Investment in Mutual Fund: A Path To Financial Independence

Mutual Fund Investment : A Path To Financial Independence*

I. INTRODUCTION:

There are different places to invest your money. Savings account (less risky, less return), Gold /jewelry (moderate risk, volatile returns), Real estate (low-moderate risk, volatile return) Some people who want to take more risk also invest in the stock market. The risk of the stock market depends upon the stock in which you are investing. Every investment possess three things return, risk and time. Return means how much percent of profit you are earning through the investment, this is normally seen in percentage. If our country’s inflation rate is 4% then you should see that the profit return is more than at least 4% otherwise there is no point in investment. If you have put your money and the value didn’t increase. Risk means how risky is it to invest. And time means how much time you want to invest. If the risk and time are more then the return will also be more. If you actually want more return on your investment then you will have to take more risk and should invest for a longer time period. And many may think that it’s too risky without even knowing about it.

II. MUTUAL FUNDS:

A mutual fund[i] is a special kind of investment through which you can invest in different types of investments together. In simple words, if someone doesn’t want to invest directly in stocks then he/she can do it through mutual funds. Where we get the diversification and our risk gets a bit reduced, we get the expertise of the fund manager. Asset Management Company starts the idea of mutual funds. You give your money to an asset Management Company. The company invests all the money jointly in different places. The company appoints experts and with their suggestion, they invest the money. They invest money at different places and the return rate they get collectively from these different places out of some small percent of 1-2% is kept as a profit by the asset company and the rest you get back as per your return rate.

So how risky are your mutual funds and what is the return depending on the mutual funds that you are investing in? Mutual funds can give a return rate of 4% to 30%. All of this depends on where the asset management company is investing your money. If that company is investing in stocks then it will be riskier and you’ll get more returns and if it is investing in government bonds then it will be less risky.

III. TYPES OF MUTUAL FUNDS: 

Mutual funds are also of two types: Active and Passive.

[Fig.1: Types of Mutual Funds]

• Active Mutual Funds: Main aim of active mutual funds is that whichever benchmark or index it is comparing, it can beat that. For example, if someone is comparing nifty-50, then whatever returns come in nifty-50, assume nifty-50 increases 15% in any year, so the target of an active mutual fund is that he has to give returns of more than 15%.
• Passive Mutual Funds: In Passive Mutual Funds, they follow the index only. This means their target is not to beat the index. But here, mostly you’ll see the funds, especially those which track the big companies, mostly they cannot beat them. So maximum people think if no fund can beat the index, then why do we give more management fees? Because in mutual funds there is a 1-2% management fee. So if they are not able to justify that fee, it is better to invest in passive funds, where our fee is very low. For example, whatever stocks are in the Nifty-50, they will buy the stocks in the same weightage in the index funds.

According to the Assets Management Company, there are three categories of mutual funds:

1. Equity Mutual Funds.

2. Debt Mutual Funds. (Money is invested in

3. Hybrid Mutual funds.

IV. EQUITY MUTUAL FUNDS:

In Equity Mutual Funds, Money is invested in the stock market so there is high risk and high return.  So the return depends upon what kind of company you are investing in it a big company then it’s called as large-cap equity funds. If it is a small company then it’s called a small-cap and in the same way mid cap equity funds. Big company doesn’t have many discussions compared to smaller ones but big companies want to have a growth rate as high as it can be for the smaller companies. So risk and return both are less than big companies ICICI prudential bluechip fund is an example of a large-cap equity fund if you invest here for 1 year and after a year your expected return is 11.3% but if you invest for 5 years then you respected return can be of 19.7%. The more time invests the more return you can expect.

• Diversified equity funds: Here the investment is done in the large medium small-cap or it’s done in different companies. It is also known as the multi-cap fund.
• Equity-linked saving scheme: This is a special type of equity fund where you can save your tax. You can save up to 1.5 lakh in taxes. The fund manager purposely invests in such places where there is a high return and also has high risk. IDFC tax advantage is an example of ELSS funds with an expected return of 11.3% within a year.
• Sector mutual funds: Here specifically such companies are invested in which belongs to which sector like the agricultural sector. All the companies which are under the agricultural sector are invested in a logistic ultra sports sector so there one example of this is UTI transportation and logistic funds. These funds are more risky sins all the investment is done in one sector so if the sector is going down everything depends on that.
• Index funds: Index funds are passively managed fund that is no agent of the assets management company is looking at where to invest the money. These are passively managed that is according to the market’s rate up and downs they go ups and downs. They are completely dependent on Sensex and nifty.

Debt mutual funds:

These are those mutual funds that are invested on tapped instrument

• Liquid mutual funds: liquid funds are those mutual funds which can be easily and quickly converted into cash. But it has a very low risk such a low that you can consider this as an alternative to saving account. Assets liquid fund is one such example where you will get the return of 7.1% in a year.
• Gilt mutual funds: These are those funds where investment is done on the government issued bonds. So technically it has zero risk because it’s never possible for the government not to return your money. Mostly the interest rate can fluctuate.
• Fixed maturity plan: this can be considered as an alternative to fix deposits (FDs), because it has very low risk just like FD and it is done for fixed time for a specific time investment is done here.
• Fixed maturity plan: This can be considered as an alternative to fixed deposits (FDs) because it has very low risk just like FD and it is done for a fixed time for a specific time investment is done here.

V. PROS AND CONS OF EQUITY AND DEBT FUND:

POINT OF COMPARISON	EQUITY MUTUAL FUNDS	DEBT MUTUAL FUNDS
Risk	Moderate-High Risk	Low Risk
Returns	Higher Returns (Depend on Share market) In the long term: 13-15%	Assured return of average of 7-8%
Liquidity	Moderately low liquidity	High Liquidity
Volatility	High Volatility	Low Volatility

[Table 1.0: Pros & Cons of Equity and Debt Funds]

Hybrid mutual funds:

It is a mixture of debt and equity mutual fund some people wants to invest in the stock market but doesn’t want to invest all the money there and also investor amount of debt instruments so hybrid mutual funds are for them.

• Balance saving funds: If most of the money is invested in a debt fund then it will be called balance saving funds. Approximately the ratio is 70:30.
• Balanced advantage fund: If it’s the other way 70% is an equity fund and the highest then it is called a balanced advantage fund
• Solution Oriented Schemes: These Mutual Fund schemes are those that invest according to the goal of individuals such as for child education, retirement, marriage, travels, home purchase, and many more.
• Miscellaneous Schemes: These schemes are made to invest in like tax saving mutuals funds etc.

VI. MUTUAL FUNDS- A PATH TO FINANCIAL INDEPENDENCE.

Financial independence refers to having enough money to fulfill basic or personal needs, as well as having enough money to cover unanticipated future losses. Working is primarily intended to generate income to pay for necessities such as food, rent, EMIs, utility bills, and children’s school tuition. Being able to satisfy your financial commitments without having to work is what financial independence means.

Financial freedom is crucial to everyone, whether you work or own a business. If you work, you will have to retire at some point. When you retire, you will no longer have a source of money in the form of a paycheck, thus you must be financially self-sufficient. Your expenses will still be your responsibility.

If you own a business, there may be instances when your revenue falls short of your expenses. These intervals can be short or long. You will have to go into your savings unless you are financially self-sufficient. You will have to rely on others, such as your children or relatives if your income is insufficient to support your expenses. You should, however, consider whether or not the person on whom you are relying is financially capable of supporting you and for how long. You can use your savings to cover your living expenses, but you risk depleting your savings and losing your financial independence over time. Remember that inflation will cause your expenses to rise, whereas if you live off your savings, your savings would deplete with time.

You will be financially independent if the returns on your assets are sufficient to meet all of your expenses for the remainder of your life. It’s important to remember that assets are investments with the potential to generate future cash flows in the form of regular income or capital appreciation. In the strictest sense, electronic devices, watches, jewelry, personal autos, and other objects that do not generate cash flows and lose value over time are not considered assets.

VII. WHERE TO INVEST?

Investment in any fund depends upon three factors:

1. Age

2. Risk Appetite

3. Disposable Income

So here we can use a thumb rule –

• Age=Debt fund% (Invest the amount of money as per your age): Suppose if you are 25 years old, you can invest 25% of your money in a debt fund.
• 100-Your age= Equity fund: Suppose if you are 25 years old, you can invest (100-25=75) 75% of your money in Equity funds.

This is not a hard and fast rule. Because, as stated above investment is dependent upon three factors: Risk, Return, and Time. Sometimes even a 25 years old person has more risk appetite, so he can invest his money more in equity funds. But if we talk about a person with less disposable income, and fewer savings, he invests more money in a debt fund where he will get a fixed return on his investment and less in an equity fund to avoid risk.

And If we talk about a retired person, he can invest his money in a debt fund from where he will get a fixed and regular return. Bank fixed deposits, equities, bonds, and mutual funds are examples of assets that generate returns in the form of interest, dividends, and the potential for capital gain. If the profits on your investments are adequate to meet your costs after inflation, you will be financially independent.

VIII. PREPARING FOR FINANCIAL INDEPENDENCE INCLUDES THE FOLLOWING STEPS:

• Begin Early: It is critical to start saving at a young age. One of the most important factors of wealth accumulation is time. Investing pays off over time, and the rewards on investment pay out much more. Compounding power is the term for this.
• Begin saving: You must set aside money to invest in assets that will yield a profit. Warren Buffet, a well-known investor, famously said, “Do not save what is left after spending, but spend what is left after saving.” Savings must come first if you wish to achieve financial freedom.
• Investing Wisely: Put your money into assets that will pay you back. Different asset types have different risk/return characteristics.
• Investment Discipline: Sticking to a strategy (financial plan) that is designed to help you reach your financial goals while balancing risk and reward is referred to as investment discipline (asset allocation).

IX. FUNCTIONS OF MUTUAL FUNDS:

Through Systematic Investment Plans, investors can begin investing in mutual funds with their regular money (SIP). It also calculates the average cost-benefit and the compounding effect over time. They provide risk diversification by investing in several industry segments, and their funds are managed by a professional. Mutual funds offer a diverse selection of products to cater to a variety of risk tolerances and investment needs. Spend your money on a product that is appropriate for you. Mutual funds are one of the most tax-efficient solutions for long-term investing. Long-term capital gains in stocks funds are tax-free up to Rs 1 lakh before being taxed at 10%.

By investing in solution-oriented schemes, you can achieve a basic aim that is tailored to your own needs, such as retirement planning, marriage and education preparation, and so on. According to SEBI regulations, mutual funds must be labeled according to the level of risk they pose, and this information must be displayed on a risk-o-meter.

The multiple levels of the risk-o-meter are as follows:

• Low – The money of the investor, i.e. the principal, is at very low risk.
• Low to Moderate – The risk to the principal invested is moderate.
• Moderate – The principal is invested at a low-risk level.
• Moderately High – The principal is in moderately high danger.
• High – It entails a high level of principal risk.
• Extremely High – Your money, or principal, is at extreme risk.

X. HOW TO STAY AWAY FROM INVESTMENT FRAUD:

You must have heard about the disclaimer of Mutual Fund: “Mutual fund investments are subject to market risks, read all the schemes related documents carefully.[ii]” India has recorded various cases where people were looted through online social media portals[iii]. So you need to be careful while investing your money online. Here are a few points you should keep in mind while investing:

• Investors should not rely on data obtained from a third party, such as an unlicensed agent or someone else.
• Before investing, investors should research essential financial statements of mutual funds on the SEBI website or through the mutual funds themselves.
• Before investing, investors should thoroughly study the plan documentation.
• Investors should be informed of the advantages and disadvantages of mutual fund schemes.
• Investors should not give out their personal information, such as their OTP, PIN, or CVV, to anybody else.
• Investors should attend investment decision-related lectures or workshops.

XI. CONCLUSION

Investors should put a percentage of their income into a mutual fund or any other investment that meets their needs to protect themselves from life’s uncertainties and achieve financial independence at a young age. This information is not intended to be construed as “investment advice.” Readers are encouraged to make informed investment decisions and to seek advice from their Mutual Fund distributor or financial consultants to determine the financial implications of investing in Mutual Funds. At last we can conclude, “Mutual Fund sahi hai.”

REFERENCE:

* Author Name: Harshita Malviya, Banasthali University, Rajasthan.

[i] https://www.rbi.org.in/Scripts/BS_ViewBulletin.aspx?Id=18995

[ii] https://www.amfiindia.com/disclaimer-investorawareness

[iii] https://www.businesstoday.in/magazine/mutual-fund/story/the-thirdparty-scam-16554-2010-08-25