Mutual Fund Investments – A Prudent way to secure your Financial Future

Mutual Fund Investments – A Prudent way to secure your Financial Future


There are few investments that have the potential to give you huge returns over the long term like stock market investments do.

For example, the benchmark index of the National Stock Exchange, the Nifty 50 (an index that is based on 50 stocks spread across 12 sectors of the Indian Economy) has gained over 18% in this year alone. Between June 2012 and now, the Nifty index has gained over 90% (from 5100 – 9700). This is not a surprise considering that the Indian Economy had encountered some robust growth in between, which automatically translates to growth in various sectors linked to the economy, and thereby the companies linked to the sectors. Therefore, if you had invested in any Nifty Index Fund, you would have almost doubled your investment in just about 5 years – compare that with hoarding your hard earned money in a fixed deposit in a bank that gives you about 6-7% per year – barely keeping up with annual inflation rates.

In fact the ROI of 90% on the Nifty is only scratching the surface – there have been numerous stocks that have surged to over 10 times their value in the past 5 years. Even if you leave out relatively unknown stocks that gave magnificent returns, even well-known companies have given excellent returns for those who invested in their shares. For example, in the past 5 years, MRF has given a 700% return, Eicher Motors has given a 1400% return, ICICI Bank has given close to 200%, and Reliance industries has given over 200%.

The list is just endless.

Investing in stock markets has always been prominent among those who have a sound knowledge of financial investment. Despite the occasional short-term negatives due to environmental conditions, investing in financial markets always pay off in the long term. A fundamental assumption one can make is that as long as India continues to grow economically, stock market investments will thrive in our country.

However, despite the return-on-investment one can get in equity markets, the number of people who invest in equities is only a paltry percentage of those who put money in a bank. And the primary reason is because people simply do not know better – they think it is too much of trouble and too risky, and hence vouch for the safest option (and undoubtedly, the lowest-returning one) of keeping money in an FD.

It is true that finding the right stock to invest in might be a challenge and nobody would be able to accurately say if a stock will grow many times over in the next few years with certainty.

However, even for those with limited financial investment knowledge there is a great way to invest in the stock market in a way that can maximise his/her returns while keeping risk minimal – via Mutual Funds.

Why invest in Mutual Funds?

A Mutual Fund is an investment category that is funded by shareholders and is professionally managed by Mutual fund managers who diversify the capital into different stocks (or other securities). Some things you need to know about Mutual Funds:

  1. Mutual funds are excellent investment options for somebody who is looking at long-term wealth creation. A fairly well performing fund can fetch you as much as 40% returns in 4 years (specific case in example is the SBI Magnum Equity Fund – verified as of Jun 2017) and their growth far exceed the returns on fixed returns offered by any bank.
  2. If you hold on to any Equity-based Mutual Fund for just 1 year and then sell it, you get a 100% tax exemption on your returns. This is because the returns from equities of equity-related Mutual funds held for a minimum of 1 year gets classified as ‘Long Term Capital Gains’ that are tax-free in India. On the other hand have a look at bank investments – no matter how long you hold, you still have to pay an income tax on the interest earned.
  3. Any dividends you earn through your Mutual fund holdings (equity or debt funds) are 100% tax free.
  4. Professional Mutual fund managers who manage the funds will ensure the fund capital is invested in the right stocks and securities to provide maximum returns for the fund holders and therefore it saves the investor the trouble of having to closely monitor his investment (unlike in the case of direct equity investment).
  5. Mutual Funds help in diversifying your investment in a variety of ways and are much less riskier than investing directly in shares.

Over the past 10-15 years, Mutual Funds and ULIPS (Unit-linked insurance plans – very similar to Mutual Funds but additionally also provide Health/Life Insurance for its policy-holders) have risen in popularity among the salaried class and I had personally invested in a couple of them. In fact, it was only earlier this year that I finally liquidated my investment in one receiving over 120% returns on my original investment in about 10 years – something that came as a blessing when I was really in need of money.

Back in 2005-2006, when I first started investing in such funds, the paperwork was far more than it is today, and you only had the option to apply for such funds (such as ICICI Prudential or SBI Magnum) through an agent . The fund house would charge you a commission deducted from your returns, and in addition to this commission, there were costs to entry and exit in every fund. Nevertheless, it was still a great investment given that it beat any FD hands-down in returns.

But nowadays, with the introduction of the Direct Investment Option in Jan 2013, any investor could bypass the middlemen and directly invest in the same Mutual Fund without having to pay entry/exit loads or having to pay commissions. The introduction of direct investment in Mutual Funds also meant, you no longer needed to spend time and effort on the paperwork and you had the flexibility of investing as much you required and whenever you felt like it – after all you now bought and sold NAVs (the primary units for a mutual fund) via your regular Demat/Trading account.

Types of Mutual Funds

Mutual Funds come in a variety of types and depending on your risk-appetite and outlook you can invest in the ones of your choice. Some of the most common types are:

  1. Money-Market Funds – These are very safe investments based on fixed-income securities like Government bonds. However, the flip-side to this is that their returns would be the least among various mutual fund classes and might barely give you more returns than let’s say, a fixed deposit in a bank.
  2. Fixed-income Funds – These funds provide a fixed return and will be based on high-yield or investment-yield corporate bonds. While they may give a better return than the above type, they are generally riskier than funds that hold government bonds. Debt Funds come under this category.
  3. Equity Funds – These are the class of Mutual Funds that invest in stock market equities and while they carry a certain amount of risk because they invest in the stock market that are subject to fluctuations, they give you great potential for far more returns. Equity funds are further divided into various types including those that specialise in growth stocks (which don’t usually pay dividends), income funds (which hold stocks that pay large dividends), value stocks, large-cap stocks, mid-cap stocks, small-cap stock.
  4. Balanced Funds – These are funds that mix caution with risk in a balanced manner by investing in a mix of equities and fixed income securities. These funds have more risk than fixed income funds, but less risk than pure equity funds.
  5. Index Funds – Index based funds directly track the performance of a specific Stock Market Index such as the BSE 30 or the Nifty 50 and therefore their returns will directly correlate with the movement of these indices.
  6. ELSS Funds – While an ELSS (Equity Linked Savings Saving Scheme) Mutual Fund is a type of Equity fund, this has been listed separately since it is something that gives you a distinct advantage over other Equity funds – investing in them gives you a direct Income Tax exemption using the 80C category of the Income Tax act.

The above is by no measure an exhaustive categorisation and you can have Mutual Funds types that help you invest in many more varieties of securities.

Which Mutual Funds should you invest in?

You can invest in a variety of Mutual funds based on your risk appetite and depending on how much you would invest. But given that there are umpteen different Mutual Funds out there how do you decide which ones to invest in?

Simple, just pick one of the best performing funds based on their historical track record. While nobody can be 100% sure about the future, it is far more likely that a fund that has historically done well is likely to continue doing so.

CRISIL is a company that provides exhaustive analysis based ratings for the various Mutual Funds available in India today and if you are looking for the best Mutual Funds in a specific category, have a look at their CRISIL ranking and how they have performed when compared with their peers.

Check this link on the financial website

The above page gives you information on the best performing Mutual funds sorted on their category.  Here are a few from that list:

  1. Performance of Large Cap Mutual Funds
  2. Performance of Small and Mid-Cap Mutual Funds
  3. Performance of Diversified Equity Mutual Funds
  4. Performance of ELSS Mutual Funds
  5. Performance of Gold ETFs

*PS: If you want to invest in Gold for the long term,  invest through a Mutual Fund – It is a far better option than buying physical gold – at least you won’t’ have to worry about making charges ( gold shops charge an atrocious 12-18% usually) or worry about its actual purity.

How should you invest once you short list your choice of Mutual Funds?

While I do not claim to be an investment expert, I have come to know from experience that one of the best ways to invest in Mutual is by investing regularly in a diverse set of funds.

For example, I hold 3 different types of Mutual Funds. While all of them come under the Equity category, since I believe in the long term growth potential of equities. Nevertheless I have minimised my risk by taking the following measures

Using weekly SIPS – I use weekly Systematic-investment-plans (a.k.a SIPs) to invest a fixed amount every week in 3 different funds of my choice. The use of systematic investments normalises the fluctuations in the equity market and ensures I acquire NAVs at a moderated price which assures me a better return over the long term.

Diversification of investment – I have invested in three categories of Mutual Funds as of today:

  1. ELSS Fund – Investment in this ELSS helps me meet my quota of 80C investments for the year and also ensures I get a good return on my investment
  2. Top 100 Large-Cap Fund – This Mutual fund invests in the 100 largest companies in India (in terms of market capital). The equities of these companies will be among the most stable and in the event of a market downturn, they will not tumble down by much. Hence, I invest in this for stability.
  3. Small and Midcap Fund – This is the riskiest of the 3 funds but also has the potential to give most returns (history shows the same). This fund invests in the most promising companies in the Small Cap and Mid Cap space in India today.

I invest approximately 10% of my monthly salary in Mutual Funds currently and the funds are invested in a 2:1:1 ratio in the 3 Funds above.

NOTE: Lastly, I use the Zerodha Trading Platform to buy and invest in Mutual Funds. They let customers invest up to ₹25,000 in Mutual Funds for ₹0.00 processing fee and charge just ₹25 a month once MF investments exceed the 25K limit – this is practically the best deal I have seen since I can invest directly without any hassles or without paying commissions or paying an entry or exit load.

PS: If you are looking for a platform to invest in Mutual Funds and Equities, I would recommend the brokerage house Zerodha. You can open an account with them by clicking on the logo on the left.


The Future is nearer than you think – Plan ahead

“Money without financial intelligence is money soon gone.”  – Robert T. Kiyosaki, in the all-time personal-finance bestseller: Rich Dad, Poor Dad.

I have lost count of the number of people I have come across who squandered opportunities to invest for the future when they had a chance. And these include those who earned very well in comfortable jobs at one point, but spent every penny as it came and when at one point they fell on hard days, they didn’t have anything to fall back on and had to count on the goodwill of others around them to give them a helping hand.

Many of us complain that we never have enough money or draw a salary that’s good enough, but how many of us had the perspective to look into the future and invest for the long term with whatever little we have?

How many of us in our 20s or 30s thought, “I’m earning a decent salary with enough left at the end of the month to save. Instead of squandering it all on frivolous stuff (like the latest smart-phone), let me invest for the future right while I have the chance.”

It’s never too late to start. After all, money that is well invested today is money that will secure your tomorrow and your family’s tomorrow too!


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