Part 4 of the Classroom series on mutual funds explains how much you should invest in funds, whether it will help save taxes and how you can name a nominee for your account.
Q. Do mutual funds help me save taxes?
A. There is a specific category called tax-saving mutual funds or equity-linked saving schemes (ELSS). A tax-saving or ELSS scheme is a diversified equity fund, but it gives you the additional benefit of a tax deduction under Section 80C, up to a limit of Rs 1.5 lakh in a financial year. In simple words, your taxable income comes down by the amount you invest in an ELSS, up to a limit of Rs 1.5 lakh.
Q. Do mutual funds allow single and joint holdings?
A. Investors can buy units of a mutual fund scheme in their personal capacities. They can also invest jointly. Typically, fund houses allow up to three joint holders in a mutual fund folio.
Q. What is a nomination? Is this method better than joint holding?
A. A nomination is a process that allows an investor to name the person who should hold his investments after his death. The nominee may not be the ultimate beneficiary of the deceased investor’s monies. A nominee is a custodian of the assets of the deceased person. The nomination comes into effect only after the death of the investor. Joint holding, on the other hand, connotes equal ownership of mutual fund units.
Q. How many funds should I invest in?
A. There is no one number for this. You should take into account your needs and financial goals. A higher number of schemes do not necessarily offer meaningful diversification. Too many schemes may make tracking your investments a cumbersome process. Ideally, a mix of 7-10 schemes across categories and asset classes (equity, debt, gold and so on) should be good enough.
Q. I have Rs 10,000 to invest now. Will that be enough?
A. The answer, as always, would be ‘it depends.’ Once you decide on specific goals, you must also decide on how much amount it involves for you to invest, perhaps every month, to reach there. Depending on the time horizon, risk appetite, investible surplus and type of investment, you can arrive at the amount you will need to invest.
If you can invest Rs 10,000 every month, you must decide how long you can spare that money. Also, this amount must represent the money you would not need for at least five years in case you wish to invest in equity mutual funds.
If you can invest only a lump-sum of Rs 10000 now, it would be hard to infer which goal it can cater to. That said, regular investing is always a good habit. And a better way to do this is to first fix a goal then work towards it.
Q. Is there a better way to ascertain how much money I need to invest in a mutual fund, either one-time or monthly?
A. As mentioned earlier, investments must be directed to specific goals. For every goal, you must factor in inflation, time horizon, your risk-taking capacity and your investible surplus. Once you have a reasonable idea on how much you would need and by when, deciding on how much you need to invest and in which instruments would become easier.
You can sit with your advisor to get a detailed blueprint on how much you would need to invest. For starters, you can also try using the financial planning calculators available on the internet with personal finance portals. Once you key in the numbers, you would be able to get a rough idea on how much you would need to save. You can then take the help of an expert to fine-tune your investment strategy.
Q. Can I plan for multiple goals at the same time? Like buying a car, home or a foreign holiday?
A. Most definitely you can! In fact, it is recommended that you save for every goal separately. Depending on when you want a goal to fructify, you must invest accordingly. You must then decide which category of funds you wish to invest – equity, debt, hybrid, gold and asset allocation – and in what proportion.
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