Having more money each year is what everyone aspires for, and one of the best ways to achieve this goal is through investing in mutual funds. Mutual funds are one of the best ways to invest one's money, given the sheer number of choices catering to every type of investor preference. The fact that one need not monitor the investments on a minute to minute basis (unlike if one's investments were directly made into securities), and the ability to diversify one's portfolio without high initial capital also are positive add-ons.
Many people are attracted to mutual funds, due to its higher returns, but are concerned by the perceived risk factor. Mutual funds are actually a relatively better way to grow your money as compared to direct investments in Equities, with a variety of options - both equity as well as more conservative debt options. Investing in mutual funds is an excellent way to achieve one's financial goals as the investor benefits from market rate of returns without having to spend too much time understanding the intricacies of the market.
Mutual funds offer benefits such as:
- Hassle free avenue for investing - the investor is not required to have pre-knowledge on the various asset classes
- Tax savings via ELSS funds
- Tax free returns on equity investments held over a year
- Opportunities to invest across different asset classes (debt, equity, commodity, etc.)
- Facility to invest in foreign markets
- Specialized funds to cater to varied requirements, such as index funds, sectoral funds, arbitrage funds, fund of funds, and distressed asset funds
- Better liquidity than traditional investment avenues such as PPF, fixed deposits, and bonds
Ascertaining one's financial situation such as income, expenses, investments and investment goals is the first step towards constructing a portfolio. Apart from financial situations and goals, points to consider are age, investment style, personality and risk tolerance. Once the current situation is taken into account, we also need to fix financial goals, and break this up into short, medium and long term.
The next step is to understand one's risk profile and based on the risk profile, one can select the appropriate asset allocation (debt, equity, commodity, etc.). Are you a risk taker or risk averse person? If one loses sleep over the ups and downs in the stock market, it will be better to avoid any significant exposure to equity funds. However, if the investor is willing to take risks and has the ability to hold on to the investment for a reasonable period, equity funds are the best option to reach one's financial goal.
The risk profile then decides the asset allocation, and one can divide the capital between the various instruments. Here it is very important to understand the various instruments available in the market. There are the following types/categories of mutual funds - Equities, Balanced, Gold and Debt. Equities are one of the riskiest, while at the same time one of the most rewarding investment. There is further categorization to an Equity Fund based on capitalization – Large Cap/Mid Cap/Small Cap Fund.
Based on one's Financial Goals and Risk Appetite, one can select the suitable category of mutual fund for investments. Post deciding on the allocation for each category of fund, one need to finalise on the funds. Factors such as Past performance, portfolio size, how long the fund has been operational, and expense ratio are some of the key points that have to be studied while selecting/evaluating a fund. Fund houses with larger portfolio size (AUM) and the long plus consistent track record should be preferred over newer options, as these tend to be more stable in times of turbulent markets. The expense ratio is an aspect that will impact the returns, with different fund houses charging differing ratios, even a 0.5% reduction in the expenses can result in a substantial increase in returns over a longer period.
Historical Performances of few Mutual Fund Schemes
| Scheme Name | SIP Amt | SIP Start Date | Total Investment | Current Corpus | Returns |
| Birla Sun Life Frontline Equity Fund (G) | 5,000 | Jan 1 2005 | 575,000 | 1,387,275 | 17.83% |
| HDFC Top 200 Fund (G) | 5,000 | Jan 1 2005 | 575,000 | 1,405,690 | 18.09% |
| ICICI Prudential Dynamic Plan (G) | 5,000 | Jan 1 2005 | 575,000 | 1,414,077 | 18.21% |
| Franklin India Bluechip Fund (G) | 5,000 | Jan 1 2005 | 575,000 | 1,195,993 | 14.89% |
Note:- These is only for the purpose of information and should not be considered as recommendation to invest in.
Once the investor has decided on the asset type, fund house, and funds in particular, the next step is deciding the investment mode - either lump sum or SIP (Systematic Investment Plan). The SIP (Systematic Investment Plan) is a better way to invest, as this eliminates the need to time the markets. When investing via the SIP route, the investor benefits from both falling and rising markets since when the markets fall the number of units purchased will be higher which will help to enhance the Risk Adjusted Returns in the long run.
Summary:
- Make financial goals & determine your risk profile
- Decide on asset allocation
- Select the mutual fund based on criteria such as fund performance, expense ratio, asset size, etc.
- Decide on the investment mode – SIP (Regular)
Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015
1.ICICI Prudential Tax Plan
2.Reliance Tax Saver (ELSS) Fund
3.HDFC TaxSaver
4.DSP BlackRock Tax Saver Fund
5.Religare Tax Plan
6.Franklin India TaxShield
7.Canara Robeco Equity Tax Saver
8.IDFC Tax Advantage (ELSS) Fund
9.Axis Tax Saver Fund
10.BNP Paribas Long Term Equity Fund
You can invest Rs 1,50,000 and Save Tax under Section 80C by investing in Mutual Funds
Invest in Tax Saver Mutual Funds Online -
For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call
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