Success in investing can come with ordinary intelligence, what is needed is the temperament to control urges that get us into trouble in investing.
-Warren Buffet
We need not plan our finances or save if there is abundant financial resources during the entire span of one's life. We need not take risks to enhance returns. But this is not reality. At later stages of our lives we would like to have sufficient assets to take care of our needs and that of our dependents.
Moreover, financial needs may arise at different points of time and we require finance to meet those needs. Making finances available when we need is one of the major goals of financial planning.
Mutual funds with their varied risk-return profiles can help you in your financial planning.
Mutual funds as risk mitigator: Why should one take risk? One should be interested in risk as well as return. Nobody gets rich keeping money idle in savings account. So, investors cannot hope to earn high returns unless they are willing to accept the risk involved. Mutual funds as vehicles help you to invest in varied underlying securities and to optimise returns at a certain level of risk you are comfortable with.
Factors that determine your risk tolerance includes the financial goal you need to achieve and your investment horizon. If by investing in risk-free assets, your financial goals are met, then there is no need to take risks.
The rate of return required to achieve your financial goals be it retirement planning, child's education or buying a home should determine the composition of your portfolio.
Investment horizon is the time required to achieve your financial goals also is a factor determining your portfolio composition.
How long you will require to achieve your financial goals determines your portfolio composition. An investment which is risky over a short investment horizon may not appear to be risky over a longer term.
Mutual funds fit into any investment horizon: If you are looking for short-term investments, you can invest in ultra-short-term plans or short-term bond funds. If you desire to invest for one to three years, you can consider medium-term bond funds and monthly income plans. For long-term investment equity funds are available. Mutual funds help you to start early and inculcate a disciplined approach to investing.
Also, when one starts investing is more important than how much you invest.
It is like chasing a target in a limited over. It is safer to score uniformly rather than see the required run rate climb in the slog over's forcing one to take additional risk.
Mutual funds help you to build a corpus by investing small amounts through their systematic investment plans. Systematic investment plans (SIPs) help you in diversifying across various time periods. Moreover, SIPs mimic regular deposits in a defined contribution plan and inculcate a discipline to investment.
Mutual fund as diversifier: What is more, mutual funds also allow you to diversify. Diversification is an admission of not knowing what to do, and our effort will be to strike the average.
Mutual funds have schemes that invest across varied securities such as stocks of various caps, sectors, themes; bonds and gilts of various durations, ratings; money market instruments and gold. One can diversify by choosing a mix of such funds as per his risk return profile.
Mutual funds also provide bundled solutions.
One unique aspect of investor's human capital is mortality risk, the loss of human capital in the unfortunate even of premature death. Life insurance has long been used to hedge against mortality risk. The greater the value of human capital, the more life insurance cover the family demands. The demand for life insurance and the optimal asset allocation should be decided jointly rather than separately. Ulips of mutual funds are bundled products that provide you risk cover along with investment benefits.
Solutions across life stages: Over the life time the financial stages that investors go through varies enormously. The life stages can be broadly classified as upto 23 years (taken care by others), 23-35 years (starting out), 35-60 years (family commitments) and above 60 years (retirement era). The strategy and asset allocation of each stage would be different from each other as the attitude towards money and needs change as one progresses in life.
Mutual funds have schemes ranging from children career plans, retirement benefit plans to take care of various stages of life.
One can build a customised portfolio by investing across various funds to cater to his profile.
