Why investing in mutual funds makes sense?

Wealth creation, basically, is not about what you earn, but how you invest. The majority, however, deposit their money in bank accounts. Is it enough when inflation hovers around 7 to 8 per cent?

The interest rate will further decrease as India keeps developing. Hence, while selecting an investment option, inflation, too, should be taken into account. The value of today's ₹1 lakh will be just ₹37,000 after 20 years. At the same time, an ordinary family will require ₹92,000 after 20 years (inflation calculated at 5 per cent). How will one find the required ₹92,000 once the person retires from service?

Making adequate investments in excellent schemes is the only way to meet future expenses.

What does money say?
Money speaks only one language. "If you save me today, I will save you tomorrow." However, most of us spend the money we earn. It must be noted that no successful investor will first spend the money. They will save first before spending.

When it comes to investing, most people want high returns in the short term. This greed often leads to people getting shortchanged. Instead of taking dangerous shortcuts, investing in better schemes will help make the money grow.

The equity route
Suppose an individual parks his money in the bank, while another invests in shares. The one who bought the shares might get 30 per cent in the first year. He might get nothing in the next two years. But he might get threefold benefits in the succeeding year.

Meanwhile, the individual who has invested his money in the bank will get an interest of 7 to 8 per cent until the deposit matures. While considering the average, the individual who had invested in shares will earn more than the one who had deposited his money in the bank.

Will you axe a fruit tree on your farm only because it did not bear fruit in one year? No. Instead, the tree will be looked after well, because the yield will be better next year.

Equity, too, is similar to the tree. Returns from equities will not always be the same. But, on a long-term average, the returns from equities will be better than those from other investments.

Why mutual funds?
Shares bring better returns in the long run and are a good option for growing money. However, it is not easy to select the right shares. A professional, like a doctor or engineer, may not have enough time to study and find the right stock. Instead, they will follow tips provided by others to invest in the stock market, which often leads to a major loss of money.

Those who have difficulty finding the right shares can assign the job to expert fund managers. Mutual funds are the better and cheapest way to do so. Even the smallest amount deposited will be invested in 60 to 70 shares. This diverse investment will reduce the market risk. Mutual funds help investors to be part of the stock market and benefit from India's growth.

Different types of funds
Mutual funds offer various schemes suitable for the investor's needs and circumstances. The investor should select and invest in the most suitable one. To select the correct scheme, the investor should have a good understanding of the funds.

Large-cap funds that invest in stocks are relatively safer. Those investing in mutual funds for the first time may consider putting their money in funds like flexi-cap or multi-cap.

In case the investor wants to avoid risks, debt funds are a good option. Those retired from service could consider investing in hybrid funds (combining equity and debt funds) instead of opening fixed deposit accounts in banks.

Which mutual fund to choose?
This is the major question that confuses investors. The fund should be selected considering your needs and circumstances. Also, the investor should be willing to take risks. Mutual funds have schemes catering to the individual needs of investors. Investing in the right scheme will ensure a timely return at the time of need. A wealth manager could provide the correct advice in choosing the scheme.

Different target, different vehicle
We take different vehicles according to the destination. We take an autorickshaw to go to the nearest railway station, but catch a train or bus to travel to Kochi from Kozhikode. If the destination is Dubai, we take a flight.

Likewise, for each financial target, we need different investment schemes.

If you own a house, purchasing another is not wise. Suppose you shell out ₹1 crore for buying a flat in Kochi. The monthly revenue from rent will be ₹30,000. It means a return of 3.6 per cent. When the inflation is at 6 per cent, what benefit will the rent bring? Additionally, you will have to find extra money for maintenance.

You should change your investment in accordance with your changing financial targets. Your wealth manager will decide the type of investment.

Financial planning is inevitable for achieving your targets with discipline, to save tax, and for a peaceful life.

Asset allocation
We don't eat just rice. All of us like the 'sadya', the complete spread, because it is a balanced diet. Investment, too, should be a balanced one like the 'sadya'. Consider bank deposits as the rice. Investment in equities and other schemes should be considered as curries that accompany the rice. One should not invest the entire money in only one plan. The available money should be invested in diverse plans.

There are solutions-centric funds, such as the Sukanya Samriddhi, Children's Fund or Retirement Funds. Such funds will have a lock-in period. Sukanya Samriddhi, which provides a return of 8.2 per cent, now has about seven crore accounts. However, the Children's Fund, which provides a benefit of 15 to 18 per cent, has only 30 lakh accounts.

You can use Sukanya Samriddhi to diversify your investments. However, it is not advisable to invest in funds with a lock-in period of 15 to 18 years and with lower interest rates. Even if you choose such funds, equity mutual funds, too, should be considered.