Investors of all ages can use mutual funds to meet a wide range of investment requirements. You can put money into them with the intention of accumulating wealth, accomplishing various life-stage objectives, such as planning for retirement, ensuring that your children attend college, planning a vacation, purchasing a property, or creating an income stream for retirement. But before you start investing, the most important question is how to select mutual funds that may meet your investment goals.
You must be aware of the following three things before attempting to choose mutual funds:
1.1 Financial targets
The most important part of making an investment plan is deciding on various financial objectives. In order to have a plan that you can put into action, such as how much, where, and how long to invest, you should outline all of your objectives across the various stages of your life and account for inflation. When these are complete, you should consider which mutual funds will assist you in achieving these goals
1.2 Appetite for Risk
A negative financial outcome that goes against your expectations is called risk. Your age, stage of life, personal circumstances, and financial situation all influence your risk appetite. You can choose a mutual fund based on your risk tolerance if you can accurately assess your risk.
1.3 Asset distribution
The risk profiles of various asset classes vary, with debt funds typically having a lower risk than equity funds. You ought to be aware that returns and risk are directly related. In order to achieve your financial objectives, asset allocation seeks to strike a risk-return balance. You can have a higher allocation to stocks and a lower allocation to bonds depending on your risk tolerance. You need to know how to choose the right mutual fund in order to invest in the appropriate asset class based on your financial goal and risk tolerance.
1.2 If you consider the following, you will be able to select an appropriate mutual fund
based on your financial objectives, risk tolerance, and asset allocation:
1.2.1 Investing time frame:
It will depend on how long it takes you to achieve your financial objective. If you know how to choose the right mutual fund, you will know that debt funds are best for short- to medium-term goals, while equity funds are best for long-term goals. Funds such as overnight funds, liquid funds, ultra-short duration funds, and so on are appropriate for very short investment tenures (less than one year).
1.2.2 Objective of investment:
You need to know your investment objective before you try to choose the right mutual fund. Do you prefer steady income or growth? Equity funds are best for long-term capital appreciation, while debt funds are best for regular income.
1.2.3 Profile of risk:
Choosing the right mutual fund will be simple if you know your risk profile. To ensure that you are taking on the appropriate amount of risk, you should be aware of the scheme's risk profile. Investors with moderately high to high risk appetites should invest in equity funds, whereas investors with low to moderate risk appetites should invest in bond funds or debt funds.
Taxation is one of the most important considerations when looking for a good mutual fund because you need to know what your investments will cost you in terms of taxes before you start investing. For instance, equity funds' short-term capital gains, which are held for less than a year, are subject to 15% taxation, while equity funds' long-term capital gains, which are held for more than a year, are exempt from taxation up to Rs 1 lakh and subject to 10% taxation thereafter (on capital gains in excess of Rs 1 lakh).When held for less than 36 months, short-term capital gains in non-equity funds are taxed at your income tax rate, while long-term capital gains are taxed at 20% after the indexation benefit is allowed.
1.2.5 SIP vs. lump sum:
If you know how to choose the right mutual fund, you should decide whether you can invest in a lump sum or through a SIP. You can make lump-sum investments in accordance with your ideal asset allocation if you have sufficient funds.
1.2.6 Record of the fund manager and the fund house
Before making an investment, you should investigate the fund house, the fund manager, and the scheme's long-term track record.
1.2.7 Ratio of expenses:
Your returns will not include fund expenses. For certain kinds of investments, like ETFs and index funds, the expense ratio is very important. Higher expense ratios may be offset by the fund manager's capacity to generate high alpha in actively managed funds. In contrast, index funds or exchange-traded funds (ETFs) merely track the index and do not aim to generate alpha. Therefore, the expense ratio of an ETF or index fund is crucial.
How to use mutual fund calculators? Is it worth your time?
The mutual fund calculator is a simulation that helps you figure out how much money you'll make from investments in mutual funds. The maturity value of an investment can be calculated using either the SIP method or a lump sum investment.
A mutual fund calculator is a simple tool that allows you to estimate the maturity value of an investment before you actually put money into the fund. Because you already know how much money you will have when you reach retirement age, this gives you the ability to plan your expenses and reach your financial goals. For an estimated rate of return on the investment, you can calculate the maturity amount by entering the SIP amount, duration, and frequency.
There is a formula box on the mutual fund calculator where you can choose the type of investment. It can be an SIP or a one-time investment. To determine the maturity amount, you choose the amount of the investment, the rate of return, and the duration of the investment. If the investment is a SIP, you can choose the SIP amount, frequency, duration, and anticipated rate of return. The investment's value at maturity is displayed by the mutual fund calculator.
To accurately estimate your investment's maturity value, the Mutual Fund Calculator makes use of the concept of future value.
4.1 One-time expenditure
For instance, you have invested a lump sum of Rs 1 lakh for ten years in a mutual fund plan. You have estimated that the investment will return 8% annually. The following formula can be used to determine the investment's future value:
Present Value (PV) = Rs 1,00,000
r = Estimated rate of return of 8% = 8/100 = 0.08
n is the investment's ten-year duration.
The mutual fund investment's Future Value (FV) must be calculated at maturity or after ten years.
FV is Rs 2,15,892.5, or one million (1+8/100).
Therefore, at an estimated return of 8%, the mutual fund investment will have a future value of Rs 2,15,892.5 after ten years.
4.2 Investment in SIP:
The mutual fund calculator can also be used to determine a SIP investment's maturity value.
Follow the formula:
FV = P [(1+i)^n-1]*(1+i)/i
FV = Value in the future or how much you get when you get older
P = Amount you invest through SIP
i = Compounded rate of return
n= Investment duration in months
r = Expected rate of return
Take, for instance, the systematic investment plan, or SIP route, in which you make monthly investments of Rs 1,000 in a mutual fund plan. An estimated annual return of 8% is anticipated for the ten-year investment.
You have i = r/12 x 8/12 x 0.006667.By dividing the rate of return by 12, you must convert it to a monthly figure. Additionally, you have n = 120 months or 10 years.
FV = 1,000 [(1+0.006667)^120 – 1] * (1+ 0.006667)/0.006667
FV = Rs 1,84,170.
Thus, at an estimated rate of return of 8%, a SIP investment of Rs 1,000 per month for ten years will result in a future value of Rs 1,84,170.
5.1 An investment sum:
1) In the Mutual Fund Calculator, the One-Time Investment (Lump Sum) option must be chosen.
2) After that, you enter the amount of money to invest, the anticipated rate of return, and the amount of time to invest.
3) The maturity value of the investment is displayed by the Mutual Fund Calculator.
5.2 Investment in SIP:
1) In the Mutual Fund Calculator, the SIP option must be selected.
2) After that, you enter the amount of the investment, the frequency of the SIP, and the length of the SIP.
3) The maturity value of your investment is displayed by the Mutual Fund Calculator.
When starting a business from scratch, you want it to succeed. Entrepreneurs naturally invest their profits back into their businesses. However, growth opportunities may not always present themselves for investment. In such a situation, it's best to put your money into other ways to make more money. Equity mutual funds are one option for this.
Equity mutual funds invest primarily in the stock of various businesses. They might also put some money into money market and fixed-income instruments. Returns on equity mutual funds typically outpace inflation. The chance to make a lot of money over time is provided by their ability to compound interest. Equity mutual funds should be an option for entrepreneurs who cannot find other investment options.This is why:
6.1 Why people in business should think about investing in equity mutual funds:
6.1.1 Keep money from going to waste.
Never leave money idle is a rule that every businessperson and entrepreneur should learn. It is like wasting money in the bank. This is due to the fact that investments can generate returns that savings or current accounts cannot. Equity mutual funds are an option to consider investing in if you are unable to grow your own business or believe the time is not right. This will guarantee that the money you have will grow and be available for you to use for wise investments in the future.
6.1.2 .Diversify your company without actually diversifying.
If you're an entrepreneur, you might want to expand your company. However, a significant amount of money, staff, and other resources are required for expansion and diversification. Equity mutual funds still give you a way to diversify and take advantage of a market opportunity without actually investing in anything. You can, for instance, take advantage of the trend by investing in a sectoral fund that focuses on IT stocks if you anticipate a boom in the IT industry.
6.1.3 Save money for the future.
Profits and reinvesting them in the company aren't the only ways to save money in the future. Investors in equity mutual funds, like retail investors, can increase their capital to achieve long-term financial objectives. Instead of attempting to raise capital from investors or the market, you can instead accumulate sufficient funds to invest in future opportunities.
6.1.4 Reach your own financial objectives.
In addition to your business objectives, you may have personal financial objectives. To achieve these objectives, you can invest a portion of your company's profits in equity mutual funds. Equity mutual funds outperform other fixed-income instruments like bonds or fixed deposits in terms of market-linked returns.
Examine the various approaches to calculating returns on mutual funds.
7.1 Absolute or point-to-point returns
Absolute returns can be calculated with ease.The initial Net Asset Value (NAV) and the current NAV are all that are required.A mutual fund's NAV is simply the price of one unit.
The formula for determining the absolute returns can be found here.
(Present NAV minus initial NAV) / initial NAV 100 is the absolute return.
Therefore, if you had invested for seven months and your initial NAV was 20 and your current NAV is 35, the absolute returns would be 75%.
7.2 Return Simple Annualized
For investments that have been invested for less than a year, Absolute Returns can be helpful in calculating returns.However, the simple annualized return can assist you in determining your annual returns, or how much you would have earned if you had invested for a year.
The simple annualized return is calculated using the absolute return's value.
The method is as follows:
Annualized Simple Return: [(1 (plus the absolute return) (365 times the number of days)] – 1
The previous example shows that the annualized return is
= [(1 + 75%) ^ (365/210)] – 1
7.3 Rate of Compounded Annual Growth, or CAGR
When the investment period is less than one year, absolute returns and simple annualized returns are acceptable options.However, you can use the Compounded Annual Growth Rate (CAGR) to calculate a lump sum investment with an investment period of more than one year.
The CAGR indicates the average annual growth rate, despite the fact that the returns on your investment will vary from phase to phase.
The CAGR can be calculated using an Excel spreadsheet.
Let's look at an example to better understand this idea.
Let's say that in 2015, you put Rs. 1 lakh into a mutual fund plan.20 is the initial NAV.After six years, the NAV has increased to 50 now in 2021.Instead of using NAV, you can also use an investment's value to determine the CAGR return.
Therefore, the following is how the average investment growth can be calculated:
= [(Present NAV / Initial NAV) / (1 / the number of years)] 100
Use this formula if the holding period is measured in months:
= "[(ending value / beginning value)/12 / number of months)" = "1" = "100"
The returns can be calculated using the formula in Excel.However, using the RRI formula in Excel makes it simpler to calculate the CAGR.
Here's how it works:
=RRI = Nper, PV, and IV
Where Nper is the period's duration in months.
PV is the current value.
IV is the first value.
The CAGR will be calculated after the value has been converted into a percentage.
7.4 XIRR, or Extended Internal Rate of Return,:
Because each investment remains invested for a different period of time, calculating SIP returns can be a little challenging.Therefore, applying the aforementioned strategies might not be appropriate.To determine our SIPs' returns, we must therefore employ XIRR.
XIRR is an Excel formula that takes into account multiple cash flows to determine the internal rate of returns.
You'll need the following items:
Sum of SIP
When SIP investments are made
When redemption occurs
Quantity of redemption
The XIRR formula is
(Values, Dates, Guess) XIRR =
7.5 The steps to calculate XIRR in Excel are as follows:
7.5.1 Create a two-column table.
7.5.2 Next, in two distinct columns, add the SIP amount and the dates of investment.
7.5.3 Now, in the final row, add the redemption date and amount.
7.5.4 Utilize Excel's given XIRR function.
7.5.5 To include values and a date in the formula, select the values column.
7.5.6 The Guess portion can be skipped.
7.5.7 To get the XIRR in percentage terms, either change the value into a percentage or divide it by 100.
In conclusion, an investor must evaluate his or her objectives. After that, determine the level of risk with which they are comfortable and thoroughly investigate the performance of the mutual fund scheme in which they intend to invest as well as the fund manager who will be handling it on their behalf.
Mutual funds are available to investors of all income levels. They can also be excellent investment opportunities for businesspeople and entrepreneurs. Equity mutual funds can assist you in easily achieving many of your goals if you have them clearly written down