Answering 5 questions you were too afraid to ask about Mutual Funds!
Mutual funds are the hottest trend this season and we are constantly hearing complicated terms around them. But for once, let’s cut out the noise. Today, let’s address the elephant in the room (or rather 5 of them)! 1. Is it worth going for a SIP in a fund when the NAV is high? This is a question we all have had at some point in time! The short answer is: it doesn’t matter. The whole magic of investing periodically via a SIP is that the price at which you invest averages out over time (if you’d like to geek out on this, look up “rupee cost averaging”). So it really doesn’t matter when it’s high or low. Also, a “low” NAV does not guarantee the future performance of the fund. The NAV keeps changing due to the performance of the fund and that depends on markets and the fund's performance. 2. Are there any tax benefits if I invest in mutual funds?
The simple answer to this is YES! But there are specific funds you will need to look at. These are Equity Linked Saving Schemes (or ELSS) and you can get a tax benefit under section 80C. The benefit is that you can deduct up to ₹ 1.5 lakh from your taxable income if you invest that amount in an ELSS fund. ELSS schemes have a lock-in period of 3 years (although we’d suggest staying invested for longer than 3 years if you can!).
3. What are the different charges I pay as a mutual fund investor? We’re glad this question came up. You cannot ignore the charges that are added to the maintenance of the mutual fund. So, let’s begin! TER or the total expense ratio charges depend on the type of fund and the size of the fund you are investing into. The charges are slightly higher in the case of equity funds compared to debt funds. These charges are used for managing your Mutual Funds and are automatically deducted from your NAV. So the NAV you see is after adjusting these charges. But that’s not all. Remember, taxes also eat into your final returns, so don't forget to factor those in! 4. Equity, debt or Hybrid? Which one should I choose?
Hmm... Here's an interesting one. First, you need to understand the broad categories- Equity Mutual Funds: These primarily invest in stocks (at least 65% of its assets). They are considered high risk and generally recommended for long term investments (5+ years).
Debt Mutual Funds: These primarily invest in fixed income securities such as bonds and government securities, etc. They are considered a lower risk with stable returns and recommended for short term investments.
Hybrid Mutual Funds: Just as their name suggests, think of these as funds that invest in a combination of equity and debt - and sometimes even gold. Depending on your risk profile you could choose a hybrid fund with a higher allocation to debt or equity to stay aligned to your investment objective.
5. SIP vs Lump-Sum? Which one should I choose?
This should be an easy one. Both SIP and lump-sum investments allow you to benefit from mutual funds. However, the primary difference between SIP and lump sum methods is the frequency of investment. Say for example you receive a salary every month and are able to save 30% of it. Then you should look at making a commitment of a SIP since it enables you to invest a certain amount regularly. On the other hand, lump-sum investments are one-time bulk investment in a particular scheme. Like, say, for example, you received your bonus and want to invest it in one go. What’s great about both SIP and a lump sum is that you can start with amounts as low as ₹500. If you want to invest regularly - and have a predictable income, then SIPs are a great route. If you are looking to make an ad-hoc investment, then you can pick a lump sum investment.
What does this mean for you? Whether you choose to invest today, tomorrow, a month or a year later, it is important to understand what you’re getting into and what better way than to ask!
Glossary: NAV: Think of NAV as the price of a unit of a Mutual Fund. It's updated once a day and can change every day as the value of the shares, bonds and deposits change within that Mutual Fund.
TER: The total expense ratio (TER) is a way for you to understand how much your mutual funds are costing you. This is expressed as a percentage of total assets.
You are charged a certain amount by the AMC who manages the mutual funds. SIP: A Systematic Investment Plan (SIP) is a method of investing in a mutual fund.
This allows you to invest a fixed amount periodically in a selected mutual fund scheme.
You can start with as low as ₹ 500 and can set up a monthly auto-debit - this way, investing becomes a habit. We’d suggest setting up the auto-debit closer to your payday.
Exit Load: When you withdraw funds from your mutual fund investment prematurely, you are charged a certain amount as a penalty. This fee is called an exit load.