Mutual Funds are the flavor of the season. You and many other citizens want to invest in mutual funds. The favorite of most investors are equity mutual funds. They promise high returns to those who are willing to take risk in investments.
After demonetization, banks were flush with funds as you and other citizens deposited old 500 and 1000 rupee notes in banks. Most of this money went into savings bank accounts and current accounts, which are low cost deposits. So, banks cut interest rates offered on fixed deposits.
Now, you and other salaried employees used to invest a lot of money in FDs. With FDs giving low returns, salaried employees shifted investments to mutual funds especially, equity mutual funds. Equity mutual funds promise high returns to those willing to bear risk. Mutual funds come with a disclaimer, "Mutual Fund investments are subject to market risk. Please read the offer document carefully before investing."
But, salaried employees say even FDs are risky. With inflation being high, part of the returns from FDs are eaten up anyway. Why not invest in mutual funds and get high returns?
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Before demonetization, not many salaried citizens invested in mutual funds. Today, all this has changed. Investments by mutual funds in domestic equities was a staggering $12 Billion. Who has given all this money to mutual funds? You and other salaried employees of course.
Equity Linked Saving Schemes popularly called ELSS are a tax saving mutual fund. ELSS invests most of your money in stocks. ELSS has a compulsory 3 year lock-in. You can't touch the investment for 3 years.
What's special about ELSS is it comes with the EEE benefit. You get a tax deduction under Section 80C up to Rs 1.5 Lakhs a year. The returns you get and the money withdrawn after the 3 year lock-in are tax free. This makes it one of the best tax saving investments around.
Why ELSS? To get good returns from equities, you need to stay invested for at least 3 years. ELSS forces you to stay invested in equities for at least 3 years. This increases the chances of getting good returns from ELSS.
It would be good if you can stay invested in ELSS for at least 5-7 years.
See Also: Tax Saving Investment Other Than 80C
A great way of investing in equity mutual funds is through the systematic investment plan, popularly known as SIP. SIP is a method of investing in mutual funds. You invest a fixed sum of money, say once each month or quarter, regularly in a mutual fund scheme. You and other investors (retail investors), invested a record Rs 6,222 Crores in mutual funds via SIPs, for the month of December 2017.
So why invest in mutual funds via SIPs? With SIPs you invest regularly in the stock market, irrespective of market levels. You get more units of the mutual fund when markets are low and less units when markets are high. This helps you average out the purchase cost of your mutual fund units.
SIPs force you to be a disciplined investor and stay invested in the stock market at all points of time. SIPs also give you the eighth wonder of the World, The Power Of Compounding. With SIPs you stay invested in mutual funds for a long time. Your returns earn returns and this is the power of compounding.
SEE ALSO: How To Link Mutual Funds With Aadhaar?
AMFI (Association of Mutual Funds in India) is running a very successful campaign called Mutual Funds Sahi Hai. The aim of this campaign is to educate you and all salaried citizens on the benefits of investing in mutual funds.
i) Invest in mutual funds with just Rs 500 a month
You can invest in mutual funds via SIP with just Rs 500 a month. You then increase your investment in mutual funds as salary increases.
ii) Invest in mutual funds for short-term, medium-term and long-term goals
Equity-oriented mutual funds are suitable for long-term financial goals, typically 5 years and above. Liquid funds are suitable for very short-term financial goals of less than a year. Short-term bond funds are suitable for financial goals of around 1-3 years. Long-term bond funds are suitable for financial goals of 3 years or more.
iii) Invest in mutual funds for retirement
Mutual Funds Sahi Hai advises you to invest in equity and balanced funds for retirement.
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Mr. C S Sudheer is the founder and CEO of IndianMoney.com – India’s largest Financial Education Company. He started his career with ICICI Prudential Life Insurance and later on worked with Howden India. After his brief stint in Howden India, he moved on and incorporated Suvision Holdings Pvt Ltd which is the sole promoter of IndianMoney.com. He aims to build a nation that is financially literate with investment savvy citizens.
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