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Article | Sip - Jun 02, 2017 | 17:55 PM

Financing Goals through Mutual Funds

Birla Sunlife - Grow My Money - Financing Goals through Mutual Funds
Every individual has dreams and aspirations in life. These goals take us ahead in life and help shape our future. Yet, despite our individual differences, the goals often are not altogether that different. For instance, owning a home is a big priority for many, so is buying a car, or creating a large retirement fund or ensuring their children have access to the best education money can buy. The only thing that can fulfill these goals is an adequate amount of money at the right times in life. So how do we get them?

Mutual funds can help achieve these financial goals whether one is looking for long-term wealth creation or to park funds for a short amount of time. It caters to the aggressive and conservative investor, long-term or short term, to all income categories and all age groups. There is something for everyone.

Therefore, picking the right type of fund is paramount. It should be guided by one’s risk capacity and investment horizon. While these in itself won’t narrow it down, any financial expert worth their salt won’t recommend a debt fund for a 25 year old looking to save for retirement or an equity fund for someone wanting to buy a vehicle in one year. Each type of fund provides optimum returns at certain time periods and it is important to align one’s financial goal to the right fund.

Goal: Planning for retirement

Planning for retirement should begin as soon the individual is earning a stable income and mutual funds can be a great avenue for building a corpus through capital appreciation over traditional savings options. Especially if the investor is in their 20s or 30s, they can invest a larger proportion in equity funds. Though equity funds are supposedly risky, they tend to outperform all other asset classes in the long term on the basis of RoI (return on investments).

For the conservative investor, they can look into large cap funds which invest in well-known, reputed companies with strong fundamentals. For those not looking to invest a lump sum amount can take the SIP (Systematic Investment Plan) route as it helps in rupee cost averaging and help beat volatility in case the market timing is off.

Goal: Saving tax

ELSS or Equity Linked Savings Scheme is touted as a tax saving fund and rightly so. ELSS is an attractive option because of the unique tax benefits it provides. Any investments in an ELSS mutual fund are tax deductible under I-T Section 80C for a maximum of Rs 1.5 lakh. It is the driving force for people who haven’t utilized 80C to its hilt.

Amongst all the other tax saver options available today, it has the shortest lock-in period of three years. The beauty of the product is that with any mutual fund unit held for more than 12 months is considered long-term and because of the inherent lock-in period of ELSS, any capital gains or dividends are completely exempt from taxation.

Goal: Child's education and marriage

Let’s face it, education does not come cheap and quality education for the kids will severely dent a parent’s savings. Private schools, professional degrees, tuitions, extracurricular activities, hostel fees, etc., will cost you an arm and a leg or even more. No parent would ever want to compromise on the quality of education for their child. Fortunately, with sound financial planning, no parent has to. Depending on the investment horizon, a couple of options are available. Balanced funds could serve as a middle ground, with exposure to both equities and debt. While they may not outperform aggressive equity funds, they carry lower risk and steady returns as returns do not come at the cost of safety.

One can also consider Index funds for the same objective. Index funds invest in stocks that constitute their benchmark index in the same weightage. As a result, they rarely underperform or outperform the benchmark. These are also known as passive funds and have a lower expense ratio as compared to actively managed funds.

 Goal: Saving for the near term or parking surplus money

For people looking to park their money to beat inflation or have short-term goals like buying a vehicle, liquid funds can prove to be a good option. Liquid funds invest in money market instruments like treasury bills, corporate papers and bank certificate of deposits and have either none or low risk, have a fixed interest rate and fixed maturity.

Even medium-term debt funds can be an alternative for an investor with 12-15 month investment horizon. However, debt funds and liquid funds by virtue of investing in bonds are sensitive to interest rates. If interest rates go down, the funds perform well and vice versa.

Disclaimer: Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

 

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TRivia

  • Indian Mutual Funds

    Indian Mutual Funds have currentlyinvested about 1.35 crore (13.5 million) SIP accounts through which investors regularly invest in Indian Mutual Fund schemes. (March 2017. Source: AMFI)

  • AAUM

    Average Assets Under Management (AAUM) of Indian Mutual Fund Industry for the month of March 2017 stood at ₹19.26 lakh crore. (Apr 2017. Source: AMFI)

  • Equity-oriented Schemes

    Equity-oriented schemes account for around 32.8% of the industry's assets. (March 2017. Source: AMFI) Equity-oriented schemes derive 85% of their assets from individual investors. (March 2017. Source: AMFI)

  • HNI Investors

    HNI investors account for 20.98% of investments for a period of 12-24 months. (Source: AMFI)

  • Benefit of Index Funds

    Index funds usually have much lower operating expenses over actively managed funds.

  • What is Net Assets?

    This figure represents the fund's total asset base, net of fees and expenses.