Have you looked up Mutual Funds as an investment avenue to save for your child’s future? If no then why not? They offer 2nd highest earning potential in long run, the 1st position being taken by equities. And when saving for your child future the higher earning your investment can make the better. Because cost of education is rising, and the escalating inflation is only going to make things costlier in long run.
As the earning potential of an investment avenue increases so does the risk it carries. This makes equities the highest risk investment avenue, which makes it lucrative but also a scary investment avenue for many parents. The risk of losing everything makes parents fearful of investing in equities. Equities require careful study of market and the companies you seek to invest in. This is not everybody’s cup of tea. Some might find all the researching too boring, for some others it might feel tedious, and some might just not have the time on hand to do it all. Does this mean you cannot reap the benefit of high earning potential of equities? NO. You can invest in Mutual Funds
Mutual Funds offer the perfect gateway for parents to enter into the equity market in a safe and secure manner. So let’s look at how you can use Mutual funds to save for your children’s future.
What is Mutual Fund?
It’s a pool of funds created by investors and managed by professionals who invest into different avenues on the behalf of the shareholders.
Example: You invest in XYZ mutual fund. Many other investors also invest in this fund. A pool of your investments is created. Now a professional (fund manager) will manage this pool of funds, he/she will decide where best to invest these funds to generate maximum returns for all of you. Whatever profits the fund manager generates, a part of that is paid to the investor, and rest is retained by the, mutual fund company, as their fees for managing your funds.
Where do Mutual Funds invest in?
Mutual funds invest in array of avenues. Most common places are debt, equity, gold, oil, precious metals, etc. Funds are also classified on the basis of their investment avenues.
Example: Debt fund, Gold Fund etc. Many mutual funds invest exclusively in one avenue, while most others invest in a group of avenues. For example a fund might invest 80% in equities and 20% in debt and so on.
How much money can your investments in mutual Fund earn?
This varies from fund to fund, because a host of factors come into play. For example if a fund invests 50% in equity and 50% in debt market, then its earning will depend on the earning of the debt and equity market respectively. Also it will depend on the fund manager. Some fund managers are excellent at their work and earn consistently high returns for their funds by making optimal investment decisions, while some other mangers cannot earn such high numbers even in excellent market conditions.
So how much a mutual fund can earn is an open question. While there is no fixed number, the earning potential of a mutual fund ranges from 8% – 17%
When choosing a fund it is best to study its previous years earning over a couple of years, to know how much that fund can earn for you. Value Research online is an excellent website to compare different funds and study them in depth.
How Can I invest in mutual fund?
There are two options for you to choose from
- Regular Investment in form of SIP: SIP or systematic Investment Plan as it is known is the best option to save in a systematic manner for your children’s future. Under this option you invest a fixed amount of money in your chosen mutual fund every month. These benefits in the following manner:
– Your investment per month is fixed, ensuring that you will be saving at least that much amount every month for your children’s future.
– Since you invest every month, over long term your investments enjoy the benefit of averaging out, and market volatilities will not affect your returns majorly
– You can set the SIP amount for automatic withdrawal from your account every month, thus saving you the hassle of maintaining financial discipline.
- Lumpsum Investment: This mode of investment involves more risk, and requires some researching. Under this mode you can invest whatever funds you have accumulated in your chosen mutual fund in one go. For example you have accumulated Rs 10,000 and wish to invest the same in mutual fund; you can do so via a lumpsum investment. Its features are as follows:
– No recurring investment to be made every month, thus freeing you from hassle of every month deposit.
– You can maximize your returns by investing all your funds in one go when the market is right.
– You are exposed to higher risk, and market volatilities since you cannot enjoy same averaging benefit as SIP
– This mode requires financial discipline, since there is no binding on you to invest any particular amount of funds at particular intervals
Lumpsum Investment might not be the best way to save funds for your children’s future, until you are a very disciplined investor and can ensure that you are making regular deposits into mutual funds.
What are the Tax implications of Mutual Fund Investment?
Income from mutual funds is received in two forms, Dividend paid out by the mutual fund house to you, and the sales proceed you will receive when you sell the mutual fund.
- Dividend Income you receive from investing in mutual Fund is tax free in your hand upto Rs 10,000/- p.a beyond that it will be clubbed with your income and taxed accordingly
- Long term capital gain arising from sale of equity oriented mutual funds is tax free, u/s 10(38) of Income Tax Act. For Debt oriented funds capital gain tax is applicable.
Have any questions? Ask below.
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