Do you need mutual funds?
Long-term goals are important, but how do we cope with unexpected calamities? Enter an emergency corpus, which can take care of sudden expenses that we couldn’t have planned for. This could be a mutual fund investment.business Updated: Jul 20, 2017 11:13 IST
Very often, we think we don’t need mutual funds in our portfolio and that our existing investments are enough to meet our future goals. But, to reach our goals we need a vehicle. We’re not saying mutual funds are the only vehicle for reaching your goals, but they are certainly one of them.
Long-term goals are important, but how do we cope with unexpected calamities? Enter an emergency corpus, which can take care of sudden expenses that we couldn’t have planned for. This corpus came to the rescue of a Delhi-based lawyer who had walked into Gurugram-based financial adviser Ashish Chadha’s office in 2009. In those days, she and her husband were sceptical about investing in mutual funds. After much persuasion, Chadha got them to invest Rs1 lakh in a mix of fixed income funds, of which 50% went into a liquid fund for emergencies. “Around 2011, they needed Rs 4 lakh for her mother’s hospitalization. We redeemed the money instantly from their liquid fund investments,” recollects Chadha. Building an emergency corpus is not tough. By investing Rs 5,000 a month in a liquid fund for 36 months, which earns 6% a year, you can have an emergency kitty of about Rs 5.95 lakh, which can cover hospitalization expenses for most ailments. Financial planners suggest a corpus equivalent to six months of expenses.
And why a liquid fund? “First, this money will not show in your savings account, so it would not encourage impulsive spending behaviour. Second, you can withdraw it easily. A liquid fund also enables you to invest through a systematic investment plan as opposed to buying a new fixed deposit every month, which you will have to if you use the fixed deposit route to build an emergency corpus,” says Balvir Chawla, director, Finnovators Solutions Pvt. Ltd, a Pune-based financial planning firm.
When salaried employees get a bonus or when someone inherits a large amount, what to do with it? Finding a vehicle to invest this money is crucial, else it could get spent. Windfall gains, ideally, must be invested for the long run. And you don’t need to invest them in equity funds only; debt funds work just as well if that’s what your asset allocation demands. Also, remember that bank fixed deposits are taxed at your income tax slab rate. While withdrawals from debt funds before three years are also taxed at your income tax rates, after three years the withdrawals are taxed at 20.60% with indexation benefits.
Funding Your Goals
What if you want to send your child to a premier college for postgraduation, like an Indian Institute of Management (IIM)? At present, the fees for a two-year postgraduate programme at IIM-Ahmedabad is around Rs18.78 lakh. Assuming you are planning for a newborn and she would seek admission after 21 years—we can safely assume the fees to be around Rs63.84 lakh then, assuming 6% inflation. This means, if you have an equity mutual fund that grows at 15% compounded, you would need to invest around Rs4,000 a month to reach the goal.
These are real-life situations that we all could face, for which we need solutions. A mutual fund is one of few vehicles that offer help here. But it’s not a magic wand. You need to figure out your asset allocation and your risk appetite first and be realistic about your financial goals.