SIP or lump sum
If you are new to the world of investing, you will find it hard to choose between the SIP and lumpsum modes for investing in Mutual funds. This article will help you figure out the advantages & disadvantages of both.
We will cover following topics this article -
- What are the Benefits of choosing SIP over Lumpsum Investments?
- If you have big corpus in hand than how to choose while investing in mutual funds?
- What are the tax liabilities on the gains made from such investments?
There are two primary ways of investing in a mutual fund — lump sum and SIP. A lump sum investment is a one-time investment while a SIP (systematic investment plan) is a recurring investment.
A lump sum investment is generally considered when the investor has a big amount to invest. This could be money received after retirement or from the sale of a house or from an inheritance or it might just be the case that you have accumulated money in your bank account and wish to invest it now. SIP is generally recommended as compared to Lumpsum investment.
2. What are the Benefits of choosing SIP over Lumpsum Investments?
a. No worry of timing the market
The markets have always been volatile. If you invest a big amount in a market high and the markets crash after you have invested, you will lose out on a major portion of your investment.
With a SIP, your money is spread over time and only some parts of your entire investment will be at a peak, which will allow you not only limit losses but also invest at a low with the next SIP installments
b. Averaging the cost of rupee
A SIP allows you to invest at different levels of the market. When the market is low, the fund manager will be able to invest more money and buy more units as compared to when the market is at its peak. It will help to reduce the per-unit cost of buying the units. This phenomenon is known as Averaging the cost of rupee . This way you will end up with higher gains.
c. Build the habit of investing
When you initiate a SIP, a fixed sum is transferred from your bank account to the mutual fund scheme. It is a disciplined way of investing and inculcates the habit of saving.
d. Ideal for budding investors
If you are someone who has just started a career, then SIP is your thing. You can begin investing and buy SIP even with a nominal amount. Investments can be stepped up after increase in income.
SIP investments can also earn higher long-term returns as compared to lump sum investments. You can still invest a lump sum amount in a debt fund, but SIPs are the way to go when it comes to investing in equity funds.
3. If you have big financial corpus in hand than how to choose while investing in mutual funds?
Let’s suppose you have ₹10 lakh in your bank account that you wish to invest in mutual funds for the long-term. Entire amount should not be invested in one go.
There are two approaches that you can take to invest this amount:
a. Start a monthly SIP of an amount that you are comfortable with. This could be ₹10,000, ₹20,000 or ₹50,000. Let the money stay in your bank account till all of it gets invested systematically in the equity mutual funds you have chosen
b. Invest the lump sum in a liquid fund. After that Systematic transfer plan - STP can be started from a debt fund to an equity fund. Your corpus will not only earn higher returns than a savings bank account but also allow for systematic investment
If you want to go for an STP, then be aware of the tax implications.
4. What are the tax liabilities on the gains made from such investments?
Gains made from debt fund are subject to capital gains tax. Short-term gains are added to your taxable income while long-term gains are taxed at 20% after indexation. Every STP instalment will be considered as a redemption from the debt fund and taxed accordingly. But despite the tax, the debt fund investments will generate higher returns than a bank account, especially if the STP to an equity fund runs for a long period of time. But either way, a lump sum in an equity fund should be avoided.
Debt funds better than FDs
Fixed deposits have been a part of each and every Indian household. Our grandparents, parents have all ended up in investing in FDs at least once in their lifetime. All bonuses went to FDs. Whenever they thought of saving money to achieve a goal, they put it in an FD. Fixed deposit was considered as the best option to earn interest along with ensuring capital protection.
Mutual funds are considered to be a core now from last few years. Now FD is no longer considered as popular tool for investment growth. In this article, we’ll see how debt funds are fare better than the conventional FDs.
- A transition from Conventional FDs to Mutual Funds
- Why invest in Debt Funds?
- Debt Funds vs Fixed Deposits
- Taxation on Debt Funds and Fixed Deposits
- Comparing the inflation flexibility of Debt Funds and Fixed Deposits
1. A transition from Conventional FDs to Mutual Funds
Mutual funds were able to cash in onto the opportunity of the reduced deposit return rates. It was able to perform way better than the FDs, giving returns more than 2x times of the investment. Tax Saving mutual funds ( ELSS ) rose to prominence.
All these factors made no sense for an investor to continue with his conventional FD and so many decided to jump ship.
2. Why invest in Debt Funds?
Mutual funds are categorized into three types: equity funds, hybrid funds and debt funds in descending order of their risks associated respectively. Debt funds are the closest which comes to the conventional FDs in terms of risk.
A debt fund’s main goal is to give investors a steady income after the maturity period, and you must choose a time framezon in line with that of the fund.
You can find out about various debt funds and their duration directly from the fund houses or online or through a third-party. This will help investors understand a fund’s performance with respect to interest and return rates, which makes it easier for you to avoid market volatility by making informed decisions.
3. Taxation on Debt Funds and Fixed Deposits
Short-term debt fund (less than 3 years) gains are added to your income and they are taxed at the applicable tax slab. Long-term gains are taxed at 20% after the indexation benefits.
Fixed deposit returns are added to your income and they are taxed according to the applicable tax slabs.
4. Comparing the inflation flexibility of Debt Funds and Fixed Deposits
Everyone knows that inflation puts a damper on savings as it leads to loss of currency value. Debt mutual funds, albeit the risk, have the potential to pace with inflation. For instance, you have invested in an FD at 7% interest and the inflation rate is 5%, the adjusted return would be a measly 2%. Debt funds deliver better.
Summing up with an illustration
|Particulars||Debt Funds||Fixed Deposits|
|Lock-in period||3 years||3 years|
|Fund worth at the end of tenure||2,45,000||2,45,000|
|Indexed Investment Sum||2,38,000||-|
|Tax to be paid (at 30%)||2,333.33||15,000|
|Returns after tax||42,666.67||30,000|
Ultimately, you should weigh your decision on your risk appetite, time horizon, and investment goals. All we suggest is that when the market looks positive and you notice several prospects for economic growth, it makes more sense to opt for debt funds than fixed deposits.
How to choose a mutual fund
Picking the right mutual fund that meets your goals is all about choice. But, sometimes it seems to be hard to decide.
In this article, we tell you:
- Why are multiple fund choices not always a good thing?
- Choosing a Fund- personal needs or market trends?
- What to keep in mind while picking the fund?
1. Multiple fund choice is not a good thing. Why?
Being spoilt for choice isn’t always favourable. Studies have shown that the best decisions are made when there are fewer options to choose from. The paradox of choice is what supermarkets thrive on. They give you so many options to pick from that you end up buying more than what you need–often just to try things out.
On a similar vein, the mutual fund investor is also spoilt for choice. But when it comes to fund investing, an investor cannot afford to “try” funds out. The performance of your investment is directly linked to the goals you are investing for. It is your hard-earned money that you are putting into a fund, which is why picking the right fund is of utmost importance.
2. Choosing a fund – should you go by personal needs or market trends?
But choosing the right fund is not easy. Even seasoned investors struggle when making a choice. There are just way too many funds to choose from. That said, choosing your first mutual fund has more to do with your own self than the fund options in front of you.
3. What to keep in mind while picking the fund?
What to keep in mind which deciding ot choose a mutual fund, ask yourself the following questions and base your decision on the answers you come up with.
Question 1: What am I investing for?
You will make better investment decisions if you are investing for a specific purpose or goal. This goal could be the purchase of a new car or house, saving for your child’s education or a vacation abroad. Even investing in a mutual fund just to be able to save and earn better returns than a savings account or fixed deposit can be a goal. With a definite purpose in mind, you can make an informed choice.
Question 2: What should be the investment horizon?
On a very broad level, the longer you have to invest, the more risks you can take. If your time frame to invest is just a few years away, you should probably take fewer investment risks. This is why the number of years is an important metric to consider when choosing a mutual fund.
Question 3: Is my goal negotiable or not?
A vacation abroad can be a negotiable goal in the sense that if you don’t have the adequate amount, you can push the vacation further by a few months. But something like a child’s college education is a non-negotiable goal. College fee is to be paid at a specific time and that is something you cannot delay.
4. What fund types should my portfolio contain?
Once you have the answers to these three questions, you will be able to decide on the type of fund you need to invest in.
Follow these steps:
a. For non-negotiable short-term goals, you should opt for debt mutual funds.
b. If the goal is non-negotiable but a few years away, you can begin investing in an equity fund and gradually book profits as you come nearer to your goal.
c. For negotiable long-term goals, you can consider equity funds because they are best placed to give you higher returns.
d. If the goal is negotiable but short-term, a balanced fund would be the best option.
|Your Personal Goal||Your Time Limit for Achieving the Goal||Your Portfolio|
|Non-negotiable (home loan payment, children's education)||Immediate||Debt Funds|
|Non - negotiable||Few years||Equity Funds|
|Negotiable (buying a house, world tour)||Few to several years||Equity Funds|
Once you have figured out the type of mutual fund you need to invest in–equity, debt or balanced–you should choose a fund that has a long history of doing well over different market cycles. This means that a fund that has weathered different economic conditions in the past would be a more sound bet than a new fund that doesn’t have a history to speak of. Of course, past performance does not guarantee future returns, but it is a good indicator when making a choice.
A simple way to do this is to look at the top performing funds of a category over various time periods like 1 year, 3 years, 5 years and 10 years. Among these funds, choose the fund that appears in the lists for most time periods. You can also take the help of mutual fund expert to give you fund suggestions based on your goals and investment horizon.
This is how you can simplify the process of choosing a mutual fund. One must be honest to himself when answers the questions mentioned above. You will make a better choice when you know your investment purpose and goal clearly.
Are mutual funds safe
Worried about Investing in Mutual Funds? Are Mutual Funds safe? Multiple factors have led to a general lack of trust about them, but do they make sense as an investment option?
We give you the answers below. Read on to find out.
1.Mutual fund investment is safe or not?
Safety of Investment in Mutual Funds can be determined in two ways:
a. Safety in terms of the company or institution disappearing with your invested money
b. Safety in terms of offering capital protection and guaranteed returns
While no investment is 100% risk-free, our handpick only the best-performing Mutual Funds for our platform so that when you invest in them, you get the best value for your money. Before making investment in Mutual funds one must know few things.
a. No one will run away with your money!
If you are worried about flight risk then rest assured because mutual funds are completely safe. You will not wake up one morning to find out that the fund company you have invested with has run away with your money. That is not going to happen!
How can we assure you this? Because Mutual Fund companies are regulated and supervised by government agencies like the Securities and Exchange Board of India (SEBI) and the Association of Mutual Funds in India (AMFI). The license to run a Mutual Fund company is given after as much due diligence as is done while giving banking licenses to banks. In short, a Mutual Fund company is as safe as a bank. The flight risk is therefore as low as can possibly be.
b. Mutual Funds are meant for earning higher, tax-efficient returns
Coming to the second type of safety, it is true that Mutual Funds don’t guarantee capital protection or fixed returns. But that is a good thing because Mutual Funds would be poor investment products if they did.
The purpose of investing in Mutual Funds is to generate higher returns than what traditional investments offer. Mutual Funds are also more tax-efficient than traditional investments. Short-term as well as long-term gains from Mutual Funds are taxed in a way that it doesn’t eat into the returns.
This is why, Mutual Funds don’t guarantee returns, but still they are much better because the longer you stay invested in them, the more returns you earn. This is because of the power of compounding where your returns also earn returns. Over most long periods, Mutual Funds have given superior returns that have beaten traditional investments and also been higher than the prevailing rate of inflation. The risk that comes with Mutual Fund investments can be managed by diversifying your investments.
3. The Last Word: Should you Invest in Mutual Funds?
Mutual Funds are safe. Investors should not be worried about losing their money while investing in them. You should just choose the right kind of mutual fund to match your investment goal and invest in it with a long-term view. Just as time heals everything, time also makes mutual funds safe and rewarding!
Before you invest though, it is always wiser to do your research and read more about Mutual Funds in general. Different funds will give you different returns based on their market performance and their historical graph.
If you need help, remember that we have your back. You can choose to speak to our experts and learn all about Mutual Funds before pledging your money.
Mutual Fund investments are subject to market risk and the Investors should consider their investment objectives and risks carefully before investing & must read all scheme related document carefully
MF Invest India is registered with AMFI under ARN code: ARN144789
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