ThinkStock PhotosIt doesn’t matter whether you are looking for a regular income or create wealth over a long period of time, mutual funds are your best choice. All you have to do is to choose a mutual fund scheme that matches your financial goal, investment horizon and risk profile.
To begin with, If you are risk-averse, you should stick to debt mutual fund schemes. If you have high tolerance for risk and you are ready to take risk to earn extra returns, you should invest in equity mutual fund schemes.
Further, you should choose debt mutual fund schemes if you have a short-term investment horizon. According to mutual fund advisors, debt mutual funds are ideal for goals with a horizon of less than five years to earn better post-tax returns.
Investments in debt mutual funds held over three years qualify for long-term capital gains tax of 20 per cent with indexation benefit. Indexation helps to bring down the rate of tax on returns. This is the reason why investment experts prefer debt mutual funds over bank deposits.
However, it is very important choose debt mutual funds according to your investment horizon. For example, you should choose overnight funds to park money for a few days. If you want to park money for a few weeks, you may opt for liquid schemes. Ultra short term schemes are ideal to park money for a few months. Short-term schemes are good to park money for a few years.
If you have a long-term investment horizon of at least five to seven years, you may consider investing in equity mutual fund schemes. Again, you should choose a scheme on the basis of your risk profile. For example, if you are a conservative investor, you should stick to aggressive hybrid schemes and largecap schemes. If you have a moderate risk profile, you should invest in multicap schemes. Aggressive investors may go for midcap and smallcap schemes.
Investors with deep pocket can also consider investing a small part of the total portfolio in sector schemes and international schemes.
Many mutual fund investors opt for dividends to receive regular income from their investments. However, this is not a great strategy. Mutual funds are mandated to declare dividends from the realised profits. So, when a scheme is not generating enough profits, it may skip declaring dividends.
In such a scenario, it is better to opt for a Systematic Withdrawal Plan or SWP. SWP is like SIP, but in an opposite way. Just as an SIP allows you to invest a fixed amount regularly in a mutual fund scheme, SWP allows you to withdraw a fixed amount regularly from a mutual fund scheme. However, investors need to be careful about the amount or percentage they want to withdraw if they want to preserve the capital. A higher percentage withdrawal regularly would deplete the capital over a long period.
For those looking to create wealth over a long period, you should opt for the growth option in mutual fund schemes. Under the growth option, profits are reinvested in the scheme. This will help to benefit from the compound interest over a long period. Compound interest is called eighth wonder in the world because it adds a lot sheen to the corpus over a long period.
To begin with, If you are risk-averse, you should stick to debt mutual fund schemes. If you have high tolerance for risk and you are ready to take risk to earn extra returns, you should invest in equity mutual fund schemes.
Further, you should choose debt mutual fund schemes if you have a short-term investment horizon. According to mutual fund advisors, debt mutual funds are ideal for goals with a horizon of less than five years to earn better post-tax returns.
Investments in debt mutual funds held over three years qualify for long-term capital gains tax of 20 per cent with indexation benefit. Indexation helps to bring down the rate of tax on returns. This is the reason why investment experts prefer debt mutual funds over bank deposits.
However, it is very important choose debt mutual funds according to your investment horizon. For example, you should choose overnight funds to park money for a few days. If you want to park money for a few weeks, you may opt for liquid schemes. Ultra short term schemes are ideal to park money for a few months. Short-term schemes are good to park money for a few years.
If you have a long-term investment horizon of at least five to seven years, you may consider investing in equity mutual fund schemes. Again, you should choose a scheme on the basis of your risk profile. For example, if you are a conservative investor, you should stick to aggressive hybrid schemes and largecap schemes. If you have a moderate risk profile, you should invest in multicap schemes. Aggressive investors may go for midcap and smallcap schemes.
Investors with deep pocket can also consider investing a small part of the total portfolio in sector schemes and international schemes.
Many mutual fund investors opt for dividends to receive regular income from their investments. However, this is not a great strategy. Mutual funds are mandated to declare dividends from the realised profits. So, when a scheme is not generating enough profits, it may skip declaring dividends.
In such a scenario, it is better to opt for a Systematic Withdrawal Plan or SWP. SWP is like SIP, but in an opposite way. Just as an SIP allows you to invest a fixed amount regularly in a mutual fund scheme, SWP allows you to withdraw a fixed amount regularly from a mutual fund scheme. However, investors need to be careful about the amount or percentage they want to withdraw if they want to preserve the capital. A higher percentage withdrawal regularly would deplete the capital over a long period.
For those looking to create wealth over a long period, you should opt for the growth option in mutual fund schemes. Under the growth option, profits are reinvested in the scheme. This will help to benefit from the compound interest over a long period. Compound interest is called eighth wonder in the world because it adds a lot sheen to the corpus over a long period.
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