Posted On Wednesday, May 07, 2014
From past few weeks the entire nation has been gripped by an exciting event. No, we are not talking about the ongoing T20 cricket series; we are talking about the 16th Lok Sabha elections that started from 7th April, 2014. For this general election, 814.5 million people are eligible to vote in India, the largest democracy in the world (Source: Election Commission of India). India will vote in 543 parliamentary constituencies and decide the fate of approximately 10,000 candidates, contesting on behalf of more than 1,500 political parties.
We have seen a wave of campaigns from various brands - from tea to motorcycles riding the coattails of this mega event by encouraging people to vote. These campaigns have been mostly targeted at urban India, which seems to have a great tendency to ignore important decisions. Decisions like who should represent you in parliament or what do you need to do and where should you invest in order to achieve your financial goals. Unfortunately it seems that there is a lack of enthusiasm among the people in some of the big cities in India to give their vote. Urban centres such as Mumbai and Chennai saw lower voter turnouts. Mumbai witnessed a 53% turnout. (Data Source – Wikipedia)
While we still wonder why is the so called 'urban', 'literate' and 'evolved' bunch of the large population didn’t turn up to vote (almost half of Mumbai didn't turn up to vote), one wonders if we are so busy to miss such an important role, a responsibility actually to cast our vote. The 'chalta hai' attitude seems to have crept in. It should therefore come as no surprise that this 'chalta hai' attitude touches all facets of life, including investing. 'Why bother with investments now, we can do them as we grow older' seems to be the thought process. What we don't realize is finances is also as important a role or a responsibility as it is to cast our vote.
As individuals we have responsibilities to manage our finances and create a smooth path to achieve our future financial goals. As life today moves at such a fast pace, sound financial planning is the need of the hour. Through financial planning you can plan ahead and ensure that the phrase "Failing to plan is planning to fail" does not apply to you. Key to successful investments is long term investment horizon.
When you think about long term investments, mutual funds could be one of the investment avenues you could consider. Regulated by the Securities and Exchange Board of India (SEBI), a mutual fund is a professionally managed pool of money from many investors and that is invested in stocks, bonds, short-term money market instruments and other securities in accordance with objectives as disclosed in scheme information document of a Mutual Fund Scheme. Mutual funds are managed by investment experts also called fund managers, who invest the money on behalf of the investors.
To help you decide whether you can consider mutual funds as your investment option, let’s look at some advantages of investing in mutual funds:
Diversification involves holding a wide variety of investments in different asset classes in a portfolio so as to reduce risks. Your portfolio of Mutual funds schemes should be spread across investments in various industries and asset classes. If you invest most of your savings in a single security or a single type of security you are exposed to any risk that is inherent to those investments. Assume you have put all your life savings in the shares of XYZ & Co. and that company goes bust, your entire investment amount drops to zero, which is very risky. Thus in order to balance-out the risk factor, you need to diversify your investments in all the 3 asset classes i.e. equity, debt and gold as it may offset the loss caused by investing in only one asset class. Thus, by investing in mutual funds, you can avail of the benefits of diversification.
This is another major advantage of investing in a Mutual Fund. When you opt in for a Mutual fund scheme, your money is taken care of by a professional fund manager. Fund Managers are experienced and skilled professionals, who conduct investment research and analyze the performance and prospects of various instruments before selecting a particular investment. Thus, by investing in mutual funds, you can avail of the services of professional fund managers, which would otherwise be difficult for an individual investor to avail of. A lot of people believe that they can time the market better, most fail due to the lack of knowledge and time taken to monitor and analyse each investment. As they say 'It’s best to leave it to the experts.'
Ease of Investment:
Due to lack of money, it may not be possible for a retail investor to buy a stock, however mutual funds allows them to invest in equities in smaller denominations. Further smaller denominations of mutual fund units enable investors to make periodic investments through SIP. A Systematic Investment Plan (SIP) is a vehicle offered by mutual funds to help investors save regularly. An SIP is a mode of investment whereby you, the investor, invest a pre-determined amount on a monthly basis, on a pre-determined date, into a particular mutual fund scheme, thereby building your savings over time. Today, it is one of the most common and conveniently chosen method of investing by retail investors.
Another advantage of mutual funds is its liquidity. You can buy and sell mutual fund units easily. The liquidity of a mutual fund unit determines how quickly you could sell your units of the mutual funds. Since they are very well integrated with the banking system, most mutual funds can send money directly to your banking account. If the investor wants to redeem his investments, he could use add on facilities like Systematic Transfer Plan (STP) and Systematic Withdrawal Plan (SWP). An STP is a plan that allows the investor to give a mandate to the fund to periodically and systematically transfer a certain amount from one scheme to another of the same fund house, whereas an SWP is a facility that allows an investor to withdraw money from an existing mutual fund at predetermined intervals.
Mutual funds in India are regulated and monitored by the Securities and Exchange Board of India (SEBI), which strives to protect the interests of investors. Mutual funds are required to provide investors with regular information about their investments, in addition to other disclosures like specific investments made by the scheme and the proportion of investment in each asset class.
With all these reasons to invest in mutual fund, all you need to do is make a wise decision of choosing a fund whose objective matches to that of yours and monitor it from time-to-time. However, you should also consult a financial advisor before selecting any tool for investments.
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