Use mutual funds wisely to achieve your financial goals.

Many people ask me one question.

“ Mam, how much importance I should give to mutual fund investment in my portfolio.”.

Such a question is obvious when you do not understand what is a mutual fund and how it works.

Mutual Funds are suitable to all types of investors having ultra-short, short, and long term horizons. Investors can invest in mutual funds in two ways. First one is Lump sum payment and another one is through SIP. A systematic Investment Plan is a great tool to invest in a staggered manner allowing investors to invest small amounts periodically i.e. weekly, monthly or quarterly. Investors can start investing in mutual funds through SIP at a minimum of Rs. 500 only. Some scheme also has a provision of monthly SIP of Rs.100.

Beginners should start investing cautiously. The general rule of investment is that, invest in those assets which you understand and whose process of investing is simple and hassle-free. A mutual fund is one such investment.

Mutual Funds are of 2 types. First, one equity mutual fund, and the second one is a debt mutual fund. The need for the former is felt when your financial goals are long-term and you want to take a calculated risk to earn inflation hedged return.

When you invest in an equity mutual fund along with a decent return one more advantage you receive is that you need to invest the lesser amount in comparison if you opt to invest the full amount in the debt asset class. As debt asset class return is low and after taxation real rate of return really goes down so you may need to invest a substantial amount per month to achieve the targeted corpus.

Equity Mutual fund returns are market-linked. It carries risk but in long run, through the SIP investment pattern, this risk becomes calculated and almost manageable. SIP made in a good quality Large, Flexi-cap funds and a smaller portion in Mid and Small caps can generate returns ranging from 10 to 14% p.a. But considering ups and downs in the equity market it is always prudent to be realistic and reasonable. SIP investments’ rate of return should be considered at 10-11% p.a.(overall portfolio return) for the safer side if the investment is made through SIP.

You should always build your equity portfolio based on Core and satellite approaches. In this pattern, more proportion of the money is invested in Nifty/Large-cap funds. Nifty/large-cap and flexicap funds can generate 10 to 11% returns for SIP investments. in the long term. These funds provide stability and minimize the downside risk of the market. The smaller portion is invested in good quality in Mid and Small Cap as satellite portfolios which has the potential to generate 11 to 14% returns. This can add a kick in overall portfolio returns. These funds are suitable only for long-term financial goals. But you have to stomach short-term volatility and keep on investing for a longer period.

Debt mutual funds are comparatively safer than mutual funds. It shows lesser volatility but one has to be careful while choosing a debt fund.

When your goals are short to mid-term you can invest in debt mutual funds along with hybrid funds. Debt mutual funds offer better taxation as well as the possibility to earn a little bit more than FD in the mid-term time horizon.

But for any goals less than 3 years better to stick with FDs or RDs as no difference in taxation as well you may earn a lesser return in debt mutual funds if your goal is 1/2 years away. FD and RD provide guaranteed returns with the same taxation for up to 3 years.

if you understand how arbitrage funds work then you can think of Arbitrage funds for better taxation benefits if you are into a higher tax bracket. Arbitrage funds focus on earning profits in price difference in cash and futures market. Volatility in these funds is comparatively low than pure equity funds and a little bit more than debt mutual funds. But these funds are considered as equity mutual funds for taxation purposes so good to park money up to 3 -5 years if you can digest the volatility in short term.

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