Financial planning is the art of formulating a plan with best sorted financial methods listed and suggested to club-in the finances required to fund the desired goals in the best possible way. Be it the objective of building a retirement nest, or to save for children’s higher education or marriage, or saving for family’s protection cover from unforeseen risks, clarity of goals to be achieved is the essence required to nurture an effective financial plan.
Whether planning for any short, medium or long term financial goal, the most secured and benefitting option available in the market for any of these is mutual funds. MFs are professionally managed and diversified investment instruments. MFs also safeguard an investment from various risks in the market, including the inflation, provide tax-efficacy and render good benefits.
When working on long-term financial planning (LFP), it needs to be clearly understood that the process doesn’t involve a rigid rate card, but instead provide customers with the convenience to flex their rate of investing as according to their financial strength at that particular time.
Usually, goals planned 10-15 years prior their actualisation are counted as long-term, but now the minimum criteria for entering the long term field is set for 7 years and above. Since these goals involved in a longer actualisation period, ideally, it's best to stop holding back the capital and gear up to take some greater risks.
Higher the risk more are the returns coming your way, and when dealing with risks, nothing can be better and safer than the equities. In the long run, equity being an asset outperforms the benefits reaped from all the other avenues.
According to CRISIL AMFI Equity Fund Performance Index (December 2016), the equity mutual fund category as a whole has returned 10.73 percent per annum over a ten-year period. This great track record builds up a hope in long-term investors that investing in equity MFs is sure to help them achieve the targets in an optimum time-frame and cost.
Investing in equity mutual funds also benefits the customer with certain tax-free conveniences like providing tax-free returns after a period of one year and giving tax-free dividends up to a limit of Rs 10 lakh in a year. Here is a list of some equity mutual funds that can reap the maximum benefits on the cheapest possible investment rate:
1) Equity Linked Savings Scheme or ELSS
ELSS or equity linked savings scheme is a tax-saving instrument that brings in diversified portfolios for the fund manager to choose from. When compared with instruments like the NSC and PPF, this tax saving vehicle benefits the customers with the shortest lock in period of 3 years only. When narrowing down the option for fund investment, most investors tend to be lured by the bold disclaimers and are most probably going to opt for the recent chart toppers. But the sole parameter to be looked at in the long period is the consistency of returns. When going with ELSS, the first rule is: be fully aware of the degree of diversification and concentration of portfolio and invest only after comparing it with your risk-taking ability.
2) Sectoral Funds
These funds concentrate their investments in particular sectors like healthcare, IT, FMCG, banking, pharma, etc. Too much concentration in a few companies in a particular sector makes this a riskier option among others, and it’s better to step into investing in these funds only when backed up with a well thought out strategy. Do not gravitate towards a particular sector with this fund only because it’s the flavor of the year and if you bet on a sector, stay with it for a longer time span. For instance, let’s take the case of energy funds, (Company: Morningstar), performed fantastically in the year 2007 with 105 percent returns that year. The very next year the sector dipped down to -53 percent but made a good return in 2009, then once again crippled in 2010, 2011 and 2013. The growth graphs of such funds are much more volatile than the other equity funds. Only the ones with proper industry knowledge and foresight will enhance with these funds; alternatively, others will decline to doom.
3) Diversified Equity Funds
Diversified Equity Funds are known for investing in stocks of companies, regardless of the sector, they belong to. This in turn is beneficial to neutralise the effects of losses caused by the downfall of one sector with the steady or rising performance of the other one. However, it’s a must for investors to have a keen eye for market cap before investing. Neither the flexi- cap funds nor the small and mid-cap ones should be the core holding in your portfolio. Instead of stocking up the small ones go with dealing only one or two large-cap funds in the core holding of your portfolio.
(Rachit Chawla is Founder & CEO, Finway Capital)
Published Date: Dec 14, 2017 18:56 PM | Updated Date: Dec 15, 2017 12:41 PM