Is it safe to invest in Mutual Fund?
“Risk comes from not knowing what you are doing.”
WHAT IS RISK? RISK is worrying about loosing money. And why do we worry? We do hard work to earn money and all necessities of life are fulfilled by money. So, everyone wants to grow money but scared of scam or losing it. Many people don’t want to take risk so they invest in fixed deposit and recurring deposit. But though these investments give guaranteed return, they give less return. And in today’s world, expenses have increased. Earlier people used to eat in restaurant not so often. But now look at today’s children, they want to eat out frequently. So, overall expenses have increased.
And financial goals like marriage of children, education, retirement planning also play an important role in everyone’s life. Now a days, people start retirement planning from their 30’s. So, what is this financial planning to achieve financial goals? Take example of retirement planning, you know your lifestyle and you know how much money you need to live such lifestyle. And you need to consider health issues which come without knocking. So, you invest somewhere which will give you xyz amount for your retirement, for children’s wedding, education, buying house, etc.
Now, question is where to invest to fulfil financial goals in life. So, everyone wants to invest somewhere with high return. Stocks give good return but you need to do a lot of market research. You have to be updated all the time. I mean, you just cant invest on friend’s recommendation if your friend doesn’t know how to study company’s inside before buying a stock. So, concept of mutual fund comes here and mutual fund has gained popularity because when you don’s have detailed knowledge of market and don’t have time to study the stock market, you invest money in mutual fund and fund manager invests your money on your behalf in some instrument like equity, debt or both.
When we talk about mutual fund investment, people are generally scared of some type of scam or losing all capital invested. First of all, mutual fund houses won’t take your money and run away as they are regulated and monitored by two regulatory agencies, namely, the Securities Exchange Bureau of India (SEBI) and the Association of Mutual Funds in India (AMFI).
Of course risk is there but when you want higher return, risk is involved. And risk can’t be taken away from mutual fund investment. What does mutual fund do? MF invests your money into equity(high risk) or debt(low risk).
Against this risk, you need to consider the benefits of investing in mutual fund:
- Return on Investment: Though traditional investments like fixed deposit gives guaranteed return but mutual fund offers higher return. To meet your financial goals, you need to look for investment with higher return.
Traditional investments can give return upto 7% but wisely selected mutual funds can give returns upto 12% and more.
- Flexibility: If you select Systematic Investment Plan (SIP) as an investing mode for mutual fund and then cant manage to pay one SIP amount, it doesn’t stop your mutual fund investment. You can pause SIP and restart it anytime. But same thing is not possible with traditional investment plans.
- Various Choices Available: You have lot of options available as per your risk tolerance and financial goals. You can select less risky(Debt fund) to moderate risky(hybrid fund) to more risky with higher return(equity). If you can take risk and young then you can go for equity fund. Or, you can put your money in multiple options to balance risk.
- No headache of loan: When you want your daughter to get married and you don’t have enough money in hand then you take loan. But if you invest wisely from young age, you have enough money in hand for child’s education, marriage so you don’t have to take loan and you don’t have to pay interest on loan.
- Tax Benefits: Tax on mutual fund is calculated based on holding period. If you hold investment for than one year for equity and more than 3 years for debt then tax on long term capital gain is calculated. And if investment is less than an year in equity and less than 3 years in debt fund then tax on short term capital gain is calculated. Also, Equity linked saving schemes have dual benefits such as tax deduction and wealth accumulation. The lock in period of 3 years is the shortest among all tax saving investment options. Moreover, they offer highest returns among all.
This is the perfect quote of money by Warren Buffet. Never lose your hardly earned money. So, talking about mutual fund investment, if an investor has risk capacity, then he might go for equity fund. If investor doesn’t want to take risk, then he may go for debt fund which carries low risk. Or, investor can put money in hybrid (equity + debt) or different types of mutual funds to balance risk. Investor can take help of an expert to choose a fund which will fulfil investors financial goals.