It is said that MONEY is your best friend.This is true to large extent as Money/Finance is our primary means of living.It is required to meet our day to day expenses,children education and wedding expenses,hospitalization expenses, to purchase of residential/commercial house/property and finally to meet our living expenses during retirement period.
To meet all the above social requirements it is highly important to start make savings regularly from the very first day you start earning.Not only that you should start saving but it shoud be of significant amount.It should not be “spend and save” theory but opposite of it.You should save a predefined portion of your earning every month and then use remaining amount for your living expenses.This way you can save more for a long period say 30 to 35 years.
It is not only enough to make regular and sufficient saving during our life.At the same time We must invest our savings in proper financial instruments where its real value grows(with respect to inflation).If you keep your savings in Bank FD or PPF or some post office scheme its real value does not grow as the return you get is nullified due to high inflation.(you receive about 8-8.5% interest and inflation rate is also same or even more!)
To overcome above mentioned difficulty you must invest in equity or equity mutual funds if your investment horizon is long(more then 8-10 years).Investing in equity requires deep knowledge, understanding and research for an individual which is not practical for a common man.The best option for common man is to invest in equity mutual funds where he is relieved of all complex work like selecting stocks,giving them weightage,when to buy,when to sell etc.In MF scheme this is all managed by Fund manager who is a highly qualified professional person and experienced.Moreover it is a proven fact that if you make investment in an equity MF scheme for long term the probability of loss is almost nil.On the contrary your long term returns are enhanced by compounding effect.Some good equity funds schemes are known to have given average return of more then 20 % annually in last 15 to 20 years.To add feather to all this,all income generated from Equity MF schemes is totally tax free if you stay invested in the scheme for at least one year.Moreover if you invest in ELSS equity MF schemes you are entitled for tax exemption upto a limit of Rs 1,50,000/-every year.ELSS equity MF schemes have a lock in period of 3 years which is least compared to other tax saving instruments.
There are some risks associated with equity MF schemes.During bad cycle they face high volatility during some time and their NAV reduces significantly.But for those who have invested with a long horizon,this is not a concern as it does not affect long term returns.
One more important thing investors are concerned about is when to invest.Answer to this question is difficult and different experts give different opinions.To remove this confusion it is best method to invest through systematic investment plan in which you have to invest a fixed amount every month in one scheme or more.By investing like this your purchase cost is averaged.Simultaneously you can invest lumpsum also when you feel that market has come down to significantly low level.While investing in equity MF keep following points in mind.
(1)Invest only a portion of your savings which you will not require for 8 to 10 years.
(2)Invest always in Equity MF GROWTH schemes so that you get the benefit of compounding.
(3)Select a good performing equity MF scheme.(Very Important)
(4)As far as possible invest through SIP mode which averages your cost.Simultaneously you can invest some lumpsum amount additionally whenever market level comes down significantly.
(5)Remain mentally prepared for high volatility as NAV is reduced significantly during bad market cycle.Have patience and stay invested.
(6)Monitor the performance of the scheme every six months.
(7)Always keep in mind that over a long period of time equity MF schemes give very high returns which effectively beats inflation.
(8)After completion of investment period if money is required make it a point to withdraw it conveniently 1-2 years before requirement(so that you are not likely to get trapped in a bad market cycle)
The author is a Certified Financial Planner who can be reached at email@example.com
GOOD ADVISORS CREATE WEALTH BUT
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