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Savings play an important role in fulfilling our needs wants and desires. After savings come in the most prominent step is to invest the same.
There are many options to park your money as you can make investments in the stock market if you understand the market or invest in mutual funds or as our parents invest in real estate or the best option for no risk open an FD account in your bank account.
For a person who wants to invest in the stock market but does not understand the market, the best option is to invest in mutual funds.
In mutual funds, an expert -the fund manager handles your investments where you can earn higher returns and less risk is involved. It helps you to diversify your portfolio along with mitigating your risk. Fund Manager understands your risk appetite, and your objectives and invests your savings as what suits you the best.
Benefits of Parking Your Money in Mutual Funds
·Creates Emergency Funding- you can get a loan against mutual funds-securities in your portfolio, such as your mutual fund holding, are used as mortgages, or are pledged as security for the debt. Your loan application may be accepted based on how your borrowing amount compared with the value of the mutual fund units in your portfolio and their tenure.
· Managed by an Expert-As you may not have time or knowledge to purchase individual stocks or bonds, the erudite- fund manager monitors investments and rebalances the portfolio accordingly.
· Diversification of your investments as risk associated with one asset is resisted by the others.
· Meeting of Financial needs as and when the redemption amount is credited to your bank account within one day to 3-4 days, depending upon the type of scheme until or unless it is a close-ended scheme or ELSS where the lock-in period is 3 years or maturity.
·Tax Benefits-Investment in ELSS upto ₹1,50,000 qualifies for tax benefit under section 80C of the Income Tax Act, 1961. Mutual Fund investments when held for a longer term are tax efficient.
Things to be kept in mind before investing:
Before you start investing, decide how much you will invest in different asset classes like equities, gold, debt, etc., and then invest.
·Check the riskometer (level of risk in the scheme) of that particular mutual fund that you want to invest.
·Check the investment objective along with the experience of the scheme managers managing your funds.
Keep in Mind the Performance Indicators -
Lower Expense Ratio-fees charged for managing your money (lower the better)
Lower Exit Load-fees charged by the AMC for premature redemption of your mutual fund units (less the better)
AUM (Assets Under Management) of the AMC- the total assets that are being managed by a mutual fund scheme. A larger AUM indicates a larger fund corpus from the collection of funds from investors and indicates that more investors are involved.
Higher CAGR-Compounded Annual Growth -portrays the fund’s performance over multiple years- 1 to 5 years (higher the better)
Lower Standard deviation shows you how much the returns of a mutual fund scheme are likely to deviate from its average annual returns- returns of funds with a high standard deviation may fluctuate either on the higher or lower side of the average and may lack consistency. However, assessing the standard deviation of one fund alone will not reveal the risk of the whole portfolio.
Higher Alpha shows the excess returns generated by a fund over its expected returns (higher the better-more than 0)
Low Beta is different from standard deviation as it compares the returns of the scheme to the index or benchmark. You need to check if your fund provided consistently high returns despite the high Beta when the market goes up for different periods. If the Beta value is low, then check if your fund provides you better protection when the market falls.
Sharpe ratio means the returns earned by an investment over the returns generated by any risk-free asset such as a fixed deposit- A Higher Sharpe Ratio means greater returns from an investment but with a higher risk level.
The Sortino Ratio considers only downside risks when evaluating additional returns. The lower the value of the Sortino Ratio better it is for the investor.
Fund A is better than Funds B, C, and D . Since Fund A has a lower Beta and highest alpha value with the lower value of Sortino ratio and Standard deviation with marginal difference in returns for one year and three years.
Well Being Shiksha Message:
Don’t keep your money idle in your bank accounts, start investing now in Mutual Funds and see your money multiplying by mitigating the risk!
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