Fall 2024 Scholarship: Get Up to $10K for Your Master's Abroad!
October 8, 2024
Sector Funds: Definition, benefits, and comparison
Sector funds are mutual funds that invest in companies that belong to a specific sector of the economy. Sectors like Healthcare, Finance, Real Estate, Energy are usually covered by AMCs to expand the market and diverse investors’ portfolio. Sector funds can be a great addition; they follow a focused strategy towards investments. These funds capitalize on the growth and performance of the specific sector by investing predominantly in companies operating within that sector.
Sector funds can also potentially offer high returns when timed wisely. For example, during the pandemic, the pharmaceutical sector and its companies saw prosperity, which resulted in high demand for these companies and increased returns for their investors. Sector funds employ a tactical approach to investing and allocate funds so that the investors can seize the market trends and global political shifts.
Sectoral funds are more effective for long-term investors. Investors who are hoping to invest for long-term goals like child’s education expenses or college should consider this type of investment fund. This is because sectoral funds are high risk funds because they lack diversification within the sector, they require careful market timing so that the investor can determine when to enter and exit the fund, and they can be volatile to changing economic and socio-political sphere. Hence, investors saving for long-term goals and planning to stay invested for the long haul can consider this type of fund to add to their portfolios!
What are Sector Funds?
Sector funds are equity mutual funds that invest in companies belonging to a specific sector. Investors get targeted exposure to a specific sector of the economy like healthcare, energy, IT, infrastructure, real estate and many more.
For a sector fund to qualify as one, fund managers need to invest 80% of the fund’s total assets in equity and equity-related instruments of a particular sector. Sectoral funds invest in companies of all sizes from large-cap to mid-cap to small-cap. For example, a sector fund with focus strategy on energy sector would invest in companies such as Reliance Industry, NTPC, ONGC, Adani Green Energy, Tata Power and more. Similarly, a sector fund focused on apparel and accessories would focus on companies that thrive in this sector such as Titan, PC Jeweller, Kaylan Jeweller, Campus and more!
Characteristics of Sector Funds:
Here are some characteristics of a sector fund to help you determine if it’s a good investment for your goals:
- Targeted exposure: Sector funds offer investors concentrated exposure to a specific industry or sector, allowing them to capitalize on the growth potential of that sector.
- Higher volatility: They are focused on a single sector like energy or healthcare, sector funds can be more volatile than traditional mutual funds. The performance of the fund can be heavily influenced by the performance of the underlying sector.
- Potential for higher returns: If the chosen sector performs well, sector funds can generate higher returns than traditional diversified funds. However, if the sector underperforms, the fund’s returns may be lower.
- Sector-specific risks: Sector funds are subject to sector-specific risks, such as regulatory changes, economic downturns, or technological disruptions that can negatively impact the performance of the sector.
- High risk: Sector funds invest in a specific sector and lack diversification which means these are some of the riskiest funds to consider.
- Long term investment: A particular sector may take years to thrive so investors who are planning to invest for long-term goals like their child’s education can consider sector funds. An investment horizon of 5-10 years is good for sector funds.
Who Should Invest in Sector Funds?
Here’s how you determine if sector funds investment is right for you and your goals:
- Investors with high risk tolerance: Due to their concentrated nature and limited diversification, sector funds can be more volatile. Investors who are comfortable with potential fluctuations in their investments are more likely to benefit from sector funds.
- Investors who are looking for long-term growth potential of a specific sector: Investors who have a strong conviction in the future prospects of a particular industry or sector can use sector funds to capitalize on that growth.
- Investors who are prepared to accept potential losses: Sector funds are not immune to downturns, and if the chosen sector underperforms, investors may experience losses.
- Investors who are seeking targeted exposure: Investors who want to focus their investments on a specific industry or sector, rather than a broad range of assets, can use sector funds to achieve this goal.
- Investors who are looking for long-term investments: Investors who are looking to stay invested for 5-10 years and more should look at sector funds. Sectoral growth can take time and hence, staying invested is key to seeking potential growth.
However, sector funds may not be suitable for investors who:
- Are risk-averse: If you are uncomfortable with the potential volatility of sector funds, it may be better to invest in more diversified options.
- Lack knowledge about the sector: Investing in sector funds without a thorough understanding of the underlying industry can increase the risk of making poor investment decisions.
- Are seeking short-term gains: Sector funds are typically more suitable for long-term investments, as the performance of a sector can fluctuate significantly over shorter periods.
Sector Funds vs Traditional Mutual Funds
| Feature | Sector Funds | Traditional Mutual Funds |
| Investment Focus | Specific industry or sector | Diversified across multiple industries and sectors |
| Volatility | Higher | Lower |
| Potential Returns | Higher (if sector performs well) | Generally lower |
| Risks | Sector-specific risks | Diversified risks |
| Suitability | Investors seeking targeted exposure to a specific sector | Investors seeking diversified exposure across multiple industries |
Benefits of Investing in Sector Funds for your Child’s Education
Sector funds can also potentially offer high returns when timed wisely. Here are some reasons why adding them to your long-term investment portfolio can be beneficial.
- Time horizon: Sector funds are well-suited for long-term investments, aligning with the goal of saving for education. If you are saving for college, you are probably planning to stay invested for 8-10 years which can be a good time horizon for sector funds.
- Industry-specific focus: Sector funds concentrate on specific industries or sectors, allowing you to capitalize on the growth potential of a particular field.
- Potential for outperforming the market: Sector funds can potentially outperform broader market indices if the chosen sector experiences strong growth. These funds can potentially beat the rising education inflation and help you send your child off to college debt-free.
- Potential for higher returns: If the chosen sector performs well, sector funds can generate higher returns than traditional diversified funds. However, if the sector underperforms, the fund’s returns may be lower.
How to Invest in Sector Funds?
If you are looking to invest in sector funds, you can use the EduFund App to get started. Here’s a stepwise guide:
- Download the EduFund App and create an investment account by completing your KYC process.
- Explore the variety of sector funds that align with educational goals.
- Consider factors like the fund’s expense ratio, minimum investment amount, and lock-in period.
- Select the sector fund that best suits your child’s future educational needs and risk tolerance.
- Place an SIP or lumpsum order for the selected fund and start investing for your child’s education.
Risks of Investing in Sector Funds
Sector funds carry high risk! Sector funds are heavily invested in a specific industry or sector, making them more susceptible to fluctuations in that particular area. If the sector experiences a downturn, the fund’s performance can decline significantly.
Before investing in a sector fund, it is essential to conduct thorough research and due diligence to understand the fund’s investment strategy, portfolio holdings, and performance history. You can also consult a financial advisor to help you understand whether it’s the right fund for you and how much you should invest.
This is all about sector funds. If you wish to invest in sector funds for your child’s education or for any other long-term financial goals, then consult a financial advisor before starting. You can connect with our experts on the EduFund app before starting an investment goal for your child’s education.
recommended reading
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.
Money Management Tips for Homemakers
Read More
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.
Investment Tips for Dad's in India
Read More
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
Read More
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
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
Read More
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?
Read More
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
Read More
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.
6 types of risk associated with Mutual Funds
In the previous article, we discussed taxation in mutual funds. In this article, we will discuss the types of risks associated with mutual funds.
Mutual funds are excellent investment options for both novice and seasoned investors; they are currently a very popular investment option due to their capacity to provide inflation-beating returns.
Mutual funds combine money from a range of individuals and institutions and invest in various asset classes such as shares, debt, and other money market instruments after conducting thorough research to maximize capital appreciation or income generation.
The investors are subject to risks like volatility risk, management risk, liquidity risk, interest rate risk, and inflation risk. We shall now discuss all such risks that come up with an investment in mutual fund schemes; a sound knowledge of these is helpful to an investor in making the investments.
There are two types of mutual funds: equity mutual funds and debt mutual funds.
Risks associated with mutual funds
There are major two types of risks associated with mutual funds that the article will discuss such as risks associated with equity mutual funds and risks associated with debt funds.
1. Management risk
A company's management refers to the group steering the organization on the right path.
Changes in the management team and their activities, such as pledging shares, decreasing or increasing promoter stakes, and so on, can impact the price of a company's stock.
While principles such as solid corporate governance and high transparency benefit a company's stock, mismanagement, team conflicts, and other factors depress the stock price and thereby affect your mutual fund investments as well if that particular stock is a part of your investment.
2. Liquidity risk
When it comes to equity investments, long-term investing has the best possibility of securing investment profitability.
Thus, it is difficult for equity mutual funds to quickly buy or sell stock investments to profit or minimize a loss leading to a situation where the scheme's liquidity is insufficient to meet investors' redemption requests.
A liquidity crisis like this is most prevalent when investors make a high number of redemption requests due to prolonged bad market inequities.
Many equity funds invest a small amount of their capital in debt and money market instruments to mitigate this risk and ensure more substantial returns.
3. Volatility risk
An equity mutual fund invests mainly in the stocks of publicly traded corporations.
As a result, an equity fund's value is in line with the performance of the companies in whose stocks it has invested. Current macroeconomic conditions have an impact on the company's performance.
Government, Sebi, and RBI policies, consumer preferences, the economic cycle, and other macroeconomic changes are all examples of factors that directly impact the price of company stock, either positively or negatively.
The value of an equity fund is affected by this movement. Large-cap corporations, on average, are less prone to such volatility than mid-cap and small-cap market enterprises.
Similarly, when compared to thematic or sectoral equity, funds are diversified. Equity funds are less likely to be influenced by such volatility.
Risks associated with debt funds
1. Inflation risk
Bonds and money market instruments are fixed-rate instruments because their coupon rates are fixed. As a result, rising inflation erodes the coupon rate-based revenues that the debt fund aims to receive.
As a result, rising inflation causes bonds to trade at a lower price on the bond markets, lowering their potential returns for the debt funds investors.
On the other hand, lower inflation tends to push bond prices and debt fund investment values higher.
2. Credit risk
Government securities, corporate bonds, certificates of deposits, commercial papers and other debt and money market instruments are among the items that debt funds invest in.
Credit ratings such as AAA, AA+, AA, AA- and so on are offered by credit rating agencies such as CRISIL, ICRA, and Fitch they evaluate the credit quality of these investments, which vary depending upon the issuer.
A specific risk is that the borrower fails; they do not pay the principal and/or interest on the loan.
3. Interest rate risk
A risk linked with debt funds is interest rate risk. Bonds are exchanged in the same way as stocks, and their prices fluctuate.
The economies' interest rates mainly influence the movement in bond prices; the link between interest rates and bond prices is the opposite. As a result, as the economies' interest rate rises, the values of current bonds fall since they continue to offer the same interest rate.
Interest rate risk refers to price variation in bonds caused by changes in interest rates it is a market-wide element that influences bond prices and, as a result, the value of all debt mutual funds.
The degree of interest rate sensitivity varies by debt fund type and is shown by the adjusted duration of the debt fund.
In general, debt funds that invest in shorter-term assets are less vulnerable to interest rate risk than those that invest in longer-term products.
With regard to the above-mentioned risks, it is vital to note that while mutual fund performance is always subject to numerous risks, every fund house employs a variety of tactics to reduce, if not eliminate, these well-known dangers.
As a result, even if your investment gains are not guaranteed, your chances of developing your wealth are good if you invest with a well-known fund house, choose a fund with an established track record, and make the investment with a long-term horizon.
FAQs
What are the three main risks associated with mutual funds?
The three main risks associated with mutual funds are:
Management risk
Liquidity risk
Volatility risk
Do mutual funds have high risk?
All mutual funds are risky. Its terms and conditions specify that mutual funds are volatile in nature and are subject to market ups and downs. There are different levels of risk involved in mutual funds.
What is the biggest risk for mutual funds?
The biggest risk for mutual funds is inflation. Inflation affects different types of funds differently.
Rising inflation causes bonds to trade at a lower price on the bond markets, lowering their potential returns for debt fund investors. On the other hand, lower inflation tends to push bond prices and debt fund investment values higher.
Consult an expert advisor to get the right plan for you
TALK TO AN EXPERT
6-ways to Calculate Monthly Interest on ₹1 Lakh Fixed Deposit
Did you know that more than 95% of Indian families prefer Fixed Deposits (FDs) as a secure investment option? If you are unsure of where to invest and want to keep your money safe while getting a regular passive income, then knowing the structure of monthly interest for ₹1 lakh fixed deposit is very important. FDs are the most preferred amongst the population of the Indian households due to safety and return on maturity which is pre-defined.
In this blog, we will show you how to calculate monthly interest for ₹1 lakh fixed deposit and discuss the advantages of various types of Fixed Deposits.
Interest Payout Options for Fixed Deposits
When considering the monthly interest for ₹1 lakh fixed deposit, it's essential to know the two primary types of FDs:
Cumulative Fixed Deposits
On cumulative fixed deposits, the interest earned is taken and added to the initial deposit principal and paid at the end of the maturity period. This makes your earnings to be paid in a way that they are compounded where, your interest earned is taken back to your initial sum and then used to calculate future interest. This type is best suitable for wholesale investors who do not need their money in the short term and who seek high yields at the end of its term.
Non-Cumulative Fixed Deposits
Non-cumulative fixed deposits, meanwhile, pay out interest monthly, quarterly or annually. And if you require a steady supply of income, this avenue can be especially advantageous. Cumulative FDs are more suited for those looking to create a corpus. Non-cumulative FDs suit them who need regular income, such as retirees.
Significance of Monthly Interest Pay-outs
Opting for monthly interest for ₹1 lakh fixed deposit can yield several benefits.
Steady Cash Flow- The regular income helps in keeping monthly expenses at bay as you can get a monthly interest payout. This can be good for retirees, or anyone on a fixed income to have monthly interest for ₹1 lakh fixed deposit for financial stability.
Financial Flexibility- The requirement of a more constant flow of cash is beneficial for all-purpose expenditure control. You can use it to pay for recurring expenses such as water bills, rents, or hospital bills.
Consideration of the proposed model for yearly distributions
Though the annual pay-outs look decent, you have to stick with your money until the end of the year before you can touch it. How much practical use are monthly payouts for most investors? They are a form of security with the capacity to broaden or narrow the number of payouts in accordance with the investor’s needs; thus, incorporating the feature of providing funds when required in their structure.
How to Calculate Monthly Interest for ₹1 Lakh Fixed Deposit
To determine the monthly interest you can expect from a ₹1 lakh fixed deposit, you can use simple formulas for both simple and compound interest.
Basic Formulas:
Simple Interest (SI):
SI=P×r×t/100 =
Where:
P = ₹1,00,000 (Principal amount)
r = Annual interest rate
t = Time in years
Compound Interest (CI):
A=P(1+rn)nt
Where:
A = Maturity amount
P = ₹1,00,000
r = Annual interest rate
n = Number of compounding periods per year
t= Time in years
Understanding the Calculations:
Let’s try and understand with an example using an interest rate of 6% to illustrate how to calculate the monthly interest.
For Simple Interest:
If you invest ₹1 lakh at an interest rate of 6% for one year, your monthly interest for ₹1 lakh fixed deposit would be 500 using Simple Interest.
The annual interest would be ₹6,000.
For Compound Interest:
If you invest ₹1 lakh at an interest rate of 6% compounded monthly, the total maturity amount after one year will be slightly higher due to compounding.
After using the formula, you would find that the monthly interest is approximately ₹513.98.
Using Our FD Calculator to Estimate Monthly Interest
At EduFund, we offer an FD calculator that simplifies this process. With just a few inputs—your deposit amount, interest rate, and tenure—you can get an accurate estimate of your monthly interest.
Benefits of Using Our FD Calculator:
Quick and Accurate: This service delivers accurate results in terms of seconds within zero human interference.
Comparative Analysis: Subscribe and easily compare how different interest rates can affect your monthly payouts.
To make a wise decision regarding which fixed deposit plan is closest to your requirements you need to understand these calculations and apply FD calculator.
Factors Affecting Monthly Interest Rates:
Several factors determine the monthly interest for ₹1 lakh fixed deposit:
Bank Policies: The interest rates on loans can vary from one bank to another due to established regulations and competition. This means that one should compare our rates of the various banks to select the best sector that will suit him/her.
Tenure Amount: Fixed deposits as a type of investment are typically reliant on the amount to be invested and the duration for which it will be invested; this is because the length of the fixed deposit and the amount of money deposited substantially determine the interest rates to be given. Usually, duration of the account and the amount of deposit determines the interest rate that a particular account will first be charged or offered.
Market Conditions
Economic factors, such as inflation and changes in monetary policy, can also impact the interest rates offered by banks. Keeping an eye on these factors can help you make informed investment decisions.
Real-Life Scenarios
Understanding how monthly interest for ₹1 lakh fixed deposit can impact personal finances is crucial:
Scenario 1: Retirement Planning An individual who invested in a non-cumulative FD with monthly payout of ₹500 can manage daily expenses from this income without touching the principle, which gives a retiree financial security.
Scenario 2: Emergency Fund An individual saving for emergencies would go for monthly interest payouts for example in case of an emergency one will not need to break the FD and thus have access to that money.
Conclusion
Understanding the monthly interest for ₹1 lakh fixed deposit is important for effective financial planning. By calculating your potential earnings and exploring various Fixed Deposit options, you can ensure a steady income stream that aligns with your financial goals.
Take advantage of our FD calculator at EduFund to make informed decisions about your fixed deposit investments today! With the right information and tools, you can maximize your returns and achieve financial security.
7 amazing tips to break free from debt
In the previous article, the focus was on education inflation and its impact on our savings. This article will discuss how to break free from debt.
Debt, this dreaded four-letter word, is a nightmare for most people. However, everyone has a debt of some kind, whether credit card debt, student debt, home mortgage, personal debt, or more.
Debt is an unavoidable part of life. Dealing with debt often leads to stress and anxiety and can impact your physical health. There are both good debts and bad debts. The debt that creates a valuable asset (tangible or intangible) for you is good debt.
Debt that keeps on exerting negative pressure to pay off is known as bad debt. You need to remove this bad debt to live a stress-free life.
How do you break free from debt?
Here is a step-wise guide to help you break the vicious cycle:
Assess your situation: To get out of the debt trap, you must know where you stand. Check all your accounts and add up your liabilities (all types) to know how much you owe and to whom. Calculate your net worth by subtracting your liabilities from your assets. This will help you know your worth on paper.
Know where you spent your money: It is important to categorize your expenses into housing, transport, food, travel, miscellaneous, and debt. An example of a bad monthly budget is where the debt is almost equivalent to income. You need to get your basics of spending right as your first step.
Improve your budget: When you don't follow the rule “Spend less than you earn” that's how your debt problem arises. Living below your means is a very important thing that one should take care of to avoid getting into a debt cycle or when trying to get out of it. Unless you manage to spend less than you earn, you will always be in debt and never be able to come out of it.
Pay off your high-interest debt in full every month: Your credit card bills keep on mounting because you do not pay them in full every month. It happens because you take on more interest-bearing debt than you can manage. Paying off your credit card bills and other debts very religiously every month will do good for your credit score and will be a good step to lighten your debt burden.
Source: Pexels
Some effective ways to reduce your debt
Use the snowball effect: Start paying off your small debts and then tackle the bigger ones. Put as much money towards paying that one small debt, and once it is done with, the free money from that shall go to the next big one. As you proceed with wiping out debt, the amount going to the current payment will increase. Another way is to tackle the highest interest debts first (to save on interest payments) and proceed.
Pay more than the minimum amount: You pay both the principal and the interest when paying down debt. So, paying more than the minimum for a particular month means cutting the principal for the next month and thus, saving money on interest payments.
Increase your income: An increase in your income will solve half your debt problems if you know how to channel your money. An increased income from the same work or a new income from a different income source will leave more money in your hands to get out of that unwanted debt you are in. You have to help yourself in this regard.
FAQs
What are 3 ways to eliminate debt?
The 3 ways to eliminate debt are:
Budgeting, increasing your income, and paying your debt on time without accruing more interest.
What are the 5 ways to get out of debt?
The 5 simple ways to get out of debt are: Listing your debt obligations, creating a budget for repayment, increasing your income and paying your debt on time without accruing more interest and finally reducing your daily/miscellaneous expenses to create space for savings and investing.
What are the 5 golden rules for managing debt?
The golden rules for managing debt are: Budgeting your expenses and debt, actively generating more income and wealth, paying your debt on time without any delays or additional interest, reviewing your spending habits, and avoiding future debt traps.
How do I clean up my debt?
Stepwise guide to help you break the vicious cycle:
Assess your situation
Know where you spent your money
Improve your budget
Pay off your high-interest debt in full every month
What is the best solution for debt?
Start paying off your small debts and then tackle the bigger ones. Put as much money towards paying that one small debt, and once it is done with, the free money from that shall go to the next big one.
As you proceed with wiping out debt, the amount going to the current payment will increase. Another way is to tackle the highest interest debts first (to save on interest payments) and proceed.
How to live a debt-free life?
When you don’t follow the rule “Spend less than you earn”, that’s how your debt problem arises. Living below your means is a very important thing that one should take care of to avoid getting into a debt cycle or when trying to get out of it. Unless you manage to spend less than you earn, you will always be in debt and never be able to come out of it.
How can I recover from debt fast?
It is important to categorise your expenses into housing, transport, food, travel, miscellaneous, and debt. An example of a bad monthly budget is where the debt is almost equivalent to income. You need to get your basics of spending right as your first step.
Consult an expert advisor to get the right plan for you
TALK TO AN EXPERT
8 ways you can invest in mutual funds
What is a mutual fund?
Mutual funds are investment vehicles that pool money from multiple investors and invest them into equity, debt, other related instruments, and asset classes after thorough research and analysis.
Each mutual fund portfolio is managed by a fund manager who has a great deal of experience in the industry. Their decisions are substantiated and are taken after following the thorough research done by the AMC's research analysts.
As individual investors, we do not have enough time to perform such research to make a well-informed choice on “Where to invest to gain maximum returns?” or “Where to invest in the long-term?” We may also not have enough capital to make a diversified portfolio to sustain the blows of market fluctuations. Mutual funds provide a one-stop solution for both issues.
Why should one invest in mutual funds?
a) Money managed by experts
The fund manager and his army of research analysts are experts in the field of investing. They make informed choices with respect to every penny and always aim to provide the promised objective to their pool of investors.
b) Liquidity
Redemption requests are handled with great ease in fund houses. The investor can also buy/sell his units in the secondary market (in an open-ended fund) for redemption (withdrawal) of the units.
c) Diversification
Despite having low ticket sizes for investment, an investor can receive returns that mimic or beat the market performance.
He/she can own a portfolio that is diversified across market capitalization or across sectors or different companies to sustain the blows of volatility.
d) Lower cost
The funds charge a small % of the NAV or your gains from the fund as a management fee which is also known as the expense ratio.
These are also regulated by SEBI and have an upper limit to ensure that the funds do not overcharge the investors.
e) Fund switch options
One can invest in a debt fund and have the plan to have a systematic transfer into equity or vice versa to match the risk appetite, financial goals, and other factors.
f) Tax saving with equity linked savings scheme (ELSS)
Mutual funds also allow you to save some part of your income and claim it for tax deduction under 80C.
Rupee Cost Averaging: Investing in Mutual funds through SIPs averages the cost of purchase/unit.
Regulation: Funds are highly regulated and are designed to ensure retail investor protection.
Ways you can invest in mutual funds
If you are a new investor, you will need to complete your Know Your Customer (KYC) compliances through distributors, online platforms, or mutual fund houses (KRA – KYC Registration Agencies) – SEBI registered intermediaries. This is a one-time mandated process by SEBI to prevent fraudulent transactions.
1. Through an agent
An investor may contact an agent who would direct the investor to invest in different mutual funds based on risk appetite, investment horizon, goals, and other factors. There is no commission that is to be paid to the agent. The fee is paid by the fund house and is deducted from the expense ratio paid by the investor to the AMC. Login credentials are given by each fund house which enables the investor to receive real-time data on fund performance.
2. Asset Management Company (AMC)
One can directly invest in the fund house through this route. However, the investor needs to perform some amount of research before choosing the fund and the fund house.
He/she can walk into one of the fund houses for offline registration, post which, all the transactions can be performed online through their website.
If an investor wants to invest in 5 different funds, each from a different fund house, he/she will have to visit 5 different offices.
3. Demat account
The investor can directly invest in various funds of different AMCs, corporate bonds, government securities, ETFs, etc through one account.
These can be managed from one single location – your Demat Account. However, one needs to pay an additional brokerage charge annually for maintaining the account in addition to the expense ratio (which is to be paid to the AMC).
4. Fintech investment platform
These platforms are third-party mutual fund aggregators which aid the investor in investing the corpus after a detailed analysis of their risk profile, goals, investment horizons, and more and suggest the best funds to suit their requirements.
They also offer the convenience of managing the investor’s portfolio through their user-friendly sites. Some of the popular firms are Groww, EduFund, Scripbox, FundsIndia, etc.
5. Stock exchanges
One can invest through NSE or BSE, hence eliminating all the intermediaries/brokers. However, the investor needs to perform a thorough analysis before investing in any fund and ensure that the objectives of the fund match his/her financial goals, risk appetite, and other requirements.
To go through this route, one needs to complete an online registration with NSE or BSE (a one-time process).
6. Registrar and Transfer Agents (RTAs)
One needs to complete the application form and submit a bank draft or cheque at the branch office of the RTA post where one can visit any of the RTAs to start investing.
Some of the popular RTAs are CAMS and Karvy. This route enables the investor to choose across multiple fund houses (instead of a single fund house – in the AMC route).
7. Mutual fund utilities
It is a shared service platform that hosts all the fund houses (owned by several AMCs in the country) and is used for fund transactions. Investors can use this facility online or offline.
8. Investor service centers
These are physical offices across the country belonging to RTAs or fund houses. They assist the investor with respect to all the steps in the investment journey – investment to redemption.
FAQs
What is a Mutual Fund?
Mutual funds are investment vehicles that pool money from multiple investors and invest them into equity, debt, other related instruments, and asset classes after thorough research and analysis.
Why Should One Invest In Mutual Funds?
Mutual funds is the best way to enter the investment market. It helps you invest in multiple companies and the investment strategy is managed by experts.
What are the ways to invest in mutual funds?
There are many ways to invest in mutual funds: You can invest through an agent, directly with the AMC, through a Demat account, or through a third-party financial investment platform depending upon your goals and ambitions.
Conclusion
As an investor, you can use any of the above ways to invest in the mutual fund of your choice and enjoy the wealth generation that comes with compounding.
You can start your investment journey by downloading the EduFund app and signing up. You can get started immediately and pay zero commissions.
A Guide to Taxation in Mutual Funds!
In the early article, we discussed financial planning. In this article, we will try to under the taxation in the mutual fund system that applies to mutual fund investments.
Factors determining the taxation of Mutual funds
To know the taxation structure, first, you need to identify which type of mutual funds you have invested in and whether the fund you hold is an equity mutual fund or a debt-oriented mutual fund.
Along with this, the type of income that you are generating from the fund, whether a capital gain or dividend income - both these types of income are taxable in different ways.
Finally, your holding period is crucial in knowing the taxes applicable to your mutual funds' portfolio.
Earnings in mutual funds
There are usually two ways in which money is earned in mutual funds: one through the selling of the mutual fund (capital gain) and the other through dividend income.
For example, if you are holding units of a mutual that you purchased at a NAV (Net Asset Value) of Rs. 100, and you sell it when its NAV of Rs. 150, you make a capital gain of Rs. 50; it is worth noting that capital gains tax accrues on the mutual funds' units only after redemption.
The tax will be payable when you file your income tax returns for the coming fiscal year.
The second way to earn from mutual funds is dividend income – the fund declares dividends for the holders based on the surplus that it has for distribution Dividends are taxable as soon as the dividend amount hits the bank accounts of the investors.
Source: Pexels
Tax on capital gains
Here, there are again two parts to the story – whether the realized capital gains have come from equity mutual funds or debt mutual funds.
An equity mutual fund has an equity exposure of greater than 65%. For equity mutual funds, if the gains have been realized within 12 months of holding, then the applicable tax rate is flat at 15% on the gains (irrespective of your income tax bracket).
When the holding period exceeds 12 months, the capital gains of Rs. 1,00,000 are exempt from taxes. Any amount upwards of Rs. 1,00,000 is taxable at 10%, along with the provision of indexation benefits.
For debt mutual funds (funds with greater than 65% exposure to debt instruments) - the holding period is considered short-term if it is less than 36 months; anything more than that is long-term.
For the short term, the tax rate is in accordance with your income tax slab. On the other hand, for debt funds held for more than 36 months, the gains are taxable at a flat rate of 20% post-indexation (plus, some cess and surcharge are added).
A possible third case is hybrid funds (funds with a mix of debt and equity) it is simple, their tax treatment is supposed to be on the basis of the fund's exposure to debt and equity.
If the hybrid fund is equity-focused: LTCG is charged at 10% on capital gains exceeding Rs. 1 lakh (without indexation), and STCG is charged at 10%.
If the hybrid fund is debt-focused: LTCG is charged at 20% with indexation benefits, and STCG is charged per income tax slab.
Tax on dividends
Now, when it comes to taxation of dividends paid out on mutual funds, it is done by adding the dividend to the investor's taxable income, and then the individual income tax slab rate is applicable; this is in accordance with the amendments made by the union budget of 2020.
Earlier, dividends were tax-free in the hands of investors since the companies paid the Dividend distribution tax (DDT) before sharing the profits with the investors.
Dividends (received from domestic companies) of up to Rs. 10,00,000 per year were tax-free in the hands of the investors during this period. Dividends above Rs. 10 lakhs were subject to a dividend distribution tax of 10%.
STT
Aside from the dividends and capital gains taxes, there is also a securities transaction tax (STT).
When you acquire or sell mutual fund units of an equity or a hybrid mutual fund, the government charges an STT of 0.001%. It is important to note that selling units of debt funds are exempt from the STT.
Important points to note
There are tax-saving equity funds as well. Investments made under the ELSS (Equity-linked savings schemes) qualify for tax exemption under section 80C of the Income-tax Act (exemption up to Rs. 1,50,000).
Please note that ELSS schemes come with a lock-in period of 3 years – that is, investors cannot redeem the units before three years. LTCG (long-term capital gains tax) is not applicable for gains up to Rs. 1,00,000.
For LTCG more than Rs 1 lakhs, the applicable tax rate is 10% without indexation.
Taxation in the case of SIP (Systematic Investment plans)
Let us understand this with the help of an example
An investor invests Rs. 10,000 every month from April 2021, and another investor invests Rs. 60,000 lump sum at the same time.
When both of them redeem their funds simultaneously, Rs. 10,000 will qualify for tax exemption for the SIP investor because the investment made in 2021 would exceed one year as of May 2021. In contrast, the entire capital gain isn’t taxable for the lump sum.
Investing in the long term can be more tax-efficient than holding the units for a short duration.
FAQs
How much amount is taxed in mutual funds?
If the investor claims redemption in less than 1 year of investment, it would fall under the Short-term Capital Gains (STCG) category.
The tax rate would be 15% on the gains earned by the investor. If the investor holds the investment for more than a year, (say April 2020 – May 2021), the gains would be taxed at long-term capital gains (LTCG) tax of 10%
Is SIP in mutual funds taxable?
Yes, SIP in the mutual fund is taxable. The tax amount differs based on the duration and returns generated
Which mutual funds are tax-free?
Profits from the sale of ELSS fund units are considered long-term capital gains and have tax exemption.
Consult an expert advisor to get the right plan for you
TALK TO AN EXPERT
