Advantages of Mutual Funds over Fixed Deposits

In today’s competitive market space, customers have a huge range of financial products available to choose from. Depending upon their financial goals and risk appetite, customers prefer one financial instrument over another for saving and growing their money. While Fixed Deposits are one of the most popular and oldest forms of financial instruments available to customers, Mutual Funds are comparatively newer and highly growth oriented tools that customers can invest in.

Advantages in Mutual Funds

Advantages of mutual funds over fixed deposit schemes

Fixed deposits and mutual funds are two totally different financial tools which customers may avail. Although, there are certain parameters which these two tools can be gauged against. This helps customers to decide which financial instrument will be better for their investment goals. Here are certain advantages of mutual funds over fixed deposits as a financial tool to invest in.

• Inflation adjusted returns are one of the most striking and Advantages of mutual funds. Most mutual fund schemes offer returns that take into account the inflation rate prevalent in the country and hence offer higher rates in the end as compared to those offered by fixed deposit schemes. These schemes offer rates that are fixed and have no bearing with respect to the prevalent rate of inflation in the country.
• Higher risk, higher returns is the principle on which mutual funds operate. This does not mean that all mutual funds are high-risk financial tools. There are funds that invest majorly in the stock market and hence have high returns and high risk associated with them. On the other hand, returns offered by fixed deposits are not, in the least, as aggressive as mutual funds advantages.
• Premature withdrawal is allowed in mutual fund schemes with some amount of exit load. Fixed deposits offer premature withdrawal on payment of certain penalty fee.
• Tax on mutual fund is paid only when withdrawn unlike fixed deposits, where tax is to be paid every time interest is earned on the deposit.
• Mutual funds are managed by fund managers of fund houses. This means that with mutual funds you get the services of an expert fund manager to manage your investment whereas for fixed deposit schemes, you are supposed to manage your deposit on your own.
• Mutual funds offer better tax savings as compared to those offered by fixed deposit schemes. Fixed deposits earn tax exemption only if they are availed for 5 years or more.
• Mutual funds offer higher liquidity of funds as compared to fixed deposits which work on the principle of fixing a particular amount for a specific period of time.

Fixed deposits and mutual funds are two totally different investment avenues. Both work on absolutely different principles of finance and as such any successful portfolio is advised to have an optimum mix of both these tools. Diversification of investments in various financial tools is the best way to lend stability and growth both to a financial portfolio. Mutual funds come in various forms and customers can choose to opt for a specific form based on their financial goals and risk appetite.

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How to Invest in Mutual Funds through Demat Account

There are several channels online through which you can invest in mutual funds schemes. Some of these channels are mutual fund websites, net banking, transfer agents such as CAMS or KARVY, online mutual fund platforms, etc. Though it is not mandatory to hold a demat account, having a demat account has its own advantages.

A number stock broking companies provide Demat facilities to their stock investors and traders. They offer an array of services that  mutual fund trading, IPO/FPO subscription, investment in tax saving infrastructure bonds (under section 80CCF), trading in international stock exchanges, investment in Gold through Gold ETF, other than the usual stock broking facilities. Demat account can also be used for post office savings schemes such as NSC and KVP. However, these are available in select cities only.

Invest in Mutual Funds

The process of investing in mutual funds through a Demat account is similar as stock investments. After applying  for KYC compliance and subscription, the Asset Management Company (AMC) or Registrar and Transfer Agent (RTA) where you have registered with will credit the mutual fund units to your Demat Account. Here are some of the pros and cons of investing in mutual funds schemes through a demat account:

Advantages:

• The transactions are convenient and paperless which helps you save the task of filling forms and providing documents every time you invest in a share.
• The mutual fund and stocks investments can be centralized at one place, irrespective of multiple schemes  across different agents.
• In case you have a single nominee, the nomination requirements are simple.
• In case you want to change your contact details  with your depository participant (DP), you have to only submit one application even though you may hold multiple investments. The updated contact information is updated, the same will automatically get upgraded with all the AMCs.

Disadvantages:

• The charges for holding and trading of mutual funds using a Demat account are a bit higher, in comparison to the ones without an account. Higher charges: Some brokerage firms may charge a fee for the actual sum and SIP investment in the scheme, as compared to online mutual fund platforms who may not charge anything for the same services.
• Only if you are stock investor who trades or invests in direct stocks, then you may find Demat accounts as cost effective and useful.
• Funds can be purchased only if the AMCs are tied-up with the brokerage firm you have registered with.
• You cannot hold a joint account for mutual fund investments with a Demat account.

For all other investments, you can do through a bank account which has online fund transfer facility. However, it is essential to wisely choose a mutual fund investment, according to your convenience and requirement.

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Basics of Mutual Funds NAV

Mutual Funds are one of the most growth-oriented financial tools available to customers. These funds not only ensure savings but also have high potential to grow your funds and offer high returns. Mutual funds are categorized into various types based on the nature of fund and their risk-return ratio.

More and more customers are opting for mutual funds considering the financial growth that they offer. Other regular investment tools are able to offer returns that are only enough to match the current inflation rate. On the other hand, mutual funds offer returns that are substantial enough and as such are able to cover the inflation effect as well as provide growth over and above that.

What is NAV in reference to mutual fund?

NAV is short form for Net Asset Value. NAV of a mutual funds represents the fund’s market value per share. This is the price at which the fund’s shares are bought by investors and sold to companies. NAV forms an important part of mutual fund basics for any investor, be it an amateur or a seasoned professional investor.

How is NAV of a fund calculated?

The Net Asset Value of any mutual funds is calculated by taking into account the total value of all securities and cash in a fund’s portfolio and then dividing it by the outstanding number of shares. NAV is computed every day at the end of the trading cycle. These computations are based on the closing market prices of the securities.

Importance of a mutual fund’s NAV

Here are some of the most important features and benefits of the Net Asset Value of any mutual fund.

• NAV helps calculate the price per unit of any share. For example an NAV of 60 million Dollars divided by 6 million shares outstanding will lead to a share price of $10.
• Net Asset Value is a term used mostly in context with open-ended mutual funds. This is because for open-ended funds, shares and interests are not traded between investors but are issued by the fund to investors depending upon their NAV. On the other hand, for close-ended funds, shares and interests are traded between investors and hence, the share and interests are priced at the final amount decided upon by the investors.
• NAVs point out the company’s current asset and liability holdings which makes it easier for investors to know the growth and risk prospects of any company.

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The Danger of Over-Diversifying in Mutual Fund Portfolio

There is an age old saying, “Don’t put all your eggs in the same basket.” This is basically the principle that a mutual fund follows when deciding where the money is actually invested. Sometimes mutual fund investors may take this theory to heart and invest in too many funds at the same time. While there is nothing wrong with doing this, there is one that you should watch out for and that is the danger of over diversification of the portfolio. With an over diversified portfolio you can find yourself in a situation where even investing in the best mutual funds in India will not provide returns to the tune you were hoping for.

Best Mutual Funds

What is over diversifying?

Let us take an example of an average person. This person has decided that he is going to invest Rs. 30,000 in mutual funds. When the time to invest comes, he takes a list of the top 10 mutual funds in India and invests Rs. 5,000 in 6 different mutual funds. This can be called an over diversified investments because the ideal number of investments he could have made with this amount should have been 1 or 2.

Why is over diversifying bad

There is no doubt that over diversified investments in mutual funds are bad and the reasons for this are:

• Can’t buy much: With a small investment, the returns too will be small since the invested amount will not be enough to buy too many units..

• Building wealth will take long: Since the invested amount is small, and the number of units bought through them is also small, when it comes time to see how much wealth has been built, there will be a lot of disappointment since the amount built won’t be significant enough to make a difference.

• Reduction in benefits: If one or two of the investments were made in tax saving mutual funds (ELSS) then the tax benefit available to the investor will be only Rs. 6,000 to Rs. 12,000 instead of Rs. 30,000.

• Small hits big damage: The very nature of mutual funds speaks of an inherent risk in the investment. When the invested amount is small, its capacity to sustain losses is reduced and even a small loss can do a lot of damage to the portfolio.

• Similar investment: There could be a chance that some of the mutual funds may be investing in the same company. This means that the whole purpose of diversifying to invest in different sectors or companies will be defeated.

• Expensive to pay for: Most mutual funds will charge an entry load and fund management charges. Will investments in 6 different funds, the service charges alone for our investor will end up losing him money.

• To many threads to track: When you invest in too many mutual funds, you are more than likely to find it reasonably tough to keep an eye on each and every one of them at the same time.

The fact is that there is no formula or magic number that can tell you how many mutual funds you can invest in. The decision must be made by you after you have understood how much money you have to invest and what sort of returns you can expect out of the investments. If you are still convinced that you want to invest in more than one fund then it would be best to consult a financial advisor who can help you decide on what to invest and where so that you can get the most out of your money.

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Why You Should Not Invest Just For The Sake of Tax Deduction

When the months of February and March come around there is a frantic race to invest in various instruments that will provide tax benefits but if you invest just for the sake of saving on taxes there is one thing you just missed on. That one this is the return from the investment. No one likes paying taxes but that is no reason to make rash decisions with your money, especially when it gets invested in an instrument with a lock-in period because once committed, they cannot be withdrawn till the lock-in period get over.  For example let’s take the example of investments in a tax saving fixed deposit vs a tax saving mutual fund. With one you get a safe environment for the money but not a particularly attractive interest rate and a 5 year lock-in. With the other you get an unsafe environment but also the chance for getting higher returns and a shorter lock-in period. Weighing the option is everything when it comes to tax deductions.

Tax Saving Mutual Fund

Why not to invest just for tax

Since weighing the options quintessential to proper investment planning, let’s take a look at what happens when this step is actually ignored.

Investing in the wrong instrument

Let’s say you need to invest another Rs. 8,000 before the financial year is over and you need that money for something else as well. You decide to take a term insurance policy of about Rs. 1 crore but you just did something wrong. You invested in an instrument that provides tax benefits but no returns if you survive the policy. Even if the investment was made in a return of premium policy, there was a chance that there would be some maturity benefit. But not with a term insurance.

Minimal return

Let’s say you wanted returns and tax saving and you ended up investing Rs. 1 lakh in a tax saving fixed deposit. You just made a bit of a mistake because of you had invested that money in a tax saving mutual fund or ELSS, you might have gotten better returns.

Not a sustainable investment

Let’s assume that you weighed your options and decided to invest in an ELSS or tax saving mutual fund. You decide to invest in lump sums and the amount you invest is Rs. 60,000 per year. You pay the first years Rs. 60 thousand but the next year you don’t have that kind of money but there is nothing that can be done because it needs to be paid. You just made an investment that is not sustainable.

Wasted investment

Let’s say you wish to invest in a health insurance policy and are looking for one thing and one thing only; and that is tax savings. You take a policy and one day fall ill and decide to you that policy but when you go to claim the benefits you realise that you have taken inadequate cover or a policy that is actually a co-pay policy where you have to pay part of the bill. You just wasted money on an investment that does not serve you at all.

Investment that earned loses instead of returns

This is something that can happen with tax saving investments that have a link to the markets like tax saving mutual fund, ULIPS and ELSS. You invest thinking you’ll get tax savings but realise that you invested without looking and now the investment is actually generating more losses than returns and you cannot sustain such losses. You just wasted money and forced yourself into a financial corner.

An investment made for tax saving can be anything you want. It can be a life insurance policy or a tax saving mutual fund or even a fixed deposit. But the thing you MUST do is, first understand what you are looking at and what you are buying!

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Benefits of Birla Sun Life Mutual Funds

Everyone will tell you that investing in a mutual fund is a good idea and it probably is because where else will you get to invest in the equity and debt markets without having to bother about knowing how to understand them. Making the decision to invest in a mutual fund, however, is the easy part. The difficult part comes when it’s time to choose a fund or an asset management company to invest with. There are quite a few companies like Birla Sun Life Mutual Funds out there offering mutual funds and making a decision is a matter of some research but to help you narrow that search, here are some things, or benefits, that you get access to when investing in Birla Sun Life Mutual Funds.

Birla Sun Life Mutual Funds

Benefits of Birla Sun Life mutual funds

The benefits offered by Birla Sun Life Mutual Funds can be classified into the funds that they offer based on the objective of the investor and the options that these funds can come with.

Wealth creation

The wealth creation plans offered by Birla Sun Life Mutual Funds are actually long term investments that aim to help investors grow their wealth. Currently there are 7 plan on offer (this figure can change depending on the company) and they offer investment opportunities in equities and gold. They are long term investments and can even invest in multi-national companies allowing investors to reap the benefits of the growth of a company outside India.

Tax savings

Tax saving mutual funds or ELSS are mutual funds where the investments are made in the debt or equity markets but the money invested in them by an individual is eligible for tax benefits. These funds have a lock-in period of 3 years, which is good because many of the other tax saving investments offer 5 year lock-ins. These plan offers 3 key benefits, the first is the obvious tax benefit on the investment, the second is that they too can help your money grow and the third is that right now the government has declared that long term capital gains from tax saving mutual funds will be tax free. It is worth noting that this offer can be withdrawn at any time so it would be best to check up on it before invest.

Savings

The savings plans are mutual fund investments that are meant to help investors save. They do this by concentrating on low risk investments and the debt markets. They can be a good idea for anyone who is investing in mutual funds for the first time and can’t afford to take too much of a risk. Some of these funds will invest in debt market instruments with short maturity periods and then too only those that are of the highest quality.

Regular income

A regular income plan, as the name suggests, are mutual funds that come with a risk rating of moderate and are designed to supplement the investor's income. This is done by offering plans that can provide monthly pay-outs. These are all long term investments and are made mostly in the debt markets with a small portion, about 10% to 15%, being invested in the equity markets to enhance the growth of the funds.

General options

Some of the other options that Birla Sun Life mutual funds can offer are:

• Systematic investment plans allowing for monthly payments
• Variety of risk profiles ranging from low to high
• Freedom for timing the markets
• Funds that are managed by extremely experienced fund managers

If you are pretty convinced that these are the investments that you wish to go in for, you must remember two things above all. The returns in a mutual fund are never guaranteed and that no matter which fund you invest in, the element of risk will always be there.

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Top Ten FinancialTips

Financial planning makes an important aspect of an individual’s life. Financial planning ensures that your finances are well planned and that you have enough savings and investments to ensure financial protection in times of trouble as well as sufficient growth of your money. In today’s world, money has become a necessity so deep that just amassing it is not enough, ensuring that your money grows is also an essential step of financial planning.

Top 10 Financial Tips

Here are a few tips that can make you save as well as grow your money so that you are financially covered at almost all points of time in your life.

1. Differentiate between wants and needs

There can be a thousand different things that you might want to buy but only a handful of things that you actually require. Avoiding to splurge unnecessarily on things that are not essential is one of the foremost rules of financial planning.

2. Set aside a little emergency cash each month

While huge savings isn't a matter of minutes, setting aside a small amount every month will ensure that little by little you are able to build a sufficient corpus for times of emergency or urgent financial need.

3. Form a basic monthly budget and try sticking to it

Budgets are the best way to plan your spends. Overspending is an issue with almost all individuals and as such sticking to a basic monthly budget proves to be a beneficial strategy for better financial planning. Monthly budget can also help you realize your essential versus non-essential expenditure.

4. Drop excessive use of credit cards

While credit cards offer great financial flexibility, overuse might result in inflated credit card bills which may eat into your monthly budget and destabilize it. So, restrained use of credit cards is the best policy.

5. Get a retirement plan in place

Think about your current lifestyle and how you want it to be during your older years and then based on these inputs, avail a retirement plan that would take care of days when you will no longer be earning.

6. Diversify your investment portfolio

Investing in just one or two types of financial instruments is not the best way to plan finances. Diversify your portfolio in order to hedge the risk associated with bad performing financial instruments.

7. Maintain a good credit history

Pay your credit card and other utility bills on time. Ensure all EMI payments are timely made so that your credit history is good and maintained that way. This will enable you to avail credit in times of urgent or sudden financial need.

8. Maximize benefits offered by employer

Take full advantage of all employee perks that your employer offers. This goes a long way in cutting down personal expenses and enhancing savings.

9. Check your insurance plans

Avail insurance plans but check that they do not have clauses that you are paying for without actually needing them anytime in the present or future. For example, going for life insurance policies makes sense only when you have dependents and not otherwise.

10. Invest some amount from your income

While saving is an extremely essential part of financial planning, investment too is very important. Considering the current global trends and inflation rate, just saving isn't enough since you also need to ensure growth of your money which can only be achieved via investment. Avail an investment tool that you are most comfortable with based on your risk appetite.

With the above few tips in mind, your financial planning will not only be sorted but will also yield returns that you will be happy to achieve.

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