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How Mutual Funds Can Help In Successful Financial Planning

Aug-03-2018Blog by – Mr. Dhruv AjmeraRead Time: 3 Min.Word Count: 80584How Mutual Funds Can Help In Successful Financial Planning
Well crafted financial plans are extremely critical to ensure long term wealth creation and are the hallmark of financial prowess. For retail investors, investing in stock markets through mutual funds is a very useful and easy option to plan ahead for a better future. Mutual funds have emerged as an attractive investment option for all types of investors in recent years. While the local equity markets have been soaring and hit record highs consistently, the participation through Mutual Funds also increased intensely. Ease of transactions, tax benefits and good returns drove a wave of retail investors into mutual funds for last few years. Systematic Investment Planning (SIP) has become a popular way of investing in financial markets.

A SIP allows investors to make regular, equal payments into a mutual fund for a period of time instead of one-time payment. The investments are spread over a longer term and allow investors to ride above the short term fluctuations in markets successfully. SIP is a well planned approach towards investments and offers a systematic solution for long term wealth creation.

According to data from Association of Mutual Funds in India (AMFI), the assets managed by the Indian mutual fund industry have grown from Rs. 20.42 lakh crore in July 2017 to Rs 23.96 lakh crore in July 2018. That represents a 17.33% growth in assets over July 2017. Individual investors now hold a higher share of industry assets, i.e.  51.9% in July 2018, compared with 48.1% in July 2017. he value of assets held by individual investors in mutual funds increased from Rs.9.83 lakh crore in July 2017 to Rs.12.43 lakh crore in July 2018, an increase of 26.50%.

It seems that the mutual funds schemes would remain highly popular investment vehicles for parking funds in shares and every investor should know how to select good equity funds which would offer a good performance. Here is how an investor should go about using mutual funds in an effective manner for successful financial planning.

First and foremost, it is critical to define your investment objectives in clear and measurable terms. One should be able to foresee the trend in future expenses and also be able to estimate the current flow of savings in order to arrive at the likely amounts needed to be invested. This would ensure that you allocate sufficient funds to mutual fund investing. Also pay attention to the time horizon i.e. be certain about around when you should achieve your financial goals.

All investors have to bear in mind that selecting the best mutual fund does not necessarily mean choosing to invest in the fund which is providing the best returns. An investor has to think about factors like his risk appetite and financial needs before deciding to put his money in a specific instrument. If you are thinking about parking your funds for a very high duration- say around 15 years, then it makes sense to think about funds which can outperform over a long term and which have good quality stocks with sound businesses. The near term returns might not matter much when such kind of a decision has to taken.  The performance of any fund can also be assessed by its ranking among the peer group.

Investors also need to look at the Alpha of the fund. Alpha, in simple terms measures the difference between a fund`s actual returns and its expected performance. Alpha tells us what extra or less the fund manager has generated out of a given portfolio of stocks in comparison to benchmark. Investors can check it out on a regular basis to see if the fund has been able to generate positive alpha on a consistent basis.

Mutual funds are of different types. For investors who have a high risk appetite, it advisable to invest in equity mutual funds which typically tend to provide with the highest amount of returns in medium to long term though these investments are exposed to short term fluctuations in share markets.  For investors with a low risk appetite, investment in debt mutual funds is a good idea which generally offers better returns than bank fixed deposits.

Conclusion:

Investing in mutual funds of various types offers the much needed diversification. Your investable funds are spread among different asset classes like stocks, bonds, government debt etc, thereby reducing risks and optimizing returns. Remember that because the mutual funds are professionally managed by fund managers adept in understanding the various factors impacting markets and the economy, your investments are in safe hands and you stand a much better chance of achieving of your financial goals. No wonder that since December 2014, there is an increase in mutual fund investor accounts from 4.03 crore to 7.46 crore in June 2018.
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