Why Mutual Funds?

The purpose of investing in mutual funds is to earn higher returns than what traditional investment options offer. … Mutual funds are also more tax-efficient than traditional investments. Short-term as well as long-term gains from mutual funds are taxed in a way that it doesn’t eat into the returns.

Why would you invest in a mutual fund?
1. Built-in diversification. When you buy a mutual fund, your money is combined with the money from other investors, and allows you to buy part of a pool of investments. A mutual fund holds a variety of investments which can make it easier for investors to diversify than through ownership of individual stocks or bonds.

Which is better mutual fund or FD?
A Fixed Deposit offers pre-decided returns which do not change throughout the tenure of investments whereas Mutual Funds offer better returns on long-term investments as they are market-linked. Longer the tenure of investment, better the returns from Mutual Funds.

Mutual funds are one of the few buzzing investment options these days. Millennials are turning towards mutual funds as they get a much-needed flexibility of investing a small amount frequently. After knowing that you can invest in small amounts, the next question that arises is “how much of my salary should be invested in mutual funds?”

1. 50:30:20 Rule

Every earning individual should mandatorily implement the rule of 50:30:20 in their financial plan. This is very important, especially for breadwinners. Implementing this rule will ensure that their future is bright. The 50:30:20 rule says that 50% of your income must be spent on needs, 30% on wants, while the remaining 20% must be utilised to build an emergency corpus.

Needs are those without which you cannot sustain your daily life. These are groceries, house rent or EMI, utilities, and so on. You can never compromise on needs, and you have no choice but to spend on them. Wants are those that are not absolutely necessary, but you are making use of them in order to make your life better. A few examples of these are gym membership, vacation, movie tickets, subscriptions to online streaming sites, and so on. It is advisable for anyone to limit their spending on wants as much as possible.

The remaining 20% of your income must be saved to build an emergency corpus which is at least thrice your monthly salary. Once that is done, you can start investing. Therefore, your investments in mutual funds should be 20% of your monthly salary. If you are able to cut down on spending on wants, then you can utilise the same in increasing your mutual fund investment.

2. Importance of Investing in Mutual Funds

Millennials are investing in mutual funds as they offer much-needed flexibility. One can invest a small amount periodically. However, this is not the only factor that is making mutual funds so popular these days. Mutual funds are one of the few investment vehicles that have the potential to offer inflation-beating returns. Inflation is something that reduces the worth of your money or investment over time. A product costing Rs 100 today may cost Rs 175 after five years.

If your investment doesn’t produce inflation-beating returns, then inflation at the rate of 8% will eat half of it in a period of eight years.

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