With mutual funds the investment scenario has changed. It offers options like equity, debt, balanced, hybrid and many such schemes. Based on your personal requirement and financial status you can invest in the scheme suitable to you.
Words: Sangeeta S
When you invest in a Mutual Fund, your funds get professionally managed and are well diversified to offset potential losses. All of us need to save and invest our money but not all of us have the required knowledge or the time to handle complex investment decisions. Mutual Fund offers the services of experts to manage your money. The money collected from several such investors are strategically invested in options like stocks, bonds etc. by professionals called Fund Managers who understand the
market and invest your money for you in lucrative options, based on the risk you have opted for.
Based on the Fund’s objective, the fund is invested in different securities like fixed income or stocks. Different schemes come with different risks and it may happen that the value of an investment may decline over a period, based on the prevailing (stock) market scenario. Or the Government may change or add new regulations.
Many factors can influence the performance of Mutual Funds. Having a diversified fund can help reduce the risk offsetting the losses from some funds with gains in other. Generally when you invest in Mutual Funds, you get a choice between two plans – Growth Plan and the Dividend Plan. The difference is simple – in Growth Plans, no regular dividend is paid to the investor and so all the profits are reinvested back in the fund and hence your wealth compounds. While in Dividend Plans, the dividends are paid out of profits earned.
How do you decide which option to choose?
According to Rabindar Kumar, a Financial Advisor, the choice of funds would depend on many factors like current market status, the investor’s financial needs, strategy and financial status. If you plan for a long term investment, say for two to four years, a growth fund definitely performs better as compared to dividend plan. In case of dividends, some assets are given as dividends and so the fund required for accumulative growth is reduced. However, if the market gets volatile and NAV gets reduced then with the dividend fund option people feel that at least they have got some returns in the form of dividend. So there cannot be a simple straight answer to this. But overall a long term growth fund performs better.
The main thing to consider is the market status at the time of investment. The fund category is quite diversified like large cap, mid cap or small cap. For people who plan to stay in the portfolio for long time, the large cap fund is a good option as it has been seen that the performance of large cap is generally constant and they perform better. The performance of mid cap and small cap is not constant; some years they perform well while sometimes the performance is not good. For regular investors who keep investing and selling on a regular basis, they generally go for diversification more and invest in small cap or mid cap funds. They go by the current market status and do the investment.
The choice of funds also depends on personal target and financial status. For people who can’t take high risk a debt fund is a good option against equity. In case of a debt fund the principal generally doesn’t go in loss. The returns may not be high but you will keep getting returns. For people looking for regular income, balanced fund is a good option where investment is done in both equity and debt funds.
There is a new scenario where if you go for SWP (Systematic Withdrawal Plan) you save on tax. People feel that now that the dividends are paid after cutting 10 per cent tax SWP is a better option as you save on tax. Our expert clarified that people need to understand the whole thing before switching to SWP from dividend option. SWP will benefit only those whose income is 1 lakh or less than a lakh; beyond 1 lakh you will be taxed here also. While in case of dividends you are not charged anything extra up to 10 lakhs. Only beyond 10 lakhs you will need to pay additional tax of 10 per cent.
Also, when you go for SWP, your units also get redeemed and if the market goes down it may happen that all your units get lost in the form of SWP. While in case of dividend payout at least your units remain intact and you will keep getting dividends as and when the company makes profit. So before making a choice of fund understand the whole scenario. Select a fund based on your personal requirement and financial status. What may suit one may not be suitable for another. Mutual fund is a good option provided you make wise decisions. It is a good idea to take advice of any good financial adviser who understands the market better.
Based on your investment objective your financial advisor will suggest the kind of investment you require. Some of the options include –
Equity/Growth Funds – These funds invest a major part of its corpus in stocks and the investment objective of these funds is long-term capital growth. This is suitable for investors with high risk appetite and long term outlook.
Debt/Income Funds – These funds invest minimum 65% of its corpus in fixed income securities. They provide for low risk, stable income and preservation of capital. These funds are suitable for investors whose main objective is safety of capital with moderate growth.
Balanced Funds – Balanced funds invest in both equities and fixed income instruments. Ideal for investors looking for a combination of income and moderate growth, these funds provide both stability of returns and capital appreciation to investors.
Money Market/ Liquid Funds – Money market/ Liquid funds invest in safer short-term instruments such as Treasury Bills, Certificates of Deposit and Commercial Paper for a period of less than 91 days. They provide easy liquidity, preservation of capital and moderate income.
Gilt Funds – These funds are safer as they invest in government securities.
Why Mutual Funds?
Professional – By investing in mutual funds, you get the services of professional fund managers, which would otherwise be costly for an individual investor.
Diversification – You get the benefit of diversification across different sectors and companies.
Liquidity – They are mostly liquid investment unless there is a lock-in period. Most funds can transfer the money directly to your bank as they are well integrated with the banking system.
Flexibility – You have the flexibility to invest in a wide range of schemes with options for systematic (at regular intervals) investment and withdrawal.
Well regulated – Mutual funds in India are regulated and monitored by the Securities and Exchange Board of India (SEBI); all funds are registered with SEBI and complete transparency is enforced.