What are Mutual Funds and How Do They Work? | Motilal Oswal
What are Mutual Funds and How Do They Work? | Motilal Oswal

Mutual Fund - Need of financial Plan

A rupee invested today will not be the same tomorrow, thus making a financial planning is the need of the hour. A sound financial plan is one that supports you the most during an unforeseen event or helps you achieve your short term and long term goals through judicious investments. However many still prefer to follow the conventional investment behavior passed on to us from one generation to another. Investment in a savings account or bank deposits is considered as a safer option while gold is considered as a safe haven and real estate has sentimental value attached to it. But, what we fail to realize is that, are these options helping us towards our goals?

In contrast to this, mutual funds are proving to be an attractive tool for wealth creation with various options to ensure the balance required for liquidity and growth. Every investor has his/her goals, risk appetite and time horizon for investing. Mutual fund investments provide extended benefits of meeting these requirements through their various product categories with the flexibility of choosing, as each mutual fund scheme is different and caters to a certain risk profile. Recently SEBI, the mutual fund regulator initiated the categorization and rationalization of mutual fund schemes in India, which ensures transparency to investors relating to the scheme’s investment objective, asset allocation and level of risk involved. This will help investors to understand scheme classification and objective making selection of scheme easy as per there short term and long term requirement. It is prudent to invest in mutual funds as it offers the benefits of diversification.

Investment is spread among different asset classes thus reducing risks and optimizing returns. It is professionally managed by fund managers who have the investing acumen thus setting you free from the time and energy spent on tracking the markets. For investors with a low risk appetite, investment in debt funds is a better option than fixed deposits as their returns are comparatively higher than fixed Income such fixed deposit or PPF. Aggressive investors who invest in equity shares can consider investing in equities through mutual funds. This will help reduce the risk, generate high inflation-beating returns and at a low transaction cost. We can see the same in Figure 1: Comparision of SIP, PPF, RD (FD) with 10,000 investment every month since Jan 2002. SIP returns are as per Sensex. RD is rate of SBI 3 yrs FD rate. The most I believe people fear is that they will lose money in mutual fund but it is important to understand that there are options other than FD where there money is quiet safe, for example Liquid fund or short term funds which play at safe side by investing in money market instruments or bonds giving at least as good as an FD with an added advantage of liquidity. Also, investors should be cognizant of certain myths relating to mutual fund investments such as past performance is equal to future returns, top rated funds guarantee best returns and mutual fund investment is only for big investors. These misconceptions need to be elucidated in order to make them comfortable with mutual funds. Among the many initiative for this, the Association of mutual fund in India (AMFI), launched SIP Sahi Hai campaign for spreading investor awareness is doing wonderful job.

The importance of having mutual funds as one of the investment avenues cannot be overlooked. It helps in creating an inflation-adjusted corpus and should be included in one’s financial plan. Earning double digit risk-free returns is history, lower interest rates are here to stay and we don’t envisage sovereign linked products to give high returns in near future. EPFO has also decided to allocate funds to equity is an ample testimony to this trend. So, anyone who is looking for long term investment and look to generate double digit returns, equity or for that matter Mutual Fund is the product. Happy Investing!!

Related Articles: Investing in Mutual Funds is Now Easy with MO Investor App | Invest In Mutual Funds Online In 5 Simple Steps |  How to Analyse Mutual Funds for Big Returns | Things to Know Before Investing in Mutual Funds | Mutual Fund - Need of Financial Plan

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