Growth and Dividend options in mutual funds

Any savvy investor understands the value of investing in mutual funds for meeting their financial goals and optimizing their investments. We have spoken about the importance of choosing the right fund, about starting small but starting early and even discussed the SIP option to help you spot the right fund. However, many investors feel confused when it comes to deciding between the growth and dividend options in mutual funds.

Growth Vs Dividends

Here’s what you need to know to make an informed choice:

Growth Option

Growth Option gives you capital returns but not regular income. It is not an option for short term yield but a good choice for long term investing. The money invested continues to get reinvested leading to capital appreciation but the investors get returns only on redemption. What this means is by choosing the growth option you will not receive any regular dividends but the fund money will be reinvested, increasing the NAV of the fund. This option is not suitable if you are looking for regular income from your investments.

Dividend Option

The dividend option is good for investors who seek a regular flow of income from their investments. Especially if you are investing in short term debt funds, choosing the dividend option can provide a steady income flow. However, payment of dividends is at the discretion of the fund manager and is not guaranteed.

The dividend option does not offer high capital appreciation as the money is paid out to the investor instead of being reinvested. Further, compounding cannot work its magic much in this option as regular payouts are made to the investor. However, this option is a wise choice for retired persons who want regular income from their investments. It is also possible to opt for a dividend reinvestment option wherein the dividend is not paid in cash but reinvested to buy more units. However, keeping in mind the entry load and the lock in period (if applicable) each time new units are purchased, growth option turns out to be a better choice.

The choice between growth and dividend options completely depends on your financial goals. However, it is best to be guided right. Get in touch with Dr. Celso at Navemarg to embark on a successful investment journey.

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Start early to reap benefits later

There is no right age to start investing and planning your wealth, but it is definitely wise to start early. In our youth, we never think of retirement or building a fund to secure our retirement. However, starting early can help you stay one step ahead and achieve all your financial goals in time, including a comfortable retirement.

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Why is it important to start investing early?

 

Firstly, to inculcate the habit of saving, right from the start. There is no shame in being frugal as a fool is soon parted with his money. Dr. Celso, India’s first financial doctor, always advises his clients to spend after they save and not vice versa – he recommends anyone who wants to grow rich must set aside 1/4th of their income for investing in well-researched options before they decide to spend what they earn. Indeed, a very simple yet effective mantra to substantially grow your savings without ever feeling the pinch.

The second factor is the relationship between time and risk as market performance over the years has shown investments (even risky ones) give better returns when one stays invested for a long time period (at least 10 years). Warren Buffet, one of the richest men in the world who started investing at the age of 11 years famously said, “If you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes.”

Planning early and planning long can help investors stay focused and reap higher returns. Further, the magic of compounding over time can substantially multiply your returns.

However, when you start investing early, work out a budget and set aside no more than 1/4th of your salary for investing (unless you have surplus) lest you find yourself borrowing for necessities. It is also important to build an emergency fund before locking up your spare in investments, as money stowed away for a rainy day can help you maintain liquidity and prevent you from breaking fixed term investments during emergencies that also attracts penalties.

Investing your money at the right place from a young age can help you build a self-replenishing fountain of wealth. It is important to choose right and be advised by someone who has already charted the road to riches and can guide you well. Dr. Celso at Navemarg helps young investors achieve their financial goals through sound investment advice. Contact now and start investing early to reap benefits later.

Fixed Income Investing

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Many investors refrain from investing in mutual funds because of the high risk that is traditionally thought to be associated with mutual fund investments. However, what investors often don’t understand is there are different classes of mutual funds and each has a different risk profile associated with it.

Most of us are more congenial towards fixed income investing, as we do not want to risk what we have already earned. Thus, PPF, fixed deposits, gold (which is also volatile), property (again, volatile) score as more popular investment options in comparison to mutual funds. While property and gold are not low risk options, PPF and fixed deposits can be said to be the safest bets, of course, with lowest returns. But wait, that’s only until you hear about Debt Funds.

What are Debt Funds?

Debt Funds are low risk mutual funds that invest in a mixture of fixed income securities such as corporate bonds, treasury bills, government securities and other debt securities. Mostly, fixed income or debt securities have a fixed time horizon and also pay a fixed rate of interest on investment.

  • Investing in Debt Funds is ideal for investors with low risk appetite who have short term goals (up to 5 years) and are comfortable with a return of 8-9% (better than FDs!) on their investments.
  • Debt Funds are thought to offer fixed returns, but can be affected by changes in interest rates (that are rare), some more so than others. Thus, it is important to choose your fund wisely or seek help from financial advisors such as Dr. Celso at Navemarg who can guide you on your journey to riches.
  • While interest from FDs is added to your income for taxation, interest earned on Debt Funds is taxed as long term capital gain if you stay invested for 3 years or more, making the post tax returns from Debt Funds much more effective than FDs. Further, unlike FDs, there is no tax deduction at source in case of Debt Funds. The gains from Debt Funds may also be offset against capital losses from other investments.

If you are an investor who plans to start small in terms of risk, investing in Debt Funds can be much more beneficial than investing in traditional favourites such as bank FDs. Contact us now to begin your investment journey.

 

3 financial mistakes to avoid

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Friends, relatives, the World Wide Web, will tell you what to do when you start investing. Whether you need it or not, you will receive golden snippets from every investor worth their salt (or not!) about what are the right things to do. However, investors are hardly advised about potential pitfalls or financial traps to avoid on their investment journey. Here are top 3 financial mistakes to avoid for better returns:

#1 Starting too late – It is unfortunate that youngsters don’t start planning for their retirement from the day they receive their very first pay cheque. Of course, you should spend and enjoy your salary, but investing as less as 1,000 rupees from the day you start earning, can make a substantial difference to your retirement corpus, thanks to the magic of compounding over time.

If you start investing INR 1,000 through SIP at the age of 24 years, by the time you are 50 years old, you will have a corpus of 21.5 lakhs (assumed return of 12% pa). However, if you start late and start investing INR 2,000 at the age of 30 years, you will have a corpus of about 20 lakhs only when you turn 50, despite investing more (assumed return of 12% pa).

So start early, notwithstanding how much you earn. Start small, but start soon!

#2 Not having a budget – Do not make this mistake, ever. Not having a budget can be a big financial trap, as you may never be able to track wasteful expenditure that can be converted into fruitful investments. Further, without a budget, it is very difficult to stick to an investment plan. Keep 25% of your salary for investments and fit in your monthly expenditure in the remaining 75% by creating a meticulous budget and sticking to it.

#3 Not taking risks – Of course, we want you to stay clear of Ponzi schemes, but not taking any risks with your investments can leave you with mediocre returns. Risk aversion is good, but investors should not have averse to prudent risks. Investing in mutual funds or equity funds is risky in the short term; however, historically these funds have given much better returns than traditional products such as PPF and fixed deposits over long-term horizons of more than 10 years. Investing in a well-diversified portfolio through SIPs can build your corpus magically over the years, if you choose a fund wisely and stay disciplined.

Dr. Celso at Navemarg can guide you with your investments, while helping you avoid the pitfalls along the way. Book a consultation to know more.