Managing Personal Finance

Apart from maintaining a savings account in Bank, we can think of investing a part of our money in few high return areas. Many of us invest money in the share market, but it’s not a cup of tea for everybody. Mutual Fund is playing as a major role in the dynamic investment sector these days.

But the problem arises when we need to decide which fund to choose, how much to invest, etc. New funds are coming up each month. When we study the performance of last few years for some good funds, we end up with a mixed result. On the other hand, fund brokers don’t guide in the right way as they have targets to promote new funds. So ultimately it’s very difficult to come up with some fruitful solution.

Here I have tried to put forward few suggestions that may help you out taking a brave decision:

• Long termed plans: Mutual funds are divided into two basic categories; a) open ended funds b) locked period (long termed) funds. In case of long termed funds investors can withdraw money only after the locking period is over. So the fund raisers can reinvest the money in a better way. They don’t have the tension / headache to refund money to the investor at any point of time. Naturally better returns can be expected from such funds.

• Tax savings benefit: The financial year ending period has been painful for most of us as Income Tax department snatches away handful of money from our pocket. This is because we don’t keep the tax exemption matter in mind during investment. It can be noted that all mutual funds don’t come under tax exemption. Generally in case of long termed funds we can get such facility.

• Pick up the cream out of Open-ended funds: You can gamble with a part of your savings from open-ended funds. As I discussed earlier, an investor can withdraw his invested money at any point of time, even at its higher market rate. So keep an eye on the market rates, stay in touch with your financial consultant and withdraw money during better rate of your fund.

• Real estate and Gold funds have been worthy: In the fund name / details, it is mentioned that where is the fund going to reinvest. If the mutual fund is related to Real estate or Gold, there is higher chance to get better returns. It’s like playing a safe side game. The value of real estate and gold is in an increasing trend.

• Diversify MF investment for risk minimization: I personally suggest not investing large amount of money in a single fund. In reality, mutual fund investment is a risky business and an investor can suffer huge loss at sudden market crash or any big slowdown of any particular fund. So choose 2/3 better funds and put money in different slots.

Lastly I would like to add that return on investment (ROI) is fully dependent on market conditions and the return calculation as shown by fund brokers are made on the basis of assumptions only. Generally they consider the higher side return into account and present the amortization sheet before us. It may differ a lot in the end. So ask yourself whether you are really willing to play the risky game.

Savings is a tough deal no doubt, but it seems even tougher when the matter of investment comes into question. In fact we become confused while deciding where and how much to invest. So many choices flicker in our mind. Banks are coming up with many dynamic plans, investment in share market has become very convenient today, mutual funds are reflecting high returns, insurance companies are offering high returns so on and so forth.

In the last 6 months banks have increased its interest rate against Fixed Deposit (FD) scheme. There has been a competition among banks (private and nationalized) to offer higher rate of interest from FD account. Many people are also speeding up to reach the same. But for me, it’s not a good choice. We can put limited amount of money in it and choose Mutual fund investments for getting higher return.

An effort has been made to clarify on how Mutual Fund investments work in a question-answer set-up. Please don’t hesitate to ask me if any misunderstanding arise.

What is Mutual Fund?
Mutual fund is a financial intermediary that allows specific finance organizations to reinvest in different stocks and bonds. Generally, commercial banks act as the broker of such funds.

Why MF is more suitable for the middle class?
In case of Mutual fund investment, the invested money is managed and reinvested by a group of financial experts. So investors need not be worried about further hazards. In the most cases it gives better return too.

What is the difference with share market investment?
In share market investment, one needs to update himself every day, even at every hour in a day. Although share market dealing has become much convenient today; by maintaining his own account, one can transact online from anywhere. But it is the investor who decides which share to purchase, when to sell, etc. So to maintain such business, one needs to devote his valuable time. Thus the whole business bears high risk and moreover, it requires sufficient knowledge about the market, which is not a cup of tea for all of us.
But in case of mutual funds, the entire fund management is done by a group of experts and it’s their job to regularize the things on time. Since the whole responsibility goes to the company itself, investors can glace through the regular update and scoop out the honey on time.

Why we can expect better return compared to other investments?
The biggest advantage is that by pulling money together in a mutual fund, investors purchase stock or bonds of various sectors seeking to bounce back with higher returns. Secondly, the fund is invested in a diversified way, thus risk factor is geting minimised here. So, Bulk investment and well-organized investment by finance experts make a difference as a whole.

How can we choose a particular fund among the huge list before investment? Should we depend on the advisor?
Apart from existing funds, new funds come up at a regular interval. But it’s better to get advice from a consultant / advisor before investment. The advisor assesses the capability of the investor through filling up a form named “Score based Customer Suitability Assessment form” to take better decision. However, there are always options to choose anyone among the list.

How can we know current rates of the funds?
There are two types of mutual funds, i) Open-ended and ii) Locked period. For open-ended schemes, investors can withdraw money anytime if market rates are high. Companies compute NAV once in a day based on closing market prices. NAV (Net Asset Value) is the price of one unit of a fund. Apart from websites, NAV for all funds is available in the leading Newspapers. In case of Locked period schemes, the investor can only redeem funds after the locked period is over. In such cases better return can be expected.