Dipankar Jakharia
Q-My monthly net income is Rs. 19,500 which keeps increasing by Rs. 500 annually. I am 30 years old and have 28 years of service left. I want to invest at least Rs. 1,000 monthly for the next 25-28 years in LIC or any other company.
Veto Angami, Kohima
Ans: In India, there is a misconception about insurance as an investment avenue. Insurance is an expense which is bought to cover a person’s life. The cover should be enough for the dependents to survive and fulfill their goals and commitments considering the inflation. You should buy a Term Plan which only has the Insurance composition (there is no investment composition in a term plan). A good Term Insurance Policy of 1 crore costs less than Rs. 8,500 per annum (for 30 yr old male for a 30 year period). As for investments, follow a goal based approach. For a long term goal, you may invest in equity mutual funds and then rebalance you portfolio as per your time horizon. For short-term goals, invest in debt/ liquid mutual funds. If you want to invest without taking any risk, then invest in PPF or a post office RD.
Q- Sir, I am studying in class XI .
I want to know what is a Mutual Fund?
Bikash Jain, Dimapur
Ans: A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realised are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.
Advantages of Investing in Mutual Funds:
1. Professional Management - The basic advantage of funds is that, they are professional managed, by well qualified professional. Investors purchase funds because they do not have the time or the expertise to manage their own portfolio.
2. Diversification - By purchasing units in a mutual fund instead of buying individual stocks or bonds, the investors risk is spread out and minimized up to certain extent. The idea behind diversification is to invest in a large number of assets so that loss in any particular investment is minimized by gains in others.
3. Economies of Scale - Mutual fund buy and sell large amounts of securities at a time, thus helping to reduce transaction costs and bring down the average cost of the unit for their investors.
4. Liquidity - Just like an individual stock, mutual fund also allows investors to liquidate their holdings as and when they want.
5. Simplicity - Investments in mutual fund is considered to be easy, compared to other available instruments in the market, and the minimum investment is small. Most companies have purchase plans as little as Rs. 500 and automatic monthly recurring deposit (SIP) starts with just Rs. 100 per month.
Disadvantages of Investing in Mutual Funds:
1. Professional Management- Some funds doesn’t perform as expected, as their management is not dynamic enough to explore the available opportunity in the market.
2. Costs – The biggest source income for mutual fund companies is generally from the entry & exit load which they charge from an investor, at the time of purchase & sale. The mutual fund industries are thus charging extra cost under layers of jargon.
3. Dilution - Because funds have small holdings across different companies, high returns from a few investments often don't make much difference on the overall return. Dilution is also the result of a successful fund getting too big. When money pours into funds that has performed well, the manager often has trouble finding a good investment for all the new money.
4. Taxes - when making decisions about your money, fund managers don't consider your personal tax situation. For example, when a fund manager sells a security, a capital-gain tax is triggered, which affects how profitable is the transaction.
N.B. some of the commonly used terms has been altered or changed for ease of understanding.
