How To Meet Your Goals With Mutual Funds

By | September 3, 2016

Meet your goals with Mutual Funds

When someone giving investment advice says, “Mutual Funds”, the response is either a confused look or a wary one. Most potential investors have a broad understanding of this investment tool with little knowledge about the different kinds of Mutual Funds. Hence, they sometimes miss out on good Mutual Fund offerings. This article aims to help investors identify Mutual Funds for their short, medium and long-term goals.

Let’s assign a time period to the goals for a better understanding. Short-terms goals are those that you want to fulfil in 1-3 years, medium-term goals stretch over 4-6 years, and long-term goals are anything more than 7 years.

Mutual Funds for short and medium term? Undoubtedly, the true potential of Mutual Funds is known in the long run, but this is not to say that there are no Mutual Fund offerings to help you meet your short-term and medium-term goals.

Now that we have your interest, let’s get started.

Additional Reading: Decoding Mutual Funds

Mutual Funds For Short-Term Goals

Saving up for a wedding or planning to buy a car? What’s the first investment option that comes to your mind? Fixed Deposit? Fair enough. Most people prefer to go with an FD. It’s safe, secure and offers steady returns. But we have something better for you: short-term Debt Funds.

Short-term Debt Funds have been all the rage the last couple of years. More and more people have been opting for them over FDs. And rightly so! Short-term Debt Funds offer better returns than FDs and are also tax efficient.

If you invest in a Debt Fund for three years, the gains are added to your income and taxed as per your salary bracket. Just like with an FD.  However, unlike with a Fixed Deposit, where the banks cut TDS when the interest earned crosses Rs. 10,000, there is no TDS deducted on interest earned in a short-term Debt Fund. That’s just cool! Wait, it gets better.

You get an indexation benefit if you invest in a Debt Fund for more than three years i.e. your gains are taxed only after factoring in the rate of inflation for the investment period. Isn’t that fair? At least, you won’t feel short-changed at the end of it.

Another kind of Debt Fund is the Income Fund. These have a maturity period of more than 5 years and react to changes in the interest rate. When interest rates fall, the value of Income Funds rises and vice versa. A drop in the interest rates this year has brought Income Funds to the spotlight, and with the RBI hinting at more rate cuts ahead, this fund is gaining power. Income Funds are subject to risks from changes in the interest rates.

Short-term Debt Funds are not all that subject to changes in the interest rate. The return on your short-term Debt Fund is essentially interest earned on the bonds. Hence, the returns are not all that juicy, but they are steady.

Now, how do you invest in a short-term Debt Fund? One of the best ways to go about it is to start a Systematic Investment Plan (SIP). You can invest a certain sum of money, at regular intervals, in your Debt Fund.

Do make a note here that each instalment will be treated as a separate investment. This is important to know because Debt Funds come with an exit load. An exit load is a tiny percentage of your investment you’ll have to sacrifice if you withdraw your funds before the minimum tenure. This tenure may range from anything between 6 months to 18 months.

Since each instalment is considered a new investment, you’ll have to calculate this tenure separately for each EMI. The exit load figure might seem like a tiny, harmless number, but it could claw away a considerable chunk from your total investment income. Be mindful of that.

Mutual Funds For Medium-Term Goals

You can consider fuelling your risk appetite if you want to invest for 4-6 years. Have you heard about taking calculated risks? One way to take calculated risks is by investing in a Balanced Fund. The name says it all. When you opt for a Balanced Fund, your money is invested in equity and debt instruments together.

Equities are stocks and we know stocks are risky. So there’s your risk. That is why balanced funds invest in debt too. So the debt portion will work as a back-up plan and cushion the impact if the equity bit fails to work its magic. But a combination of equity and debt largely increase your chance of reaping lucrative returns with only a fair amount of risk.

Now, there are two types of Balanced FundsEquity-Oriented Balanced Funds and Debt-Oriented Balanced Funds.

Equity-Oriented Balanced Funds: As the name suggests, a larger chunk of your money is invested in equities (stocks). This entitles you to all the advantages of an Equity Fund. Your gains on this fund are tax-free if your investment period is more than a year. Interesting, right? Moreover, if the markets are all bullish (i.e. stock markets go up), you’ll reap a windfall in terms of returns. But equities are risky. If good times bring good returns, then bad times could bring losses with them.

Debt-Oriented Balanced Funds:  Needless to say, a larger chunk of your money is invested in Debt Funds. This fund offers lower returns, but offers better security than its above-mentioned counterpart. Also, it does not have all the tax benefits of an Equity-Oriented Balanced Fund. Just like with Debt Funds, earnings from investments of less than three years are taxed as per your income slab.

An investment of more than three years is taxed at 20% after factoring in indexation. But note that almost all Mutual Fund houses today offer only equity-oriented Balanced Funds so that the investor can get the tax benefits.

When talking about Balanced Funds, it’s important to keep dividends in mind. Many fund companies offer monthly dividends to investors who sign up for a fund from their company. The dividends you receive are not what you earn on your fund, but your own money paid out to you every month.

Though this may seem lucrative, taking dividends reduces the net asset value of your fund. Moreover, fund companies are not liable to keep paying you a dividend if the markets don’t perform well or your fund takes a hit. Be ready for a setback then. If a fund company offers you dividends, make sure you understand the plan thoroughly before saying yes.


Mutual Funds For Long-Term Goals

Mutual Funds is the name of the game when investments are planned for the long-term. You could be investing for retirement, to buy a house, for your child’s education – no matter the reason, Mutual Funds are excellent investment tools in the long-run.

When you look at Mutual Funds as a long-term investment option, you can invest money in large-cap, multi-cap, mid-cap and small-cap funds.

Large Cap Funds invest your money in large-cap companies. These companies have a strong track record and their stock price is relatively stable. They are more or less able to withstand stock-market fluctuations with minimal swing in either direction. Since this fund is not very volatile, it offers security but lukewarm returns.

At the other end of the spectrum is the Small-Cap Fund. This fund is very vulnerable to market fluctuations, and hence, is inherently a risky bet. But the prize for taking this risk is lucrative returns. If this fund swings up, you are in for riches. But don’t take your eye off the risk.

In between these two funds are the Mid-Cap and Multi-Cap Funds. If you really must pick one, then investing in a Multi-Cap Fund will be a wiser decision. When you opt for this fund, your money is diversified. Hence, you have a balance of risk and returns. You get the stability of large-cap funds and returns of small-cap.

Additional Reading: Set Your Goals Before Investing In Mutual Funds

A thumb rule of investment is to never invest all your money on just one thing – that’s a classic case of putting all your eggs in one basket. Even if you are looking at Mutual Funds, diversify your money across different kinds of funds. Make sure you have a healthy mix of risk and returns. This is the strategy to being a smart investor.

Mutual Funds are an excellent investment choice. Do your research before investing in one and make sure the asset-management company you approach has a reputation for giving good returns. If you are trusting someone with your money, it’s only fair to make sure that they are really good at multiplying it.

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