Investment planning through mutual funds can secure your future


Financial history tells us that stocks out-perform all other asset classes in the long-run. Rs. 10000 invested in BSE sensex stocks in1979 (BSE Sensex which was 100 in 1979 is now around 33000) would have a market value of around Rs 33 lakhs today, excluding dividends. On the other hand, Rs 10000 deposited in a bank fixed deposit in 1979 would be worth around Rs 1,50,000 today.

Why mutual funds?

Even though stocks out-perform all other asset classes by a wide margin, very few people have the time and expertise to invest in the stock market directly. Therefore, a very good option for investors is to invest in stocks through the mutual fund route.

What are mutual funds?

Mutual funds are financial tools that mobilize the savings of investors who share a common financial goal. Professional fund managers invest this money in securities like stocks, bonds, debentures etc. in line with the fund’s investment strategy and the investment objective of investors.

Why SIPs?

Mutual fund investment can be done either in lump sum or in installments. SIP (Systematic Investment Plan) is an ideal form of investment where the investors invest at regular intervals, say, weekly, monthly or quarterly. Monthly SIP is an ideal strategy. Since the investment is done systematically the investor gets the benefit of Rupee Cost Averaging. This means that since investment is done regularly, the investor gets more units when the prices are down, thereby reducing the average cost.

During the last 37 years, in India, bank fixed deposits have yielded around 9 % annual return; return from gold has been less than 9 % while returns from stocks (as measured by the Sensex) has been around 16 %. Clearly, stocks have out-performed bank deposits and gold by a wide margin. Mutual funds, particularly SIPs, have out-performed the index.

Choosing the right kind of funds

Choosing a good mutual fund, however, is not easy. This requires some expertise. Returns from mutual funds can vary from fund to fund and across schemes. For instance, if we take the performance of equity fund SIPs in the last 20 years, we can see wide divergence in performance. The best fund – HDFC Tax Saver – has delivered a CAGR of 25.14 % while the worst performing fund delivered only 11.38 % CAGR. During the 20 year period from1997 September to 2017 August, 20 funds have delivered CAGR of more than 15 percent and within that 9 funds have delivered impressive CAGR in excess of 20 %. The divergence in performance is huge. A 20 year SIP for Rs 5000 (from September 1997 to August 2017) in the best performing fund would have resulted in a corpus value of Rs 2.37 crores while the same Rs 5000 SIP for 20 years in the worst performing fund would have created a corpus of only Rs. 42.68 lakhs. Therefore, choosing the fund and the scheme becomes crucial. Here, investors should do their own due deligence, if they have expertise in the area, or take the advice of experts.

It is important to appreciate the fact that during the 20 year period September 1997 to August 2017 the worst performing equity mutual fund delivered an annulised CAGR of 11.38 %. This is superior to the SIP return from gold which was 10.99 % and return from bank FD which was 7.47 %, during this period.

The tax advantage

A major attraction of investment in stocks and mutual funds is the tax advantage. Dividends from stocks are exempt from tax upto Rs 10 lakhs a year. Dividends from equity mutual funds and balanced funds are completely exempt from tax. Another major attraction of investment in stocks and equity/ balanced mutual funds is the exemption of long-term capital gains from tax. Long-term capital gains are the gains accruing to investors when they sell stocks/equity funds at a profit after holding them for a minimum period of one year. If investment is done under the ELSS, investors get 80 C tax exemption too. This makes the returns from MFs extremely attractive.

Put some eggs in the strongest basket

Conventional wisdom forbids us from putting all eggs in one basket. Therefore, it is desirable to have a good variety of assets in your portfolio. However, it is important that an investor has the best performing asset class – equity/ mutual funds – in his/her portfolio. So, invest a part of your investible funds in mutual funds, ideally through the SIP route. Select a good fund and ideal scheme that suits your risk appetite and help you in realising your financial goals. There are more than 40 AMCs and thousands of schemes to choose from. Choose good AMCs with a good track record and the schemes that suit your investment objectives.

Investment in mutual funds through SIPs is the best strategy to participate in the India Growth Story.


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