How to Secure Your Financial Assets With Mutual Funds
Few investments provide assured returns – most carry at least some degree of risk. Sound financial planning is the key to securing a reliable return on your investments.
Today, there are many ways of managing your personal finances. These include investing in stocks, bonds, mutual funds, insurance and tax-saving funds. Proper investment planning involves understanding which plan you should opt for, the ideal amount to invest, and how to secure these investments.
Life insurance is one way of protecting yourself and your family from uncertainty. It comes under the umbrella of saving plans that also include fixed deposits and health insurance, which offer guaranteed returns in the form of interest. However, investment planning is about more than just buying insurance, and the most important area to explore is mutual funds.
May 2023
5 mins read
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Know the different types of mutual funds
A mutual fund is a pool of money contributed by multiple investors and managed by a professional Fund Manager, who invests it in specific market linked instrument like stocks or bonds. There are a wide range of instruments available in today's financial market each with their own risk attributes, and thus a wide variety of mutual funds:
- Equity Funds: As the name suggests, these funds invest in equity or stocks, which provides potential for capital appreciation and dividends. Equity or stocks are classified basis their market capitalisation such as large cap, mid cap and small cap and are linked to increasing level of risk attributes
- ELSS: Equity-Linked Savings Scheme or ELSS is a tax-saving fund which invests in listed shares or other similar equity-linked securities. The main benefit here is that it allows you to save taxes for investments up to Rs. 1,50,000 per year. It comes with a minimum lock-in period of three years, while the minimum investable amount varies according to the mutual fund house you are investing in.
- Debt Funds: These funds invest in money market instruments like non-convertible debentures, commercial papers, government securities, certificates of deposits and treasury bills. Investors receive their returns from interest, and so the risk involved is lower than in an equity mutual fund.
- Hybrid Funds: These funds invest in both equity and debt. This means that a part of your money is invested in stocks, and the rest is invested in bonds or other debt instruments. The ratio of equity to debt varies according to the plan you choose.
- International Fund: As the name suggests, these funds invest in stocks and securities which are listed on exchanges outside your home country and thus provide your investments diversification beyond your home country.
What are the two modes of investing in mutual funds?
- SIP (Systematic Investment Plan): In a SIP, you make your investments either monthly, quarterly, semi-annually or yearly. The advantage here is that you are not putting in all your money in one go. The amount you pay at a time can be as small as Rs. 500, giving you flexibility. There is relatively less risk as you can opt out of the plan at any point in time.
- Lump sum investment: This is the opposite of SIP, as ‘lump sum’ means paying only one time. There is increased risk as you are paying all your money in one go. However, it may prove to be convenient as per your circumstances and helps in building long-term wealth.
How to secure your investments for fool-proof goal planning
Both debt and equity funds have their pros and cons. While a debt fund ensures stable returns, an equity fund like ELSS helps you save on your taxes. If you want to maximise these benefits, you should follow these financial planning tips:
- Know what you're investing in
The first step to investment planning is understanding the market and getting to know all the available schemes. Next, you can talk to a financial advisor who will help you understand the market's current status and how various plans differ. This will help you make better financial decisions. - Set an amount aside for making investments
Based on your income, you should set aside an amount that goes into mutual funds, insurance and other investments. You should do so after accounting for your day-to-day living expenses. - Maintain a diversified portfolio
If you can set aside a reasonable amount for your investments in a year, you can divide that money into multiple schemes. Ideally, it would help if you have both long-term and short-term planning to build your wealth. You could opt for both SIP mode and lump sum mode. - Go for hybrid funds
Since hybrid funds invest in equity, debt and other assets, they provide diversification to your investment through asset allocation. So underformance of one asset is made up by performance of other assets.
Remember to review your portfolio regularly
Investment is a long-term process. It could be part of your retirement plan or a means to give your children a head-start in life. The performance of funds can change over time, and you must regularly review your portfolio so that you are aware of these changes and can respond to them in time. If a fund begins to underperform, you may have to stop that investment and look at alternatives.
Ultimately, securing and building your wealth requires a great deal of financial planning along with continuous management of your personal finance. Besides changes in your expenses and income, you must monitor the changes in the market to ensure you don't lose the money you invested for your future. Consult your financial advisor and use online tools to explore a wide variety of mutual funds for a financially secure future.
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
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PGIM India Asset Management Private Limited
(CIN - U74900MH2008FTC187029)
Toll Free Number: 1800 266 7446
Email: care@pgimindia.co.in
This is an Investor Education and Awareness Initiative by PGIM India Mutual Fund.
All the Mutual Fund investors have to go through a one-time KYC (Know Your Customers) process. Investor should deal only with the Registered Mutual Funds (RMF). For more info on KYC, RMF and procedure to lodge/redress any complaints, visit https://www.pgimindiamf.com/ieid.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY. Read more
All the Mutual Fund investors have to go through a one-time KYC (Know Your Customers) process. Investor should deal only with the Registered Mutual Funds (RMF). For more info on KYC, RMF and procedure to lodge/redress any complaints, visit https://www.pgimindiamf.com/ieid.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY. Read more
The information contained herein is provided by PGIM India Asset Management Private Limited (the AMC)
on the basis of publicly available information, internally developed data and other third-party
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