In the past few months, I happened to spend considerable time with friends and relatives, many of whom posed the usual questions around where to invest and if they should continue investing, given the volatility in the markets. Although they all came from varied backgrounds, the crux of their concerns were similar, which set me thinking about why such questions arose so frequently and repeatedly. It made me start looking into the behaviour of some of them and I figured they were very clear about most aspects of financial transactions.
Take for instance a cousin who had posed the question; he actually got a great deal on new car which was a huge saving. Another cousin made the New Year vacation bookings with aplomb getting an extra day at the resort at no additional cost. My inference is that when it comes to investing money, most people fail to put a clear outcome of what they wish their investments to do for them. It is perhaps this lack of clarity which makes them go with guaranteed and defined return products where the outcomes are stated upfront. Sadly, several financial decisions are taken without understanding their outcomes and consequences.
Generally, people want their money to grow in value. If they are able to set a timeline to this desire, they can choose appropriate products. If the need is to build wealth with a timeframe of five years or more, the most suitable instrument is an equity mutual fund.
The best way to action this is to start a systematic investment plan (SIP) in a fund and continue it for the next five years. The regular, disciplined investments over different market cycles will benefit from compounding and build wealth. This is a smart way to build wealth over time, without frequently worrying over how the investments are faring, because of changes in the stock markets.
If your need is to build wealth with a timeframe of five years or more, the most suitable instrument is an equity mutual fund.
Another need from one’s wealth or money reserves is to have some form of a regular income stream. This too is easily possible through a systematic withdrawal plan (SWP) which is the direct opposite of an SIP and is a facility by which you can withdraw a certain amount of money from your existing investments in mutual funds at periodic intervals. While discussing these possibilities with my cousin, he posed an unlikely question – if it’s so simple, why doesn’t everyone invest in mutual funds? The answer to this question rests in the fact that many people do not view their investments in mutual funds as a solution to their financial problems or needs. They instead a few schemes to just make an investment.
If you start looking at mutual funds as solutions to your financial concerns, you will find many ways to use mutual funds to plan and realise your needs. You can plan wealth accumulation for your child’s education or your retirement. If you need money from your accumulated wealth, you could plan that as well. By changing one’s orientation towards outcomes and solutions, mutual funds could work in a very tax efficient and convenient manner in one’s financial life. My suggestion; change the way you invest your money and chances are that mutual funds will be all you need to invest in.
(D. P. Singh is ED & CMO, SBI Mutual Fund )
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