We aspire to mange our money in a better manner as the ultrarich often do through their family offices. However, we would have the limitation in terms of our ability to afford an expensive professional to manage our funds. The solution is Mutual Funds, here many investors pool sums of money they can afford to put aside to earn returns over a period. As many individuals pool money the corpus together becomes huge and is sufficient to afford the cost of an investment professional also known as a fund manager or portfolio manager. This professional invests the corpus in different securities such as bonds, stocks, gold and other assets based on the mandate provided to the mutual fund scheme. The objective being to provide investment returns. While the expenses of the mutual fund (establishment) are shared by all the investors the gains or losses on the investments too are collectively shared. Making mutual funds are a good tool to have professionals manage your investments at a relatively low cost.
Debt funds (also known as fixed income funds) invest in assets like government securities and corporate bonds. These funds aim to offer reasonable returns to the investor and are considered relatively less risky. These funds are ideal if you aim for a steady income and are averse to risk.
Equity funds invest your money in stocks. Capital appreciation is an important objective for these funds. But since the returns on equity funds are linked to market movements of stocks, these funds have a higher degree of risk. They are a good choice if you want to invest for long term goals such as retirement planning or buying a house as the level of risk comes down over time.
Hybrid funds invest in a mix of both equity and fixed income securities. Based on the allocation between equity and debt (asset allocation), hybrid funds are further classified into various sub-categories.
One of the best features about investing in mutual funds is that you don’t need a large amount of money to start investing. Most fund houses in the country allow investors to begin investing with as little as Rs. 500 / 1000 per month through Systematic Investment Plans (SIPs). Now, this might seem like a tiny amount to begin your investment journey, but when you invest consistently over a considerable period, you can achieve a substantial sum. SIP is a method of investing in mutual funds where you invest a specific amount at fixed intervals. This way, you can avoid timing the market and increase your wealth steadily.
Here’s an example to illustrate how you can unleash the power of SIP’s:
Let’s imagine you invest Rs. 5,000 per month in an equity fund for 15 years. The fund offers an annual return of 12%. At the end of the investment period, you would have amassed a corpus of over Rs. 23.79 lakh. Now, if you continue investing the same amount for another fifteen years (total 30 years), you would get a total sum of almost Rs.1.54 crore! This is roughly six and half times the amount in an additional fifteen years.
This is the power of compounding. The returns you earn in turn begin to make profits for you. So, when you invest for a longer time frame, your gains also rise higher. But to gain the maximum benefit of compounding, you should start investing as early as possible and invest for as long as possible. This can give you an extended investment window to increase your returns.
Note: SIP should not be construed as a promise on minimum returns and/or safeguard of capital. SIP does not assure any protection against losses in declining market conditions.
Exchange-traded funds, commonly known as ETFs, are a collection of various securities such as bonds, shares, money market instruments, etc., that often track an underlying asset. Simply put, ETFs are a mashup of different investment avenues. They offer the best attributes of two popular financial assets – mutual funds and stocks.
ETF funds are somewhat similar to mutual funds in terms of their structure, regulation, and management. Additionally, just like mutual funds, they are a pooled investment vehicle that offers diversified investment into various asset classes like stocks, commodities, bonds, currencies, options, or a blend of these. Moreover, they can even be traded like stocks on the stock exchanges.