Mutual Funds: Ladder to Wealth Creation
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About this ebook
1. Amount Invested
2. Rate of Return
3. Time Duration
It says that more you invest, more you will get in return. Second, more returns means more money. And longer the time duration of investment, better returns you will get. We can't control returns, we can't invest big amounts but we can invest small amounts at regular intervals over a long period of time. If this amount is properly diversified in different asset classes, it can help you to achieve better returns with the security of the money invested. Mutual fund helps you to take exposure of different asset classes and get the best returns.
Let's come to a journey towards freedom through this book.
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Mutual Funds - Vivek K. Negi
Definitions
1
Mutual Funds – Introduction
I would like to start this book with a simple statement.
No one is perfect in this world; if you are not the best, you can hire the best to make the things work for you.
Intelligent people allow their money to work for them. They earn through two resources:
Through job, business or profession &
Through Investments
Before getting into complex topics we need to understand why one should invest. A person may be born poor because of bad luck but if he dies poor, it’s no one else’s mistake. He didn’t plan his investments in a proper way. Any person despite of his earnings capacity can become rich in the second half of the life. Let’s first discuss the context of investment or why one needs to save and invest.
Context of investing starts from your job, business or profession. In the initial years of your life, you have one or few sources of earnings. We need to increase our earning hands in order to become rich. We earn some sort of income during initial years; it may be more or less. It doesn’t matter in the long-term whether you were earning less or more during initial stage of your career. You need to save and invest the savings on a regular basis. Your income can be divested into two parts; one, for your current expenditure and two, for your future expenditure through investments. Inflation will keep eating value of your money year after year. So, you need to invest in such products where you can get better returns than inflation. One thing is certain, in future, that our expenses are going to rise. There is only one way to have protection against this rising expenses i.e. investment. Following are the important points which should be taken care while making an investment decision.
We should invest so that our money grows and shields us against rising inflation.
The rate of return on investments should be greater than the rate of inflation, leaving you with a nice surplus over a period of time.
Whether your money is invested in stocks, bonds, mutual funds or certificates of deposit (CD), the end result is to create wealth for retirement, marriage, college fees, vacations, better standard of living or to just pass on the money to the next generation or maybe have some fun in your life and do things you had always dreamed of doing with a little extra cash in your pocket.
It’s exciting to review your investment returns and to see how they are accumulating at a faster rate than your salary.
Inflation silently eats into our savings.
Most people discount the effect of inflation while planning for future needs.
To put things in perspective let’s assume an average inflation of 6% for the next 30 years. Then 30 years hence:
Aspirations:
We want to do more, bigger and better – for our families and for ourselves. The fulfillment of one wants is, often, the beginning of another, thus they seem to be endless:
Investment Objectives:
There can be multiple investment objectives. Everyone whether rich or poor, whether employee or employer, whether Govt. servant or self-employed, whether businessman or professional; needs to invest for one purpose or the other. The different purposes for investment can be as follows:
Hedge against Inflation: Everyone knows; what we are earning today may not be sufficient for tomorrow. Rising inflation would eat out substantial part of your earnings in the future. First you need to understand what is inflation? Inflation is the depreciation in the value of money. For example, if you can buy 2kg. Mangoes for Rs.100 today, one year later you would able to buy just 1.5 kg. for the same amount. It means you are spending more to get the same quantity of the same product. If you combine the rise in prices for all the commodities it would count as inflation. In general, inflation of below 5% for a developing country like India is considered as good. Negative inflation (Deflation) is a symbol of slowdown in the economy. It would show lack of demand for the products which would impact the economy as a whole. So, controlled inflation is a good sign and everyone should prepare for the same through systematic investments.
Long-term Goals: Everyone has got aspirations in life. No one want to stop, they would like to grow on a continuous basis. One aspiration fulfilled would give rise to another aspiration. But if I think aspirations can be fulfilled immediately, it may be a wrong notation. One needs to plan for the long-term in order to achieve his dreams. It may be a house, big car, foreign trip, children’s marriage or education. For example, if my earnings are Rs. 25,000 a month and I want to plan a foreign tour few years later for me and my family. There are four members in my family and the total expenditure on tour would be around Rs. 2,00,000. What I can do is start planning today by saving Rs. 5000 a month @10% per annum. Around 3 years later I would have the sufficient fund with me to plan a foreign tour for the family.
Special Occasions: In India celebrating certain occasions is a trend. People spend lots of money on these occasions. It’s a matter of prestige that how well you celebrate these events in your life. These occasions include marriage, anniversary, birthday, arrival of a new baby, new business, new degree, any award or promotion etc. These occasions should be planned in a very strategically manner. Huge funds are required to perform these functions. Long-term planning is required to celebrate the occasions in a decent manner. Middle class families spend their lives in planning these activities and occasions.
Security for Future: Today you have got good health. You are qualified and experienced professional. You are in a good shape to earn money and live a comfortable life. But accidents can happen anywhere and with anyone. It may happen that unfortunately, you are not in a position to work for few years or for rest of your life. It may also happen that your source of earnings may be stopped or interrupted. Everyone wants to secure their future, therefore they need to save and invest. Life insurance is the most popular financial product for this segment. Your standard of living should not be compromised even after you stop working.
Tax Planning: Many people invest just to save on their tax liabilities. Government always looks forward to contribution from the public. The Government plan things in such a way that either they should pay tax to the Govt. or they should invest to contribute toward the development of the country. Govt. give tax exemption on various investment products such as insurance, mutual funds, infrastructure bonds, post office deposit schemes, Provident Fund, National Savings Certificates, Kisan Vikas Patra etc. Salaried employees do more and more investments in these products in order to save tax. These small contributions, every year, helps to create a big fund and security for the future in the long run.
Returns (Surplus Management): If anybody is not investing for the above purposes, he must be investing for the maximum returns on his surplus funds. Many of the businessmen have surplus funds with them so they want to park their funds in such an investment where they can get a decent return with minimum risk. They decide about investment amount, time horizon and the risk they are willing to take and chose the investment product accordingly. Many of them hire professional financial consultant to take the best advice.
Any person who invests in any investment product in the world has one or more of the above objectives. But there is no identical product which can suit the requirement of every person. Everyone has got different risk appetite and different objectives. The investor should consider the following factors before making the investment decision:
Risk: The risk taking capability of everyone is different. A person may have more or