How to Maximise your Wealth by Investing in Mutual Funds

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“It’s more important to grow your money than cut your expenses. It is more important to grow your spirits than cut your dreams.” –Robert Kiyosaki, author of Rich Dad Poor Dad

Ever wondered how some people get rich faster than others even when all the other factors are same? Well, the answer is simple – they don’t work for money, they make their money work for them.

While saving is important, saving alone cannot make you rich. The only way to be truly rich is when you can make your money work for you. Making money work for you means putting your money to such use where it keeps multiplying without you being directly involved.

Investments are the way to put your money to work and saving is the way to accumulate money that can be put to work.

There are many financial instruments in the market that can be used for investment purposes. One should be careful when investing in these instruments as the advertisements may make them look very lucrative but the actual returns may not be so.

Therefore, it is important to have complete knowledge about each financial instrument in order to take a calculated decision.

In this article, we will help you know more about mutual funds, the #SabseImportantPlan and discuss if Investing in them is a good way to make money or not.

Basics of mutual funds

A mutual fund is an investment tool where a pool of investors come together with small savings and give it to a company with a panel of professional expert investors who invest the money in a variety of securities on their behalf.

The experts are seasoned investors who make calculated decisions and invest the money in a portfolio of investments to maximise the gains. The gains – in the form of dividend or capital appreciation – are then distributed among the investors.

Mutual funds came into being to empower small investors and encourage them to invest. Small investors generally don’t have much knowledge about the stock market, due to which they are unable to invest or end up losing money when they do invest.

In the case of mutual funds, a group of small investors invests a small part of their savings in mutual funds. A large sum of money is accumulated and then invested in the stock market by a panel of experts. When a large sum of money is invested it is easier to create a diverse portfolio, which maximises returns and minimises the risk.

Is it worth investing in mutual funds?

To check whether it is actually worth investing in mutual funds let’s compare it with the most popular investment tool – the fixed deposit.

Fixed deposit vs mutual fund

There are various AMCs that offer mutual funds. For the purpose of comparison with fixed deposits, we narrowed down on the Aditya Birla Sun Life Digital India Mutual Fund.

Talking of numbers, let’s compare the factual data for Aditya Birla Sun Life Digital India Mutual Fund with a bank fixed deposit. If you had invested Rs 1,00,000 in both in 2013, the current value would be:

Particulars Fixed Deposit @ 7.5 p.a. Mutual Funds
Amount invested in 2013 Rs 1,00,000 Rs 1,00,000
Current value of investment Rs 1,45,329 Rs 2,25,000

 

(Source: https://www.moneycontrol.com/mutual-funds/nav/aditya-birla-sun-life-digital-india-fund/MAC025)

As you can see from the table above, the returns earned by mutual funds from Aditya Birla Sun Life are much higher than the returns on a fixed deposit. It has offered a return of 18.5% compounded annually as compared to the 7.5% offer by fixed deposits.

Although the returns from mutual funds vary from year to year (and may also give negative returns in some years) they usually give a much higher total return when the amount is invested for longer durations, say five years or more.

Now that you know why investing in mutual funds is a great option, let’s consider how to invest in them.

How to invest in mutual funds?

There are two ways in which one can invest in mutual funds:

  • Monthly instalment: In this type of investment you make regular payments towards the mutual fund investment. #SabseImportantPlan, popularly known as Systematic Investment Plan (SIP), this is ideal for small savers and those who don’t want to invest all at once. You can invest as little as Rs 500 per month (this amount differs from bank to bank).
  • Lump sum: In this method there’s a one-time annual payment. Instead of investing every month you can make a whole payment at the starting of the tenure.

You can choose either of the methods given above to invest in mutual funds. When you make the payment you are issued something called ‘units’, which have a value based on the performance of the mutual fund and its type.

There are various types of mutual funds based on the types of securities in which the money is invested, such as:

  • Debt mutual funds: Money is invested in a variety of debt instruments
  • Equity mutual funds: Money is invested in equity only
  • Hybrid mutual funds: Money is invested in a mix of both debt and equity
  • Solution-oriented mutual funds: Money is invested for a purpose such as one’s retirement plan or a child’s education

These are the broad categories, within which there are many other types of mutual funds.

Duration of investment in mutual funds

Except for ELSS (Equity Linked Security Scheme), which provides tax benefit and has a lock-in of three years, mutual funds do not have a mandatory lock-in period.

You can withdraw even after one day but this is subject to a penalty called ‘exit load’. Even though you can withdraw by selling your units anytime, most mutual funds come with a fixed duration (which could be 1/3/5 years or more) to discourage frequent withdrawals, as earnings are maximised only when invested for a longer duration.

You can invest for whatever duration you prefer, but it is advised that you invest for a longer period. If you invest for a longer duration the chances of high returns increases. Since mutual funds are an investment in the stock market, there are no fixed returns, but the returns in the long term are usually higher when compared to any other investment class.

The stock market is subject to market risks, so when you invest for a short duration, chances of a negative impact of market risk is higher than when you invest for a longer duration.

Benefits of mutual funds

There are many benefits of mutual funds as an investment tool, such as:

  • Expert advice: Investments in mutual funds are made by professional experts who are also seasoned investors and know how to pick the best securities that generate high returns.
  • High returns: Mutual funds are known to generate high returns since there’s no cap on earnings. Depending on the performance of the security where the money is invested, returns are generated. Since financial experts invest money on your behalf, returns are generally high.
  • Small investment: A person can invest small savings every month in mutual funds and still earn high returns. Unlike other securities where an amount has to be invested all at once and locked in for a certain period, mutual funds let you invest small savings every month.

This pretty much sums up mutual funds and we hope you have understood it well enough to make a calculated decision to make your money work for you and not vice versa. Remember the quote: “Nobody ever got rich by saving.”

Note: If you wish to invest in Aditya Birla Sun Life Mutual Funds, click here.

Karan is CA by Qualification with the rare distinction of being awarded All India Rank 22. He is also the founder of this website and is an expert in helping people save Taxes legally. He can be reached by booking an appointment for Tax Advisory Service.