How Mutual Funds Help You Earn Money

mutual fundsWhether you’re considering generation of daily income or wish to create wealth for the long term a mutual funds investment is one of your best strategies. Simply choose a mutual fund plan that matches your goals, risk profile and investment horizon.

If you’re averse to taking risks invest in debt-based funds. If your risk tolerance is high consider investing in equity-based mutual fund plans.

Mutual funds also work as short term investments. According to mutual funds investment advisers debt-based mutual funds are ideal for financial goals less than five years. These investments also earn better post-tax returns.

Investments in mutual funds involving debt held for more than three years qualifies for long-term capital gains tax of 20% alongside indexation. Indexation helps lower rates on income tax returns and is a major reason why investment experts prefer debt-based mutual funds over bank deposits.

Choose the right investment vehicle and timeframe

Debt Based funds

Choose debt-oriented mutual funds in accord with your specific investment timetable. For example, overnight funds are good for parking money for a few days or weeks. Liquid plans work very well for extremely short term cycles (a few days). Ultra short term plans work well for a few months. Short-term plans are also available with time-frames of up to 5 years.

Equity Mutual Funds

If your investment time-frame is long-term (say, five to seven years) you might consider investing in an equity mutual fund. Again, choose a plan that fits your appetite for risk.

Conservative investors shoiuld consider hybrid mutual funds that consist of both aggressive and large-cap plans. If yours is a moderate risk profile then invest in a multi-cap pla. If you’re ok with higher risk then consider funds that concentrate on small-cap and midcap investments. Investors with deep pockets may also invest a small section of their total portfolio in international and sector plans.

Dividends

Some MF investors opt for dividend-based funds in order to receive regular income payments. This isn’t the best strategy as mutual funds are mandated to declare dividends realized from profits. So, if a plan doesn’t generate profits it cannot declare earned dividends.

If you’re interested in receiving regular income you’re better off investing in a SWP (Systematic Withdrawal Plan).While a Systematic Investment Plan (SIP) allows you to invest fixed amounts regularly a SWP lets you withdraw fixed amounts regularly. However, as an investor you must be careful about the amount withdrawn if you would your capital preserved.

For wealth generation over a longer period a growth option mutual fund is useful. Under the  growth option profits get reinvested in the same plan. This helps you earn compound interest over a long term.

What is a mutual fund?

A mutual fund owns investments. They hire portfolio managers and pay them a management fee, which is around 0.50% to 2.00% of assets. The portfolio manager invests the fund’s money in accordance with the strategy laid out in the mutual fund prospectus.

Some MFs specialize in stock investment while others in bonds, estate, gold and much more, including every type of niche or strategy one can imagine. Invest your money only in the mutual funds whose operations you actually understand. If you cannot explain specifically how your mutual fund makes an investment, its underlying holdings and risks, its investment strategy it is probably not wise to include it in your investment portfolio.

ULIP is another instrument where people can achieve short-term and long-term investment goals with an insurance factor. With both of ULIPs & mutual funds, it’s now easier to contain, measure and manage risks when investments are kept simple.

The best strategy is to investing in terms that exceed five years, and if possible, even longer. This way wealth accumulates despite the sometimes sickening market volatility waves. Longer term cycles typically ride out short term volatility. With equity funds in particular you can expect fluctuations of up to 50% in any given year. This happens with equity funds and if you’re a relatively prudent investor interested in risk management you’re advised to stay away from equity funds due to their high volatility. There is a danger that you will be become emotional at the worst possible time and cash in your portfolio. This is not the way to build long-lasting generational wealth.

Shift Frequency © 2019 – Educational material

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