Is it possible for you to promote and build a great company like Infosys or Bharti Airtel or Sun Pharma? The vast majority of readers will answer in the negative. Great companies are founded by visionary entrepreneurs. They create jobs for the people, contribute to economic growth and create incredible wealth for investors. A great
Is it possible for you to promote and build a great company like Infosys or Bharti Airtel or Sun Pharma?
The vast majority of readers will answer in the negative. Great companies are founded by visionary entrepreneurs. They create jobs for the people, contribute to economic growth and create incredible wealth for investors. A great merit of the capital market is that it enables ordinary investors to participate in the sharing of this wealth. The Indian stock market, as measured by the index, has given an annual average return of around 16 per cent during the last 36 years. (The BSE index, Sensex, which was 100 in 1979 is now around 26,000). Most people do not have either the expertise or the time for making direct investments in the stock market. For them, it would be sensible to entrust their funds with experts who invest their money in good securities. This is the essence of mutual fund investment.
Mutual funds are institutions that mobilize the savings of investors and invest them in a portfolio of securities like shares, bonds, debentures, money market instruments etc. The securities are selected to suit the investment goals of investors. Investment goals of investors differ due to differences in age, income, family commitments, life style etc.
Based on investment objectives, mutual fund schemes can be broadly classified into five: Growth schemes, Income schemes, Balanced schemes, Liquid schemes and Tax saving schemes.
Growth schemes invest major part of their funds in equity shares. Such funds mainly seek to give long-term capital appreciation to investors. This would be an ideal investment option for young investors. Income schemes aim at giving regular income to investors. Therefore, bulk of the funds are invested in fixed income securities like bonds, debentures etc. Income schemes are ideal for retired people.Balanced schemes balance the growth and income objectives. Therefore, they invest both in shares and fixed income securities. This scheme is suitable for investors who look for moderate growth and income. Liquid schemes invest in short term instruments like treasury bills, call money, commercial paper etc. Investors in these schemes are normally corporates and individuals looking to park their short-term surplus funds. ELSS (Equity-Linked Savings Schemes) offer tax savings to investors. They can invest up to Rs. 1.5 lakh in ELSS and claim tax savings under section 80 C.
Mutual funds are eminently suitable for small investors. Investors can start with small amounts, say Rs. 1000.
The ideal form of mutual fund investment is the Systematic Investment Plan – SIP. Under SIP, a particular amount of money is invested periodically, say every month. This enables the investors to benefit from market volatility. They get the advantage of expert fund management. Investments in equity-mutual funds and balanced funds are eligible for attractive tax treatment. The dividends from these funds are tax-free. The long-term capital gains (profit from the sale of funds after holding for a minimum period of one year) are also tax-free. These are highly attractive tax benefits. Mutual funds are liquid since they can be sold and easily converted into cash. The Indian mutual fund industry has given excellent return to investors beating fixed income return by a wide margin. Investment in mutual funds enables investors to participate in the ‘India Growth Story’.
good funds for investment
Birla Sun Life Top 100 Fund, SBI Blue-chip Fund, ICICI Focused Blue-chip Fund (large cap)
UTI Midcap Fund, ICICI Value Discovery Fund, Franklin Smaller companies Fund (midcap)
HDFC Balanced Fund, Tata Balanced Fund, Franklin India Balanced Fund (balanced)
Birla Sun Life Tax Plan, Franklin India Taxshield, Reliance Tax Saver (ELSS)
(The author is investment strategist, Geojit BNP Paribas)