Are you looking to park your short-term funds or investing to achieve a long-term investment objective or to get a regular income? It's a tough call for investors with a different risk profile to select an appropriate investment option for different objectives and time horizons.
The problem has always been, and remains, that there are simply too many variables to consider before making a decision. Thankfully, there are mutual funds to make the task easier for investors. They provide plenty of options to investors and if selected properly, have the potential to help them achieve varied investment objectives. Let us analyse as to what mutual funds offer:
Parking of short-term funds
If your objective is to park your short-term surplus, mutual funds offer plenty of options. One can begin with floating rate funds. FRFs safeguard short-term returns from interest rate fluctuations.
The second stop is liquid funds. Liquid funds provide very high level of liquidity from a portfolio constituted of money market instruments and high quality debt securities. There are different variants of liquid funds and their suitability depends on the time horizon of investors.
Then, there are fixed maturity plans. FMPs are essentially debt funds that invest in securities maturing in line with the time profile of the respective plans. In other words, FMPs provide investors with an opportunity to invest for various fixed maturities.
FMPs normally have a series of monthly, quarterly and yearly plans. FMPs aim to generate predictable returns and at the same time protect investors from the interest rate volatility.
Investing to save taxes
Mutual funds offer equity-linked savings schemes as an option under section 80C to save taxes. Being equity oriented schemes, ELSS have the potential to provide better returns than most of the options under Section 80C.
Another notable feature is the tax efficiency in terms of returns earned through them. It is important considering that ELSS also aim to distribute income by way of dividend periodically depending on the distributable surplus.
As per the current tax laws, an equity fund investor is not only entitled to earn tax free dividend but also the long-term capital gains are not taxable.
Investing for long-term objectives
To achieve these very important long-term goals of your life, it is necessary to have a financial plan in place. Each of these goals has its own importance in one's life. For example, when you invest for your child's education, you wouldn't like to compromise on the type of education that you intend to provide.
Therefore, to ensure that there is no short fall in the targeted amounts, it is necessary to invest in those options that have the potential to provide better real rate of return ie returns minus inflation. Beating inflation is absolutely crucial considering the escalating costs over the years.
Remember, inflation reduces the value of capital and the returns earned over the years. If you have been investing only in instruments offering assured returns to achieve your long-term investment goals, you need to think again.
Most traditional instruments offering assured returns do not have the potential to beat inflation consistently over the longer periods.
Mutual funds can be an excellent investment vehicles to achieve long-term objectives. For example, equity funds, if selected properly, provide the best chance of beating inflation over the long-term. Besides, the added advantages are that they offer diversification, flexibility and are simple to invest in.
Remember, investing through a tax efficient vehicle like mutual funds can help you accumulate more for your long-term investment goals. Investing in a disciplined manner through a systematic investment plan is an ideal way to accumulate and avoid timing the market.
For those who are not comfortable with investing in equity funds, mutual funds offer a variety of options. For example, if you wish to invest for child's education, mutual funds have established dedicated for children where one has the option of investing either in an equity dominated or a debt dominated portfolio.
Similarly, for those intending to invest for retirement, there are pension funds. In other words, investors can decide the asset allocation based on their risk profile and select an appropriate fund to achieve their desired results.
Investing for a regular income
For those looking to receive regular income, mutual funds offer monthly income plans with a dual objective of providing regular income as well as growth of capital. MIPs are basically ultra conservative balanced funds wherein the debt portfolio provides a steady return and the equity portfolio enhances the chance of improving overall returns.
There are different variants of MIPs. For example, there are MIPs that have higher exposure to equity say around 25-30 percent. While these aggressive MIPs have the potential to provide higher returns over a longer period of time, the level of exposure to equity makes them more risky.
A conservative investor will do well to start investing in those MIPs that have capped the equity exposure to 10-15 per cent.
This asset mix, over a period of time, has the potential to provide returns that are more attractive than other options like fixed deposits and debt funds. However, there is a possibility of fluctuations in the returns in the short-term due to certain market factors.
The writer is CEO, Wiseinvest Advisors.
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