Manage Finances Smartly with Mutual Funds: How to Choose Funds to Meet Different Needs in 2022

Managing finances through mutual funds: how to choose funds to meet different needs?

Mutual funds are not just about stocks and stock market concerns. Different types of funds exist, depending on whether one invests in stocks, bonds or money market products. You can choose a fund that suits your needs and risk appetite.

You can divide your finances into four groups based on your financial needs and goals: emergency funds, short-term funds, medium-term funds, and long-term funds. You can manage all these sums through MF programs if you wish.

What is a mutual fund?

A mutual fund is a financial product that pools the money of many investors. The money is then pooled and invested in securities such as stocks of publicly traded companies, government bonds, corporate bonds and money market instruments.

You don’t own the shares of the company that mutual funds buy directly as an investor. You, on the other hand, share the profit or loss equally with the other investors in the pool. The term “mutual” thus describes a mutual fund.

You get the knowledge of the fund manager and the regulatory protection of the Securities Exchange and Board of India (SEBI). The expert fund manager ensures that investors receive the highest possible return.

How do mutual funds work?

Investing in mutual funds is simple. You put money into a fund with a variety of assets. As a result, you don’t have to risk putting all your eggs in one basket.
Plus, you don’t have to worry about keeping up with market changes. The mutual fund company takes care of research, fund management and market monitoring. Therefore, mutual funds are a popular investment option for a wide range of investors.

The Asset Management Company (AMC) is in charge of managing mutual funds. The creation of a mutual fund begins with the pooling of funds from several investors.
The money is pooled and invested in a carefully constructed portfolio of several types of assets like stocks, debt, money market instruments and other funds. As a result, you benefit from diversity, a proven market currency.

Additionally, your money is invested in securities like government bonds, which you could not afford on your own.

The best thing about mutual funds is that a team of professionals, together with the fund manager, selects all the investments that go into building a portfolio. Investments are made in accordance with the stated objective of the mutual fund.

Expert and professional fund management surpasses traditional investment vehicles like bank savings accounts and term deposits.

For your contribution to the common fund, shares will be allocated to you.

Fluctuations in the prices of the underlying assets determine the value of the portfolio. The net asset value (NAV) is calculated by dividing the net assets by the number of units in circulation

A higher net asset value indicates an increase in portfolio value, while a lower net asset value indicates a loss in portfolio value.

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Benefits of Investing in Mutual Funds

More than 8000 mutual funds are available in many categories to meet the needs of different types of investors. Mutual funds are great for everyone because they provide the right combination of growth, income, and security.

Here are the benefits of investing in mutual funds:

1. Expert Money Management

A team of specialists manages your mutual funds. You benefit from expert advice on building up assets. When deciding on stocks, sectors, allocation, buying and selling, the fund manager does extensive research.

2. Low cost

When considering the benefits of insight, diversification, and other yield alternatives, mutual funds are clearly a profitable investment vehicle.
The expense ratio is subject to a regulatory cap of 2.5%.

3.SIP Options

A systematic investment plan allows you to invest at regular intervals, such as weekly, monthly or quarterly. You can start investing in mutual funds with as little as Rs. 500.

4. Switch funds

If you are unhappy with the performance of a mutual fund, you may be able to switch funds with certain mutual funds. However, you must exercise extreme caution when changing.

5. Diversification

Mutual funds offer diversity in these asset classes that an individual investor would not be able to achieve. You get the highest exposure with the least risk.

6. Investment and repayment facility

Buying, selling and redeeming fund units at NAV is now quite simple. Simply submit a redemption request and your funds will be sent to the selected bank account within a few days.

7. Tax advantage

You can save money on taxes and build wealth by investing in an ELSS tax-saving mutual fund. You can deduct a maximum of Rs. 1,50,000 per annum under Section 80C of the Income Tax Act.

8. Blocking period

A lock-up period applies to closed-end mutual funds, which means that you as an investor are not allowed to redeem the fund until a certain period has passed.
Long-term capital gains tax benefits are available to you.

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How to choose funds to meet different needs?

An emergency fund should contain the funds you need quickly in an emergency. Although it is impossible to predict how much money one might need in the event of an unforeseen event, it is recommended that an employee hold at least six months’ salary in such a fund.

You can park your emergency fund in overnight funds and/or liquid funds in addition to liquid cash and savings bank accounts. Due to the investments of these funds in overnight or very short-dated debt securities, the capital invested is often stable.
Although the returns are minimal, these funds provide plenty of liquidity. You can request a redemption even on Saturdays and Sundays, and if you do so before the cut-off time, the redemption money will be credited to your bank account the next business day.

A short-term fund is used to store the money needed within six months to two years. For example, if a person takes out a loan to build a house and needs to make installment payments over the next 24 months depending on the state of the construction, the money can be placed in a short-term fund.

Since you won’t be able to wait for recovery if your wealth is lost due to market volatility, you should avoid equity exposure and instead invest in low-risk, stable-return products such as debt funds short-term and dynamic bond funds.

The money needed over the next three to four years could be kept in medium-term funds. For example, if you have saved enough money to reach a financial goal of 3 to 4 years through equity investments and you want to limit market risk, you can put it in a medium-term fund.

In this case, you will need to protect your money while earning a higher rate of return to fight inflation over the next three to four years.

Since pure debt funds are unlikely to beat inflation, you can reduce your market exposure from 60-100% to 20-25% by investing the rest of your money in debt funds. Alternatively, you could shift your money from equity funds to conservative hybrid funds and trust experienced fund managers to manage your portfolio.

Money that is not needed in the short or medium term but can be saved for a long time or to achieve long-term financial goals can be invested in long-term funds. The money needed for the education of a child after 10 years or to build up retirement capital to be used after 20 years, for example, could be deposited in such a fund.

Since the goal of a long-term fund is to outperform inflation over time by earning a higher return, you can invest in stocks if you don’t have immediate or medium-term liabilities. The amount of your equity exposure will be determined by the need to take risk to achieve long-term financial goals and your appetite for risk.

You can invest in medium-risk aggressive hybrid funds to very high-risk short-term funds in the equity section – the higher the risk, the better the chance of outperforming returns over the long term.

However, before investing in equity-oriented mutual funds, you must carefully organize your finances and enter the market to achieve your long-term financial goals. Alternatively, if you enter the stock market to increase your returns, you may be forced out during a market downturn if your returns are negative.

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