NAV. The benefits of investing systematically include taking out the risk of market timing and providing investors the benefit of rupee cost averaging and power of compounding.
One therefore doesn’t have to worry about when to invest and doesn’t have to consider daily market movements.
An SIP also smoothens the impact of market fluctuations thereby reducing the risk of investing in volatile markets. The risk of market volatility gets negated with more units purchased when the price is low and fewer units purchased when the price is high.
- Daily and Weekly is the best frequency as it would capture market movements in the best possible way.
- Every month is recommended as stock market index will go through changes every day in a month and you can buy mutual fund units every month with which you will get rupee cost averaging benefit.
- For Quarterly and Yearly frequencies, there is a large possibility that you would miss major up/ down swings in the market depriving you of the cost averaging SIP is famous for.
SIP is usually considered a good method if you have long term investment goals.So,if you are planning your long term investments, then SIP is a very good option to follow.
Some risk is always attached,but in the long run you tend to generate good returns.Debt funds are safer than equity.But,equity funds reap high benefits if invested for longer period.
Features of SIP are as follows:-
- You invest small small amounts on a regular basis either weekly,fortnightly or monthly as per your convenience.
- You can invest in a variety of financial instruments like debt mutual funds,equity mutual funds based on your risk appetite.
- Investment through SIP usually gives better returns in the long rune.if invested for longer period.
- You develop a habit of investing since a fixed amount is to be invested at regular intervals.
- You can benefit out of Cost averaging e.Buy more units in low market and less units when market is high,thus reducing your average cost of purchasing.
You can anyway start a monthly SIP with a small amount initially and then slowly and gradually increase it as and when your income and savings increase.
1.) Your Tax Bracket: If you are in 10% or 20% tax bracket, then going for dividend strategy would mean that you will end up paying higher tax on your capital gains. Dividend distribution tax (DDT) is 28.33% and is deducted at source. It would be better to invest in Equity Savings Fund which have same Equity exposure and much better taxation (they are treated as Equity funds for their taxation and hence the DDT is Zero.
2.) Your Investment Horizon: In my opinion investments in MIP should be with at least 3 year horizon such that the Indexation benefits can be availed by the investors. Again, if the investment horizon is less than three years then Equity Savings Funds are much better (2 year plus horizon)