Find answers to some of the frequently asked questions about investment and wealth management.
Planning should be the first step to any new project to minimize future risks, and in this world of uncertainties, we can’t predict much about the future. The biggest example we all have is of the covid-19 pandemic situation, to survive in the worst situations it becomes necessary to have enough savings for self and family for which financial planning is the best option to go for. With better financial planning you can have good savings, investment, and security.
The first step towards financial planning is finding expert guidance, such as a professional advisor or a person with adequate experience. The next step includes a few points that must be covered while making your financial plan.
- Make a fixed budget: As you are aware of all your monthly expenses you can make a certain budget that will help you to keep a track of your money and then you can plan accordingly.
- Set financial goals: The ultimate motive of financial planning is to achieve your financial goals without compromising with your current lifestyle. So, set your goals, keeping in mind your budget, expenses, and dreams.
- Create an emergency fund: The emergency fund is also termed a contingency fund which simply means to have six months of living expenses saved.
- Asset Allocation: It is the foundation of your plan where you make the right mix of equity and debt.
- Keep a check on your financial plan: Reviewing your financial plan over time is as important as preparing it. If you review it, you can know what is your progress and what are domains where you need to work on.
Depending on the structures, tax treatment, scheme management, and the goals of the investor Mutual funds can be classified as
- Open-Ended Funds: These funds can be bought or sold at any time after the launch of NFO. However, there are open-ended funds with a lock-in period of 3 years, after which they can be redeemed at any time.
- Close Ended Funds: These funds can be purchased at the time of the subscription window, after the closing of the subscription window investors can’t continue investing in the same. The close-ended funds have a fixed investment period during which the investment units can’t be redeemed. After this period, the closing unit value gets transferred to the holder’s bank account.
A Mutual Fund is a financial instrument that is created by the money collected from many investors. Though they can be a higher risk investment, the returns are generally higher than any other current investment plan. Here are some benefits of investing in mutual funds
- Financial Management : You might quit worrying about your investments once you opt for Mutual funds.
- Liquidity : Mutual funds are somewhat classified as liquid investments unless it gets guided by a pre-specified lock-in period. You can redeem your holdings at any point(subject to exit load, if any).
- Varied Investment Options : You can access multiple scheme options according to your financial goal, risk appetite, and time horizon.
- Transparency : Being an investor you can stay updated with new schemes and market information.
- Well Regulated : Mutual funds in India are well regulated and monitored by the Securities and Exchange Board of India(SEBI) so the interests of the investor are protected. SEBI makes Mutual funds a safer option of investment.
Tax-saving mutual funds are also known as ELSS because they offer tax exemption of up to Rs. 1,50,000 from your annual taxable amount(Under section 80C of the ITA). ELSS funds are just like a regular mutual fund with an additional tax-saving benefit. When you invest in these funds, you can claim a tax rebate of up to INR 1.5 Lakhs while saving around INR 46,800 per annum in taxes. ELSS Funds have the shortest lock-in period of three years and have the potential to offer 2 times returns of FD and PPF.
SIP stands for Systematic Investment Plans. SIPs are the best periodic investment plan starting at Rs. 500. Investors can invest in SIP in intervals like weekly, monthly, fortnightly, or annually.
- SIP can be started with lesser amounts.
- As no one can predict the market accurately, investors benefit from the concept of Rupee Cost Averaging and get superior returns over a long investment period despite rising or falling market trends.
- SIPs are very flexible and give the freedom to choose the investment frequency.
- You can terminate your SIP at any time by a simple procedure.
- SIPs help in creating long term wealth using the power of compounding.
- Risk and Return : Stocks are riskier to invest in as compared to equity mutual funds. This is because the diversified equity mutual fund is capable of spreading your investment across different sectors, therefore, reducing the risk associated with your investment. On the other hand, stocks are vulnerable to market fluctuations and the performance of one stock can’t compensate for the other.
- Diversification : Mutual funds provide investors with different ways of managing their investments. One can choose from modes like SIP, STP, SWP, lump sum. You can select from various types of asset classes to invest your money in, based on your financial goals, returns expectations, and risk appetite.
- Management : While investing in stocks, the best thing to rely on is your market research, knowledge, and skills. This is a huge task while investing in stocks so you might face constraints by tools and resources. While investing in mutual funds, this drawback isn’t there as there are financial experts that take care of your investments.
- Cost : Mutual funds have lesser transaction costs hence the brokerage is lower as compared to the stock investment.
- Investment Style : When you spend directly in stocks, you have to do your research and apply the knowledge that makes you an active investor. You have to devote more time to managing your investment.
In the case of mutual funds, the fund manager does all the investment tasks, research, and tracking so you don’t have to spend much time on the same. In mutual funds, you are the passive investor.
- Investing Time : Stocks can be bought at any time of exchange trading hours that start from 9:15 a.m. to 3:30 p.m. While mutual funds can be bought or sold only once at the end of the day after the NAV is finalized.
- Tax Benefits : ELSS mutual funds give you an option to save taxes Up To Rs. 1.5 Lakhs under Section 80C of Income Tax Act, 1961. This option is not available while investing in stocks.