Published by – ASHISH NAIK
Category - Finance & economics & Subcategory - Personal Finance
Summary - MF investment
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I met a long time friend recently and during the course of meeting the discussion went towards investment. He mentioned that he doesn't invest in anything other PPF and fixed deposits.
I was surprise or should i say shocked !! He is same age as me in late forties and if he has not invested in mutual funds, stocks then how is he protecting and growing his wealth? I know that he is not rich nor he has vast amount of properties.
Frankly i got worried and dragged him for a walk to understand his thinking and probably to explain what he needs to do now, so late.
He explained that a very good friend of his lost everything he invested in stock market when it had crashed. And this was enough for him to never even think about it let alone read and know more.
So he was driven by safety. But was this wise?
I explained to him main pitfall of investing in debt instruments such as PPF, FDs that they cannot beat inflation. What does this mean?
Simplistically, inflation is rate at which price of things that we use increase or decrease. Higher the inflation, faster prices rise. They never stop rising so a packet of biscuit costing Rs 10 may cost us Rs 20 after 10 years !!! So value of rupee goes down as we go in future. Means we will need more money after let’s say 10 years than now to afford the same things that are necessary. So we can either generate more money via own profession/business or there had to be another way because we can’t keep working till late age.
PPF offer approx. 8.65% return and bank FDs and other instruments mush less from 4%-6.5% (I guess this is the range right now) which is around same or less than inflation so the money that you will get after FD matures will be of less value than at maturity. This means FD is not meant for wealth creation.
The best option for small investors (and large too) is mutual funds. The mutual fund in a simple term is a fund that is invested in different categories such as stocks, government bonds, company FDs etc by a fund manager who is an expert to deduce the potential of stocks to grow in future and thus giving higher return than FDs, bonds.
There are different types of MFs.
Equity – that invests in stock market (aggressive category) and gives higher return (at risk of course) - average 15-20% annualized typically
Index – invests in same proportion as SENSEX or Nifty
Diversified – invests in different categories of companies across sector
Sector specific – eg bank stocks, pharma stocks
ELSS - Funds that are used for tax savings under section
Debt – invests in conservative categories such as company FD, government bonds, papers etc (much lower return than equity) –
Monthly Income Plan 8-12% annualized typically
Liquid - 7-9-% typically
Short term
Balance – typically 50-50% in stocks and debt instruments (returns between equity and debt) 10-15% annualized typically
An investor can choose different type of funds from above categories so that risk is balanced. To further reduce the risk, can do Systematic Investment Plan (SIP) where fixed amount is invested at defined time internal (monthly, daily etc)
After explaining above he asked, “But investing in equity MFs is risky..”
So I explained that yes it is risky but less than investing in stock market directly where. In stock market you invest in one stock and if that drops in price then you lose money. Whereas in MFs, fund manager ivests in different stocks so some may go up and some down so there is balancing effect. However, stock market crash during extreme situations affect adversly but those are not everyday events.
I explained he can invest small, take out money whenever he wants so there is no lock in, no need to go to bank, same time. And best of all the fund managers work for us and they work hard to make money for us.
In my opinion, everyone must invest in some kind of way for secured future and mutual finds are easiest and most rewarding.
Coming to tax implications – according to latest government policy, if an investor makes profit of more than one lac per year then 10% LTCG is applicable if the investment was held for more than one year. This is still a good deal.
If a mutual fund is held for less than one year then short term capital gain is applied so best strategy is to invest for minimum 3-5 years in MFs.
There are plenty of places where one can read more about MF investing. One of the best sources is https://www.valueresearchonline.com/
I was surprise or should i say shocked !! He is same age as me in late forties and if he has not invested in mutual funds, stocks then how is he protecting and growing his wealth? I know that he is not rich nor he has vast amount of properties.
Frankly i got worried and dragged him for a walk to understand his thinking and probably to explain what he needs to do now, so late.
He explained that a very good friend of his lost everything he invested in stock market when it had crashed. And this was enough for him to never even think about it let alone read and know more.
So he was driven by safety. But was this wise?
I explained to him main pitfall of investing in debt instruments such as PPF, FDs that they cannot beat inflation. What does this mean?
Simplistically, inflation is rate at which price of things that we use increase or decrease. Higher the inflation, faster prices rise. They never stop rising so a packet of biscuit costing Rs 10 may cost us Rs 20 after 10 years !!! So value of rupee goes down as we go in future. Means we will need more money after let’s say 10 years than now to afford the same things that are necessary. So we can either generate more money via own profession/business or there had to be another way because we can’t keep working till late age.
PPF offer approx. 8.65% return and bank FDs and other instruments mush less from 4%-6.5% (I guess this is the range right now) which is around same or less than inflation so the money that you will get after FD matures will be of less value than at maturity. This means FD is not meant for wealth creation.
The best option for small investors (and large too) is mutual funds. The mutual fund in a simple term is a fund that is invested in different categories such as stocks, government bonds, company FDs etc by a fund manager who is an expert to deduce the potential of stocks to grow in future and thus giving higher return than FDs, bonds.
There are different types of MFs.
Equity – that invests in stock market (aggressive category) and gives higher return (at risk of course) - average 15-20% annualized typically
Index – invests in same proportion as SENSEX or Nifty
Diversified – invests in different categories of companies across sector
Sector specific – eg bank stocks, pharma stocks
ELSS - Funds that are used for tax savings under section
Debt – invests in conservative categories such as company FD, government bonds, papers etc (much lower return than equity) –
Monthly Income Plan 8-12% annualized typically
Liquid - 7-9-% typically
Short term
Balance – typically 50-50% in stocks and debt instruments (returns between equity and debt) 10-15% annualized typically
An investor can choose different type of funds from above categories so that risk is balanced. To further reduce the risk, can do Systematic Investment Plan (SIP) where fixed amount is invested at defined time internal (monthly, daily etc)
After explaining above he asked, “But investing in equity MFs is risky..”
So I explained that yes it is risky but less than investing in stock market directly where. In stock market you invest in one stock and if that drops in price then you lose money. Whereas in MFs, fund manager ivests in different stocks so some may go up and some down so there is balancing effect. However, stock market crash during extreme situations affect adversly but those are not everyday events.
I explained he can invest small, take out money whenever he wants so there is no lock in, no need to go to bank, same time. And best of all the fund managers work for us and they work hard to make money for us.
In my opinion, everyone must invest in some kind of way for secured future and mutual finds are easiest and most rewarding.
Coming to tax implications – according to latest government policy, if an investor makes profit of more than one lac per year then 10% LTCG is applicable if the investment was held for more than one year. This is still a good deal.
If a mutual fund is held for less than one year then short term capital gain is applied so best strategy is to invest for minimum 3-5 years in MFs.
There are plenty of places where one can read more about MF investing. One of the best sources is https://www.valueresearchonline.com/
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