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mutual fund investment

Finance

WORRIED ABOUT MARKET? INVEST IN HYBRID MUTUAL FUNDS

Several investors are often apprehensive of investing in the markets given the current market situation. As a result, these investors are often on the lookout of safer investment options that can help them take a defensive position in the market. One such great investment option for such investors can be hybrid mutual funds. Hybrid funds ensure graded exposure to equity as per your risk profile. Different types of hybrid funds aim to cater to varying goals of investors. In this article, we will understand about hybrid funds, their types and why you should invest in hybrid mutual funds.

What is a balanced fund?

Balanced funds, commonly known as hybrid mutual funds are a type of mutual funds that contain both stock and bond component in a predetermined ratio in a single investment portfolio. The stock component in the fund helps the fund to earn higher returns on their portfolio, while the bond component in the fund helps to diminish the risk exposure of the fund.

Types of hybrid funds

There are different types of balanced funds an investor can choose from. Let’s have a look at some of these mutual funds. Balanced advantage funds or BAF is a hybrid fund wherein the fund manager determines the equity allocation in the fund. On the other, aggressive hybrid funds or AHF invest around 65% to 80% of their assets in equities and equity-related instruments. In the next category, equity savings funds have an equity exposure of around 20% to 40% as per the fund’s investment objectives. The remaining corpus in equity savings fund is allocated to debt instruments and hedged equity.

Advantages of balanced mutual funds

There are several benefits of investing in hybrid funds. Let’s look at a few of these advantages enjoyed by hybrid investors:

  1. Investment discipline – Hybrid funds decide their asset allocation to equity and debt instruments as per the investment objectives of the portfolio. As market movements are not uniform, this ratio of asset allocation might get distorted. If the equity markets experience rally, the originally decided ratio might work in the favor of equities.
  2. Flexibility – In all equity-fund categories, with the exception of flexi-cap funds, fund managers are bound to invest in these funds in a specific ratio. For instance, ELSS mutual funds are mandated to invest a minimum of 80% of their assets in equity investments. Multi-cap funds are mandated to invest at least 25% of assets in small-cap, mid-cap, and large-cap funds. Large-cap funds are authorized to invest in the companies of top 100 stocks. However, hybrid funds offer flexibility to investors to determine their asset allocation mix as per their financial objectives, risk profile, and investment horizon.
  3. Tax aspect – The equity component in balanced funds is taxed similar to equity funds and the debt component in hybrid funds are taxed similar to debt funds. If you are still confused about the tax aspect on their investments, you might consider availing of the services of a financial expert.

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Finance

4 THINGS YOU SHOULD KEEP IN MIND WHILE INVESTING

When it comes to investing in mutual funds, mere mutual fund comparison to choose the best mutual fund schemes for your investment portfolio might not be enough. There are certain things that you as an investor must be aware of. In this article, we will understand four such things that you as an investor must keep in mind before investing in different types of mutual fund investment plans.

Things to keep in mind while investing

Following are a few things that an investor must be aware about before investing in mutual funds:

  1. Asset allocation strategy
    The asset allocation strategy is determined by certain aspects of risk – how much risk an investor can afford to take? How much risk does an investor need? And lastly, how much risk is an investor willing to take? Once you are clear on these questions, it will be easier for you achieve the broad framework for asset allocation – i.e., where should an investor invest and in what proportions. Based on your investment horizon, you can break your investment portfolio into three or four components – short-term financial goals that need to be in investment options with low risk profile such as fixed-income instruments, medium-term financial goals that can be invested in securities with slightly higher risk profile such as mix of both equities and debt, and long-term financial goals that can be allotted to securities with high risk profile such as equities.
  2. Portfolio diversification
    Diversifying your investment portfolio is a way of allotting and investing your money across different types of securities, asset classes, and locations. This helps an investor to considerably reduce their risks without compromising too much on the returns. Hence, rather than putting all your eggs in one basket, diversify them across different types of investments.
  3. Maintain liquidity
    It is important to maintain enough liquidity that can easily protect an investor against loss of income or drop in income or any other type of emergencies. Hence, it is recommended that an investor has an emergency fund in place that can cater to any type of emergencies that might come their way during their investment journey. As a general rule, it is advised to invest at least three to six months of your living expenses in securities that offer high level of liquidity with decent rate of returns such as money market instruments or cash and cash equivalents.
  4. Reviewing financial portfolio
    It is extremely essential for an investor to conduct regular reviewing of their financial portfolio. This will help an investor to distinguish underperforming funds and reallocate their investment if the mutual fund scheme has been constantly underperforming as compared to their underlying benchmark indices and other peer funds belonging to the same category of the mutual fund scheme. Additionally, all long-term investments are likely to turn into mid-term investments and ultimately into short-term investments over time. And it is crucial to appropriately adjust your mutual fund investments when the financial goal is near completion.
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Investment

YOUR FINANCIAL PLAN IS NOT JUST ABOUT INVESTING

Financial planning is a step-by-step process to help investors achieve their short-term and long-term financial goals. In short, a financial plan helps to create a roadway to achieve one’s financial objectives. However, several investors have an incorrect notion towards financial planning that their job as an investor merely ends at researching and selecting the best investment options for their investment portfolio.

Did you know that a financial plan is dependent on an individual’s financial security? So basically, an individual who has just stepped into the investment world would have a different approach to financial planning than someone who has say accumulated a sum of money. Let’s understand this better and in-depth through this article.

If you are a beginner and new to the investing world

For someone who has just stepped into the investment world, certain things must be taken care of. Health insurance policy is the first thing that must be tended to as it helps to cater to your medical bills. Next, you can consider getting a life insurance policy provided that you have some dependents. Apart from this, you must also have an emergency corpus. Emergency corpus helps to tend to different types of emergencies that come unannounced in life such as home repair, loss of family member, job loss, etc. It is advised that you allot and invest at least three to six months of your total living expenses. Once you have catered to these basic necessities, you might consider moving towards being entirely debt-free. Being entirely debt-free gives the real freedom of being financially independent. you can choose to allot your assets in investments that cater to your financial needs. Mutual funds are a good way to cater to a novice investor’s needs because of the professional management it offers to investors. Mutual fund investments are professionally managed by fund managers who have in-depth knowledge and skills to manage several investors’ investments.

If you have collected a considerable sum of money

In this scenario, an individual is in that phase of their life where in they have catered to all their safety nets for their family. Additional to that, these individual has also made several investments to achieve their financial objectives. An individual is this phase is already debt-free and living in a financially independent life. This individual has their health insurance policy and life insurance policy (if needed) in place. Also, they have a decent size of emergency fund. Next, they must invest in securities that allows them to have a diversified investment portfolio. A diversified portfolio reduces the risk of being exposed to just one type of asset class or investment. You can choose to invest in different types of mutual funds to cater to your varying financial needs of different investment horizon and risk profile.

No matter what type of investment you choose for your investment portfolio, you must ensure that it aligns with your financial goals, investment duration, and risk profile. Lastly, do not forget to monitor your investments on a periodic basis. Remember, financial planning is a dynamic and continuous process. Your financial plan does not end at mere investing. Happy investing!

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Investment

DEBT MUTUAL FUNDS VS FIXED DEPOSITS- WHAT MAKES FOR A BETTER CHOICE?

Though Fixed deposits (FDs) are considered as traditional investment options, they still find a place in most Indian households. As per the reports of Reserve Bank of India (RBI) released on June 2020, around 53% of average Indian household’s financial assets are dedicated towards fixed deposits as on March 2020. Though mutual funds are also seemingly popular among retail investors, these investment options raise to popularity in the recent decades. As per the date released by AMFI (Association of Mutual Funds in India), the AUM (asset under management) of mutual funds in India have grown at CAGR (compounded annual growth returns) of around 17% in the last twenty years. So, which of the above two investment options make for a better choice? Let’s understand and explore in this article.

What is a mutual fund?

Mutual funds are financial vehicles that are professionally managed by mutual fund experts known as fund managers. A fund house or an AMC (asset management company) pools the funds of several investors and invest in different securities basis the investment objective of the fund. Examples of such securities include cash and cash equivalents, stocks, money market instruments, bonds, etc. These fund managers have in-depth knowledge and understanding of the markets. You can invest in mutual funds either via a systematic and regular mode of investment – SIP (systematic investment plan) or lumpsum mode of investment.

What is a fixed deposit?

Fixed deposits are financial instruments provided by financial intermediaries such as NBFCs (Non-Banking Financial Company) or banks that offers investors with a fixed rate of interests for a fixed duration. The government of India predetermines this interest rate every year. Hence, these are relatively safer investment options than mutual fund investments. In return, investors are not allowed to redeem the schemes before the maturity of the term. Unlike mutual fund investments, you cannot make an SIP investment in fixed deposits. You need to make a lumpsum investment to invest in fixed deposit schemes.

Mutual funds vs fixed deposit

Let’s understand the differences between fixed deposits and mutual funds by referring to the following table:

Parameter Fixed deposits Mutual funds
Interest rates Fixed Vary as they are market-linked
Investment objective To preserve wealth To generate wealth
Market conditions Returns are not dependent on market conditions Market conditions play a significant role to calculate mutual funds returns
Risk Relatively lower risk as returns are predetermined and fixed Relatively higher risk
Expenses FDs do not levy any additional costs to investors Mutual funds levy certain charges and fees
Tax Dependent of the investor’s income tax slab Tax on mutual funds are dependent on the type of mutual funds invested in and the holding period of the investment
Lock-in period 5 years Except ELSS funds that have a lock-in period of 3 years, mutual funds do not have lock-in period
Mode of investment Only lumpsum investment Either SIP (systematic investment plan) or lumpsum investment

Where should I invest?

The decision to invest in mutual funds or fixed deposit lies with an investor. You must check your financial objectives, investment duration, and risk profile before deciding the right investment option for you. That being said, if you’re looking to generate wealth, you are better off with mutual funds as they have the potential to generate significant returns when invested for a prolonged duration. Happy investing!

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