When you need to grow more money, while it’s wise to look at the regular options, it pays to opt for those that fetch you greater returns in the long run.
If you have been setting aside a particular sum of money every month as ‘savings’ in a purely ad hoc fashion and if that money just lies in your savings account, get this clear: you are not going far. A savings account with any bank returns 3.5 per cent less than the rate of hike in prices every year.
What should you do?
First, you need to become an ‘active’ saver rather than merely looking at what is left in the account at the end of the month as ‘saving’. This means setting aside a certain tidy sum right in the beginning of the month for ‘saving’, before you start issuing cheques to pay for bills. Look at it this way: ‘saving’ is what you pay yourself, a reward for earning the income. So reward yourself first before you begin paying others for providing goods and services. This attitude will reinforce the saving habit.
You can make savings exciting by devising a game with someone in your family. For example, try a game in which you reduce expenses progressively every month through the entire year. (If you ate out for 2000 in March, can you reduce it to #1500 in April? If you spent #1500 on electricity in April, can you bring it down to Rs 1300 in May? Another way is to jot down what all you can do with the amount splashed on a particular expenditure. For example, #400 saved on eating out every month, at a return of 10 per cent will fetch you more than #30,000 after five years. With that sum, you can take a holiday… or renovate the children’s room…and so on…
Are you getting back enough?
OK, you have begun actively saving now. What should you do with it? It depends on two things: how much risk you are willing to digest and what you need this money for. For example, fixed deposits are a good choice if you want to set aside some money for emergencies. They could be fetching returns as low as 5-6 per cent but the money can be taken out in a jiffy.
However, if you are looking at fixed deposits (or recurring deposits, which give similar returns) for long-term goals, you may severely hobble your growth potential. For example, a one-time investment of #50,000 would fetch you about #91,000 after 10 years, if you earn 6 per cent a year. In contrast, if you up the returns by four percentage points to 10 per cent a year, you would reap #1,35,000 after 10 years. Mind the gap: about 50 per cent more money on a difference of four percentage points! To earn higher returns compared to that of a fixed deposit, broadly, you have two options: bonds and stocks. In general, stocks are riskier but also fetch higher returns. But do you really have the time, energy and skills to pick stocks and bonds? Even if you do, it is an enormously stressful exercise. Before long, you will be poring over financial statements of companies, furiously crunching numbers to pick the best.
Some more saving options
The Public Provident Fund (PPF) has been a popular tax saving plan for decades. It has lost much of its sheen thanks to the drastic reduction of effective return from over 16 per cent—8 per cent, but it is still a good option for long term saving (runs for 15 years and you may extend it too), if you are completely averse to risks. You can invest up to #70,000 a year to claim a tax rebate of up to 30 per cent depending upon the rate of rebate applicable in your case.
There is another option if you are totally averse to risk. National Savings Certificate (NSC) offers 8 per cent return but matures in six years. You can claim tax rebate on the principal invested as well as on the interest that accrues on the principal every year. You may gift it to close relatives and on maturity, collect the proceeds from any post office.
The benefits of mutual funds
A mutual fund collects money from lots of small investors and invests on their behalf. It could be investing in stocks or bonds or both. The fund will tell you about where it proposes to invest so that you can check if it matches your risk concerns and goals.
A mutual fund offers its units for subscription. Each unit of the mutual fund is a small slice of its entire portfolio investment in stocks, bonds, etc. When you buy into a mutual fund, you simply buy a certain number of these ‘units’. Mutual funds are headed by fund mangers who have teams of people deciding on where, when and how to invest the money collected from you. On your behalf, the fund’s team invests in carefully selected shares or bonds of companies and monitors these investments. All this, in return for a small fee. There are mutual funds and mutual funds. You may choose a fund depending on how much risk (of losing the money) you are willing to take and when you want the money back. Go for an equity fund if you don’t mind a little higher risk. If you are slightly risk-averse, prefer a balanced fund, which invests in stocks only up to 60-70 per cent. If you have little appetite for risks, choose debt funds that invest in bonds and other forms of debt.
Let’s look at two types of Mutual Funds
Systematic Investment Plans (SIP)
A simple strategy called Systematic Investment Plan can help you save regularly in a totally stress-free fashion. By investing a fixed amount at regular intervals you smooth out the ups and downs of the market. This is how it works: suppose the mutual fund unit costs #200 in March, for an investment of #1000 you will get five units. If the unit price were to go up to #250 in April (because the prices of stocks in the fund’s kitty go up), for #1000 you will get only four units. So, in some months you will get more units and in some fewer. But your investment in the fund, which is intrinsically good (that is why you have selected it), will keep going up steadily.
Every month, on a day you choose, your bank account can be debited with a particular sum and specified mutual fund units available for that sum will be bought. You don’t even face the hassle of issuing post-dated cheques. This way you not only discipline your investments, but to a great extent you also protect yourself against the vagaries of the market.
Balanced Mutual Funds
These funds invest in both stocks (riskier investments) and bonds (safer investments). Balanced funds usually generate returns higher than debt funds but lower than equity funds over 3-5 years. Balanced funds in a sense allow you to have the cake and eat it too. The stock portfolios of the fund (say, 50 per cent of the fund’s kitty) will allow you to benefit from the rising values of stocks. On the other hand, the bonds in the balanced fund’s portfolio (say, 50 per cent of the fund’s kitty) offer stable returns.
What benefits do mutual funds offer?
Transparency
A mutual fund is nothing more than a collective savings pool. Several investors like you come together to invest in stocks, bonds or in both. That is all. However, mutual funds are strictly regulated. They have to declare their portfolios from time to time. Almost all the funds declare their portfolios every month. The net asset value (NAVs) of a fund, which points to how much a unit of the fund is worth on a particular day, is declared every working day. You know where your money is going and how it
is doing.
Availability
A few years ago, even if you wanted to buy a mutual fund, it was not easy. Only a few distributors, most of them small, sold mutual funds. The quality of their advice often left a lot to be desired. But today, you could buy mutual funds in over 60 cities or towns, either through their own offices or through banks. All private sector banks now sell mutual funds across the counters in most branches. Some public sector banks too have begun marketing mutual funds through select branches.
Professional Management and Customer Service
When you buy a mutual fund, you hand over the task of investing to a qualified and probably more knowledgeable fund manager who is paid for finding the right opportunities for you. As for advice, only a person who has qualified in a rigorous test conducted by the Association of Mutual Funds of India (AMFI) can now sell mutual funds. As for customer service standards, mutual funds in India have been constantly raising the bar they have set for themselves. The service standards are comparable to what you will get anywhere else in the world. For example, most fund distributors will come to your residence or office and explain the product features and also collect your cheque.
Ease of Operation
If you want to sell your fund, you can do so pretty quickly, mostly within one or two working days. There is no paperwork to fear. Many funds offer to credit the money directly into your bank account if the account is held with select banks.
What if, on a particular day, you have queries on your monies lying with a mutual fund and cannot wait for the statement to arrive? Not to worry, mutual funds offer toll-free lines at over 200 locations where you can get to know how much your savings are worth on a particular day, order for account statements and even redeem your investments.
To sum up, mutual funds offer you the largest menu of investment choices. Pick a fund based on how much risk you can digest and how long you can wait for returns. Do your homework and avoid false expectations — you will not get fabulous returns overnight from any fund. Decent returns require time, and you need to be patient.
And remember your job does not end after buying a fund. Read the newsletters the fund would be sending you regularly to check if the fund manager is doing well. You can get to know the changes in the fund’s investment portfolio, the shares and bonds it bought and at what price, how well it’s juggling its portfolio to get you better returns, etc. The Net Asset Value (NAV) of a mutual fund, which is put out daily, is a barometer of how well the fund is doing. It should always be higher than the price at which you bought the fund. Of course, don’t forget to check if the mutual fund’s investments are in line with your goals. Good luck!
