Which option should I go for in a mutual fund if I don’t have an immediate need for cash?
— Arnab Ghosh
One should opt for either the growth option or the dividend re-investment option in mutual funds if one doesn’t have immediate need for cash. This is particularly beneficial for investments in equity funds. Suppose one invests Rs 10,000 per month over 10 years, resulting in a total investment of R12 lakh. Assuming the investment is held for another 20 years and earns an average return of 12% per annum, the corpus would grow to around R2.21 crore at the end of 30 years. Take the case of another person who invests the same amount every month over a period of 10 years, also resulting in a total investment of R12 lakh. Assuming this investment also grows at an average rate of 12% p.a., but is held for another 10 years only, the corpus would grow to R71.44 lakh at the end of 20 years. This shows that over the longer term (typically 10 years and above), the power of compounding can add significantly to the value of investment.
What is the difference between income and gilt funds and does investment in the latter give any assured returns like fixed deposits?
— Ravi Singh
Income funds typically invest in a mix of corporate bonds and government securities across various maturities based on the investment objective of the fund and the fund manager’s views.
Such funds carry credit as well as interest rate risk. Credit risk, or the risk of default by the bond issuer on the repayment of either the interest and /or principal due, is on account of their investment in corporate bonds. Interest rate risk is on account of the impact of fluctuations in interest rates on the prices of bonds.
Bond prices and interest rates are inversely related; hence, if interest rates rise, bond prices would fall and vice-versa, with longer maturity bonds being more sensitive to movements in interest rates compared to shorter maturity bonds. On the other hand, gilt funds invest only in securities issued by the Central and state governments. These securities don’t carry credit risk, but do carry interest rate risk, the level of which varies based on the residual maturities of the securities. Hence, returns from gilt funds aren’t assured and vary based on the prevailing interest rate cycle and fund manager’s skills. Fixed deposits, though popularly considered assured return vehicles, are in reality guaranteed only up to R1 lakh.
How do I go about making a direct investment in MFs?
— Rohit Saxena
Expense ratios for direct investments into MFs are lower than those applicable for investments through an agent/distributor. For equity mutual funds, the expense ratios on direct plans would be lower by approximately 50 bps to 75 bps, whereas for debt MFs, they would be lower by 10 bps to 75 bps (depending on the type of fund chosen).
Lower expense ratios would translate to higher returns on direct investments vis-à-vis if the same fund were purchased through an agent/distributor. You can opt for direct plans if you are willing to manage your own portfolio and select the appropriate funds for investment based on your requirements. One can invest in direct plans by submitting a physical application to the fund house or a registrar. Alternatively, most fund houses have online platforms that one can access to make investments through the direct plan.
Are there any pension products in MFs where I can invest monthly for 15 years and get some pension every month after retirement?
— Lokesh Garg
Yes, there are a few pension or retirement funds available on the MF platform. Some of these funds also provide tax benefits under Section 80 C with a deduction of up to R1.5 lakh per year available on the amount invested in approved funds. These funds invest in a mix of equity and debt instruments in varying proportions ranging from 30-100% in equity and the rest in debt, during the accumulation or pre-retirement phase and typically up to 40% in equity during the post-retirement or withdrawal phase. Some funds also offer separate fund options for the pre-retirement and post-retirement phases with varying levels of equity investment. Post-retirement, one can withdraw from the scheme using a Systematic Withdrawal Plan, either at a monthly, quarterly, semi-annual or annual frequency. The SWP amount can be fixed at the time of retirement and would continue till the investment corpus is exhausted. Since the corpus is invested in market linked instruments, it could fluctuate based on the market value of the underlying holdings.
The writer is director, Investment Advisory, Morningstar Investment Adviser (India)
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