Mutual Funds
Investment in Mutual Funds is considered to be risky but without taking risks it is not possible to get good returns. The calculated risk would be a better choice than keeping the funds in the Fixed Deposit Account.
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Ways of Mutual Funds
Mutual Funds investments are of two ways. They are through SIPs and Lump sum.
Lump-Sum
- Lump-sum or one-time investment in Mutual Funds can help the investor to get monthly returns by opting Systematic Withdrawal Plan (SWP) with tax benefits. One-time investments in Mutual Funds would fetch good returns if kept for longer tenure.
SIPs
- SIP mode is considered to be the best as it averages every purchase and gives good returns. The advantage of purchase through SIP mode is averaging all purchases.
- Step-up SIP is also considered as the best way to beat inflation, as you should take advantage of the market fall and prop up your returns by making more investments or increasing your SIP.
Mutual Funds Categories
There are many categories in the Mutual Funds. The popular categories are Large Cap funds, Mid Cap and Small Cap.
Large Cap
Among all listed companies, top 100 companies in terms of market value
Mid Cap
After first 100 big companies in terms of valuation, 101st to 250th companies
Small Cap
After first 250 big companies, 251st company onwards
Types Of Mutual Funds
- Large Cap Funds
- Mid Cap Funds
- Small Cap Funds
- Multi Cap Funds
- Balanced Funds
- ELSS Funds
- Dividend Yield Funds
- Value Funds
- Contra Funds
- Focused Funds
- Sectoral Funds or Thematic
On the basis of a person’s risk appetite and goals, selection of funds, investment amount can be chosen. The Advantage of Mutual Funds, the investment can be started, stopped, decreased or increased any time.
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Mutual Funds Tax Rules
- If a fund is stopped and the investment is withdrawn with 1 year, then Short term Capital gain Tax would be 15% + cess + surcharge. At the same time if the redemption is done after one year from the date of investment, upto Rs. 1,00,000/- is tax-exempted. All profit withdrawal of more than Rs. 1,00,000/- would attract Long term capital gain tax of 10% + cess + surcharge.
- Equity Linked Savings Scheme which is mainly for tax savings, cannot be withdrawn within 3 years from the investment date.
- The moral is, don’t let the market spook you into getting off your investment track. A SIP will work in all market cycles. It will work exceptionally well when the market sees a correction. There is only one scenario when a SIP won’t work, that is when you stop it.
Why You Should Not Stop SIP
- Why you should not stop SIP is considering your long term goals and recent market fluctuation may be taken care by regular investment in the same funds for a long term. Are you looking at your funds’ one-year returns and wondering if something is wrong? The last you saw the returns chart, say December 31, 2017, most equity funds delivered 25% plus one-year returns. You see your funds’ one-year chart now and they are in low single digits or even negative.
- How can the return picture change so dramatically in six months? – you ask yourself and suspect your fund of slipping down the returns chart.
- Now, this is often a trigger for many of you to conclude that your fund is not doing okay and stop the SIPs. And there begins your woes.*Investment in Mutual Funds SIP are subject to market returns, Please read offer documents fully.
- Stopping SIPs, unless you know your fund is a definite underperformer, can harm your portfolio. That is to putting it mildly.
- If you were saving for a goal, then stopping SIPs can be short of being disastrous for the following reasons:
- One, you lose out on the best periods to average your costs, when the NAV is trending down
- Two, you would stop installments thereby upsetting the whole time frame over which you intended to save for the goal.
- Stopping SIP would not only decreases your investments but it also stops averaging your previously purchases units. Disrupting the SIP it would mean losing out the potential upside. The stock market, with its currently moderate earnings fundamentals and economic growth besides an upcoming election year, is likely to see enhanced volatility. That means markets and NAVs can see-saw.
- Next thing why you should not stop SIP is 3-4 months is too short a period to conclude a fund is poor even if it under performs its index or category average.
- Temporary blips are bound to happen if a call or two goes wrong (and it is bound to, for any fund). That should not cause panic in a long-term wealth creating process.
- SIP, as a method of investment, has proven to safeguard you from market falls by taking advantage of such falls. What you should be more concerned about is if your time period and risk appetite are in line with your choice of equity instrument. With that being the basis of your investment decision, refraining from investing because the market is falling will only be counterproductive.