Mutual funds, provident funds, and fixed deposits are some of the significant financial products available in India. Mutual funds are managed by an organization and can be invested in stocks or bonds.
A provident fund is a type of retirement saving account managed by a government or a private organization to benefit its members. Provident funds can be invested in either stocks or bonds, depending on the nature of the fund. Fixed deposits are secured deposits that can be withdrawn without penalty after maturity.
Mutual funds, provident funds, and fixed deposits are important financial instruments in India. They are designed to help you grow your savings, and they're a great way to diversify your investments.
Undertanding Mutual Funds
Mutual funds are typically available through a mutual fund company that invests in stocks, bonds, and other securities. You'll invest in these securities through a fund manager who manages your fund's investments. The manager buys and sells securities based on their value at the time of purchase or sale. Mutual funds can be held directly through the fund company or a brokerage account with an investment advisor who manages your investments.
Undertanding Fixed Deposits
A fixed income savings account, where you deposit money for a decided period with an already fixed interest rate, is your fixed deposit.
Fixed deposits are offered by all the significant banks and money-related foundations. In this plan, you can contribute a particular amount, and on the amount contributed, you will get a fixed interest.
Investing in a fixed deposit means you cannot withdraw your money invested before the maturity period. People who choose to put their funds into fixed deposits should pick a term between 7 days to 10 years. And the tenure you choose will pre-determine your interest rate.
Undertanding Provident Funds
A provident fund account is a type of saving account where an employee pays into his salary and invests it in government-approved securities over a period of time, usually for 15 years or more.
The money accumulated in such an account is used for retirement after retirement from work or as a rainy day fund if there is no other source of income available during retirement. It also helps you save on future expenses like education, marriage, etc.
A provident fund is an investment plan created by an employer for its employees to save money for their retirement. The amount which is deposited into the fund is not taxable as per income tax laws, and it can be withdrawn at any time once it has been accumulated over a period of time.
Rs.50,000 for 20 years in Mutual Funds, Fixed Deposit, and Provident Fund
You might often wonder, if I invest 50000 in mutual funds for twenty years, how much can I make?
To answer the question, let us first make some assumptions.
The assumption is related to the individual (investor) profile that shall help us arrive at a risk appetite.
Assume the investor in this situation is 30 years old and is a salaried individual working with a multinational firm. He/She is married and has no kids currently. The individual is looking to create wealth in two decades and is not likely to withdraw any money before the tenure.
How to Invest 50000 Rupees - What Should Be the Approach?
The investor, in this case, is looking for wealth creation and has a long-term investment horizon. Also, age is in his/her favour, and thus, his/her risk-taking ability will be high.
In this situation,mid-cap and small-cap funds can purely be of help to reach the desired goal. The investment in the small-cap is capped at 40%, whereas the remainder is allocated in the mid-cap.
Category | Fund | Share |
Mid Cap | Kotak Emerging Equity Scheme | 30% |
Mid Cap | L&T Mid Cap Fund | 30% |
Small Cap | HDFC Small Cap Fund | 20% |
Small Cap | L&T Emerging Businesses Fund | 20% |
By investing Rs 50,000 per month one time, he could look to accumulate Rs.19.16 lakhs in twenty years with 20% annualized returns.
We have taken a weighted average of the return of each fund after considering the lower 3-year and 5-year returns as the return over the 20 years.
Now, let us check out some traditional options:
1. Public Provident Fund / Provident Fund
Public Provident Fund (PPF) scheme is a long-term investment option backed by the Government of India. The instrument offers safety with an interest rate of 8-9%.
The returns are fully exempted from tax. The deposit scheme comes with a lock-in period of fifteen years and can be extended to multiple of five years.
Considering 8% returns, an investment of Rs 50,000 can fetch you Rs 2,33,051 in 20 years.
Limitations of PPF/PF
- Low liquidity
- Low actual returns when considered with taxes and inflation
- Not suitable for long-term wealth creation or investors with a high-risk appetite.
2. Fixed Deposit
A fixed deposit is a financial instrument provided by banks or NBFCs which offers investors a higher rate of interest than regular savings accounts until the given maturity date.
Considering 9% returns, an investment of Rs 50,000 can fetch you Rs 2,80,220 in fd in 20 years.
Many people even ensure to use the FD Calculator to correctly estimate how much they can earn after a certain time period based on the ROI.
Limitations of FD
- Low liquidity if opting for tax saver deposits
- Low actual returns when considered with taxes and inflation
- Not suitable for long-term wealth creation or investors with a high-risk appetite
3. Mutual Funds
As you can see from the chart, the corpus from a mutual fund is way higher than fixed deposits and PPF/PF. For example, mutual funds generate 8.2 times more wealth than what is accumulated in PPF/PF.
Thus, for the long-term horizon, you should always opt for mutual funds, given the wealth generation capability.
Why Do Investors Prefer Mutual Funds?
- Professionals handle mutual funds
- Less volatile compared to the stock market due to a well-diversified portfolio
- Can be aligned to your risk appetite
Conclusion
You don’t need to be a financial expert in investing in mutual funds. On the contrary, a mutual fund is suitable for those who don’t understand investments.
Given that professionals manage the fund, it is an ideal investment instrument for people who either have no knowledge or have no time to go through the intricacies of the functioning of a fund.
Also, there is a misconceived notion that one should invest a significant amount of money to earn substantial returns. However, you can start investing a small amount of Rs. 500 per month through a Systematic Investment Plan (SIP).
You can also increase this amount, depending on your increase in savings or income. Besides inculcating a habit of saving, there are other benefits of SIP, such as convenience, flexibility, disciplined approach, rupee cost averaging, and the power of compounding.
Lastly, remember a mutual fund is not only about equities.
Around two-thirds of the assets under the management of mutual funds are in debt instruments. But, and not just debt, investors can invest in hybrid funds as well, which is a culmination of debt and equity.
You can consider the mutual fund industry a shopping mall where different types of shops offer other products.
Thus, as final words, we say that it’s time you give yourself and your family a financially stable lifestyle. Think Big, invest in Mutual Funds now!
Alright, buckle up because we're diving deep into the world of financial instruments, and I've got the expertise to make it crystal clear.
First off, let's talk Mutual Funds. These gems are managed by organizations that invest your money in stocks, bonds, and securities. You're not navigating this sea alone; a fund manager takes the wheel, buying and selling based on market values. Whether you hold your funds directly or through a brokerage account, it's all about letting the pros handle the intricacies.
Next up, Provident Funds. Picture this: a retirement savings account managed by either the government or a private organization. You contribute, they invest in stocks or bonds, and voila—a nest egg for your golden years. Plus, it's not just for retirement; think education, marriage, rainy day funds—this is the Swiss Army knife of financial planning.
Now, Fixed Deposits. These are the solid, secure deposits that sit and grow without penalty until maturity. It's like planting a money tree with a predetermined interest rate. Just remember, once you commit, you're in until maturity. Choose your term wisely—7 days to 10 years—and watch that interest accumulate.
Now, let's get into the nitty-gritty of that Rs.50,000 investment scenario. Picture this hypothetical investor—30 years old, working in a multinational firm, married with no kids. Looking to create wealth in two decades, with no plans of early withdrawal. For this go-getter, we're talking mid-cap and small-cap funds for that high-risk appetite.
The specific breakdown? Here it is: Kotak Emerging Equity Scheme (30%), L&T Mid Cap Fund (30%), HDFC Small Cap Fund (20%), and L&T Emerging Businesses Fund (20%). Crunch the numbers, and with 20% annualized returns, we're looking at a cool Rs.19.16 lakhs in twenty years.
Now, let's compare it to the classics. Public Provident Fund (PPF) and Provident Fund (PF). They're like the wise old elephants in the financial jungle, offering safety and 8-9% returns. But beware—they come with a 15-year lock-in period, and the liquidity game is not their strong suit.
Fixed Deposits (FD), on the other hand, are like the reliable turtle in this race. A solid option with 9% returns, but watch out for low liquidity and the inflation game.
But here's the mic-drop moment—Mutual Funds. The chart doesn't lie, my friend. Mutual funds generate a whopping 8.2 times more wealth than PPF/PF. Why? Well, the pros handle it, it's less volatile, and it aligns with your risk appetite.
In conclusion, you don't need a PhD in finance to dive into mutual funds. Let the experts handle the heavy lifting. Start small with Rs. 500 per month through a Systematic Investment Plan (SIP), and watch your financial future blossom. It's like a shopping mall—mutual funds offer a variety of products, not just equities. So, think big, invest wisely, and secure that financially stable lifestyle. Mutual funds, my friend, are the keys to the kingdom.
