Want Guarantees for your investments

There are some persons who would like to see their investment grow, but cannot think of anything other than Fixed Deposits. If you suggest anything else, they want a guarantee. But you are aware that in Mutual Fund investments there are no guarantees, whether it’s Equity or Debt. Ask any financial planner and he would say, if you want to grow your wealth and beat inflation, go with equity. So what do these people do, they invest where they have guarantees i.e. Fixed Deposit, Post office, Insurance, etc. and these are the very investment which erode your wealth in real terms. Many of them had burnt their fingers with equity investments in 2008 and with the many scams which took place.

This year they saw the market go up all the time and now they are again scared to invest in equity, because of their fear, which is, the market can crash anytime. Such investors should go for hybrid funds, which invest in both debt and equity. The debt portion would take care of the security of the investment and Equity would take care of the growth. This is one of the safe investments in mutual funds which would ensure you do not erode your wealth.

One of the most commonly named funds in this hybrid category are monthly Income plans. These funds invest around 75% in Debt and the balance in equity. The debt portion increases if the market is too heated. So the debt portion gives you a stable return just like fixed deposits and depending on market situation equity would give growth. So when the going is good, the returns would go to say 13-15%, but in a bad market the returns could be from 11-13%, which is not bad at all. If you look at all the Monthly Income plans the average returns for the last 5 years is around 12.5%. Here as I had said earlier, we still cannot give guarantees for returns.

Investments in these funds should be for a minimum of 3 years, as a major portion of the funds are invested in debt, these are treated as debt funds for income tax purposes and if you have read some of my earlier posts, you would have seen, that debt funds definitely beat fixed deposits if the investment is for more than 3 years. So Monthly Income Plans are tax efficient investments as well. If you go for dividend option, it’s even better as Dividends are tax free, but remember, the income tax department taxes their pound of flesh, in the form of dividend distribution tax, which is quite heavy at around 28% after adding surcharge and tax. So it is better to go for growth option and withdraw any time after 3 years when you need the money or go for a systematic withdrawal plan after 3 years.