Managing finances through Mutual Funds: How to choose funds to fulfil different needs?
Mutual funds aren’t only about stocks and stock market concerns. Different types of funds exist, depending on whether one invests in stocks, bonds, or money market products. You can choose a fund that suits your needs and risk appetite.
You can divide your finances into four groups based on your financial needs and goals: emergency funds, short-term funds, medium-term funds, and long-term funds. You can handle all of these monies through MF schemes if you like.
What is a Mutual Fund?
A mutual fund is a financial product that pools money from many investors. The money is subsequently pooled and invested in securities like publicly-traded firms’ stocks, government bonds, corporate bonds, and money market instruments.
You don’t own the company’s equities that mutual funds buy directly as an investor. You, on the other hand, split the profit or loss equally with the other pool investors. The term “mutual” describes a mutual fund in this way.
You benefit from the fund manager’s knowledge and the Securities Exchange and Board of India’s regulatory protection (SEBI). The expert fund manager ensures that investors receive the highest possible return.
How Do Mutual Funds Work?
Investing in mutual funds is straightforward. You put money into a fund with a variety of assets. As a result, you don’t have to risk placing all your eggs in one basket.
Furthermore, there is no need to worry about keeping track of market changes. The mutual fund house handles research, fund management, and market tracking. As a result, mutual funds are a popular investment option for a wide range of investors.
The Asset Management Company(AMC) is in charge of managing mutual funds. The creation of a mutual fund begins with the pooling of funds from multiple investors.
The money is pooled and invested in a carefully constructed portfolio of several asset types like stock, debt, money market instruments, and other funds. As a result, you enjoy the benefit of diversity, a tried-and-true market motto.
Furthermore, your money is invested in securities like government bonds, which you could not afford on your own.
The nicest thing about mutual funds is that a team of professionals, in collaboration with the fund manager, selects all the investments that go into constructing a portfolio. The investments are done in accordance with the mutual fund’s stated goal.
Expert and professional fund management outperform traditional investment vehicles like bank savings accounts and fixed deposits.
For your contribution to the pooled fund, you will be assigned units.
The underlying assets’ price fluctuations determine the value of the portfolio. The Net Asset Value (NAV) is calculated by dividing net assets by the number of outstanding units
A greater NAV indicates a rise in portfolio value, whereas a lower NAV indicates a loss in portfolio value.
Advantages of Investing in Mutual Funds
Over 8000 mutual funds are available in many categories to fulfil the needs of different sorts of investors. Mutual funds are excellent for everyone since they offer the right combination of growth, income, and safety.
Below are the advantages of investing in mutual funds:
1. Expert Money Management
A team of specialists manages your pooled funds. As a result, you benefit from experienced advice when it comes to accumulating wealth. When deciding on shares, sectors, allocation, and purchase and sell, the fund manager does extensive research.
2. Low Cost
When considering the advantages of knowledge, diversification, and other return alternatives, mutual funds are clearly a cost-effective investing vehicle.
The expense ratio is subject to a regulatory cap of 2.5 per cent.
3. SIP Option
A systematic investment plan allows you to invest at regular intervals, such as weekly, monthly, or quarterly. You can begin investing in mutual funds with as little as Rs. 500.
4. Switch Funds
If you are dissatisfied with the performance of a mutual fund scheme, you may be able to switch funds with some mutual funds. However, you must use extreme caution when making the switch.
Mutual funds provide diversity in such asset classes that an individual investor would not be able to achieve. You benefit from the highest exposure with the least amount of risk.
6. Ease of Investing and Redemption
Buying, selling, and redeeming fund units at NAV is now rather simple. Simply submit a redemption request, and your funds will be sent to your selected bank account within a few days.
7. Tax Benefit
You can save money on taxes and build wealth by investing in an ELSS tax-saving mutual fund. You can deduct a maximum of Rs. 1,50,000 per year under Section 80C of the Income Tax Act.
8. Lock-in Period
A lock-in period applies to closed-ended mutual funds, which means that as an investor, you are not allowed to redeem the fund before a particular time period has passed.
Long-term capital gain tax advantages are available to you.
How to choose funds to fulfil different needs?
An emergency fund should contain the funds that you would require quickly in the event of an emergency. Although it is impossible to forecast how much money one may need in the event of an unforeseen occurrence, it is recommended that a salaried individual hold at least six months’ salary in such a fund.
You can park your emergency fund in overnight funds and/or liquid funds in addition to liquid cash and savings bank accounts. As a result of these funds’ investments in debt instruments with overnight or very short maturities, the capital invested is often steady.
While the returns are minimal, these funds provide a lot of liquidity. You can request a redemption even on Saturdays and Sundays, and if you do so before the cutoff time, the redemption money will be credited to your bank account the next business day.
A short-term fund is used to store money that is needed within six months to two years. For example, if a person takes out a loan to build a house and must make payments in instalments over the next 24 months based on the construction status, the money can be put into a short-term fund.
Because you won’t be able to wait for recovery if your wealth is lost due to market volatility, you should avoid equity exposure and instead invest in low-risk, stable-return products such as short-term debt funds and dynamic bond funds.
The money required over the next three to four years could be retained in medium-term funds. For example, if you’ve saved enough money to accomplish a 3-4 year financial objective through equities investments and wish to limit market risk, you may put it in a medium-term fund.
In this instance, you’ll need to protect your money while earning a greater return rate to combat inflation over the next three to four years.
Because pure debt funds are unlikely to beat inflation, you can lower your market exposure from 60-100 per cent to 20-25 per cent by investing the rest of your money in debt funds. Otherwise, you might move your money from equities funds to conservative hybrid funds and trust experienced fund managers to handle your portfolio.
Money that is not required in the near or medium-term but can be saved for a long time or to accomplish long-term financial goals can be invested in long-term funds. Money needed for a child’s education after 10 years or to build a retirement corpus to be used after 20 years, for example, might be deposited into such a fund.
Because the goal of a long-term fund is to outperform inflation over time by earning a higher return, you can invest in stocks if you don’t have any immediate or medium-term responsibilities. The amount of equity exposure you have will be determined by the need to take risks to fulfil long-term financial goals and your risk appetite.
You can invest in medium-risk aggressive hybrid funds to very high-risk short-term funds in the equity section—the greater the risk, the better the chance of achieving superior long-term returns.
However, before investing in equity-oriented mutual funds, you should carefully organise your finances and enter the market to achieve your long-term financial objectives. Otherwise, if you enter the equity market to increase your returns, you may be forced to exit during a market downturn if your returns are negative.