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December 7, 2022
How to invest in Debt Funds?
Most of our parents and grandparents have invested their hard-earned money into trusted FDs, and PPFs and relied on gold for wealth creation. That was a good option a long time ago, but today, that’s a way to lose wealth than make wealth.
A bank deposit earns 6% per annum. The interest earned on the principal is taxed according to the tax bracket. If the tax bracket of the individual is 20%, the net interest earned is 6%*(1-20%) = 4.8%.
The current inflation ranging from 4% to 6%, erodes the wealth that is created by the bank deposit. Hence, in the current economic scenario, these instruments are not sufficient for beating inflation and creating wealth with reasonable returns over the years.
Debt as an investment vehicle has always been trusted as there is a fixed promised return and a guaranteed principal payment, giving a sense of comfort to the investor.
The debt market is a platform that enables the purchase and sale of loans in exchange for a rate of interest and periodic payments of the coupon.
These markets are lesser risky than their equity counterparts, and hence also have lower returns when compared to equity instruments. In the following article, we explore various facets of this financial instrument.
What is a Debt Mutual Fund?
A debt fund is a mutual fund that invests in fixed-income instruments such as treasury bills, commercial paper, government bonds, corporate bonds/debentures, money market instruments, etc.
All the instruments that the fund invests in have a maturity and a fixed coupon or interest rate payment that the buyer/investor can rely on – hence have the name – fixed-income instruments.
These funds are also known as bond funds or fixed-income funds. As the returns are pre-decided, they are not affected by market fluctuations when the instruments are held until maturity. Hence, these funds are low-risk options for an investor.
Every debt security is assigned a credit rating which indicates the risk/probability of default, based on which the fund managers take a decision to either include or exclude them in their portfolios.
If a paper or debt security has a high credit rating, it implies a low probability of default i.e., the borrower has a high propensity to pay back the principal and interest.
Fund managers sometimes also choose a lower-quality debt to earn higher returns by taking a calculated risk. A debt fund with a higher amount of high-quality debt is more stable and less prone to market fluctuations however, earns a lower return.
The fund manager also has the flexibility to choose long-term or short-term debt based on the existing yield curve or interest rate regime in the economy.
Types of Debt Funds
Debt funds are classified based on the maturity period as follows –
Liquid Fund: This fund invests in money market instruments that have a maturity of fewer than 91 days (3 months). The returns earned by these funds are greater than the savings accounts.
These are considered one of the best alternatives for liquid and short-term investing.
Gilt Fund: These invest over 80% of the assets into Government securities over a range of maturities (10 years, 5 years, etc). These funds are credit risk-free (as one is lending to the Government of India, which cannot default on its payments), however, are highly vulnerable to interest rate risk.
Dynamic Bond Fund: These invest in debt securities with a range of maturities, adjusting for the interest rate regime or yield curve prevailing in the economy. These funds are ideal for investors seeking moderate risk with an investment horizon of 3-5 years.
Money Market Fund: The fund invests in debt securities with a maturity of less than 1 year. These are sought after by investors looking for short-term investment options in low-risk vehicles.
Corporate Bond Fund: This fund invests over 80% of the assets in corporate bonds with the highest credit rating (implying a low risk of default). These are suitable for investors seeking low risk and provide exposure to corporate bonds which provide higher returns than the G-secs.
Banking and PSU Fund: The fund invests over 80% of its assets in Banks and PSU bonds.
Credit Risk Fund: These funds are mandated to invest over 65% of their assets in bonds with a credit risk rating below AA+. They aim to generate a return higher than the funds invested in G-secs and other high credit-rating debt securities, by taking on more risk in their portfolios.
However, these funds only thrive in a credit conducive environment where the economy is booming. These funds are very volatile and are suitable for investors seeking moderate-high risk.
Floater Fund: These funds invest over 65% of their assets in bonds with a floating interest rate. One should consider investing in floater funds when there is a rise in interest rates in the economy to reap the maximum benefits.
Short-term floater funds typically invest in Government securities with a tenure of less than one year. Longer-term floater funds invest in corporate bonds, debentures, and government bonds. Flexibility in tenure makes it an attractive investment to all investors in the market.
Despite these funds providing higher returns (lower than equity funds), they are heavily reliant on market conditions, implying uncertainty in the prediction of returns that can be expected from these funds.
Investors looking to make gains from the interest rate fluctuations, dilute the interest rate risk factor in their portfolio, or have their wealth unaffected by the volatile market fluctuations prefer to invest in these funds.
Overnight Fund: These invest in securities with a maturity of 1 day. Due to the extremely small-time horizon, the interest rate and credit risk are almost negligible (SEBI also mandates these funds to invest in low-risk debt securities).
The returns earned from these funds are also lower ranging from 3-5%. These funds do not charge exit loads even when the units are redeemed in a day, which was the primary reason for their popularity among investors.
What is Macaulay’s duration?
This financial jargon indicates how many years it would effectively take for the bond to repay back to the investor with its periodic cash flows. It can also be considered as the time at which the investor’s investment reached a breakeven.
It is also used as an indicator for the interest rate sensitivity of the bond, the higher the duration, the higher the sensitivity. The following table indicates the type of bonds that the funds would invest in depending on their fund type.
| FUND TYPE | Macaulay Duration |
| Ultra-Short Duration Funds | 3-6 months |
| Low Duration Fund | 6-12 months |
| Short Duration Fund | 1-3 years |
| Medium Duration Fund | 3-4 years |
| Medium – Long Duration Fund | 4-7 years |
| Long Duration Fund | >7 years |
What type of Investor should invest in Debt Funds?
Debt funds are considered ideal for risk-averse investors who aim to generate a regular income out of their investments. The funds diversify across various securities and ensure a stable return to their investors.
If an investor has been saving in bank deposits for their stability, then he/she could prefer debt mutual funds and earn similar or higher returns in a tax-efficient manner. The funds are available for short-term (3-12 months) and medium-term investors (3-5 years).
As an investor, if you are looking for a more liquid investment, you could prefer a short-term fund over a savings account and earn 7-9%.
Monthly Income Plans (MIPs) also provide an option for the investor to receive a monthly payout, similar to FDs.
Risks in debt funds
We are not suggesting that debt funds are risk-free. That tag only belongs to the Government of India (Sovereign Debt). The underlying risks that one must consider while investing in debt funds are as follows –
- Liquidity Risk: In an economic downturn, the fund house could receive an umpteen number of redemption requests from the pool of investors. There is a possibility that the fund may not have enough cash and cannot sell/reverse their positions due to the economic conditions to oblige to all the requests. This risk is known as liquidity risk.
- Interest Rate Risk: When the interest rates increase, the NAV of the fund falls. In case of the interest rate decline, the value of bonds in the portfolio increases, due to their higher pre-decided coupon rates. This also pushes the NAV of the debt funds in an upward direction. Hence, the NAV of the fund is prone to interest-rate fluctuations in the economy.
- Credit Risk: The probability of default, i.e., the event when the borrower does not pay the principal and interest.
Expense Ratio: It is the fees paid to the fund house for managing your money. One should also consider this expense while investing in a debt fund. These funds earn lower returns than their equity counterparts. If the expense ratio is high, it could dent future returns/earnings.
Hence, it is always advisable to stay invested for a longer duration and to choose funds with a lower expense ratio.
Benefits of debt funds
- High Liquidity: Debt funds are typically considered alternatives to fixed deposits. Along with providing recurring returns, debt funds (especially liquid funds and overnight funds) have high liquidity where investors can redeem their investments in the shortest time frame.
- Investment Horizon: There are umpteen options available for any type of investment horizon that is preferred by the investor – a large number of options to choose from and hence make a portfolio customized for yourself.
- Higher Returns: The debt funds provide a higher return than the typical FDs, and savings accounts.
- Tax Efficiency: The interest rate earnings are taxed every year in the case of FDs. However, in the case of debt mutual funds, the investor reaps the benefits of indexation after a holding period of 3 years.
- Flexibility: The funds also provide an option to transfer the units to equity schemes if the investor is ready to take on additional risk for higher returns. Such options or alternatives are absent in the traditional route of FDs and bank deposits.
FAQs
What are debt funds?
A debt fund is a mutual fund that invests in fixed-income instruments such as treasury bills, commercial paper, government bonds, corporate bonds/debentures, money market instruments, etc.
What are the benefits of debt funds?
- High Liquidity
- Investment Horizon
- Higher Returns
- Tax Efficiency
- Flexibility
Is it good to invest in debt funds?
Yes, debt funds are a great investment option for investors. These offer higher returns over a long investment horizon and are tax-efficient as well.
Is a debt fund better than an FD?
Both are great investment options. FDs are more secure and offer fixed stable returns. A debt mutual fund offers high returns and has a risk factor involved.
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10 Reasons Why You Should Study in the USA
The USA has emerged as a top destination for ambitious students, and for good reason! This blog explores ten compelling reasons why studying in the USA can be a transformative journey, opening doors to academic excellence, personal growth, and a bright future.
1. World-Class Education: The USA boasts some of the world's most prestigious universities, renowned for their exceptional faculty and rigorous academics. You'll find innovative programs designed to challenge and inspire across diverse disciplines, from engineering and medicine to humanities and business. Many universities prioritize cutting-edge research, offering students the opportunity to learn alongside leading minds in their fields.
2. Globally Recognized Degrees: A US degree is a passport to success. Recognized and respected by employers worldwide, a US education equips you with valuable knowledge and skills that will set you apart in the global job market. Whether you seek a career in India or internationally, a US degree opens doors to exciting opportunities.
3. Flexible Education System: Unlike rigid educational structures, US universities offer a refreshing level of flexibility. The credit system allows you to tailor your studies, choosing courses that align with your interests and career goals. This freedom to explore different fields before specializing allows you to discover your true passion.
4. Diverse and Inclusive Environment: US campuses are a melting pot of cultures, fostering a vibrant and inclusive learning environment. You'll have the opportunity to learn alongside international peers, broadening your perspective and developing valuable intercultural communication skills. This diverse environment prepares you to thrive in an increasingly globalized world.
5. Practical Learning Opportunities: US universities go beyond theory, offering a wealth of practical learning experiences. Internships, co-ops, and hands-on projects allow you to apply your knowledge in real-world settings. This practical experience enhances your resume and makes you a more competitive candidate for future jobs.
6. Cutting-Edge Technology and Resources: US universities are at the forefront of technological innovation. State-of-the-art facilities, advanced research labs, and access to cutting-edge software and equipment provide an unparalleled learning environment. Imagine conducting research in world-class facilities and having access to the latest technological advancements in your field!
7. Development of Life Skills: A US education is more than just academics. Universities cultivate essential life skills, fostering independence, critical thinking, and strong communication abilities. You'll learn to manage your time effectively, collaborate with diverse teams, and express yourself confidently. This holistic approach empowers you to succeed not just in academia, but also in your personal and professional life.
8. Vibrant Campus Life: Step beyond the classroom and immerse yourself in the rich tapestry of campus life. US universities offer a vast array of clubs, organizations, events, and activities catering to every interest. From sports and cultural clubs to student government and academic societies, you'll find opportunities to explore your passions, make lifelong friends, and contribute to a dynamic campus culture.
9. Scholarship and Financial Aid Options: Don't let financial concerns hold you back! Many US universities offer scholarships and financial aid programs specifically for international students. EduFund's expert advisors can help you navigate the financial aid process and explore scholarship opportunities to make your dream of studying in the USA a reality.
10. Post-Graduation Prospects: The Optional Practical Training (OPT) program allows international students to gain valuable work experience in the USA after graduation. This practical experience can strengthen your resume and enhance your career prospects. For some students, OPT can even lead to exciting job opportunities in the US after graduation.
Wondering about how to finance your US education? Join our WhatsApp Community to know more!
Embrace Your American Dream!
Studying in the USA is an investment in your future, offering academic excellence, personal growth, and a chance to build a successful career. At EduFund, we're here to support you every step of the way. Contact our advisors today to explore your options and turn your dream of studying in the USA into a reality!
4 essential tips on investing in your child's education
Life becomes easier and more manageable with planning. A very important part of a happy and balanced life is managing your finances well.
This responsibility becomes manifold if you have a family to provide for. Prioritizing the prior planning of your child’s college education can make your retirement life effortless and stress-free.
Put away savings to preserve wealth. Invest money to generate more wealth. At the end of the day, gaining that fine balance between your savings, investments, and spending habits is what will secure a beautiful future for you as well as your family.
Here are some pro tips on how to invest and save for your children’s college education.
1. When to start?
Timing is everything. The logic is simple - the earlier you start, the more wealth you can generate and accumulate.
You may begin as early as the family planning stage itself. Even if you do not have a clear sight of the stream of academics your child might pursue later in life, it does not hurt to put away money.
As your child grows up, they might decide upon what line of academics they want depending on their career goals.
Your savings will come in handy in reassuring your child that you are perfectly prepared to back them in realizing their dreams as there will already be a considerable amount of funds they can count on.
2. Compartmentalise your savings
The habit of saving money regularly is one of the healthiest habits one can inculcate. But mastering the art of saving requires self-regulation and a sense of organization.
Putting away a bulk of money indiscriminately is not the most effective way of saving.
Keep track of your expenses and your income; device upon an amount you can afford to put away as savings. Make a list of all the things you need to save for - emergencies, education, health, housing, and so on. Divide your savings accordingly.
The act of compartmentalizing savings can also be effective in regulating your spending habits. You can also inculcate this healthy habit in your child from an early age by encouraging them to save money from their monthly allowances.
3. Consider different investment options
Investing is always an improvement upon saving because investments can generate new wealth. Thus, it is not enough to just put away money as savings; you also need to allocate funds to certain investments that suit your monetary goals.
There are different kinds of investment channels you can opt for. Some of us prefer fixed or recurring deposits while others want to generate more returns and go for mutual funds.
Mutual funds can be of different types depending on the factors like the amount of risk, duration, return rates, etc.
The mode of payment can also vary. For example, you can go for a one-time investment or you can choose monthly SIPs. Be well aware of all kinds of investment plans available so that you can choose the best one for yourself.
4. Invest in a global education
Your savings and money made from investments will be especially useful when you send your child abroad to pursue a college education.
Even if you are not sure about the possibility of global education in the future, it is always advisable to remain prepared for the same.
Simply saving money is not enough. Investing is a better idea and in the case of global education, it can be beneficial to invest in foreign stocks.
This is because the value of the Indian currency is forecasted to fall in comparison to other stable currencies in the world.
This means that the cost of living and studying abroad will be way higher than the cost of living and studying in a new city within India.
Once you set your financial goals, find out about investment schemes with international equity funds from countries like the US, so that you can make money in a more stable currency.
Conclusion
There can be several investment goals relating to different parts of your life like yourself, your spouse, relatives, housing and accommodation, health, gadgets, and emergencies. Mixing these up will only cause chaos and distress.
Hence, it is important to think separately about saving for your children’s college education and indulge in smart investments.
Consult an expert advisor to get the right plan
TALK TO AN EXPERT
4 W’s of Balanced Advantage Funds
What is a Balanced Advantage Fund?
A balanced advantage fund is a fund that can invest 0-100% in the equity market or 0-100% in the debt market dynamically as per the prevailing market condition.
For example - If a fund manager finds that the price of the equity market has gone up, he will tilt the portfolio more toward the debt market.
Likewise, if the equity market trades at a discount, then the fund manager can tilt/shift the portfolio toward the equity market.
The valuation is the internal process of the fund. Based on valuation, the fund manager can take the call. This way, the fund manager can take the opportunity and change the asset allocation.
The fund manager can go aggressive in the equity market or can also decide to play conservatively to reduce the portfolio's volatility. The aim is to minimize the portfolio's downside risk and maximize the returns.
Who should invest?
Investors who are looking for long-term wealth creation.
Investors who are not comfortable with the market volatility.
Investors who do not want to face high volatility and looking for equity-like returns.
Investors who are unsure which type of fund they should invest in, whether in the equity or debt-oriented fund.
Risk-averse equity investors with an investment horizon of more than three years.
Additional read: Financial mistakes to avoid
Why should you invest?
A balanced advantage fund is a dynamically rebalancing fund between two asset classes, i.e. equity and debt.
It has the complete flexibility of rebalancing from 0-100% in both asset classes.
It provides you with better risk-adjusted returns.
It manages the equity market volatility and provides stability in the portfolio by diversifying the portfolio into the debt market.
It offers you equity-like returns, which help your portfolio to grow at a much faster rate than debt funds and also helps you to beat inflation.
Minimizes the downside risk and provides scope for growth by investing in the equity market.
When should you invest?
When the volatility in the equity market increases you do not want to have such high exposure to the prevailing volatility.
When you want equity-like returns but do not want to face high liquidity.
First-time mutual fund investor looking for long-term wealth creation.
Conclusion
Try to allocate some portion of your portfolio towards a balanced advantage fund if you want to reduce the portfolio's volatility. A balanced advantage fund is like a season fund.
FAQs
What is a Balanced Advantage Fund?
A Balanced Advantage Fund can dynamically invest 0-100% in either the equity or debt market, depending on market conditions.
Who should consider investing in Balanced Advantage Funds?
Investors seeking long-term wealth creation, those uncomfortable with market volatility, and those unsure about equity or debt-oriented funds can benefit.
Why invest in Balanced Advantage Funds?
These funds offer flexible asset allocation, better risk-adjusted returns, and stability by diversifying into the debt market. They provide equity-like returns, growth potential, and risk mitigation.
When is the ideal time to invest in Balanced Advantage Funds?
Consider these funds when equity market volatility increases, and you want equity-like returns without excessive risk.
What is the aim of Balanced Advantage Funds?
The aim is to minimize portfolio downside risk, maximize returns, and adapt to market conditions, providing both stability and growth.
5 financial things to consider before child planning.
Both life and wallet will never be the same once you decide to have a baby. No event in your life will signify financial change quite the way this one does, from the first prenatal appointment to the day of college graduation (and beyond).
5 financial things to consider before child planning
1. Create a budget
Before you start child planning, you need to have a budget in place. You and your partner may need to create a realistic budget based on your expenses and your streams of income. Once you know how much you can afford to spend, you will be able to tackle the costs easily.
A new child is a new family member that needs space! So if you need extra space once the baby is born, figure out what kind of home you can afford, whether it's a slightly larger apartment, a warm cottage, or a pricey house.
Will you want the latest baby things or your sister’s passed-on ones? Think about what sort of child care would you require and get candid with your expenses before you start making any purchases.
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2. Costs associated with birth
As new parents, you need prenatal vitamins, alternative therapies, labor and delivery alternatives, and screening tests. Give yourself enough time to change or upgrade insurance plans should you need more comprehensive coverage.
Good health insurance is vital in this economy. Hospital bills, medical fees, and maternity costs can be high. According to estimates from the industry, a straightforward delivery could cost between Rs 50,000 and Rs 70,000, but a private specialty hospital could charge up to Rs 2-3 lakh.
A cesarean delivery could result in a cost rise of up to Rs 4-5 lakh. Before having a kid, you should make financial arrangements for the costs associated with the delivery and child care.
3. Consider maternity leave
The vast majority of Indian employees are not entitled to paid family leave. If the mother is employed, you might need to think about taking a lengthier (unpaid) maternity leave or a sabbatical for a year or two. This can be a huge financial loss for families that rely on both streams of income.
Paid parental leave is not always an option. Find out if your workplace offers paid leave for new parents and if there are any policies in your favor that you can utilize.
Determine the number of weeks covered and the proportion of your salary that is used. Do you have to use your sick and vacation days first?
If you don't have access to paid time off or you're going to take more unpaid time off, you might want to cut costs or rely on your savings.
4. Purchase life and health insurance
You'll want your child to be stable financially if something were to happen to you or your partner. A life insurance policy can assist in paying for things like child care, housekeeping, cooking, and more.
Purchasing maternity insurance is the first action you can take to cover maternity costs. When purchasing health insurance, (even for a couple), it is important to confirm that the policy includes coverage for maternity costs and, if applicable, any applicable waiting periods. Additionally, by paying a larger rate, you might add pregnancy coverage to a current insurance policy.
Buying health insurance is most important when considering having a child. Get your health covered in your plan so that you are not financially burdened in case of a health emergency.
5. Plan for the child’s education
Just like the prices of lemons and oranges are growing, the cost of education is skyrocketing. Saving for your child’s college is a necessity. When it comes to saving money for college, time and compound interest are your best friends.
Even while inflation is an unavoidable fact, keep in mind that education inflation is far higher. Utilizing the force of compounding is one approach to combat this, but it will only be effective if you have a long-term strategy in place.
You indeed have no idea what career path your child will take, but you still need to put aside a portion of capital that can be utilized when the time comes.
Right now, you need to think about the type of education you would like to offer because the practical costs of studying engineering in India vs. the US would be very different.
From giving birth to seeing them off to college, watching your child grow and thrive is every parent’s dream! So give those dreams wings by planning ahead and investing for their bright future!
TALK TO AN EXPERT
5 investment plans every parent should have
As parents, we have a profound responsibility to ensure a bright and secure future for our children. While providing love, care, and education are crucial aspects, financial planning plays a pivotal role in setting the stage for their success.
Investing wisely is key to securing their future aspirations and safeguarding against unforeseen circumstances. Let's explore five essential investment plans that every parent should consider, ranging from mutual funds and US ETFs to US stocks and insurance.
So, we will dive in and discover the strategies that can pave the way for your child's financial well-being.
Education Fund: The Power of Mutual Funds
One of the most crucial investments you can make as a parent is in your children's education. Start by setting up an education fund that specifically caters to their academic pursuits.
Consider tax-efficient options like a 529 plan, which allows you to invest in a variety of mutual funds, ensuring growth potential while enjoying tax benefits.
Platforms like EduFund (www.edufund.in) offer valuable guidance and tools to help you plan and manage your child's education fund effectively.
investment plans
US ETFs: Diversification Made Easy
1. Exchange Traded Funds
Exchange-Traded Funds (ETFs) have gained significant popularity in recent years due to their flexibility and global exposure.
Just like mutual funds, ETFs represent a basket of securities, including stocks, bonds, commodities, or a combination thereof. However, unlike mutual funds, ETFs are traded on stock exchanges throughout the trading day at market prices.
ETFs offer several benefits, including transparency, liquidity, and cost-effectiveness. Parents can buy and sell ETFs at any time during market hours, allowing for more flexibility in managing their investments.
Additionally, ETFs disclose their holdings daily, ensuring transparency in the investment portfolio. With generally lower expense ratios compared to mutual funds, ETFs offer a cost-effective investment option for parents.
2. USA Stocks
For parents who are comfortable with taking on more active roles in their investment journey, investing in individual stocks can be an exciting avenue.
Owning shares of well-established companies can offer substantial returns over time. While investing in individual stocks requires careful research and monitoring, it can provide the potential for higher growth compared to mutual funds or ETFs.
EduFund's resources can assist you in understanding stock investing basics and identifying companies with strong fundamentals.
To mitigate risk, parents can consider diversifying their stock portfolios across different sectors and industries. This diversification helps reduce the impact of a single stock's performance on the overall portfolio.
In addition, parents should adopt a long-term investment mindset and focus on the fundamentals of the companies they invest in rather than short-term market fluctuations.
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Insurance - Protecting Your Family's Future
Insurance is a pivotal component of any comprehensive financial plan, especially for parents. Life insurance provides financial protection to your family in the event of your untimely demise.
It ensures that your children's education, living expenses, and future aspirations are secure, even in your absence. Term life insurance offers coverage for a specified period, providing a higher coverage amount at an affordable premium.
Additionally, health insurance safeguards against unexpected medical expenses, offering peace of mind during uncertain times. By securing adequate insurance coverage, parents can safeguard their family's financial well-being and ensure a secure future.
Investment Tips for Mom's in India
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Mutual Funds - Diversify and Grow Your Wealth
Mutual funds are an excellent choice for parents seeking diversification in their investment portfolios. These funds pool money from several investors to invest in a variety of asset classes, including stocks, bonds, and money market instruments.
Managed by professional fund managers, mutual funds allow parents to benefit from their expertise and experience in making investment decisions.
By spreading investments across different sectors and markets, mutual funds help reduce the risk associated with investing in individual stocks.
Parents can choose from many types of mutual funds on the basis of their risk appetite and financial goals. For those seeking stability, bond funds can offer a regular income with lower volatility.
On the other hand, equity funds offer an opportunity for capital appreciation through investments in stocks. Balanced funds offer a blend of both equity and bond investments, providing a balanced risk-return profile. By investing in mutual funds, parents can access professional investment management and enjoy the benefits of diversification.
You can lay a strong foundation for your family's future by incorporating these investment plans into your financial strategy.
Remember that investment decisions should align with your risk tolerance, financial goals, and time horizon. It's always suggested as advice to seek guidance from financial advisors who can provide personalized advice based on your specific circumstances.
Conclusion
Investing wisely is an integral part of parental responsibility. By incorporating these five investment plans into your financial strategy, you can take proactive steps toward securing your child's future while also protecting your own financial well-being.
Remember to conduct thorough research, seek professional advice, and regularly review your investment portfolio to adapt to changing circumstances.
By combining long-term vision with disciplined investment practices, you can build a strong financial foundation for your children, allowing them to chase their dreams with confidence.
Start planning today and pave the way for a prosperous future for your family.
Consult an Expert Advisor
5 reasons why SIP is the best investment choice?
A systematic investment plan or SIP is the best plan that helps you invest in mutual funds on a regular basis. You can choose to invest weekly, monthly or even quarterly – the most popular choice being monthly.
There are multiple reasons why SIPs are the best way to grow your money especially when you have a goal to plan – e.g. your child’s education. SIPs can be bought easily and you can start with a very low amount - Rs. 500 per month. In this blog, we will talk about the ‘Big 5 advantages’ that SIPs offer to you as a parent.
But before that, let's understand what a SIP is
What is SIP?
A SIP or systematic investment plan is an investment mode through which an investor can create a regular mechanism of investment for themselves.
Let's take the example of investor X. Investor X wishes to invest Rs. 10,000 every month in a mutual fund.
In this case, investor X can create a SIP for a fund they want to invest in and the money will be deducted every month automatically (the deduction can be weekly, monthly, or even quarterly, depending on the investor's choice).
Think of it as a recurring deposit, with better returns.
Now that we know what a SIP is, let's get to know why investing via SIP is the best choice you can make to enlarge your corpus.
CALCULATE MONTHLY SIP
5 Reasons SIP is the best
These are the 5 main reasons why you should invest via a systematic investment plan to reach your financial goals
1. Suitable for Long-Term Investment
Any financial advisor will tell you that if you want to invest long-term, SIP is the way to go.
The reason is simple, regular investing and automatic deductions keep investors motivated to stay invested and reach their investment goals quicker.
During the 2008 financial recession, many people withdrew money from mutual funds. However, the ones that remained invested via SIP, attained a huge profit once the markets rose.
Long-term investing makes sure that even if the market is down at the moment, once the markets rise, the investor will make profits.
2. Goal-planning
SIPs are good tools to plan for a future goal – to buy a 4-wheeler or to pay for college tuition fees maybe 10-15 years from now.
When you determine the amount required to achieve your goal, you will know how much you should invest and how long it will take to reach your goal. This will help in planning effectively.
Having financial goals is very important to creating a financially secure future. One must have a defined idea about what financial goal one wants to reach by the age of 30, 40, 50, and so on.
3. Effect of Compounding
Compounding is one of the biggest advantages of a SIP.
Over time your investments grow because you start earning returns not on your principal amount, but on the interest that keeps getting added to it.
Let's take an example. Suppose you invest Rs.1,000 in a mutual fund that gives you a yearly return of 10% p.a. Your amount becomes 1,100. at the end of the first year. At the end of the second year, the rate of return is 11%, this time the returns will be calculated on Rs. 1,100 and not the principal amount, which is, Rs. 1,000.
This ensures the growth of your corpus and is one of the reasons why experts advise you to not withdraw your investments when the market is down.
4. Curated by Experts
With the increasing number of fund types like equity, debt, mixed, gold-based, etc. there is a wide variety to choose from based on your risk appetite and preferred investment duration.
This has led to customized offerings based on individual needs, supervised by experts in the SIP domain. All you need is to specify your goal and timeline and you are provided with the best possible funds that can meet your future goals.
SIPs have become popular over the past few years, because of the ease of investing and the flexibility provided in terms of the amount of money that can be invested.
You can stay invested as long as you want, although average returns have been higher when invested in the long term.
Research also shows that the returns offered by SIPs are more than recurring deposits in banks, in the long term.
5. Automates Your Investment Experience
SIPs automate your investment experience, which makes you a regular investor. It is easy and convenient and because of the online surge, today, it is super easy to invest via SIP. If you choose the lump sum method, you will have to manually invest an amount and there may be times when you can miss an installment.
With automated installments and a streamlined process, investing via SIP has now become an extremely popular method, to reach long-term goals like saving up for your child's education.
FAQs
Why is SIP investment good?
By investing through SIPs, you will do away with the burden of timing the market as you could then avail the benefit of Rupee Cost Averaging. By investing through SIP, you will tend to invest in the up and down markets. This helps you shy away from the volatility of the market. Additionally, you will benefit from the power of compounding, which fundamentally generates returns not only on capital but also on returns.
Is SIP good for students?
Investing in SIP can be a huge benefit for students. It cultivates a healthy investment habit, and they can invest a small amount to start their journey. SIP is best for beginners and a comparatively safe investment vehicle.
What are the features of SIP?
A SIP offers the following features:
It is best for long-term investment, brings financial discipline, allows small investment amounts, benefits from the power of compounding, and is a comparatively safer investment tool.
Why do people prefer SIP?
A systematic investment plan helps bring discipline to an individual’s investment habits. A SIP will automatically deduct a pre-decided amount periodically. Investors also do not need to worry about timing the market while investing via SIP. It is one of the best investment vehicles for beginners.
Consult an expert advisor to get the right plan
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5 tips to know before investing in US stocks
If you want to invest in the US stock market to benefit from US stocks, you may start by opening an international trading account in India.
But before investing in US equities, here are the 5 important things to know before investing in US stocks.
1. Regulatory framework
One of the oldest, most effective, transparent, and well-regulated stock markets in the world is the one in the United States.
On US stock markets are listed some of the largest businesses in terms of market capitalization, sales, and profitability.
The worldwide exposure and flavor that US markets offer are crucial since many of these listed firms have a significant global presence, scale, and operational structure.
The regulatory body that monitors the operation of the US stock markets is the Securities and Exchange Commission (SEC), which was founded in 1934.
It guarantees the strict application of laws and rules that establish the highest standards of openness and integrity—essential for stock markets as well as for the safety and trust of investors.
2. Impact of Foreign Exchange
The volatility in the value of the US and other currencies should be taken into account while investing in US equities.
This is because before any gain (or loss) for an Indian investment is realized, it would be converted using the appropriate exchange rate in the Indian rupee.
The gains (or losses) will fluctuate in lockstep with changes in the exchange rate.
An Indian investor must be aware that the exchange rate can be unpredictable and is influenced by a wide range of political, economic, and supply and demand variables.
3. Liberalized Remittance Scheme
According to the Reserve Bank of India's Liberalized Remittance Scheme, an individual may invest up to $ 250000 per year in US equities from India (LRS).
The cap covers any money sent abroad for purchases, travel, education, or other international transactions during the year.
The investor's brokerage account has to be filled before making any investments in US equities. Investors must complete Form A-2, which is available from RBI-authorized dealers. Any sum over the $250000 cap requires RBI approval.
Additional read: US stocks for investing in child education
4. Taxation
To make your efforts worthwhile, it is crucial to take into account the tax consequences of your international assets.
Due to the Double Tax Avoidance Agreement (DTAA) between the US and India, the same income cannot be taxed twice on investments made in the US stock market.
5. Dividend tax
The dividends from US stocks are taxed at a fixed rate of 30% for overseas investors. However, as a result of the tax agreement between the US and India, citizens of India pay a 25% tax rate (deducted before distribution).
However, because of the double tax avoidance agreement between the US and India, the tax paid in the US may be claimed as a foreign tax credit in your domestic filing.
6. Capital gains tax
Your assets in the US are not subject to capital gains tax. However, India requires you to pay tax on your overseas capital gains. This may be divided into two groups.:
Long-term capital gain (LTCG)If you keep the equities for more than 24 months before realizing capital gains, you will be subject to indexation advantages and a 20% tax rate in addition to any relevant fees and other surcharges.
Short-term capital gain (STCG)Standard income-tax regulations apply to any gains from assets held for less than 24 months, and they are added to your ordinary taxable income.
You must also take into account the recently implemented Tax Credited at Source or TCS. Under the new regulations, a 5% TCS will be applied to all international transfers over INR 7 Lakhs in a fiscal year. It is not an additional expenditure to deduct this advance tax when submitting your taxes each year.
Charges on US stock-broking account
Using an Indian stock brokerage account to invest in the US stock market is prohibited. You would need to create one with a US stock brokerage company instead.
To provide this service, the majority of Indian stock brokers who allow you to invest in US equities typically collaborate with a US stockbroker.
You would also be required to pay certain fees for a US stock broking account, just like you would for an Indian trading account.
This is something you should also take into consideration when you buy US stocks because these fees can reduce your earnings. These fees include Annual Maintenance Costs, brokerage charges, bank charges, transaction charges, and more.
Invest in the US stocks with EduFund
Download the EduFund app and create an account to start investing in US stocks. With zero charges and no hassle account opening process from the comfort of your home, you can start investing in FAANG stocks in your portfolio to geographically diversify your portfolio!!
Thus, investing in US firms and equities may give investors access to the worldwide market, credibility, and an opportunity to increase their wealth.
Consult an expert advisor to get the right plan
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5 top investments for risk-averse investors
All investments are associated with risks. Yet, the risk is not uniform, and it's essential to be aware of the different levels of risks linked with all types of investment instruments.
This is why the first thing to consider before investing is how much of a risk appetite has – how much risk one is willing to take.
Want to know the best investment options for risk-averse investors but still generate good returns? Continue reading this article to know more!
What is risk averse?
Risk-averse refers to an investor who chooses to preserve the capital over and above its potential to generate returns that are higher than the average. Risk can refer to many factors – volatility, currency, market, credit rating, etc.
Risk-averse can also refer to a conservative investor. Low risk symbolizes stability in investments. A low-risk investment generates guaranteed reasonable returns, if not outstanding, above benchmark returns. But chances are near zero that the principal investment amount will be lost. Whereas a high-risk investment option may gain or lose money over time.
Risk-averse investors are unwilling to accept market volatility. They prefer their investments to be highly liquid - readily available to be withdrawn. Such investors usually include old investors or retired individuals who depend on their savings for their daily expenses.
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Is FD a good option for risk-averse investors?
One should constantly adjust their returns against the current inflation rate. The current Fixed Deposit interest rates are 5-7% p.a. on average. But the current inflation rates are around 6-8% p.a.
Give these figures a thought. The price you pay for your everyday goods and services is rising at 6-8%, whereas your FD investments are growing at only 5-7%. FDs do not increase the value of your money over time. In fact, you actually lose money or its purchasing power over time.
Do you think FDs are the safest investment option? Banks defaulting on payments is rare but definitely possible. The Deposit Insurance and Credit Guarantee Corporation (DICGC) guarantees Rs. 5 lakhs per person per bank if the bank defaults.
Let's not forget the liquidity part of this instrument. Fixed deposits can have a lock-in ranging from 3-5 years. Banks penalize the investors for withdrawing money before the lock-in is over. This penalty is in the form of a reduction of interest rate by a certain percentage.
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What are the best investment options for risk-averse investors?
The market is filled with many investment options for investors with varying risk appetites. Let's look at some of the best investment options for risk-averse investors:
1. Short-term bond fund
The best alternative for investors who do not want exposure to FDs or volatile instruments. Short-term bond funds – bond funds with low maturity and a high
potential to offer better returns. Debt Funds with longer maturity are subjected to interest rate risk. But short-term bonds have a lower interest rate risk as their maturity period is much lower.
2. Municipal and Corporate Bonds
State and local governments and companies usually raise money by issuing bonds to the public. Bonds offer lower risk than stocks.
When a company is winding up, the bondholders are given first preference in the payment and settlement order.
3. Other debt funds
Other debt funds include banking and PSU Funds, ultra-short duration funds, Dynamic Bonds, etc. You could always invest a lump sum in these debt-based mutual funds and opt for a Systematic Withdrawal Plan (SWP).
This would ensure that along with the returns being generated on your investments, you would also get a monthly income from these investments. This investment option is one of the best options for older people who want a monthly income.
4. Liquid funds
Invest in top-rated liquid funds to avoid loss of capital with a higher degree of safety for your primary investment.
Also, when the market moves up, your investment performs better and generates higher returns in line with the market.
5. Dividend growth stocks
Stocks are not as safe as cash, savings, or other debt-based instruments. But they are safer than options and futures. Dividend-paying stocks are considered safer than high-growth ones as they minimize volatility, if not eliminate it.
You don't depend on the value of the stock as you get a dividend as a regular income on your investment.
Apart from debt-based investments, you could also apply a staggered investment approach in equity-based mutual funds for a long-time horizon.
A periodically rebalanced portfolio helps you minimize your portfolio volatility and ensures efficient capture of up-market and down-market movements even with equity exposure.
Take the help of an Investment Advisor who will guide you through goal-based planning and help you choose the investments that are most suitable to your goals and objectives and your risk appetite.
FAQsWhat type of investments do risk-averse investors prefer?
Risk-averse investors typically prefer conservative investments with lower volatility and more predictable returns. These may include government bonds, high-quality corporate bonds, certificates of deposit (CDs), and stable dividend-paying stocks. These options aim to preserve capital while providing modest growth, aligning with the risk tolerance of such investors.
What are 3 high-risk investments?
Three high-risk investments include investing in individual stocks of volatile and speculative companies, trading in cryptocurrencies known for their price volatility, and investing in startups or early-stage ventures that have higher failure rates. These investments offer the potential for significant returns but also carry a substantial risk of loss.
Which investment is the riskiest for investors?
Investing in highly speculative and unproven assets like cryptocurrencies, especially in lesser-known or new coins, can be among the riskiest options for investors. The volatile nature of these assets can lead to substantial financial losses due to sudden price fluctuations and lack of regulation.
Which investment has the highest return without risk?
No investment offers guaranteed high returns without any risk. Investments with potentially higher returns often come with varying degrees of risk. While some low-risk options like government bonds or savings accounts provide stability, they usually offer lower returns. Diversification and a clear understanding of risk are important for any investment strategy.
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Investing in mutual funds for your child’s education is always advisable. First of all, it is a less stressful option than investing in direct equity stocks because that requires you to have in-depth knowledge of market trends and fluctuations.
Secondly, with mutual funds, there are a variety of schemes you can opt for depending on a range of factors. These factors could include the time period for which you can invest before liquidating, the amount of money you can invest, the amount you require to secure the education fund, the level of risk you can take, and so on.
When it comes to building an education fund, here are the top 5 types of mutual funds you can choose from.
1. Large-cap mutual funds
The defining characteristic of large-cap equity funds is the fact that these funds invest in the top 100 Indian companies that have the highest market value.
Large-cap mutual funds can bring in impressive returns if you remain invested for a long period.
If you are a person who wants to avoid taking very high risks with your investments and has decided to invest early for your child’s education, this is the way to go.
The average returns rate has historically beaten that of Fixed Deposits and similar investment alternatives.
SIP Mutual Fund Investment
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2. Mid-cap mutual funds
Mid-cap funds invest in Indian companies that come in the next best 250 in terms of market value. These funds are for you if you are ready to take on a higher level of risk. Justifiably, the return rates also tend to get higher.
One way to satiate the risk appetite of mid-cap equity funds is to let them season for at least 7-10 years.
If your child is in primary or middle school, investing in such a scheme will generate a wholesome amount of wealth by the time they are ready to pursue a college education.
How to track Mutual Funds?
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3. Equity-linked saving schemes
Among the various perks of investing in mutual funds is the tax deduction benefit. Equity Linked Saving Schemes are devoted to enabling investors to save taxes, as the name also indicates.
The only catch here is that it has a compulsory lock-in period of at least 3 years. The aim here is to keep you invested longer to counter the risk level.
If you can spare that amount of time, then ELSS is definitely a go-to. An added benefit is the historically high level of returns.
Mutual Funds to invest in Child Education
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4. Low-risk options
There is this whole myth surrounding mutual funds that they only come with a high-risk factor. On the contrary, a debt fund is also a kind of mutual fund that comes with low risk, so much so that it remains undisturbed by market fluctuations.
Debt funds are still a better option than Fixed Deposits because they can generate a higher percentage of returns. So, if you are not in favor of taking high risks, debt funds are a go-to.
5. Hybrid mutual funds
If you are confused about your investment options or even hesitant about risking too much, the answer to your problems is a hybrid mutual fund. This kind of fund is a mixture of equity as well as debt.
Hybrid mutual funds bring in the best of both worlds. They tend to generate good returns at low risk.
FAQs
What are the different types of mutual funds?
Large-cap mutual funds
Mid-cap mutual funds
Equity-linked saving schemes
Low-risk options
Hybrid mutual funds
Which type of MF is best?
The best type of mutual fund is the Hybrid mutual fund.
Which MF gives the highest return?
Equity-linked mutual funds are considered the mutual funds with the highest returns.
Conclusion
There will be miscellaneous financial goals you will be required to set if you are a family person. One among these might be to straighten up the roadmap to your child’s academic and career aspirations.
The first step is calculating your expected expenses with the help of an education cost calculator. The calculator will help you draw your investment map to fulfill your child's aspirations.
The earlier you invest, the more prepared you will be to make critical decisions as the moment arrives.
DisclaimerMutual funds are subject to market risks. The previous performance of a fund is no guarantee of future success. Please reach out to an expert to know more about the schemes before investing.
