Savings plans vs. mutual funds for building wealth
Two friends, Ravi, and Shashi, sat down for a cup of chai one sunny afternoon. They often discussed various aspects of life, but today’s conversation was centred around creating wealth, specifically through mutual funds and savings plans. They both understood the importance of financial planning, and their discussion led to a revelation of numerous benefits and strategies for building wealth.
Benefits of investing in mutual funds –
Professional management
Shashi chimed in, highlighting that mutual funds are managed by experienced fund managers who make investment decisions on behalf of investors. These experts analyse the market and strive to maximise returns.
Diversification
Ravi explained that mutual funds pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. This diversification helps spread risk, reducing the impact of a single investment’s poor performance.
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Liquidity
Both agreed that mutual fund schemes provide liquidity, allowing retail investors to purchase or sell their units at the ongoing NAV (net asset value) on any business day.
Flexibility
Shashi highlighted that retail investors can select from distinct mutual fund types such as hybrid, debt, equity, or thematic funds, depending on their risk appetite and goals.
Affordability
Ravi mentioned that mutual funds are highly accessible to distinct kinds of investors, even those with restricted funds, making it simple for anyone to begin investing.
Tax benefits
Ravi explained that certain mutual funds, like Equity-Linked Savings Schemes (ELSS), offer tax benefits under Section 80C of the Income Tax Act, which can reduce the tax burden.
Transparency
Shashi highlighted that mutual funds provide regular updates on their portfolios, NAVs, and performance, ensuring transparency for investors.
Historical returns
They acknowledged that mutual funds, historically, have shown the potential to deliver higher returns than traditional savings instruments like fixed deposits.
Systematic investment
They both agreed that the Systematic Investment Plan (SIP) in mutual funds allows investors to invest regularly, even with small amounts, promoting discipline and long-term wealth accumulation.
Easy exit
Ravi emphasised that selling mutual fund units is straightforward, providing an exit route for investors when needed.
Benefits of investing in savings plans
Capital protection
Shashi added that savings plans typically come with capital protection, ensuring that the principal amount is secure, irrespective of market fluctuations.
Guaranteed returns
Ravi mentioned that savings plans, such as fixed deposits and recurring deposits, offer guaranteed returns, making them a safe option for risk-averse investors.
Steady income
They both agreed that some savings plans, like Monthly Income Schemes (MIS), provide a regular source of income, making them ideal for retirees.
Tax benefits
Shashi mentioned that certain savings plans, like the 5-year Fixed Deposit, offer tax deductions under Section 80C, reducing taxable income.
No market risk
Ravi emphasised that savings plans do not expose investors to market risks, making them suitable for those who want to preserve their capital.
Flexibility
They discussed that savings plans come with various tenure options, allowing investors to choose a plan that aligns with their financial goals.
Compound interest
Ravi explained that savings plans accumulate interest, and the power of compounding can significantly increase the final maturity amount.
Emergency fund
Shashi highlighted that savings plans can serve as an emergency fund, providing a readily available source of funds during unforeseen expenses.
Ease of access
Ravi pointed out that most banks and financial institutions offer savings plans, making them easily accessible to the general public.
Nomination facility
They both appreciated the nomination facility in savings plans, ensuring a smooth transition of funds to beneficiaries in case of the investor’s demise.
Strategies to create wealth through mutual funds and savings plans –
Ravi and Shashi delved deeper into strategies to create wealth through mutual funds and savings plans –
Mutual Funds –
Start early
Begin investing in mutual funds as soon as possible to benefit from compounding.
Asset allocation
Diversify your mutual fund portfolio across asset classes for balanced returns.
Regular review
Monitor your mutual fund investments and make adjustments as needed.
Avoid emotional decisions
Stay disciplined and avoid making investment decisions based on emotions.
Invest for the long-term
Focus on long-term goals and resist the urge to time the market.
Emergency fund
Maintain a separate emergency fund in a liquid mutual fund for unexpected expenses.
Consider ELSS
Invest in Equity-Linked Savings Schemes (ELSS) for tax benefits.
Use SIPs
Invest systematically through SIPs to harness the power of rupee cost averaging.
Stay informed
Keep yourself updated on market trends and economic developments.
Review expenses
Opt for funds with lower expense ratios to maximise returns.
Review fund managers
Research and choose mutual funds with experienced and skilled fund managers.
Risk tolerance
Align your investments with your risk tolerance and financial goals.
Systematic withdrawal
Plan your withdrawals systematically during retirement to ensure a regular income.
Avoid frequent churning
Minimise excessive buying and selling of mutual fund units.
Benefit from dividends
Reinvest dividends to compound your wealth over time.
International diversification
Explore international mutual funds for global exposure.
Invest in thematic funds
Consider thematic funds if you have a strong conviction about a specific sector.
Tax efficiency
Be mindful of the tax implications of your mutual fund investments.
Asset rebalancing
Periodically rebalance your portfolio to maintain the desired asset allocation.
Goal-based investing
Invest in mutual funds tailored to specific financial goals like education or retirement.
Savings plans –
Consider tax implications
Be aware of the tax treatment of interest income from savings plans.
Choose the right plan
Select a savings plan that aligns with your financial objectives.
Interest payout frequency
Opt for interest payout frequency that suits your income needs.
Ladder your deposits
Create a deposit ladder with varying tenures for liquidity and returns.
Renewal options
Review renewal options to make the most of your savings plan.
Nominate beneficiaries
Ensure you have nominated beneficiaries for your savings plan.
Automatic renewal
Set up automatic renewals to avoid unintentional withdrawals.
Review interest rates
Stay updated on changes in interest rates offered by banks or institutions.
Link to goals
Allocate specific savings plans to different financial goals.
Emergency Fund
Use a portion of your savings plan as an emergency fund.
Ending note
As Ravi and Shashi sipped the last drops of their chai, they realised that creating wealth through mutual funds and the best savings plan in India requires careful planning, disciplined execution, and a clear understanding of one’s financial goals and risk tolerance. Each investment type comes with a unique set of benefits and the choice between which one to select must be based on individual preferences and circumstances.
Both savings plans and mutual funds can play an imperative role in forming wealth and retail investors must factor in a combination of both to attain a balanced and diversified financial portfolio. With the correct strategies and long-term vision, Shashi and Ravi were highly confident that they could attain financial security, making the best utilisation of savings plans and mutual funds.
