A mutual fund collects money from you and other investors and invests in equity, debt or a mix of both, depending on the type of the scheme. A fund manager manages the money in the mutual fund. The profits and losses are shared in the proportion of investments. The value of investments is measured based on Net Asset Value or NAV.
You have different types of funds:
You also have income funds which invest in Government and corporate bonds, money market instruments like certificates of deposit, commercial paper, treasury bills, reverse repo and debentures. Income funds are safer than equity diversified mutual funds and ELSS. Hybrid funds invest in both equity and debt. Child plans, aggressive/moderate balanced funds, Monthly Income Plans (MIPs) are examples of hybrid funds.
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You can stick to safe investments. Sadly, you might not get to financial goals as inflation is close to 6%. The cost of a financial goal approximately doubles over 12 years. If inflation hits 7%, the cost of a financial goal approximately doubles over 10 years.
Let’s say inflation is 7%. You invest in a safe investment which gives 6% a year. Your investment of Rs 100 grows to Rs 106. This is 1 Re less than the amount you require. Your safe investment cannot achieve financial goals.
In mutual funds you have the term, risk and return. Risk is the swings and fluctuations in investment value. A liquid fund is least risky and an equity fund is very risky. You invest in equity with an expectation of a higher reward. Higher the risk, higher the reward. An equity fund helps get you to financial goals quicker than safe investments.
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Irrespective of whether you invest Rs 500 or Rs 4 Crores, the returns are the same. Confused? I’ll explain.
An investment of Rs 500 in an equity scheme which gives returns of 12% over 2 years translates to Rs 627.20. An investment of Rs 1 Lakh would give Rs 1,25,440 over the same time period. The rate of appreciation is the same, though the final amounts differ. Returns in percentages are the same, though a larger amount invested gives a larger absolute gain.
An investment of Rs 500 each month in an equity scheme grows to Rs 3,82,848 over 20 years. This is at the rate of growth of 10% per annum.
It’s popularly believed that to make money in mutual funds, you need lots of money. You can invest in mutual funds with as little as Rs 500 a month. You then increase investments as salary rises.
This example is only for illustration purposes. Mutual funds do not offer guaranteed returns.
With mutual funds the goal must be:
With mutual funds its start early, invest regularly and stay invested for the long-term, even if it’s just Rs 500.
These are the ways to increase investments in a mutual fund:
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Equity hybrid funds are moderate risk equity funds. They invest at least 65% in equity while the rest is in debt. Equity helps increase the returns while the debt portion cushions the investment.
Equity hybrid funds are suitable for conservative investors and moderate risk takers, who want decent returns and protection in the portfolio.
Equity hybrids give around 8-9% returns year-on-year over a 3 year period.
An ELSS invests in the top 500 Companies and gives higher returns than a large-cap fund. This is because ELSS invests in mid-caps and small-caps, beating the returns from large-caps. A true peer of ELSS are Multi-cap funds.
Multi-cap funds invest in large-caps, mid-caps and small-caps across sectors. They are able to get returns above large-caps because they invest in mid-caps and small-caps. Multi-cap funds have the diversification benefit. They invest in Companies across capitalization which offers a measure of protection to the portfolio.
ELSS and Multi-cap funds give returns around 14-16% a year. This is higher than large-cap funds.
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