Investing in Mutual Funds is not investing in Equities

You ask any person these days to invest in Mutual funds and they will tell you the market is high, what has the market got to do with Mutual Funds. It has a lots to do, but only if you are invested in Equity mutual funds. This has happened because of the high amount of advertisement about returns in Equity Mutual Funds as well as the wrong selling by mutual fund distributors. Commissions to distributors was high in case of Equity Mutual Funds, hence they used to sell equity mutual funds. But Mutual Funds is not just Equity, there are different types of funds for different goals and also based on your investment timeframe.

If people have money lying with them and they would like to use it for the contingency purposes, then people usually keep the money in Savings bank account or fixed deposits. This money could also be kept in Liquid funds as there is no entry or exit load and the returns are better than the savings interest rate. You might say then I could keep in fixed deposits, this is one option, but when you withdraw prematurely you lose on the interest. So effectively liquid funds are better.

Investors are also scared because of the volatility of the market and would like to keep their investments safe, in such cases investors could go for Debt mutual funds. If your goal is to buy gold for your child’s wedding,   then go for gold ETF’s. This way you would slowly start accumulating gold in paper form and when you need to buy, just redeem the investment and buy the gold. This is safer than buying physical gold. Remember the designs also will keep changing so it is better to keep the money aside and buy actually when required. This also takes care of the rise or fall in the cost of gold.

In some time we would have real estate funds. So as you can see, you can invest in mutual funds depending on your goal and risk appetite. Equity in not the only option in mutual funds. In equity too, you have options, depending on your risk appetite, aggressive or conservative. In debt too you could go for hybrid funds, where you capital is kept safe and equity is used for returns. As mentioned above, mutual fund investment in not just equity investment. You can do investments in mutual funds depending on various factors. Depending on your risk appetite and investment horizon choose your fund. Don’t just go for equity mutual funds just because they give you good returns. Remember Equity mutual funds are for those whose investment horizon is minimum 7 to 10 years.

Power of compounding

By definition compounding is the process of generating earnings on earnings. i.e. the initial earnings are reinvested to generate more earnings. As you are aware, for any earning there have to be two things Asset and time. For compounding you need to have two things that is time and initial earnings. So it means that the initial earnings have to be reinvested and over a period of time it will generate more earnings.

So let us take an example, if you invest Rs. 1 lakh for a 10% return over a year, at the end of the year, you would get Rs. 1,10,000/- in this the earning is Rs.10,000/- , the Asset is Rs. 1 lakh and time is one year. For Compounding, this initial earning of Rs. 10,000/- has to be reinvested over time. Assuming the same one year time frame and 10% return, you would get Rs. 1,000/- over a year. Don’t forget that you would keep getting the Rs.10,000 over the initial Rs. 1 lakh as well. In this way, Rs.1 Lakh invested over 15 years at 10% return could get you Rs. 4,17,725/-.

Compounding fuels growth of your money, so why let it lie idle in a savings bank account, when it could fetch more. You could put it in a fixed deposit at the same bank and generate 8 to 9 % or in a company fixed deposit or debt mutual fund for 9 to 10%. But remember in fixed deposits the interest generated is taxable. There are better ways to earn your income and still save tax. If you are ready to keep your funds for 3 to 5 years debt mutual funds are the best, as the return would be capital gains and the tax after taking indexation into account would be negligible.

Always remember the longer the period and higher the return percentage, the better the compounding. If you are ready to wait for 10 years, the best option would be to go for equity mutual funds, historically they have generated a return of around 15 to 16% returns, that too tax free. Invest with a plan in hand and watch the power of compounding.

Unoccupied Property – Care to be taken

An NRI friend of mine called the other day and mentioned that he has a property which he had purchased some years back and was planning to sell. The property had really appreciated very well, but there was more scope for appreciation. Knowing his financial condition I asked him, are you really in need of money? The obvious reply was “NO”. Then why? The real reason was fear of encroachment. Then I realized than this is a real problem for a lots of people, not only NRI’s but many other persons who have purchased a property a bit far off, where it is not possible to go and visit it on a regular basis. Unless you check on a regular basis, the chances of encroachment are very very bright.

These land sharks who do encroachment know very well, that the purchasers do not have the time and it would be very difficult for them to fight a legal battle in absentia. So what should one do? One has already purchased the plot. Here are some thing which you could do.

• Ensure that the documentation is completed and all records are transferred to your name. After transfer, put advertisement in local newspapers and keep copies of the same for future records.
• Ensure that all taxes and water and electricity bills are in your name and paid on a regular basis, during that time make sure your name is still as per the records. Do not delay such payments, any delay in even receiving regular bills should send alarm bells ringing.
• Get the property fenced and put a notice board which mentions the ownership. These boards have a life, so whenever you visit the site, make sure that the sign is visible, if not get a new one or paint it.
• If given on rent/lease, make a rental/lease agreement, with proper renewal and termination clauses. Get police verification done. This acts as a notice to police as well.
• There are many organizations which provides services of looking after property, get help.

You took all the above steps and yet encroachment has taken place, then

• Get set for a tough battle, get your documentation out (Copies, original to be ready, in case required)
• File a police complaint under Specific Relief Act 1963, along with your documentation.
• Get good legal help
• Be patient, this could be a long battle.

A Little care would help you really make some really good money.