“A mutual fund can do for you what you would do for yourself if you had sufficient time, training, and money to diversify, plus the temperament to stand back from your money and make rational decisions.” ~ Venita VanCaspel
Are you an investor who is looking to kick off with mutual fund investments but is worried about losing your money?
This article will help to accommodate mutual fund investments in your investment portfolio without the risk of losing your capital.
Mutual Fund investments could be intimidating to navigate as a new investor especially when it has risk associated with it.
Let us look at a more progressive approach to smooth out your fear of Mutual fund investments and dive into the article.
Risk averse investor:
Some investors tend to avoid risk or have a low-risk tolerance. Risk-averse investors prioritize the safety of the principal over the possibility of a higher return on their investments.
Are you a risk-averse investor or have a low-risk appetite?
Then your common objectives could be;
- Capital preservation
- Steady income generation
This might help you leave some high-risk investments out of the picture.
If you are a risk-averse investor, then you are missing out on an opportunity to get additional returns in an alternate investment.
How to balance out the opportunity cost & Capital preservation?
Due to market volatility, one may avoid equity instruments & prefer Governments Bonds or Bank Fixed deposits.
Let us take a practical scenario where a risk-averse investor would invest his surplus in a fixed deposit.
- As per the Deposit Insurance credit guarantee corporation DICGC guidelines, each depositor in a bank is insured up to a maximum of Rs 5 lakh.
- If you want to invest more than Rs. 5 lakhs, you can spread it across banks or spread it among your family members. Since Fixed deposits provide capital protection, half the battle is won.
- Now lets us move on to the next step. Choose the non-cumulative option in bank FD. So that each month you get a cash flow that can be routed to a Mutual fund Systematic investment plan.
- In other words, the source for your SIP investment is your Fixed deposit monthly interest.
The following calculations will give you a better picture.
|Bank FD||Bank FD Tenure||SIP||SIP Tenure||Fund Value||Final Corpus|
|Scenario 2||10,00,000||5yrs||6300||5yrs SIP + 5yrs (without SIP)||9,15,826||(10,00,000) +9,15,826|
Now, let us look at what each scenario translates into briefly below:
If a person invests Rs. 10 lakhs in a bank offering 7.6% p.a. interest for 5 years, the fixed deposit will fetch a monthly interest that would be around Rs. 6333. This amount can be invested in a Mutual Fund SIP.
Let us assume that this amount is invested in Equity large-cap funds where the average 5-year return would be around 12%. If this continues for the next 5 years, then the final fund value would be Rs 5,19,664.
At the end of 5 years, the amount invested in the bank along with your Mutual fund investments would amount to Rs. 15,19,664.
Scenario 2& 3 are the continuation of scenario 1 i.e., the first 5 years is the same under all scenarios.
In this case, let us assume you consume a capital of Rs. 10 lakhs at the end of 5 years. So, probably there won’t be any SIP after the end of 5 years.
But the existing fund value through the first 5-year SIP grows at the same interest rate of 12% in the next 5 years. Then the fund value at the end of the 10 years would be Rs. 9,15,826.
Under Scenario 3 If you continue to do the SIP in the next 5 years as well, i.e., a total of 10 years SIP, then at the end of 10 years, the fund value would be around 14,63,736. At the end of 10 years, your corpus value along with the capital is Rs 24,63,736.
When you invest using this strategy, a longer time horizon will yield better returns & also reduce the risk involved.
Investors who are new to investing are inclined towards traditional savings instruments. But a balanced portfolio is required to achieve your financial goals.
“If you have the stomach for stocks, but neither the time nor the inclination to do the homework, invest in equity mutual funds.” – Peter Lynch.
Diversifying your investment across Equity & Debt instrument yields better returns than Pure Fixed Income Securities. Though Equity instruments have the potential to yield reasonable returns, not all investors have the time to research, analyze & pick stocks.
Mutual funds fill this gap as;
- It offers a better risk-adjusted return in the long run.
- It also provides an inflation-beating return which is missing in Fixed Income instruments.
Watch our video on “How to invest in Mutual Funds without losing a single rupee” to better understand this in detail.
Select an appropriate fund based on your financial goals & time horizon to achieve the said goals & start on your investment journey.
This progressive approach will give you better insights into the practicalities of mutual funds & help transform you as a savvy investor down the lane in the long run.