What are objectives of investing in mutual funds
- 1. What are the Objectives of Investing in Mutual Funds?
- 2. Since past two decades, the growth percentage of mutual fund industry has seen a noticeable hike. This growth is the result of increased education levels which has penetrated through individual’s mind about understanding their financial requirements. What are those financial requirements? Individuals have their own financial needs and those are called as their objectives or financial goals. 1. Retirement corpus 2. Fund for education 3. Planning for children’s school fees 4. Fund for Child’s marriage 5. Emergency corpus 6. Fund to buy a house 7. Fund to buy personal vehicle (maybe a car or a two-wheeler etc.)
- 3. These objectives are the reasons why a person starts investing his/her money in order to earn the extra return on his savings within the desired period. Most individuals choose mutual funds to cater to these goals but on questions like, ‘which mutual fund is right for me? And how to invest in mutual funds?’ people still need clarity. How mutual fund categories do accompany these individual goals? Mutual fund Investments cater these objectives on the basis of their tenure or categorizing them on the basis of their term. #Short-term goals: less than 5 years (e.g. buying a car) #Medium-term goals: 5-7 years (e.g. buying own house) #Long-term goals: above 7 years (e.g. retirement plan, child education etc.) Different types of mutual funds cater to different financial goals based on the
- 4. How mutual fund categories do accompany these individual goals? Mutual fund Investments cater these objectives on the basis of their tenure or categorizing them on the basis of their term. #Short-term goals: less than 5 years (e.g. buying a car) #Medium-term goals: 5-7 years (e.g. buying own house) #Long-term goals: above 7 years (e.g. retirement plan, child education etc.) Different types of mutual funds cater to different financial goals based on the above-required tenures.
- 5. 1. Equity Funds -Invests in stocks. -High-risk investment. -Best funds as anyone can start SIP with a minimum amount of Rs. 500 and earn benefits of higher returns from equity. -There is a reduced risk of losing his principal amount also if one invests into equity through SIP. -Returns become tax-free in case of holding the investment for more than a year. -Ideal for investors having higher risk-appetite: Due to investment in growth stocks, these are ideally preferable in case of investors who are at the young age and having long-term goals due to investment in growth stocks. Those who are unmarried, usually have less number of liabilities, they can bear the risk. Ultimately, equity is going to get them higher returns as an add-on benefit. Ideally, one can start a SIP at the early stage, and keep on adding 10-15% every year to the SIP. Say after 8-9 years it comes with quite a good amount that can better serve goals like child’s higher education, retirement plan etc.
- 6. 2. Balanced Funds -As the name suggests, in order to maintain the balance, money is invested partly in stocks and partly in fixed income securities. -Ideal for long-term investments. -Investors enjoy growth and regular income, higher returns than debt. -For investors who have Moderate-high risk appetite. -The ratio is normally 60-70% in equity and rests in debt. -Investors follow a myth that the returns from balanced funds are meant for balancing the risk and they invest for the short-term purpose. Whereas, Balanced funds are for those who would need corpus after the long period so that the market high-lows won’t affect their final corpus to the higher extent. -Equity-oriented balanced funds are prone to tax-free returns if held for more than a year. -Debt-oriented balanced funds are less volatile, so attracts fewer returns. In case holding period exceeds more than three years, the returns are taxed @20%. If holding period is less than 3 years, tax implication is as per your tax bracket.
- 7. 3. Debt Funds - Invests in Bonds and Deposits of various kinds - Have negligible risk. - Ideal for investors who expects steady income as the returns from debt funds is irrespective of market high-lows. - There is no possibility that investor will have the capital loss at any point in time during the investment period. - Investors can choose dividend payout option and enjoy the regular income. - Debt funds also act as a launching pad for investors who have a large sum in hand, through STP option they can first invest in debt to regularize the income and then shift to equity. **STP is a systematic transfer plan. -Those who expect monthly flow of income from their return, they can invest in debt funds via SWP option so as to withdraw periodically. **SWP has a reverse pattern to SIP. -Preferable over FDs since FD’s interest puts you in tax liability as per tax bracket of your income, maybe 20% or 30%. -Debt funds if kept for more than a year they are taxed at 10%. -In case of investment period of less than one year, it is recommended to opt for dividend reinvestment option, then the tax rates applicable on dividend will be 13.5%.
- 8. 4. Gilt funds -These invest in medium and long-term government securities, bonds but different from Bond funds as they invest in corporate bonds. -Their functioning is riskier as similar to above categories of mutual funds but their nature is safe due to the money is invested in public sector companies. - Very less volatile or very low risk. - Ideally meant in two cases: For individuals who are about to reach their retirement. Hence, they can not afford to take a risk because they know that they may require the fund to treat health problems. Individuals who are senior citizens, having enough corpus but their investment purpose is just to invest their money in order to increase their fund with less risk.