Mutual Funds – Your partner in Wealth Creation

Mutual Funds – Your partner in Wealth Creation

13 Nov 2018

If you are wondering as to why mutual funds give better returns compared to other investments, let us have a detailed look at the different features of these funds and how these are different from various other investment categories.

When it comes to saving or investing money, most Indians still prefer traditional options such as Fixed Deposits (FD’s), Public Provident Fund (PPF) or gold. These avenues are well-known for capital preservation and stable returns. However, mutual funds are a good alternative, especially for earning higher returns over a relatively longer time horizon. Let’s see how in the following points :

  • Debt Mutual Funds vs. FixedDeposits

    Fixed Deposit – It gives capital preservation and good constant returns. However, it is to be noted that withdrawal charges will eat into your final returns if you exit before the final date of maturity.

    Debt Mutual Fund – It offers the same benefits like fixed deposits with variable returns but has a greater probability of defeating inflation. It is also highly liquid -you can exit a debt fund at any point of time.

  • Tax Saving Mutual Funds vs Public Provident Fund

    PPF – PPF has a minimum lock-in period of 15 years and offers low-risk steady returns. It requires a minimum investment of Rs. 500 per year, but the maximum investment is limited to Rs 1.5 lakh per year.

    ELSS(Tax Saving) Mutual Fund - ELSS has a 3 year lock-in period and its returns are linked to the equity markets. Since the market exposure is higher, it is also possible to earn higher returns. ELSS also requires a minimum investment of Rs. 500, but there is no limit on the maximum amount of investment

  • Gold ETF & Mutual Funds vs Physical Gold

    Physical Gold – Jewelers don’t have uniform prices and hence there is no element of transparency. The gold prices vary from one jeweler to another, with making charges (approximately 20-30%) forming a significant portion of the expenses. Loss or theft of physical gold is also possible.

    Gold ETF - Pricing and transaction of gold ETFs are completely transparent. Brokerage charges (around 0.5%) and expense ratio (1%) are much lower, and there is no danger of theft since they are traded in demat form and it is easy to sell gold ETFs as and when required.

Mutual funds have delivered good returns in the recent past and thus investing in mutual funds is always recommended to earn higher returns, especially if your goals are a few years away. Investors have a hard time resisting the data despite the bold disclaimers about past performance not necessarily being sustained in the future. One can define past performance as calculating the value of a mutual fund only so far as it is indicative of what is to come in the future. Past performance does not guarantee future success, but plays a very important role in providing useful information in identifying potential future winners. The predictive power of performance data is limited but also remarkably informative.

The following tips can increase your overall returns if you are already invested and want to further diversify your investments:-

1. Earn dividend - If you want to invest with the objective of earning dividends, then go for balanced funds. A balanced fund is a good investment proposition, offering investors the best of both worlds—the relative safety of debt along with the wealth creation potential of equity—under one roof. Dividends are tax-free in the hands of the investors. Balanced funds are being peddled as a tax-efficient source of regular income.

2. Long term SIP - If you want to start a SIP, then go for long term and not short term. A long term SIP will give good returners thana short term SIP. Long term SIP gives better Rupee Cost Averaging.

3. Pause SIP than Selling Fund - Instead of selling your mutual fund at higher prices, it is better to pause such SIP’s at current levels and resume again once the market cools off. There is a possibility of a correction in the stock market in the near future, which may sour the experience for investors who have enjoyed a good run in their SIP’s for the past few years. But taking the money out, anticipating a correction, may rob your portfolio of the compounding benefits on the accumulated corpus, and could even result in a significant short fall in your target corpus for specific goals.

4. Exposure to Small cap on basis of Returns - You should never take higher exposure to small cap funds; rather create a balanced portfolio by mixing large-cap, mid-cap and small-cap fund and then gradually increasing exposure to small-cap funds. With 23% and 17% annualized returns over the past three years respectively, mid and small-cap funds have comfortably beaten multi-cap and large-cap funds. This superior performance could easily tempt investors to bet big on this segment.

5. Credit Opportunity fund - high risk and high returns - Credit opportunity funds carry higher risk and so also hold the probability of generating higher returns. In a bid to generate higher returns, several credit funds have increased exposure to lower-rated bonds. This exposes investors to high risk, which may not be visible at the outset. Investors should remain selective in the credit space since default risk cannot be efficiently managed given that the domestic corporate bond market remains somewhat illiquid.

6. Direct plan vs Regular plan - Investment in a direct plan gives more returns than a regular plan; those who have invested in direct plans of mutual funds have earned better returns than those who have opted for regular plans. The direct plan allows the investor to purchase a scheme directly from the fund company, circumventing the distributor, at a lower expense ratio than under the ‘Regular Plan’. The difference in the expense ratio between the two plans, which can vary between 0.5%-1.25% annually, starts reflecting in the fund’s return profile over the years.

In conclusion, you also need to pay a lot of attention to consistency when looking at past performance. The fund should not have a great run that is immediately followed by a dismal one. It should have displayed a good performance on a reasonably consistent basis. Do not stick to the trailing returns if you want to receive an accurate picture of a fund’s consistency and its ability to perform under different market conditions. You should always back up your analysis with annual returns. If the fund holds up well onthe downside, it would hint at conservatism. Past performance plays a confirmatory role in the fund selection process and thus it has turned out to be the most common selection criteria. However, the above mentioned tips can help in judging better funds for higher returns which also have lower risks associated.

Founded in 2005 by new–age entrepreneur Abhishek Bansal, the Abans Group has evolved into a globally diversified conglomerate, providing expertise in Broking Services, Non-Banking Financial Dealings, Financial Services, Agri-Commodity Services, Warehousing, Realty & Infrastructure, Gold Dore Refinery & Manufacturing, Trading in Metal Products, Pharmaceuticals, Software Development & Wealth Management. The Group is a comprehensive financial and non-financial services and solutions provider, aiming to provide end-to-end solutions to its clients.