Mutual Fund to Sahee hai?  but kya aap ke liye?

Mutual Fund to Sahee hai? but kya aap ke liye?

Jul 15, 2019 ArthaSarathi 1

Mutual fund may be Sahee hai – but not for every category, not for every purpose and not for everyone for every time and type of investments.

Yes, true mutual funds are good investment instruments. They help you in creating wealth. The brilliant TV campaign may make you believe that for all your investment needs, mutual fund is a solution.

Nothing wrong with the campaign. It’s aimed at creating awareness. However, is mutual fund relevant for your investment needs? Plain answer is: No-not every time.

For following categories, mutual fund investment may not be the best solution.

If you are investing for a cause, which needs money in less than 2-3 years

If your daughter’s college education starts in 2 year from today and you are investing money to pay her lumpsum fees, well mutual fund may not be the best instrument for you. The most widely advertised category of mutual funds is equity mutual fund. It certainly isn’t the best instrument to pay for your daughter’s education starting in less than 2 years. The reasons,  

1.     Mutual funds offer a good return over a longer tenure, 3 to 5 years. But not for shorter periods. Equity mutual funds need to complete at least one business cycle before they reap benefits of the market conditions. Yes, it’s true that you can take your money out from mutual fund any time. However, that doesn’t guarantee a higher return or safety of your capital.

2.     There is an element of uncertainty in mutual fund returns. Yes, even debt mutual funds can give negative returns. This happens when interest rates start rising in the economy. Can you afford to see even slightly less amount available for your short-term goal? If answer to this question is NO, clearly you need to stay away from mutual funds.

3.     There are other instruments that offer a guaranteed return while preserving your capital. Fixed deposits / Recurring Deposits from reputed public sector banks in India offer you a safe heaven investment instrument. You may hear several arguments against FDs on their taxation and their inability to beat inflation. However, for non-negotiable short-term goals, there can’t be a better investment option than good old FDs. Only thing, beware of not investing in smaller or co-operative banks for the want of higher returns.

If you are investing for someone whose age is > 70 years

Clearly, mutual funds are not the best investment choice for you. The last thing that you wish is to jeopardize your hard-earned money. For the reasons mentioned above, you may look at other suitable investment options.

There is a prevailing argument, even retired people need returns to beat inflation. Mutual funds offer such option.

While the argument is valid. However, the extent to which you should invest in mutual funds and the type or category of funds to be invested must be carefully chosen. It’s important to understand the risk-return profile of different category of mutual funds and their relevance as a part of your total financial planning.

Some of you may also opt for equity mutual funds, however, categories such as sector specific mutual funds, thematic mutual funds (non-index mutual funds) are clearly a NO-NO for your profile.

If you are investing a one-time lump-sum

If you are lucky to receive a big lumpsum amount as a gift from someone, should you invest the money straight-way into mutual funds? Well the answer is, clearly a NO.

It’s important that the lump-sum amounts be invested in equity mutual funds in a systematic manner and not at one go. Let’s assume you get Rs. 10,00,000 as one-time bonus from your employer, it’s always better to split this amount into fixed return and variable return instrument, depending upon your need. Remember not to keep your all eggs in a single basket.

Mutual fund investments done at one go, may prove to offer an undue risk of your principle. It’s not desirable given the fact that you get such booties only a few times in your life.

It’s better to be safe than being sorry. The simplest option is to consider Goal-Based- Financial planning, from qualified financial planners. With their help, you may rationalize your choice of investments and mutual funds. Personal financial planning is an individual specific process and must be done with the help of a qualified financial planner for better results.

We repeat our stand, Mutual fund may be Sahee hai – but not for every category, not for every purpose and not for everyone for every time and type of investments.

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Mangesh Lingayat
Dec 13, 2019

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