If you look decades back, we had few options to invest our money. Among them, FD & PPF were most preferred. If you happen to take advice from your parents or grandparents, many would still recommend you to invest in them. After liberalization in 1990, when India opened its doors to the world, we could see many financial products proliferating in Indian financial markets. In contrast, today if you happen to ask for advice from someone younger you would have learnt about mutual funds and its types. This variety has worked in both ways for an average investor. On one side it has made your lives easier as you can bifurcate your goals and choose to invest in a product which matches them, on the other side too many options have got many of us confused about mutual funds.
To make a correct and wise decision while investing your money, it’s good to know about mutual funds and its types and compare them with other alternatives. These are the listed five factors and suggestions that you may consider before choosing a product.
Tax-Saving
If you have a goal of not just investing but also saving tax, then we suggest you consider Mutual Fund. ELSS (Equity Linked Savings Scheme) will offer you tax benefits by investing of upto Rs.1.5 lakhs under Section 80C. In the market, you may find more products like ULIPS, Tax Saving FD, etc., but to keep it simple, we have cited only two products for you to make a prudent decision.
PPF unlike Mutual Fund will offer you a fixed rate of interest (determined by the Government). Your principal amount will be safe but you will have a lock-in period of 15 years. There are different types of mutual funds. Under Mutual funds, there’s a category of equity mutual fund called ELSS (Equity-Linked Savings Scheme) which will expose your principal amount to equity. Thus, this mutual fund will carry market-related risk but will not be subject to a fixed rate of growth. The feature of this mutual fund is that it will come with a lock-in period of 3 years, which is the shortest among all tax saving financial instruments. Thus, you are not just saving tax but also building wealth.
Long-term Goals
If your goals are long-term, we suggest you consider the advantages of Equity Mutual Funds. The reason we are suggesting Equity is because, the longer your money is exposed to the markets the better chances are for it to grow. You may also look at Index funds in this regard. These funds have low expense ratios and they replicate the index. If you are in your early years and have an appetite to take the risk, then you may consider equity mutual funds that follow the growth strategy in investing. These funds tend to be more aggressive and have the potential to give good long term risk adjusted returns. You can also have a diversified equity allocation in other equity mutual funds that differ in style such as value-oriented or a diversified Fund of Funds that invest in other funds of varying market capitalization, thereby making the process of selecting mutual funds a whole lot easier.
Short-term goals
When we are talking about short-term goals, we are looking at a horizon of 3 years or below. If your risk appetite is less, then you can look at balanced funds. These funds have a blend of both – Equity & Debt. Thus, reducing the risk as compared to equity funds. If your risk appetite is very low, you may consider Liquid mutual funds. These funds are conservative and invest in debt-related products. If you redeem your money after 7 days you don’t have to pay any exit load in debt funds.
Commodity / Gold
If you wish to invest in precious commodities like gold but your pockets are slightly tight, then you can take a closer look at Mutual Funds schemes investing in Gold. In these funds, you can start investing with as low as Rs. 500/- a month. The amount you invest is backed by real gold and is benchmarked against the market price of gold. This just makes buying gold much easier as compared to the conventional route where you need to shell out a large amount of cash which includes making and storage charges.
Emergency
Last but not the least, whichever avenue you choose to invest in from the above suggested list, we recommend you build an emergency fund. An Emergency fund is nothing but the amount you require every month to keep your house running if any unforeseen catastrophe arises. We suggest that you invest 6 months of the required capital in a liquid fund. As money invested in a liquid fund can be easily liquidated and is ready to use as compared to conventional investment products.