Skip to main content

Debt Mutual Funds can help to beat inflation

Invest Mutual Funds Online

Download Mutual Fund Application Forms

Sample this. You earn a return of six per cent per annum on savings account deposit today. This means that your money would grow from a ~100 to ~106 if you kept it in your savings account for a year. Say inflation stands at 7.5 per cent. This means that what you could buy for ~100 one year back, can now be bought at ~107.50. As a result, your real return (pre-tax returns minus inflation) is unfortunately negative. And you end up eroding your savings by ~1.50, by not beating the inflation rate. In this example, the real return is 6 per cent minus 7.5 per cent or negative 1.5 per cent.
 
If this were to happen to your money over a certain period of time or on a continuous basis, this is akin to termite eating into your furniture. And you realise it suddenly one day when the furniture gives way.
 
The main motive of investing should not be accumulating funds for future need. Unfortunately, that is what most identify investing with. But, it is prudent to understand that your investment should be able to beat inflation. And to be able to do so, you should earn real returns. This is important for your financial health. Otherwise, you will only keep accumulating funds.
 
You also need to understand the difference between savings and investment. You cannot invest if you don't save. Saving is income minus expenditure. Savings bank deposit is not an investment. A fixed deposit is. However, if you earn 8per cent on a one-year fixed deposit, the real return is only 0.5 per cent (8 per cent minus 7.5 per cent).
 
For risk-taking investors, equities (either direct stocks or mutual funds) are advised as this avenue is a high growth instrument that can easily beat inflation. Equities, on an average, give 12-15 per cent returns annually. Till now, the highest inflation has ever gone is ten per cent in 2011, when the Reserve Bank of India had to step in by easing liquidity in the market to stem inflation. Therefore, equity investors have been lucky so far.
 
However, on the fixed income side or for risk averse investors, returns may have been a tad lower or at best, on par with inflation. So, the lucky ones may not have made money on their investment. But, some may have had to lose some capital.
 
Hence, investing in avenues that beat inflation and generate positive real returns becomes even more important for such investors. Mutual funds can come to the rescue of the risk-averse investors, too as many of these investors are seen to be wary of this investment route. Just that, you need to understand that by virtue of being market-linked, mutual funds cannot assure returns unlike banks deposits. But, that does not make them very risky, these are safe instruments as they largely invest in government securities. And they work very well for different objectives for which you need money in future. But, do make sure to read the scheme information document before investing.
 
Debt mutual funds are more liquid and tax efficient when compares to its fixed deposit counterpart. Here's some help Liquid funds or money market funds are a strong contender to savings bank accounts. They invest in easily saleable fixed income securities like banks' certificate of deposits and highly credit rated companies' commercial papers maturing in 91 days. They offer excellent flexibility to get in and get out of the investment. You can withdraw, get the proceeds even the very next working day as long as you give the withdrawal instructions before 3pm. Withdrawal, here, is as easy as from your bank account or giving instructions online. These offered 9.12 per cent in the past year.
 
Ultra short-term funds are called debt funds in the offer document and the fund manager is free to buy securities that mature in more than 91 days. But there is no compulsion to do the same. The volatility of returns is marginally higher than liquids funds as they invest in instruments with longer maturity. These have returned 9.39 per cent in the last one year.
 
Longer term investors should explore the fixed maturity plans (FMPs) route. As the name suggests, FMPs specify a date on which your investments will mature. On maturity, the money is debited to the bank account. FMPs come in varied tenures from 3 months to 3 years. Some FMPs only invest into banks' certificate of deposits. The risks here are very low. These are also very tax efficient as it cuts across two financial years to give indexation benefit. FMPs have returned between 9 and 10 per cent in the last one year.
 
Liquid funds |Investment Period: 3-6 months |Invests in: Debt instruments with a maturity of 91 days |Advantages: Gives better returns than savings accounts, low interest rate and credit risk, helps dealing with equity market volatility
 
Ultra short-term funds |Investment Period: 1 day to 3 months |Invests in: Debt securities maturing in a year |Advantages: Give higher returns than liquid funds, better for those who can tolerate volatility
 

Short-term funds |Investment Period: 18 months to 2 years |invests in: Debt securities maturing in over one year |Advantages: Low to moderate interest rate risk

Income funds |Investment Period: Over 2 years |Advantages: For investors who want regular, steady income, gives better returns when interest rates soften

 
Gilt short-term funds |Investment Period: 2-3 years |Invests in: Varied medium- and long-term securities |Advantages: Suitable for those who want safe instruments with zero default risk

---------------------------------------------

Invest Mutual Funds Online

Transact Mutual Fund Online

 

Download Mutual Fund Application Forms from all AMCs

Download Mutual Fund Application Forms

 

Best Performing Mutual Funds

    1. Largecap Funds:
      1. DSP BlackRock Top 100 Fund
      2. ICICI Prudential Focused Blue Chip Fund
      3. Birla Sun Life Front Line Equity Fund
    2. Large and Midcap Funds
      1. ICICI Prudential Dynamic Plan
      2. HDFC Top 200 Fund
      3. UTI Dividend Yield Fund
    3. Mid and SmallCap Funds
      1. Reliance Equity Opportunities Fund
      2. DSP BlackRock Small & Midcap Fund
      3. Sundaram Select Midcap
      4. IDFC Premier Equity Fund
    4. Small and MicroCap Funds
      1. DSP BlackRock MicroCap Fund
    5. Sector Funds
      1. Reliance Banking Fund
      2. Reliance Banking Fund
    6. Gold Mutual Funds
      1. Relaince Gold Savings Fund
      2. ICICI Prudential Regular Gold Savings Fund
      3. HDFC Gold Fund

 

Popular posts from this blog

Mutual Fund Exit Load Changes

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300 Mutual Fund Exit Load Changes AMCs don't communicate about any change in exit load directly with investors, but do update on their website   The exit load applicable to your investments is the load which existed at the time when you invested in the particular fund. Any subsequent changes in the exit load will not be applicable to your investments.   However, Asset Management Companies ( AMCs ) periodically publish addendums in the newspapers, which state any change in exit loads of specific schemes managed by them. Such changes are also posted on their websites. However, a direct communication to an investor is not made, considering the costs involved in doing so. In their own interests, investors should not only track the performance of the funds they i...

Birla Sun Life Mutual Fund Launches Birla Sun Life NIFTY ETF

Birla Sun Life has launched a new fund namely, Birla Sun Life Nifty ETF, an open ended exchange traded fund. The new fund will be open for subscription from 4th July to 18th July 2011, at an offer price of Rs 10 per unit. The investment objective of the scheme is to generate returns that closely correspond to the total returns of securities as represented by S&P CNX Nifty, subject to tracking errors. No exit load will be charged under the scheme. The performance of the scheme will be benchmarked against S&P CNX Nifty and will be managed by Satyabrata Mohanty.   -----------------------------------------------------------------   Also, know how to buy mutual funds online:   1) DSP BlackRock Mutual Funds: http://prajnacapital.blogspot.com/2011/05/buying-dsp-blackrock-mutual-funds.html   2) Reliance Mutual Funds: http://prajnacapital.blogspot.com/2011/06/buying-reliance-mutual-funds-online.html   3) Birla Sunlife Mutual Funds: http://prajnacapital.blogspot.com/2011/...

Atal Pension Yojana contribution Tax Benefit for spouse

Contributions to Atal Pension Yojana (APY) are eligible for the same tax benefits as the NPS. This means that the contributions can be claimed under Section 80CCD (1B). The current limit for Section 80CCD (1B) is   Rs   50,000, over and above the   Rs   1.5 lakh limit under Section 80C. Section 80 CCD (1) is a different one, meant to cover employers' contribution towards NPS . You cannot get tax benefit by investing in the name of your spouse under Section 80 CCD . ------------------------------ ----------------- Invest Rs 1,50,000 and Save Tax under Section 80C. Get Great Returns by Investing in Best Performing ELSS Mutual Funds Top 10 Tax Saver Mutual Funds to invest in India for 2016 Best 10 ELSS Mutual Funds in India for 2016 1. BNP Paribas Long Term Equity Fund 2. Axis Tax Saver Fund 3. Religare Tax Plan 4. DSP BlackRock Tax Saver Fund 5. Franklin India TaxShield 6. ICICI Prudential Long Term Equity Fund 7. IDFC Tax Advantage (ELSS) Fund 8. Birla Sun Life Tax Relief 96 9. ...

Mutual Fund Reivew: Birla Sun Life Asset Allocation Conservative

Birla Sun Life Asset Allocation Conservative has numbers on its side to prove its credibility… Don't be surprised to find this Fund of Funds ( FoF ) in our recommendations. It has earned its place. And despite the difference in the structure of the product, there is no arguing with the numbers.   Of the total 6 years of its existence, the fund has been among the top 10 funds in its category in four of them. Last year it put up an average show and the only year it underperformed its peers was in 2008.   One aspect to look at when investing in an FoF is the expense ratio. The expense ratio of an FoF is capped at a lower limit of 0.75 per cent (2.50% for an actively managed fund). However, the FoF not only has its own expense (though lower) but even the expense ratio of the fund it is investing into. Fortunately, the fund manager takes that into account. "Expense is one of the important criteria used for fund selection and is the main reason for our investment in BSL Ind...

Short-Term Investment Options in Mutual Funds

Mutual funds offer liquid funds and ultra short term funds in the debt category, which are suitable for short investment periods. Ultra short-term funds were earlier known as liquid plus funds. Liquid funds invest in money market instruments with a maturity of 91 days or less. However, there are no such restrictions for ultra short-term funds. Who should invest in these? These are open-ended schemes. Investors with a short investment horizon or with surplus cash and low risk appetite should look at these. These could include corporate as well as retail investors. Those interested in staying invested for less than 15 days can opt for liquid funds. Retail investors who want to remain invested for two-four months, can look at ultra short-term funds. The short duration for both liquid and ultra short-term funds shields them from any interest rate volatility.   What kind of returns do they offer? In terms of an investment period less than 15 days, these funds are comparable to a ba...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now