Salaried people have a predictable level of income during their career. They often prefer to manage their budget subject to their income constraints and practice strict financial discipline to accomplish their financial goals. Therefore, with the limited income they have to focus on maximizing the return on investment, lowering the tax burden and ensuring the safety of their fund at the same time.
Mutual funds come in handy for salaried people in the entire investment approach of achieving their financial goals. But often salaried people get into a dilemma when choosing mutual fund schemes as there are so many options available in the market. Here are some important points that can help salaried persons choose the right mutual fund scheme.
Factors that usually determine your mutual fund investment decisions
An employee’s mutual fund decision depends on several factors such as age at the time of investment, risk appetite, financial goals, tax management, remaining years to retirement, etc. Employees can invest regularly by saving money from their monthly salary and also use windfall income like bonuses to make a lumpsum investment in mutual funds. To lower the risk and achieve different financial goals, they should diversify investment into different mutual fund schemes. Here’re various mutual fund investment options that can help salaried people in achieving their financial goals.
Invest in Equity Linked Savings Scheme (ELSS) to save tax
ELSS allows an investor to invest in an equity mutual fund scheme and at the same time get the benefit of tax deduction u/s 80C up to the maximum limit of Rs 1.5 lakh in a financial year. So, salaried employees can save taxes and get an attractive return on investment at the same time. However, as ELSS is an equity-oriented scheme, so they are exposed to high volatility risks. Therefore, investors should prefer investing through the SIP mode to lower the volatility risk and get the benefit of rupee cost averaging in the long term.
Also Read: How to choose the right bank to save your money in fixed deposit?
Invest in short-term debt funds to build contingency fund
Apart from tax savings, salaried employees also require the fund to meet uncertain financial challenges. Therefore, maintaining an adequate contingency fund in the long term is crucial for salaried people. It is important that a contingency fund has high liquidity to meet the financial emergency. So, you can invest in short-term debt funds such as liquid funds, ultra-short duration mutual funds or arbitrage funds as they carry low risk and you can quickly withdraw money without any hassle. You can diversify your contingency fund investment into 2 or 3 appropriate liquid funds to further lower the risk.
Invest in equity funds for wealth creation in the long term
There are several options available within equity mutual fund schemes where you can invest to get a return depending on the extent of risk you are ready to take. For example, you can invest in a small or mid-cap mutual fund scheme if you want a high return and are ready to take higher risks. On the other hand, if you are ready to take a moderate to high risk, you can invest in a large-cap fund. Ideally, when you are young, at the starting stage of your career, have a high-risk appetite and the least financial responsibilities, you can invest in small and mid-cap funds as you’ll get a longer investment period till your retirement and allow more time to your mutual fund investment to grow. On the other hand, as you grow older, your risk appetite reduces gradually as your financial responsibilities tend to increase simultaneously. So you can switch focus to a lower-risk mutual fund scheme like a large cap fund. Staying invested in an equity mutual fund scheme can help you in wealth creation in the long term.
Invest in debt funds for lumpsum investment and short to medium-term goals
Salaried people usually earn a fixed monthly income in their careers. They need to stay ready for each financial goal in sync with their predictable source of income. However, they may get a big corpus on the maturity of investments like FDs, life insurance policy, etc. Now the question is, which type of mutual fund scheme a salaried person should invest in a lump-sum amount?
Salaried people can make a lump-sum investment in appropriate debt funds as they carry a lower risk compared to equity schemes, allow better liquidity and offer a stable return at the same time. Depending on the risk appetite and return expectation, you can choose an appropriate debt fund. For example, if you are risk-averse, you can invest in a mutual fund with exposure to short-term debt instruments. On the other hand, if you are ready to take a higher risk and want a higher return, you can invest in a fund that has exposures in debt instruments with longer maturities.
If you are ready to take a little more risk and want to earn a greater return, you can choose a balanced fund. A balanced fund invests in equity and debt instruments both.
Also Read: Can asking for a lower credit limit on a credit card affect your credit score?
Things to keep in mind while choosing a mutual fund scheme
While choosing a mutual fund scheme, always analyse and compare various schemes based on factors such as expense ratio, past and current performance, quality of investments in the portfolio, etc. It’s important to maintain an adequate level of diversification while investing in mutual funds.
Adhil Shetty, CEO, Bankbazaar.com, says, “Investors often feel that they need to put in a large sum of money to fetch substantial returns. That’s not true. You can invest as little as Rs 500 every month through SIPs. You can always scale it up with an increase in your income. Even a contribution of Rs 2,000 a month can fetch Rs 200,000 in 20 years if the annualized rate of return in 12%.”
Salaried employees should increase the size of their SIPs gradually with an increase in their salary and in sync with the change in their lifestyle. It’s also important to review the mutual fund portfolio from time to time for the best outcome.