Continuing from Part 1 — Is there a MF option for a mother who does not want as much risk as that of an actively managed fund but still wants basic equity investment?
• Mutual funds may either be actively managed where the fund manager plays an active role in the selection and allocation of securities, or passively managed where a fund is so composed as to simply replicate the performance of a benchmark index. These kind of funds are called index funds. ° If you do not have a high risk appetite, but want to participate in equities all the same, you can consider index funds.
• Index funds track benchmark indices like the SENSEX and NIFTY.
• Index fund are easier to understand, as they mirrors the performance of the index they are based on.
• Further, they are inexpensive as they have a low expense ratio as they are not actively managed by fund managers.
• Thus the fund management fee element is not there in the Total Expense Ratio or TER of these funds
As mentioned earlier in Part 1 – While long term goals are important to keep in sight, life can take an unexpected turn anytime. The priority thus, is to have a Term Plan(Insurance) and build an Emergency fund simultaneously.
Lets look at how a young mother can build an Emergency fund, How can Mutual Funds help?
• An emergency fund should ideally take care of 6-12 months of your expenses
• You can build an emergency fund through the liquid mutual fund route
• This is because, liquid funds invest in debt securities that have a short-term maturity
• Liquid funds have a low interest rate risk, and can deliver inflation adjusted returns.
• Such funds also facilitate easy redemption. So you can have the money credited to your bank account in 24 hours, therefore easily available in times of need.
• It is thus a better idea to invest in a liquid fund each month to take care of emergencies than relying on a savings bank account that offers lower returns
• Just like any other fund you can use the SIP route to build an emergency fund by investing a small sum each month
You can also use liquid fund to meet multiple short-term goals such as : • Pay the school fees of your child quarter on quarter • Build a holiday or an annual vacation fund • Invest for the purchase of a gadget or home improvement item • However bear in mind that such a fund should be exclusive of the emergency fund.
But the new age woman has to think beyond an Emergency fund also. She has to balance several financial responsibilities as the family CFO! How can she invest for goals that may be a few years away such a down payment on a home loan?
Goals like down payment on a home loan or other such goals like purchase of a vehicle or even starting a small business are typically medium term goals that are 3-5 years away. • Balanced funds can come in handy to meet such goals as they are a hybrid of equity and debt. • While the equity portion of these funds offer opportunity for growth over the medium term, the debt element ensures stable returns.
A young woman juggling her career along with motherhood must also consider her tax planning apart from the many goal discussed so far. Mutual Funds also help in the tax planning aspect also?
MFs offer Equity Linked Savings Scheme or ELSS that provide tax benefit under Section 80C
• It is a wise idea to integrate your tax planning goals with your overall financial goals and invest in an ELSS at the beginning of a financial year through the SIP route • An ELSS has the lowest lock in period of three years (as compared to any other tax saving instrument).
• What’s more is that ELSS are essentially equity oriented funds that also offer the opportunity of capital growth. So, you need not necessarily redeem your units after the three year lock in period.
• You can also link your ELSS to a long term investment goal such as the higher education of your child.
The modern young woman no longer relies only on age-old wisdom for everything from personal grooming to childcare and does not shy away from seeking professional guidance where she deems fit. Professional guidance with investment planning may help a woman up her financial quotient. Professional financial advice can prove to be invaluable when it comes to goal based investing • You can evaluate and prioritise financial goals better with professional financial advice
• A financial advisor can also help you assess your goals according to your financial ambitions at various life stages and provide a blueprint for investment
• Lastly and most importantly, reviewing your investment goals periodically and revising investment strategy when needed becomes easier under the guidance of a professional financial advisor.
To conclude, the must haves in the portfolio of a new mother just beginning her investment journey — A new mom can build an investment portfolio with the following funds: • A liquid mutual fund with the objective of building an emergency fund • An index fund to participate in equities with a low tolerance for risk • An ELSS fund to save taxes and link it to a long term goal.