Mutual Fund
- Part 2 -
Paikhomba *
o A combination of growth and income funds, also known as balanced funds, are those that have a mix of goals. They seek to provide investors with current income while still offering the potential for growth. Some funds buy stocks and bonds so that the portfolio will generate income whilst still keeping ahead of inflation. They are able to achieve multiple objectives which may be exactly what you are looking for.
Equities provide the growth potential, while the exposure to fixed income securities provide stability to the portfolio during volatile times in the equity markets. Growth and income funds have a low-to-moderate stability along with a moderate potential for current income and growth. You need to be able to assume some risk to be comfortable with this type of fund objective.
o That brings us to income funds. These funds will generally invest in a number of fixed-income securities. This will provide you with regular income. Retired investors could benefit from this type of fund because they would receive regular dividends. The fund manager will choose to buy debentures, company fixed deposits etc. in order to provide you with a steady income.
Even though this is a stable option, it does not go without some risk. As interest-rates go up or down, the prices of income fund shares, particularly bonds, will move in the opposite direction. This makes income funds interest rate sensitive. Some conservative bond funds may not even be able to maintain your investments' buying power due to inflation.
o The most cautious investor should opt for the money market mutual fund which aims at maintaining capital preservation. The word preservation already indicates that gains will not be an option even though the interest rates given on money market mutual funds could be higher than that of bank deposits.
These funds will pose very little risk but will also not protect your initial investments' buying power. Inflation will eat up the buying power over the years when your money is not keeping up with inflation rates. They are, however, highly liquid so you would always be able to alter your investment strategy.
Closed-End Funds
A closed-end fund has a fixed number of shares outstanding and operates for a fixed duration (generally ranging from 3 to 15 years). The fund would be open for subscription only during a specified period and there is an even balance of buyers and sellers, so someone would have to be selling in order for you to be able to buy it.
Closed-end funds are also listed on the stock exchange so it is traded just like other stocks on an exchange or over the counter. Usually the redemption is also specified which means that they terminate on specified dates when the investors can redeem their units.
Open-End Funds
An open-end fund is one that is available for subscription all through the year and is not listed on the stock exchanges. The majority of mutual funds are open-end funds. Investors have the flexibility to buy or sell any part of their investment at any time at a price linked to the fund's Net Asset Value.
Equity Linked Saving Scheme
In India, the investors have been given tax concessions to encourage them to invest in equity markets through these special schemes. Investments in these schemes of mutual fund qualify for tax deduction of up to R1.5 lakh under Section 80C of the Income Tax Act. They come with a lock-in period of only three years. Everyone who has taxable income should invest in ELSS.
Equity investment may be risky over the short term, but in the long-term is an entirely different story. For investment periods of three to five years or longer, equity investments are actually low in risk and high in returns. In fact, when you take inflation into account, it is bank FDs and similar deposits generate returns that are barely higher than the inflation rate and in effect, you lose value or barely maintaining it. The purchasing power of your money reduces at about the same rate as its value increases in a fixed deposit.
If you are not utilizing the maximum deduction available under Section 80C, you can consider investing in ELSS. These schemes have the least lock-in period and they have the potential to offer superior returns than other investment options available under Section 80C. Of course, like all equity investments, the best way of investing in ELSS funds is through monthly SIPs throughout the year. However, a smaller number of evenly spaced investments are also suitable.
Systematic Investment Plan (SIP):
A Systematic Investment Plan is an innovation in the payment options for mutual fund investors. It is designed for those who are interested in gradually accumulating wealth over long term in a disciplined manner. An SIP is not an investment product by itself, it just offers investors a different process of investment.
For many retail investors in India, especially for those belonging to the salaried classes, it would be quite difficult to save a sizable sum and then invest the lump sum amount in the market in mutual fund and schemes. SIP offer them a viable option to invest for the long term.
The emergence of SIPs in India has been due to the host of benefits that they offer. The product is primarily targeted at the retail investor and it leads to disciplined savings and wealth accumulation over a period. Most marketers offers SIPs under the equity fund as well as debt fund.
SIP is now preferred financial product for retirement planning. The advantage that SIPs offers over pension schemes is that the investor has the flexibility to manage the risk. One can invest in select funds according to the changing risk-return profile. An SIP also offers instant liquidity whenever required.
The income accrued has also been consistent over time. Two specific advantages of SIP that helped built consumer confidence and reduce risk are the power of compounding and the concept of rupees cost averaging.
Final Word
To delve into the world of mutual fund investing requires you to first analyze your own situation, specifically, your needs and goals. Determine what you're investing for and your comfort with risk to assess what types of funds to look at.
Mutual funds are the best option for reaping the benefits of different types of investment with a minimum effort and a low entry point. So, in order to fulfill/achieve the long term financial goals like retirement /Child's education etc. one need to invest in equities rather than investing in fixed income schemes. Equity gives real growth which can beat inflation over the long term.
(Concluded)
* Paikhomba wrote this article for The Sangai Express
The writer is a Certified financial plannercm. He can be reached at tpmeitei(AT)gmail(doT)com
This article was posted on November 09, 2015.
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