Posted On Monday, Feb 27, 2017
From a regulatory perspective, the disclaimer “Mutual fund investment are subject to market risk, read all the scheme related documents carefully.” maybe adequate safeguard, on paper, and fund houses have been strictly instructed to put this as a suffix for all our advertisements… But as an investor you must take into account a few more factors before deciding to invest in a mutual fund. Here are 3 factors that you must consider before taking the plunge into mutual funds:
1) Age and financial responsibilities:
If one were to condense investment wisdom into a single sentence, it would be: "The earlier you invest, the greater are your chances of achieving your financial goals." The major reason is that it takes time for the power of compounding to take effect.
Another reason is that the more time you have, the lesser you need to save. To build a corpus of 1 crore at the age of 60 would require a 25-year old to save Rs. 58,000 per annum, assuming that the investment instrument earns an 8% tax-free return per annum. In contrast, in a similar scenario, a 40-year old will have to fork out Rs. 2.19 lakh per annum – almost 4 times the amount.
Another advantage of starting your investments early is that you don’t have (potentially) as many financial responsibilities as you will have later on in life. An older individual may have retired parents, a spouse, or children to take of - financially. Plus the onus on buying a car and a house comes with the added EMI burden.
2) Asset Allocation:
The performance of a portfolio depends more on your asset allocation than on stocks or products you choose. We recommend a greater exposure to equity when younger while gradually scaling it down to fixed income products as you get older.
To find out the percentage of your portfolio that should be invested in equities, the rule of the thumb was to subtract your age from 100. For example, if you were 30, you could store 70% of your portfolio in equities and 30% in debt, and vice-versa if you were 70. However, with the increase in human lifespan, financial planners are now recommending that the new rule should be closer to 110 or 120 to accommodate the additional years.
Asset allocation is also important in wealth protection. An investment in the three base assets – equities, fixed income and gold balances risks and creates diversification so that you’re never in danger of losing all your wealth if one of the asset classes underperforms.
3) Long term vs. short term investment:
Always think long term before stashing your savings in an Equity mutual fund. Short term investments are not encouraged as stock markets tend to be volatile based on many factors.
A long term investment allows your money to be compounded. Simple interest is based on the original principal balance and ignores gains made from the interest; compound interest on the other hand works on the original principal as well as the interest. The difference may be small at first but will add up generously over time.
There are many other factors to consider, apart from the above 3, you are advised to consult your financial advisor before taking an investment decision.
Disclaimer, Statutory Details & Risk Factors:
The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. Please visit – www.quantumamc.com/disclaimer to read scheme specific risk factors.
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