5 Important Financial Tips For Millennials Before Investing in Mutual Funds
You have to be intelligent in the way you use funds to reduce taxes as funds that invest in stocks are taxed in a way, while funds that invest in fixed income securities face a different way of taxation
Mutual funds are among the hottest investment options around today. They offer opportunities to save tax, grow wealth, generate income and save cash. For youngsters, mutual funds offer new possibilities to invest. With the facility to invest online and do that any time of the day, Millenials are just a few years away from building a fortune with the help of mutual funds. However, many get confused when it comes to taking the first few steps. In a world of so many options, products and advisors on TV, Internet, and print, there is a need to stay calm and focussed. Mutual fund investing is easy if you the 5 golden rules. Let us find out what they are.
1. Invest With a Goal
Everything that we do has a goal. The morning walk is for health. The food on your plate is to mean to satisfy hunger. The sleep at night is to give your brain some off-time. Even doing nothing is a goal! Why should it be any different when you invest in mutual funds? There are three types of goals: short-term, medium-term and long-term. When you define a purpose behind your mutual fund investments, the road opens in front of your eyes. Goals can be like wedding planning, child education, retirement, overseas vacation, saving for home loan down payment etc. This approach will help millennials in making dedicated savings for their financial goals. Once you take a goal-based objective, the entry and exit points are clear.
2. Know Yourself
Every individual is unique. For somebody a 10per cent annual gain is great, and for others, even a 20per cent annual gain over 10 years is just 'satisfactory'. But nobody really tries to understand the capacity to handle losses, even if temporary. Every investor should know their risk profile and invest accordingly. If you do not want any losses in your investment at any point in time, you are probably a very conservative investor. This may mean that only debt/fixed income mutual funds are suitable for you. Somebody else may be interested in taking risks if returns are high. Risk profiling is very important. Every investor should know it about themselves. Do not follow any friend or family member's mutual fund investments without ensuring that you both have the same risk profile. If you love cycling but end up driving a sports car, the results and investing experience may be very different than you expected. So, find out your risk-taking profile and invest accordingly.
3. Long-Term Better Than Short-Term
Mutual funds do well when you hold them for 3-5 years or even more. In the short-term, returns from mutual funds can be volatile especially in the equity fund side. But if you give time, funds generate stable returns over the long-term period. If your needs are short-term in nature, you should only invest in mutual funds that are good for short-term and that means you should avoid equity funds. If your needs are long-term, the entire range of products is available. You just need to pick, choose and invest. Millennials should know in the short-term financial markets, which is where mutual funds invest, can swing up and down too much. On the long-term, such swings do not really matter much. There are a lot of studies to back this up.
4. Prefer Systematic Investment Plan (SIP)
There are two ways for millennials to invest money in mutual funds. It can be through the lump-sum mode --- you invest your money in one go and that means you are timing the market. The other route, and which is more preferred by small investors, is the SIP route --- you invest your money on the weekly, monthly or quarterly basis as per your choice. SIP route of investing is the best because you make purchases through the investment tenure and at low and high points of the market. This also inculcates a sense of discipline which makes young investors achieve maturity much earlier and helps them smartly prepare for their financial goals. SIPs rake in close to INR 8000 crore of investment money per month in India. There are about 2.5 crore SIP accounts, which shows that so many investors are practising this method of investing diligently.
5. Learn the taxes
Every financial gain is taxed. Right from bank fixed deposits, mutual funds, gold to stocks, the investors are liable to pay a tax if there is again. Mutual funds give you a smart and easy way to use the expertise of a fund manager to save and invest money. When you get gains, they will be taxed. Your returns are impacted by taxes. So, you have to be intelligent in the way you use funds to reduce taxes. Funds that invest in stocks are taxed in a way, while funds that invest in fixed income securities face a different way of taxation. For equity funds, any realized gains on an investment held for more than a year is taxed at 10per cent (plus surcharge, if applicable and cess). Any realized gain on equity fund investments held for less than one year faces 15per cent (plus surcharge, if applicable and cess). For debt funds, any realized gains on an investment held for more than 3 years is taxed at 20 (plus surcharge, if applicable and cess) with indexation benefit if units held for more than 36 months. For gains in investments held less than 36 months, the tax rate is at the income tax slab rate of the investor.
Anil Rego is the CEO and founder of Right Horizons, an end-to-end Investment advisory and wealth management firm. An MBA and CFA degree holder, Anil believes in the Contrarian approach of wealth management. His areas of expertise includes Corpus fund management, tax planning and end to end financial planning for both residents and NRI investors .
Anil has worked for Wipro as Business Planning and Merger and Acquisition Manager before starting Right Horizons in October 2003. RightHorizons has branches across Bangalore, Mumbai, Chennai and Hyderabad.
Anil has been a columnist in leading Indian newspapers. He also routinely answers queries in mainline publications and websites. He is also a Guest Lecturer with various business schools like ICFAI, ITM and Union Bank School of management. Anil has also served as member, Board of Governors, at IBSAF.