How To Make Mutual Funds Do The Hard Work For You

By Saroni Chakravarti | September 21, 2018

Most think that you can use Mutual Funds to build your wealth over a considerable period of time only. But did you know that Mutual Funds are suitable even to meet your short-term financial goals?

Enough has been said about how Mutual Funds are the perfect choice when it comes to growing your wealth over a long period of time. But no matter what your financial goal or investment horizon is, you can safely bet on Mutual Funds. Let’s understand how.

Short-term financial goals:

If you’re wary of the treacherous waters of the Mutual Funds market or want to take it easy with your investments, you could consider debt Mutual Funds. Debt Mutual Funds are ideal for risk-averse investors who want better post-tax returns than that accrue from parking your savings in traditional investments like PPF or Fixed Deposits.

Debt Mutual Funds are also more suited for short-term financial goals, say for a 3 – 5-year horizon. One thing to, however, note here is that when you stay invested in debt Mutual Funds for over three years, your investments are eligible for a long-term capital gains tax of 20% with indexation benefit.

Additional Reading: Best Equity Mutual Funds To Buy In 2018

With a number of banks slashing interest rates on their deposits, several investors are considering stashing their savings in debt Mutual Funds instead. Investors save taxes on long-term debt Mutual Funds owing to indexation. As mentioned earlier, when you sell your investments in debt Mutual Funds after three years, your investments qualify for long-term capital gains tax of 20% along with indexation benefit. Indexation helps to inflate your purchase price with the cost inflation index. Consequently, when your purchase price goes up (adjusted for inflation) and deducted from the sale price, your taxable gains decrease considerably.

BB Tip: When opting for debt Mutual Funds, you must choose funds basis your investment horizon. Consider investing in short-term schemes if you’re looking at parking your money for a few years. If your horizon is only a few weeks, there are several liquid schemes that could be more suited to your investment goals.

Long-term financial goals:

If you have an investment horizon of say 5-7 years, equity Mutual Funds should be your pick. However, here again, while picking which Mutual Fund scheme to invest in, you must be aware of the market cap, i.e. market capitalisation of these funds.

Market capitalisation:

Market cap acts as a good indication of the risk profile of a fund. As a prospective investor, you’ll need to acquaint yourself with market capitalisation before you plunge into the world of Mutual Fund investing.

Investment portfolios can largely be of three kinds: large cap, mid cap and small cap.

Large-cap funds:

Large-cap funds invest a larger proportion of their corpus in companies with a large market capitalisation. Companies in large-cap funds offer steady returns with relatively lower risk, compared to mid-cap and small-cap funds. Large-cap funds are ideal for investors who have long-term investment horizons and low-risk appetite.

Mid-cap funds:

Mid-cap funds are easily one of the more popular investment choices among investors. Mid-cap funds invest in mid-sized companies and are more volatile than large-cap funds. The basic tenet of investing in mid-cap schemes is to give it a considerable time, say 7 – 10 years, in order to rack up comparable returns like that of large caps and staying invested even when times are bleak.

Small-cap funds:

Small-cap funds invest in companies that are young but show tremendous potential for aggressive growth and expansion. These companies are not as big and financially strong as companies of large-cap funds. There is also considerable risk associated with investing in small-cap funds and it should be in line with an investor’s risk appetite, return expectations and investment horizon.

Additional Reading: Which Mutual Fund Market Cap Suits You

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Growth or dividend?

Several investors opt for the dividend option to invest in Mutual Funds as a way of earning regular income from their investments. Mutual Fund houses declare dividends from their realised profits. Opting for the dividend option may not be a good idea when Mutual Funds do not make profits, they may forego declaring dividends. One could consider instead opting for Systematic Withdrawal Plan (SWP) in cases like these. SWP lets you withdraw a fixed amount regularly from a Mutual Fund scheme. The flip side of SWPs is that one runs the risk of depleting capital over time if the withdrawal amount or percentage is too much.

Additional Reading: Equity Mutual Funds Investor? Here’s How You Can Download LTCG Statement

In comparison, the growth option is a good way to build your wealth over a considerable period of time. Here, profits are reinvested in the scheme and because of compounding, one stands to benefit in the long term.

As with anything that concerns your finances, it is imperative that you do plenty of homework and research to figure out which fund suits your portfolio, investment appetite etc. Most importantly, the kernel of Mutual Fund investing is investing through a Systematic Investment Plan (SIP), wherein a fixed amount is invested at regular intervals. This averages out the cost and allows you to buy more units when the Net Asset Value (NAV) dips and fewer units when the NAV rises. This reduces market volatility across market cycles.

Looking to make money from Mutual Funds but don’t know where to start? Click the link below.

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Category: Mutual Funds UCN

About Saroni Chakravarti

Saroni loves all things quaint and old world- be it art, music or cinema. She has a special knack for spotting the weirdest traits in people and can't for the life of her understand why she attracts the worst co-passengers. Despite her cynical exterior, she still hopes for a world that will be free from discrimination and cruelty. When she's not spending her day commuting, she can be found watching funny videos, reading, and sending out needy vibes to strays around her.

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