Most people don’t start the new year with the intention of re-evaluating their finances. But in reality, the new year is the perfect time to take stock of your finances and make necessary adjustments. In fact, financial planning can be the gateway to accomplishing most other things on your resolution list, be it travel, purchasing a home, a car, or exorbitantly priced gadgets. So without further ado, let’s learn how to plan your finances this year. This blog will look at financial resolutions for 2023 and how mutual funds can help you achieve your financial goals.
Market Trends during Q3 2022(July-September)
- The third quarter of 2022(July-September) started strong. With FIIs pouring funds and NIFTY regaining its 18,000 mark, the third quarter of 2023 was full of bullishness. Even the IT(Information Technology) and Banking stocks soared high, bagging good profits by mid-quarter
- By August 2022, India’s retail inflation peaked at a 7% hike, crossing RBI’s target of 4%.
- Over and above that, Fed increased interest rates by 75 basis points, and the rupee took a nosedive to a new low of 81.04 against the US Dollar.
- All these circumstances had a knock-on effect on Nifty and Sensex as the indices were continuously underperforming.
- The stock market volatility is likely to remain high. Hence, it is advisable to invest consistently in mutual fund SIPs rather than lump sum investments in retail stocks.
How do mutual funds help in Financial Planning?
1. Diversification
Mutual funds invest in a diverse range of securities. Your investment portfolio is exposed to companies across various sectors. The diversification will help keep a balance in your investments and protect them from sectoral volatility.
2. Professional management
Mutual funds are managed by professional fund managers with several years of experience. If you are new to investing or run in a shortage of time to pick profitable stocks, mutual funds can be a trustable investment avenue.
3. Consistent returns
Though the portfolio returns of many retail investors outperform mutual funds, they can come with a high-risk factor. Mutual funds, on the other hand, provide a CAGR(Compound Annual Growth Rate) between 12-15% on average, which not only beats inflation but also helps you get nearer to your financial goals.
How to pick mutual funds for financial planning
1. Risk Appetite
Risk appetite refers to your capacity to tolerate loss incurred in your investment. Different mutual funds come with different levels of risk. You need to evaluate your financial situation and risk appetite before picking an ideal mutual fund. Large-cap funds are the most stable kinds of mutual funds, followed by mid-cap and small-cap, which are comparatively riskier.
2. Investment horizon
The investment horizon is the timeframe for which you are willing to hold your investments. For longer investment horizons, you can take more risks, and for shorter investment periods(1-3 years), it is better to invest in risk-free instruments.
3. Investment Goals
Everyone has their own investment objectives like education, family planning, marriage, travel, etc. Once you set your investment goal, it is easier to decide how much money would be required to invest in order to achieve that goal.
Things to consider before investing in mutual funds
1. Portfolio Overlap
When you invest in more than one mutual fund, it is important to check their portfolio overlap. Portfolio overlap refers to the similarity of assets in which both mutual funds have invested. Ideally, the overlap should not be more than 35%.
2. Expense Ratio
The expense Ratio is the annual maintenance fees levied by the mutual fund company. Usually, the expense ratio ranges from 0.5-2%. So try investing in mutual funds with lower expense ratios to make the most of your mutual fund returns.
3. Exit Load
Many companies charge you an exit load of around 1% when you redeem your money from the mutual fund prematurely. Make sure to stay invested for a longer duration to avoid paying such charges.
Tax benefits of investing in Mutual Funds
Under section 80C of the Income Tax Act, tax saving schemes like ELSS(Equity-linked savings scheme) mutual fund can reduce your taxable income up to Rs 1.5 lakhs. Other than ELSS, you can also go for tax-saver mutual funds that invest in securities that are eligible for tax benefits.
What are some alternative investment options?
Investment does not have a one-size-fits-all strategy. While mutual funds might work well for some people, they might not be able to fit the financial requirements of others. However, there is no dearth of investment options, no matter what your financial goals are. Let’s look at some closely similar alternatives to mutual funds:
1. ETFs:
ETF or Exchange Traded Fund is a basket of securities traded on a stock exchange. An ETF contains assets like stocks, bonds, forex currencies, commodities, and future contracts. When you invest in an ETF, you get benefits like high diversification, lower expense ratios, high liquidity, and a varied range of investment options.
2. Index Funds:
Index funds are mutual funds that mimic the performance of stock market indices like Sensex and Nifty. They invest in stocks of companies in proportion to their weightage in the index. The indices keep rebalancing the stocks as per their performance and changes in their free-float market capitalisation. Hence, if you are a risk-averse investor, index mutual funds can be a good investment choice.
Achieving your financial goals on time gives a sense of empowerment and victory. Planning these goals and investing systematically makes the process much easier and enables you to reach the goal more quickly. Investing in equity-based securities like mutual funds, ETFs, etc., may help your portfolio outperform the returns of alternate investment avenues like fixed deposits and debt bonds.
Disclaimers: This article has been issued on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this document is for general purposes only and not a complete disclosure of every material fact. The Stocks mentioned herein is for explaining the concept and shall not be construed as an investment advice to any party. The information / data herein alone is not sufficient and shouldn’t be used for the development or implementation of an investment strategy. It should not be construed as investment advice to any party. All opinions, figures, estimates and data included in this article are as on date. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The statements contained herein may include statements of future expectations and other forward-looking statements that are based on our current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Readers shall be fully responsible/liable for any decision taken on the basis of this article. Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
