Retirement Mutual Funds

The Net Asset Value (NAV) is the price per share of any particular share at any given time. This does not include any brokerage or overheads you may pay for the share. It is updated every day at the close of the market day.

Let us compare both so that you can get a fair idea of what suits your investment strategy more.

1. Returns on Invested Money:

   FDs have a guaranteed return whereas in mutual funds there is no guarantee on the returns on the investment as it is dependent on the market. Although, in the long run, they earn much higher returns than FD.

2. Liquidity:

   Corporates and Individuals.

3. Tax Liability:

   The bank FD returns are taxed as per your income bracket upon maturity. On the other hand, mutual funds enjoy the tax benefits as well as fixed indexation rates of tax on the returns.

4. Risk:

   The biggest benefit of a FD is the fixed and guaranteed returns in the form of interest. In mutual funds there is no such guarantee and the profit and loss moves as per the market’s volatility.

While there is no investment in the world that is risk free, mutual funds are considered a safe investment because of three main reasons:

1. It is not a flight by night scheme and no one is going to run away with all your money. They are completely safe as mutual funds companies are regulated and supervised by Securities and Exchange Board of India (SEBI) as well as the Association of Mutual Funds in India (AMFI).
2. The strategy behind them is to earn higher returns that are also tax efficient. They do not guarantee capital protection or even fixed returns but provide higher returns than traditional investment instruments. They result in greater market exposure as well as are managed by professional finance managers. They are tax efficient as they are taxed in a way that does not touch the returns earned on them. They are best for long term investments, but short term also reaps this tax benefit.
3. The risk can be managed very well as the portfolio is usually diverse with a mix of equity and bonds as well as debts. Each promises different financial goals.

These are a highly liquid asset and hence, can be withdrawn at any time. While sale and purchase can take place at any time of the day, the money is transferred out generally at the close of the market day.

SIP is often considered a type of mutual fund investment but the two have considerable differences.

1. Investment Value:

   In a mutual fund the investment is generally in lump sum whereas in SIP it is done on a monthly or quarterly basis.

2. Investment Form:

   In a mutual fund the investment is made in both debt and equity funds, while SIP trades in mutual funds.

3. Market Trends:

   They have a smaller impact on SIP.

4. Cost:

   Higher fees are applicable in terms of transaction amount, AMC and more as compared to SIP.

5. Redemption:

   Both are liquid but redemption charges are lower in SIP.

These are tax-efficient investment instruments. For different mutual funds, the taxation is also separate.

1. Tax-saving equity funds:

   Under ELSS, a tax benefit upto Rs. 1.5 L is available under Section 80(C). Under this there is a lock-in period of 3 years.

2. Non-tax saving equity funds:

   Under long term capital gain, tax on redemption is exempted upto Rs. 1 L with 10% infection over that.
3. Short term capital gains like debt funds, balanced funds and SIPs are taxed at 15%.

The minimum investment possible is Rs. 100 in SIP and Rs. 1,000 in lump sum, but at the very least Rs. 500 is suggested.

The mutual funds that are significantly volatile but offer high returns with a greater risk of loss are called high risk mutual funds. Large cap equity are less risky and give stable returns. Mid cap and small-cap companies have small capitalization and have scope for growth give high returns but have significantly high risk.

Selecting the right mutual fund as per your investment strategy and goal can be overwhelming. Here are some high level criteria to make your choice easier.

1. Make a Strategy:

   Think about your financial situation, goals, timeline and risk tolerance before you select your investment. With the help of these answers, you will be able to make a choice based on size of company, style, credit quality etc. With this you can make a balance in your portfolio.

2. Monitor Performance of the Company:

   The performance of the stocks you are interested in should be monitored at all times periodically. Past performance alone cannot guarantee future performance. But studying it over the long term may help you narrow down your choices.

3. Think about the costs:

   You must look at the expense ratio of the funds you want to invest in as the costs are an important consideration. Your costs may include the management fee, distribution fee, transaction fee and other expenses. Fees differ from fund to fund, so a look into it for comparison sake would be beneficial.

4. Other Considerations:

   While the three above are important considerations, a closer look is always a good idea. Consider the manager you want to work with, the capabilities of the company that manages the fund, the track history of the companies selling equity, etc.

As a long term asset, mutual funds can be very beneficial. The average returns based on the top 20 performing ones over the last 20 years are annualised at 9.75%.

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