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Mutual Fund
Mutual funds are pooled investments managed by professional money managers. They provide investors with access to a wide mix of assets like equities bonds, commodities, etc. A professional fund manager handles this mix of investments, and the fund’s assets and goals are detailed in the prospectus.
For those who deposit into their mutual funds from their bank accounts they offer automatic investing and lower investment risk than buying stocks on your own because most funds have diverse holdings. Each investor owns units, which represent a portion of the holdings of the fund.
In the Indian Context, as per current SEBI MF Regulation, an equity mutual fund scheme must invest at least 65% of the scheme’s assets in equity & equity related instrument.
Equity funds are categorised as moderate to high risk, also have a high return potential in the long run. They are ideal for investors who want to create long term wealth by building a portfolio that gives them inflation adjusted returns over the long-term.
Equity Funds are one of the best long term investment options. Equity funds would be ideal for investors with an investment horizon 5+ years.
Debt funds offers stable return, high liquidity, relatively safe and are more tax efficient when compared to an equivalent bank FD, thus can be perceived as great alternative to bank FD. Debt funds are generally categorised as low to moderate risk, are ideal for low risk appetite investors. Debt funds can be invested by investor with Short to long term investment horizon and should be used to stabilize portfolio.
Debt Funds have potential to generate 2-3% higher return than an equivalent bank FD. However compared to Bank FD, Debt fund offers better liquidity, more tax efficient, investment flexibility. Thus debt fund should be viewed as the best alternative to bank FD. Debt funds are less volatile than equity funds. Thus debt funds add stability in the portfolio context. It’s ideal for risk adverse investor and people closer to retirement or retirees. It’s a great alternative to Bank FD.
SIP is a method of investing into mutual funds. An SIP (“Systematic Investment Plan”) allows an investor to invest a fixed amount regularly (weekly, monthly, quarterly) in a mutual fund scheme.
Benefits of SIP –
- Investment Discipline
- Time Diversification
- Cost Averaging.
- Provides Flexibility
An SIP should be seen as a return optimiser and not a return maximiser, over time it provides wealth creation diversification benefit. SIP is a great tool to create long term wealth. SIP can be effectively used to meet long term financial goals like retirement, kid’s marriage, kid’s education.
Systematic Withdrawal Plan (SWP)
- Just as investors do not want to buy all their units at a market peak, they do not want to risk redeeming all their units in a market trough. Investors can therefore opt for the safer route of offering for repurchase, a constant value of units over a period of time.
- Mutual funds make it convenient for investors to manage their SWPs by registering the amount, periodicity (generally, monthly) and period for their SWP.
- Some schemes even offer the facility of transferring only the appreciation or the dividend. The advantage of a variable SWP relative to a fixed amount of withdrawal is that the capital invested will not be withdrawn.
- This plan is highly suitable for retired person and senior citizens who desire a tax efficient regular income.