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Money Making Idea: Invest In Mutual Funds To Achieve Life Goals

Navin Chandani - Chief Business Development Officer BankBazaar

Mutual Fund is an option that helps in creating wealth in the long run. You can invest according to your set goals.

Money Making Idea: Invest In Mutual Funds To Achieve Life Goals

A few years ago, Fixed Deposits, Savings Account, PPF were preferred investment options to meet our financial goals. With good interest rates, they were considered safe for long-term investments. However, with returns on these falling to as low as to 6-7% and a rise in cost, they are no longer great instruments to fulfil all the needs. Considering the inflation figures, people are now looking at investment instruments that yield good results over a span of time and help them in achieving their financial goals related to child’s education, retirement, child’s marriage etc.

Mutual Fund is one such option that helps in creating wealth in the long run. You can invest according to your set goals.

Investing For Saving On Taxes

Equity Linked Savings Schemes (ELSS), or tax-saving Mutual Funds (as they are commonly known), are fast becoming popular tax saving instruments. Under Section 80C of the Income Tax Act, 1961 an investment up to Rs 1.5 lakhs in any ELSS fund is eligible for tax deduction in the given financial year. Investments in ELSS funds are locked in for a 3-year term, the shortest compared to other tax saving instruments.

Also, ELSS invest a portion of their corpus in equity and hence have the potential to deliver higher returns than other available instruments. Capital gains and dividends are tax-free too, whereas some other instruments under Section 80C – such as the National Saving Certificate (NSC) or 5-year bank fixed deposit treat interest income as fresh income and you are taxed according to prevailing laws.

Investing For Retirement

Most of us tend to underestimate the perils of poor retirement planning or the lack of a meaningful corpus at the time of retirement. There are many options available in the market such as National Pension Schemes. However, it would be wise to have a significant allocation to equity in retirement planning. The typical approach is, the longer the period for retirement, the greater the allocation to equity. Individuals who are less than 40 years of age should have about 80% of their investments in equity.  Anything less than these numbers will always lead towards a sub-optimal post-retirement corpus.

Investing For A Child’s Education

It is every parent’s dream to ensure that his/her child gets to pick the best possible educational institute or career option without any financial constraints. Planning early for your child’s higher education will reduce the anxiety when you actually need to shell out the money.  If you have an 18-year tenure and invest in equity Mutual Funds yielding 15% return you just have to invest Rs 3,668 every month to accumulate a sum of Rs 40 Lakhs. (Equity funds in India have generated close to 12%-15% annualised return over the past 10 years.)

Saving For The Near-Term Or Parking Surplus Money

People looking to park their money to beat inflation or have short-term goals can invest in Liquid Funds. Liquid Funds invest in money market instruments like treasury bills, corporate papers and bank certificates of deposit and have either none or low risk.

Even medium-term debt Mutual Funds can be an alternative for an investor with 12-15 month investment horizon. However, debt funds and liquid funds by virtue of investing in bonds are sensitive to interest rate fluctuations.

Choose The Right Fund

Choosing the right type of fund is, therefore, the first step in achieving your financial goals. Once you know which Mutual Funds you’d like to invest in, it’s important for you to start investing early and to invest regularly. If you need help choosing a fund, it’s best to consult a financial advisor. He/she can assess your needs, risk appetite and help you pick what’s best for you.

Start Early (Or As Soon As Possible)

When you start early, you allow your cash to grow in a way that it never will again—because you’ve then got more time on your side before you reach your goal. By starting early, you’ll reach your corpus earlier than one who begins later in life.

For example, a 25-year old, saving Rs 5,000 per month, will build a corpus of Rs. 49 lakhs by the time he turns 45; whereas a 30-year-old saving the same amount will build a corpus of Rs. 25 lakhs by the time he turns 45 (assuming a 12% annual rate of return).

Even a small difference of 5 years could make your money DOUBLE!

Invest Regularly

Regular investments add up quickly. When you invest regularly, the money you invest earlier has longer to work for you. Investing regularly is the best way to achieve your long-term financial goals. While you are still earning money, you’ve got the opportunity to build an impressive corpus over time!

For example, a monthly investment of Rs. 5,000 would grow to Rs. 4 lakhs in 5 years; Rs. 12 lakhs in 10 years; Rs. 25 lakhs in 15 years and Rs. 94 lakhs in 25 years (assuming a 12% annual return for equity Mutual Funds).

To summarise, starting early is the key. Investing consistently is as important as starting early and the best (and we believe ideal) time to start is when you receive your first pay cheque!

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