Diversifying Investments Through Mutual Funds, Passive Debt Funds and ETFs

People say, “Comparison is the thief of joy.” We bet all agree, but not when the matter concen investing in hard-earned money. Comparing has broadened the horizons and encouraged many to think beyond Fixed Deposits (FDs). It has breathed some financial sense into people and helped them to make well-informed decisions.

Today, there are far more investment avenues than FD. Thanks to movies and web series on finance for introducing people to technicalities associated with the investment markets! A few to name would be Wall Street, The Wolf of Wall Street, Scam 1992 and The Big Short. Within their influence, investors are slowly getting introduced to many investment tools and are finally, financially literate to think beyond the traditional FDs.

Let us unveil a few investment tools that yield better returns.

Better Alternatives to FDs

Check out the top alternatives to FD. Read them mindfully to clear your doubts, if any.

  • Mutual Funds

They are nothing but a pool of money that a professional fund manager manages. They operate in a way whereby money is collected from different investors with common investment objectives to invest in bonds, securities, equities, and money market instruments. The income generated is distributed proportionally among investors after the deduction of applicable expenses and levies.

When investing in MFs, one is likely to encounter NAV. It denotes Net Asset Value – the price of a unit of MF. This investment tool is perfect for investors with no time to run market research and for those who lack sufficient sums of money for investment purposes. As long as one intends to multiply wealth, MF is the way forward. Given the fact that Indians have an inherent penchant for wealth creation, it encourages them to look beyond FD and consider this investment avenue.

Now, mutual funds can be of many types - Equity Funds, Money Market Funds, International Funds, Fixed-Income Funds, Income Funds, Balanced Funds and Index Funds.

It begins with building a portfolio, which is nothing but a collection of MFs with different investment goals. The returns that matter are not based on a particular fund but on the overall portfolio.

  • Exchange Traded Funds (ETFs)

Exchange Traded Funds are an MF variant that monitors the portfolio of an index. As ETFs combine all stocks from the index, the returns are similar to that of the broader market index. Being well-diversified, they have no unsystematic risk. However, when compared to FD, they are definitely better alternatives as they have better returns and higher liquidity with taxes only on capital gains.

  • Passive Debt Funds

It’s an investment tool where buying or selling never happens actively. Instead, it involves tracking a particular debt benchmark’s performance to mimic it. Here, the objective is to generate identical returns and not beat the market. Unlike MF, fund managers of passive debt funds have a limited role to play. Such funds have a relatively low cost. The most popular example of a passive debt fund is the target maturity fund.

Unlike FD, a target maturity fund is open-ended, with the freedom to sell investments and receive the proceeds in bank accounts. There is one more point of difference. Regardless of FD tenure, the accrued interest on it is taxed. However, long-term capital gains from target maturity are always taxed at 20% but with indexation benefits. In simple terms, FDs are not as tax-efficient as target maturity funds.

How Are Mutual Funds Different from ETFs?

The functions of mutual funds and ETFs are more or less similar. However, the difference lies in the way they are traded. As discussed, MF transactions happen through a fund manager, but ETFs are traded on the stock exchange much like stocks.

Having a demat account is a must when investing in ETF, but not when it’s MF. Lastly, the prior are mostly passive funds, whereas the latter are actively managed funds.

Passive Debt Funds and Managed Funds: A Comparison

As the name suggests, passive debt funds are not actively managed and hardly aim to beat the market. They only mimic the performance of the standard indices and are never administered by a fund manager.

Managed funds, on the other hand, are actively tracked with the heavy involvement of a fund manager. If the professional believes profitable returns can be generated from investment in another stock, the person can willfully do so. Unlike passive funds, they try to outperform bench indices with the aid of the fund manager’s research.

Tips for Newbie Investors

Willing to invest? Go ahead with the decision keeping the following advice in mind:

  • Have patience

Markets fluctuate a lot, especially in the short term. Therefore, it’s always advised to have a long-term outlook. History is witness to impeccable returns for patient investors.

  • There is no opportune time to enter the market

As long as you are bent on investing in the financial market, nothing should come between you and your will, not even time. If you think you can predict the market’s performance, you are wrong. So, start today!

  • Diversification of a portfolio is good, but never over-diversification

Buying stocks from different sectors is the key to higher returns, but buying too many can make it difficult for you to keep tabs on them. Stay focused on a few to grow your wealth.

Still, Have Doubts? Seek Consultation from Inbest!

Investment diversification is something you cannot master in a day. Go through more resources on Inbest and strengthen your knowledge. Clear doubts by consulting the team of Inbest and change your perception about financial planning for salaried employees!

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