Mutual Fund investment can secure your future

All of us work hard to earn money. We want to save, invest, make our wealth grow and become financially secure. This requires careful investment planning.

What do we expect from our investment?

Ideally, good investment should have five attributes: regular returns, appreciation in the value of the invested asset, liquidity, safety and tax benefits. There are very few investments which give all these five benefits. Bank deposits give regular income, but no capital appreciation. Gold and land can give capital appreciation in the long-run, but no regular income or tax benefits. Real estate, which needs huge investment, has no liquidity.

Good stocks and Equity Mutual Funds/ Balanced Funds, though risky in the short run, can give all the above mentioned benefits in the long run.

Asset classes for investment

These days, investors have a wide variety of asset classes to choose from: Bank deposits, Non- Convertible Debentures, gold, PPF, NSCs, PO deposits, stocks, mutual funds, ETFs, real estate, REITs(Real Estate Investment Trusts), InvITs (Infrastructure Investment Trusts) and National Pension Scheme.

Bank deposits, PPF andNSC have very low risk, but real returns from these investments are low. Interest rates on these investments are trending down. REITS and InvITs are yet to emerge as popular asset classes. On the other hand, investment in stocks, either directly or indirectly through mutual funds, can yield all the benefits of investment mentioned earlier. There is an element of risk in the short-run; but in the long-run risk is low and the benefits can be substantial.

Financial history tells us that stocks out-perform all other asset classes in the long-run. Rs 10,000 invested in BSE Sensex stocks in 1979 (BSE Sensex which was 100 in 1979 is now around 33,000) would have a market value of around Rs 33 lakh today, excluding dividends. On the other hand, Rs 10,000 deposited in a bank fixed deposit in 1979 would be worth around Rs 1,50,000 today.

A major attraction of investment in stocks and mutual funds is the tax advantage. Dividends from stocks are exempt from tax up to Rs 10 lakh a year.

Dividends from equity mutual funds and balanced funds are completely exempt from tax. Another major attraction of investment in stocks and equity/ balanced mutual funds is the exemption of long-term capital gains from tax. Long-term capital gains are the gains accruing to investors when they sell stocks/equity funds at a profit after holding them for a minimum period of one year. If investment is done under the ELSS, investors get 80C tax exemption too. This makes the returns from MFs extremely attractive.

Why mutual funds?

An important lesson of the last 100 years of financial history is that stocks out-perform all other asset classes by a wide margin, in the long run. Very few people have the time and expertise to invest in the stock market directly. Therefore, a very good option for investors is to invest in stocks through the mutual fund route.

Mutual fund investment can be done either in lump sum or in installments. SIP is an ideal form of investment where the investors invest at regular intervals, say, weekly, monthly or quarterly. Monthly SIP is an ideal strategy. Since the investment is done systematically, the investor gets the benefit of Rupee Cost Averaging. This means that since investment is done regularly, the investor gets more units when the prices are down, thereby reducing the average cost. During the last 37 years, in India, bank fixed deposits have yielded around 9% annual return; return from gold has been less than 9%, while returns from stocks has been around 16%. Clearly, stocks have out-performed bank deposits and gold by a wide margin.

Choosing a good mutual fund, however, is not easy. This requires some expertise. Returns from mutual funds can vary from fund to fund and across schemes.Conventional wisdom forbids us from putting all eggs in one basket.

Therefore, it is desirable to have a good variety of assets in your portfolio. However, it is important that an investor has the best performing asset class – equity/ mutual funds – in his/her portfolio. So, invest a part of your investible funds in mutual funds, ideally through the SIP route.

(The writer is Chief Investment Strategist at Geojit Finance)