In the first part of my primer, I discussed Mutual Funds, and how they’re an attractive investment option for women. In this post, I discuss the practicalities of buying a Mutual Fund, that disclaimer about market risks and offer documents, and taxation.
Please read the offer document carefully before investing
Mutual Funds are amazing, if you know where to put your money. Doing your research is an important part of investing. I’ve often found that when women make investment choices on their own, the degree of criticism that they face when the investment doesn’t do as well is far greater than when a man does the same, even when it’s their own money! Bad investments have nothing to do with gender, but everything with poor research, so do talk to as many people as possible, read up on MFs to the best of your ability, and consult professionals.
We received quite a few emails this week, asking for names of Mutual Funds to invest in. Unfortunately, we can’t suggest funds outright because I am a finance professional, not an investment professional, and more importantly, none of us here want to get sued incase my suggestions go awry. The good news is that I can help you choose the right Mutual Fund.
How do I pick a Mutual Fund to invest in?
Before you dive into a Mutual Fund, you need to think about your financial goals. Are they short term goals, medium term, or long term? Short term goals are those that you wish to fulfil within five years, medium term, 6 to 10 years, and long term goals are those that you want to achieve after 10 years. The next aspect you need to think about, is your appetite for risk.
Understanding risk, and the levels of risk you can potentially undertake are very significant when it comes to selecting a Mutual Fund. Mutual Funds are very much subject to ‘market risks’, namely, any fluctuation in interest rates and the share market, which in turn, impact bond and share prices. It is true that the greater the risk, the greater the return. It is also true that the greater the risk, the greater the chance of you staring at your bank balance wondering where all your money went.
If you don’t know how to gauge your risk capacity, an easy way to decide is by going back to your financial goal. The shorter the time frame for achieving your goal, the lower your risk capacity.
You are never free from risk when by investing in a Mutual Fund. However, there are different types of Mutual Funds that cater to different categories of risk.
Debt funds for short term goals
If you would like to redeem your investment in the next five years, the Mutual Funds that you should be researching, are Debt Funds. These Mutual Funds invest in Debt Instruments, like bonds and debentures, which are insulated from the volatilities of the Stock Market. Although they are affected by the interest rates fixed by the RBI, they are very stable in the short term.
Debt Funds, however attract taxes. The dividends are paid after deducting Dividend Distribution Tax, which is close to 20%. If you sell the funds after holding it for 36 months, you are liable to pay Long Term Capital Gains tax at the rate of 10%. Sell it within 36 months, the Short Term Capital Gains are taxed along with your income.
Balanced funds for medium term goals
If you’re looking to save for an event that’s about six to ten years from now, you can look into Balanced Funds, which invest in a mix of Debt instruments and Equity instruments, such as shares. So, you’ll benefit when the stock market does well, and even if it doesn’t, the debt portion acts like a cushion to absorb your losses. You can also choose between Debt Oriented Funds (where more than 65% of the fund is invested in Debt instruments), and Equity Oriented Funds (more than 65% in Equity).
Debt Oriented funds carry less risk, and are taxed in the same way Debt Funds are. Equity Oriented funds, while riskier, carry tax benefits. The dividend that you receive from them is exempt from tax, and if you sell them after 12 months, you are exempt from Long Term Capital Gains tax as well. Sell them within 12 months, and you pay Short Term Capital Gains at the rate of 15%.
Equity funds for long term goals
If you have the luxury of time, you can take on risk. I’d recommend Equity funds for all women, because by the end of 10-15 years, you would not only have a significant sum in your hands, but it would also be tax free (Long Term Capital Gain is exempt, as is the dividend that you receive). Equity funds are great for building wealth, and having a solid retirement fund which you can use at your own discretion, and without having to depend on anyone else.
But I don’t make enough money!
My financial goals are long term. I earn a moderate salary, and by the end of the month, most of it has been spent. It’s not easy for me to make a considerable investment in a single go, which is why the SIP plan, or Systematic Investment Plan of Mutual Funds is perfect. In the SIP plan, I invest a fixed sum every month, a sum that is based on my income, and my ability to save. The bare minimum investment for an SIP plan in most Mutual Funds, is as low as Rs. 500/-. You give the fund a set of post-dated cheques, or instructions to auto-debit, thereby ensuring that there’s no way you can give any excuse for not keeping up with the instalments.
The great thing about SIPs is that you catch both the highs and the lows of the Mutual Fund. Let’s assume that the NAV of the fund today is Rs. 100, and the next month, the markets do excellently. The NAV of the fund would increase, and consequently you’d get fewer units than you did the previous month. If, the month after, the markets fall, the NAV would, too, and you would get more units in the bargain for the same amount invested. So, if the market does well again, so does your profit, for you would have had extra units from the previous month’s purchase.
Can I Invest Online?
We got an email asking us if Mutual Fund units could be purchased online, and the answer is yes. Most Mutual Funds’ websites make it easy to buy units in a fund online. All you have to do is fill up a simple form and pay through netbanking. You will also have to fill up an e-KYC (Know Your Customer) form where you’ll be asked to attach scanned copies of your PAN card (compulsory for investing!) and an address proof like passport/voter ID. The forms are straightforward and the e-KYC is a one-time procedure. You don’t have to repeat it each time you purchase units in a Mutual Fund.
Rupee Rani’s Top Tips For Mutual Fund Success
1. Start slow - Please don’t dump all your savings into a Mutual Fund right off the bat. Start with a small amount, preferably an SIP and see how it goes.
2. Be skeptical of everything - Some Mutual Funds promise the world, and if the Mutual Fund is being peddled by a manager in your bank, he might even promise a few extra moons. Don’t believe them, and do your own research. When you research a Mutual Fund, make sure you look at the previous track record of both the fund and the fund manager. If you aren’t convinced, don’t go for it. Moneycontrol and the ET Wealth Mutual Funds pages are great places to research the Mutual Funds available in the market. They’ve many helpful graphs and tables.
3. Talk to friends and relatives - Ask all those around you if they are investing in Mutual Funds, and how they went about it. Some might have investment advisors/agents who do the paperwork, so do consider speaking to an advisor if they come recommended. They will help you evaluate your options better, and you can start investing on your own once you get the hang of things.
4. Be aware of hidden costs - Mutual Funds come with hidden costs like entry load and exit load. These loads are charges (usually 1% of the value of the transaction) that are invoked either when you start investing (entry load), or when you redeem your investment before a certain time limit (exit load). They seem insignificant, but you would do well to be aware of these charges, and how they are invoked.
5. Invest independently - I like to call this investment hygiene. A lot of us women operate joint accounts with our parents or spouse. They are great, but when you begin investing, consciously, it would be best to operate out of your own account. If you don’t have one yet, I highly recommend you set one up before you begin (and get yourself a PAN card if you haven’t already). I know it seems like a hassle, but I cannot stress the importance of this enough, operating out of your own account is the first step to both financial literacy, and financial freedom.
Rupee Rani is a weekly column on finance for women. Write to us with your queries at rupeerani@thenewsminute.com.