Mutual funds offer you expert hands to invest in stocks and other asset classes. This improves risk adjusted returns.
When Jitesh Panchal got a job with one of the most reputed IT firms in the country, his father’s joy knew no bounds. All his life Mr.Panchal had harbored dreams that his son, unlike him, would not have to join their small family business. This has largely come true as Jitesh is now a professional with a well-paying job. Mr.Panchal is the typical Indian parent who is involved in every aspect of his son’s life including finances. Of late, he is concerned that his son wants to invest in equities instead of putting his money in safe and traditional saving instruments which provide assured returns. As a result, there have been some disagreements with his son that has left Mr.Panchal a worried man. After all, he wants his son to have a good life and save for his future judiciously without losing money.
There is a family history behind Mr.Panchal’s phobia for equities. His elder brother had lost a large part of his savings in the 1992 Harshad Mehta scam owing to which he feels that anything to do with the equity market is risky. Jitesh, a new age aspirational Indian, is at his wits end trying to explain to his father that markets have changed drastically since the 1990s and have also grown multi-fold. Besides, there are enough regulatory checks and balances in place to protect the interest of investors now. The biggest difference between his uncle’s case and his personal stand is that the former had directly invested in equities without any professional guidance while Jitesh would invest through mutual funds – which are professionally managed, well-regulated entities that invest in capital market instruments on behalf of retail investors.
As an option of the last resort, Jitesh invited his cousin Aman, an investment expert to speak to his father on this matter. Mr.Panchal had high regard for Aman as he had done reasonably well for himself at a young age. With a good job in a financial services firm, Aman moved out of his family home in 2015 to shift into an apartment that he purchased merely after five years of employment, at the age of just 28 years. Jitesh, therefore, felt that Aman was the perfect advocate for his cause.
Aman began by agreeing to Mr.Panchal that investing in equities was indeed risky if done without adequate knowledge and research. This needless to say made Mr.Panchal feel good and got him listening to Aman though Jitesh felt that his last resort too had backfired. However, Aman was smart and knew how to handle such situations and veer them in his favour. He then told Mr.Panchal that if investments were managed by full time professional portfolio managers, the potential to invest in wrong stocks reduced substantially. This was the biggest difference between a professional manager like mutual funds and an individual as the former is backed by research and strong processes while the latter may not have this wherewithal. Mutual funds help to invest across equity, debt and gold (called asset classes) based on one’s risk appetite and aim to create wealth in the long run. For example, if someone was not comfortable with equity, he/she can invest in a combination of debt and equity in varying proportions as per one’s comfort. The ticket size is also low and is as little as Rs.500 per month.
Aman used a nice analogy to push the case of equities. He said that people say good things about many companies (gave a few names) and regularly use their products as well. Some even aspire that their sons and daughters may be employed with such companies. However, when it comes to purchasing shares of these companies, they don’t have faith in their stock. Isn’t that a contradiction? Aman now had the attention of Mr.Panchal and could even see him nodding his head, as if in agreement. Jitesh, on the other hand, had a faint smile on his face, as if wanting to thank Aman.
Aman also explained diversi¬fication in a nice way. He said that we have different meals in a day where we taste variety of food like dosas, rotis, rice, bread, subjis, curds, milk, fruits, ice-creams, etc. In the same way, it is prudent to diversify and invest across investment products to meet one’s life goals. A mutual fund is like a “thali” where one can taste a variety of food (products) at an affordable price (based on one’s goals and risk appetite). Mutual funds offer different products for near-term and far-term goals that too with good liquidity. For example, with products like liquid funds, one can park money even for a week-end without any penalties for early withdrawal.
Aman also assured Mr.Panchal that mutual funds are closely regulated by the capital market regulator (Securities and Exchange Board of India or SEBI) which reports to the Government of India. Mutual funds are very transparent with all their disclosures which are readily available on the respective fund’s website. A daily per unit value of the investment portfolio is published by the name – Net Asset Value or NAV - besides releasing monthly details of where the money has been invested and in what proportion, on its website. Mutual funds also offer an investment structure similar to the popular ‘recurring deposit’ called ‘Systematic Investment Plans’ or SIPs which can be bought for Rs.500 per month. Imagine investing in the shares of top notch companies at such a small price.
Aman pointed out that besides aiming to beat inflation, mutual funds are also tax-ef¬ficient in many ways which helps to improve post tax-returns like - i) One need not pay tax until mutual fund units are redeemed unlike traditional investments which are taxed every year based on accrued returns ii) Returns from equity funds are tax free after one year iii) Dividend received from equity funds are tax free iv) returns from debt funds post three years of investment are taxed only for returns earned over and above the inflation rate that too only on redemption and not every year, v) Section 80C benefits up to Rs.1.5 lakh is allowed for Equity Linked Savings Scheme (ELSS) and approved pension funds.
Being young, it was possible for Jitesh to invest for longer periods of time and create wealth. Aman explained that an investment of Rs.10,000 over 20 years has potential to generate a corpus of Rs.1 crore if a fund generates 12% returns per annum. If one extends the period to 35 years, i.e. till retirement, one could create wealth of about Rs.6.5 crore at 12% expected rate of return. Aman said that his secret mantra of buying a house at a young age was his consistency and longevity with his mutual fund investments. Thus, if one starts investing from his first pay cheque and continues till his retirement, the quantum of wealth generation could be enormous.
Aman had a final word for Mr.Panchal where he mentioned that falling interest rates may not benefit traditional instruments but would benefit companies by lowering their borrowing cost and in turn benefit the economy or equity markets as companies may turn more profitable.
After having listened to Aman’s story, Mr.Panchal was now convinced about Jitesh’s decision and in fact felt proud of his son’s new way of investing. Thanks to Aman, yet another family understood that mutual funds offer a host of advantages. The Panchal family has converted to being mutual fund investors, whose turn is it next?
-Harshendu Bindal Franklin, Templeton Investments
When Jitesh Panchal got a job with one of the most reputed IT firms in the country, his father’s joy knew no bounds. All his life Mr.Panchal had harbored dreams that his son, unlike him, would not have to join their small family business. This has largely come true as Jitesh is now a professional with a well-paying job. Mr.Panchal is the typical Indian parent who is involved in every aspect of his son’s life including finances. Of late, he is concerned that his son wants to invest in equities instead of putting his money in safe and traditional saving instruments which provide assured returns. As a result, there have been some disagreements with his son that has left Mr.Panchal a worried man. After all, he wants his son to have a good life and save for his future judiciously without losing money.
There is a family history behind Mr.Panchal’s phobia for equities. His elder brother had lost a large part of his savings in the 1992 Harshad Mehta scam owing to which he feels that anything to do with the equity market is risky. Jitesh, a new age aspirational Indian, is at his wits end trying to explain to his father that markets have changed drastically since the 1990s and have also grown multi-fold. Besides, there are enough regulatory checks and balances in place to protect the interest of investors now. The biggest difference between his uncle’s case and his personal stand is that the former had directly invested in equities without any professional guidance while Jitesh would invest through mutual funds – which are professionally managed, well-regulated entities that invest in capital market instruments on behalf of retail investors.
As an option of the last resort, Jitesh invited his cousin Aman, an investment expert to speak to his father on this matter. Mr.Panchal had high regard for Aman as he had done reasonably well for himself at a young age. With a good job in a financial services firm, Aman moved out of his family home in 2015 to shift into an apartment that he purchased merely after five years of employment, at the age of just 28 years. Jitesh, therefore, felt that Aman was the perfect advocate for his cause.
Aman began by agreeing to Mr.Panchal that investing in equities was indeed risky if done without adequate knowledge and research. This needless to say made Mr.Panchal feel good and got him listening to Aman though Jitesh felt that his last resort too had backfired. However, Aman was smart and knew how to handle such situations and veer them in his favour. He then told Mr.Panchal that if investments were managed by full time professional portfolio managers, the potential to invest in wrong stocks reduced substantially. This was the biggest difference between a professional manager like mutual funds and an individual as the former is backed by research and strong processes while the latter may not have this wherewithal. Mutual funds help to invest across equity, debt and gold (called asset classes) based on one’s risk appetite and aim to create wealth in the long run. For example, if someone was not comfortable with equity, he/she can invest in a combination of debt and equity in varying proportions as per one’s comfort. The ticket size is also low and is as little as Rs.500 per month.
Aman used a nice analogy to push the case of equities. He said that people say good things about many companies (gave a few names) and regularly use their products as well. Some even aspire that their sons and daughters may be employed with such companies. However, when it comes to purchasing shares of these companies, they don’t have faith in their stock. Isn’t that a contradiction? Aman now had the attention of Mr.Panchal and could even see him nodding his head, as if in agreement. Jitesh, on the other hand, had a faint smile on his face, as if wanting to thank Aman.
Aman also explained diversi¬fication in a nice way. He said that we have different meals in a day where we taste variety of food like dosas, rotis, rice, bread, subjis, curds, milk, fruits, ice-creams, etc. In the same way, it is prudent to diversify and invest across investment products to meet one’s life goals. A mutual fund is like a “thali” where one can taste a variety of food (products) at an affordable price (based on one’s goals and risk appetite). Mutual funds offer different products for near-term and far-term goals that too with good liquidity. For example, with products like liquid funds, one can park money even for a week-end without any penalties for early withdrawal.
Aman also assured Mr.Panchal that mutual funds are closely regulated by the capital market regulator (Securities and Exchange Board of India or SEBI) which reports to the Government of India. Mutual funds are very transparent with all their disclosures which are readily available on the respective fund’s website. A daily per unit value of the investment portfolio is published by the name – Net Asset Value or NAV - besides releasing monthly details of where the money has been invested and in what proportion, on its website. Mutual funds also offer an investment structure similar to the popular ‘recurring deposit’ called ‘Systematic Investment Plans’ or SIPs which can be bought for Rs.500 per month. Imagine investing in the shares of top notch companies at such a small price.
Aman pointed out that besides aiming to beat inflation, mutual funds are also tax-ef¬ficient in many ways which helps to improve post tax-returns like - i) One need not pay tax until mutual fund units are redeemed unlike traditional investments which are taxed every year based on accrued returns ii) Returns from equity funds are tax free after one year iii) Dividend received from equity funds are tax free iv) returns from debt funds post three years of investment are taxed only for returns earned over and above the inflation rate that too only on redemption and not every year, v) Section 80C benefits up to Rs.1.5 lakh is allowed for Equity Linked Savings Scheme (ELSS) and approved pension funds.
Being young, it was possible for Jitesh to invest for longer periods of time and create wealth. Aman explained that an investment of Rs.10,000 over 20 years has potential to generate a corpus of Rs.1 crore if a fund generates 12% returns per annum. If one extends the period to 35 years, i.e. till retirement, one could create wealth of about Rs.6.5 crore at 12% expected rate of return. Aman said that his secret mantra of buying a house at a young age was his consistency and longevity with his mutual fund investments. Thus, if one starts investing from his first pay cheque and continues till his retirement, the quantum of wealth generation could be enormous.
Aman had a final word for Mr.Panchal where he mentioned that falling interest rates may not benefit traditional instruments but would benefit companies by lowering their borrowing cost and in turn benefit the economy or equity markets as companies may turn more profitable.
After having listened to Aman’s story, Mr.Panchal was now convinced about Jitesh’s decision and in fact felt proud of his son’s new way of investing. Thanks to Aman, yet another family understood that mutual funds offer a host of advantages. The Panchal family has converted to being mutual fund investors, whose turn is it next?
-Harshendu Bindal Franklin, Templeton Investments
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