MUTUAL FUNDS CAN BE YOUR FINANCIAL SUPERMARKET
For some unknown reasons, investing in mutual funds in India is almost always taken to be equity investing. This is despite the fact that out of a total of approximately Rs 11 Lakh Crores invested in mutual funds today, 70% is invested in Debt Funds, ie the funds which do not invest in equity markets at all. Consequently, investor perception of mutual funds is of a one horse race and that horse is stock markets.
The reality is quite different though. Mutual Fund as a class of investing is, in fact, not one single product unlike bank FDs, stocks or Gold. It is more like a basket which has three products – stocks, debt products and Gold – in all sorts of proportions. An investor can mix-and-match as per his liking and requirement. So a mutual fund can have all three or any two or just one single product as per the investor’s desire.Investor can choose one product with a mix of these asset classes or choose individual products of different asset classes – the choice is entirely his. And to top it, if chosen correctly, there can be seamless shifting between these classes. Thus, if an investor likes large company stocks today, he can invest in a good large-cap equity fund. But some time down the line, if the investor feels that some part of it should go to a safer debt product and Gold, he can shift a part to a debt fund and a Gold fund, while the balance can be continued in the equity fund. In case the shift is within the ambit of the same mutual fund company, it can be done without exiting out of the fund by simply submitting a switch request. Thus, mutual fund investing is more like an a la carte menu which gives you the flexibility of ordering bulk dishes, in small regular bytes (SIPs) or a combination of both as you like it. Taking out the money is equally easy and investor-friendly – it can be taken out in small bytes (SWP) or in a full or part bulk. Most of the mutual funds redeem the money in 3-4 working days. There are, of course, liquid funds where money is at your call within one working day.
While the mutual fund supermarket gives you this flexibility and ease, it does not disappoint you on the quality either. With expert fund managers managing your money, you would expect them to do better than if you were to manage it yourself. Table below gives out the returns generated by various categories of mutual funds over different time periods:-
|Annualised Returns||Sensex||Top 5 Equity Funds average||Bank FDs (past years)||Top 5 Debt Fundsaverage||Top 5 Balanced Equity Fundsaverage|
|1 Year Returns||38.1%||111%||9.5%||25%||58.2%|
|3 Year Returns||17.67%||40%||8.5%||14.1%||25.4%|
|5 Year Returns||10.9%||25.3%||7.5%||11.1%||17.3%|
Bank FD returns have been taken to be of FDs done 1, 3 and 5 years back. Even the Liquid Funds, which are equated to Savings bank account, have traditionally given about double the returns compared to bank accounts.
However, tax incidence on the mutual funds has to be carefully considered. Dividends received from Debt mutual funds would be taxed more heavily than your income tax slab if you are in a tax bracket lower than 30%. Similarly, if you are in 10% tax bracket, short term capital gains (less than 1 year of investing) in equity mutual funds could mean a higher tax for you. On the contrary, long term investing in equity funds (more than 1 year) and debt funds (more than 3 years) could be very tax-efficient, in addition to giving you very good returns.
Due to such varied and beneficial characteristics, mutual fund supermarket could be a one-stop solution for almost all financial shopping (except real estate and alternative investments, for now) while meeting all requirements of a typical investor – wealth creation, retirement planning, children planning, financial goals planning etc. They are an ideal product for long term investing but do not disappoint even for short term investing as short as even a few weeks.
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