6 Reasons Why You Should Consider Mutual Fund Investments

Have you ever wondered why some people who weren’t as wealthy a few years ago are now financially stable and have even secured the children’s future financially? The truth is most of them were effective financial planners who had a diversified investment portfolio and were regular with investing. Yes, if you want to achieve financial stability in the future or are looking to improve your existing financial status, you too may have to first understand the art of financial planning.

You are young and healthy and taking care of your entire family’s expenses. But due to some unfortunate events if you fall ill and your monthly source of income comes to a standstill, have you ever thought how you will be able to manage the daily expenses? If you have a plan B that means you are already good at financial planning, but if you have absolutely no idea what you will be doing if such an event occurs, it means you may have to make a financial plan. A lot of people feel that financial planning is vain and that you need to just save enough so that you can take care of your future expenses. But have you ever wondered how your savings will be able to tackle inflation?

For example, a half litre of packaged water bottle cost Rs. 5 fifteen years ago, but today it costs Rs. 10. A decade ago, a fancy meal at a decent restaurant cost anywhere between Rs. 1000 to Rs. 2000. Now the same would cost anywhere between Rs. 3000 to Rs. 4000. These are just a few examples of how inflation is on the rise and the value of rupee is going to diminish with time. That also means that just saving a certain portion of your income isn’t going to be enough in the long run. You may have to invest in such a scheme that it potentially multiples in the long run and helps you sustain in future.

Those who are good at managing money, for them financial planning may not seem that difficult. But if you are already struggling and aren't able to manage their daily expenses from their monthly income and are usually seeking loans from friends and colleagues at the month because you spent all your money, you have to work towards that attitude. It is important that your outflows never supersede your inflows. Saving money isn’t that difficult, what people don’t realize is that most of the time they end up spending money when it could have been avoided. It is evident that certain expenses such as monthly utility bills, house rent, travel expenses and groceries are going to be recurring and remain with you even after retirement. But if you want to start saving some serious money, there are a lot of other expenses that you need to put a full stop to. Why go to a restaurant when you can cook a delicious meal at home? Why use your car to travel to the office when a public transport can do the job and save you so much gas money?

The first thing about financial planning (obviously after getting good at money management) is making a list of your short term, medium term and long term financial goals and prioritizing them depending on their importance in your life. Every financial goal may need to be treated with a holistic approach and hence it is necessary to have a defined set of goals so that you can implement an investment strategy accordingly. If you have a long term goal like retirement planning, you may need to remain invested for at least 15 to 20 years if you want to build a retirement corpus of anywhere between Rs. 25 lakhs to Rs. 30 lakhs. On the other hand, if you have short term goals like going on a vacation, or buying a car or renovating your house, you may need to look out for an investment scheme that is ideal for an investment horizon for 3 to 5 years.

Apart from having an adequate investment budget and specific investment horizon, as an investor you may also have to understand your risk appetite. Before investing your hard earned money in any scheme, it is important for every individual to ascertain their risk appetite. Everyone talks about investing in lucrative schemes when it comes to financial planning no one tries to lay emphasis on such a crucial aspect of financial planning which is an investor’s risk appetite. When you have set realistic financial goals and know how much risk you are willing to take with your finances, you may be able to structure an accurate investment plan accordingly. Remember that the risk appetite of an individual may differ depending on their age, income, existing liabilities and several other factors. Remember that every investment scheme has some kind of risk associated with it. There is no investment that can be entirely called a risk free investment. And just like every individual’s risk appetite varies, so does the risk profile of an investment scheme depending on its investment strategy, asset allocation, and similar factors.

If you are someone with zero risk appetite, you may have to settle with low fixed interest offering schemes. However, if you are a young, dynamic investor who doesn’t mind taking some risk in order to give their investment portfolio an aggressive touch, you may consider investing in mutual funds.

What is a mutual fund?

In the recent past, mutual funds have become the favorite financial vehicle for several Indian investors for pooling their money to earn some capital gains. Mutual funds, for those who do not know, are professionally managed funds where fund houses and asset management companies collect money from investors sharing a common investment objective and invest this capital raised across multiple asset classes depending on the nature of the scheme. The money is invested across the Indian and foreign markets in money market instruments like equity, debt, corporate bonds, government securities, treasury bills, commercial papers, certificates of deposits, etc.

SEBI, the regulator of mutual funds in India, define them as, “a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in the offer document.

Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with the quantum of money invested by them. Investors of mutual funds are known as unitholders.

The profits or losses are shared by the investors in proportion to their investments. The mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time. A mutual fund is required to be registered with Securities and Exchange Board of India (SEBI) which regulates securities markets before it can collect funds from the public.”

Why should you invest in a mutual fund?

There are several reasons why mutual fund investments can prove beneficial if one remains invested for the long run. Here are some of them:

Mutual funds usually carry a diversified portfolio

Like stated earlier, mutual funds spread their money across multiple asset classes depending on the scheme’s goal, strategy, risk profile and several other factors. This makes a mutual fund a diversified investment scheme that invests in various asset classes like stocks, bonds, call money, etc. thus making sure that even if one industry crashes, the other asset classes are able to even out the losses.

Mutual funds offer SIP and lumpsum investment

There are two payment options for anyone willing to invest in mutual funds - you can either make a lumpsum investment or you can start an SIP. If you are someone who has surplus cash parked which you feel you can invest somewhere rather than just letting it sit idle, you may opt for lumpsum payment. When you make a lumpsum payment, you are allotted more units in quantum with the investment amount and depending on the fund’s existing NAV. However, if you want to remain invested for the long run and want to give your mutual fund investments a systematic approach you may opt for the SIP option. Systematic Investment Plan allows investors to invest monthly without having to manually visit the fund house/AMC. It is an easy and hassle free way to continue investing in a mutual fund. Investing in mutual funds via SIP may even inculcate the habit of regular investing in an individual.

Mutual funds are available in growth and IDCW option

Mutual funds are usually available in growth and IDCW options. If you are investing in mutual funds for regular income, then you may go with the IDCW option. IDCW payouts are offered by the fund house when the scheme makes profit. Also, these IDCW are rolled out at the sole discretion of the fund manager. On the other hand, if you are planning to remain invested in mutual funds for the long run, you may choose the growth option. In the growth option, the profits made by the scheme are reinvested back into it. Over a period of time, this may lead to the increase in the fund’s NAV and in turn, benefit the investor.

Mutual funds are professionally managed

Mutual funds owned by reputed AMCs usually house a staff of professionals who carry vast industry experience. There is also a team of analysts and researchers who are constantly studying the market vagaries and giving their inputs so that the fund manager can buy/sell securities in accordance with the fund’s investment objective. So those who wish to get a taste of the equity market but do not possess much investment knowledge may consider investing in mutual funds.

Mutual fund investments allow rupee cost averaging and compounding

If you continue investing in mutual funds via SIP for a longer time period you may be able to benefit from compounding. Another advantage of investing in mutual funds is rupee cost averaging. For example, if you started an SIP of Rs. 10,000 per month in a fund and its current NAV is 20, you will be allotted 500 units. If the NAV changes to 10 next month, you will be allotted 1000 units. In the following month, if the NAV of the fund you invested in goes down, you will be allotted a lesser number of units. This is referred to as rupee cost averaging. Hence investing in mutual funds for the long term is never a bad idea.

You can invest in mutual funds depending on your risk appetite

A lot of people feel that mutual funds equals to equity funds, but that is not true at all. If you are someone with a low risk appetite, you may opt for debt funds which invest in fixed income securities. If you want to balance with equity and debt, you may opt for hybrid funds. There are other mutual funds like ETF, index and solution oriented funds, all carrying a different risk profile and investment objectives. Hence you can invest in a mutual fund that holds the potential to help you with your financial goals.

Investing in mutual funds may be a good idea, but if you are new to investing it is better that you first consult a financial advisor before investing in your money in any scheme.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.