MF investments best bet for wealth creation with low risk

A targeted and aggressive approach could be achieved by investing through sectoral or thematic funds which specifically direct a particular theme or sector. Investors who have risk capacity and conviction on a specific sector or theme could benefit with such investments

Mutual funds as the name suggests could simply be understood as mutually agreed to be invested. The agreement is based on the fund objective which clearly defines how and where the investor’s money would be invested for a defined cost (fund management fee). Though, these are simple and basic avenues of investments, they could be a potential tool for wealth creation while forming a bedrock or foundation of wealth accumulation.

The options available are diverse and are good tool for asset allocation and diversification. And when mentioned about MF, the first thing that comes up within investor’s minds is risk and equity. Though they’re the most popular where the instruments invested are equity (stocks) and equity-related, there are other forms that are equally prominent and utilitarian.

There are MFs which predominantly invest in debt and related instruments, ranging from government securities to corporate bonds to other money market instruments like treasury bills (t-bills) and even in call or overnight instruments with maturities less than 24 hours. They offer liquidity and safety while providing returns better than instruments with similar risk. These allow investors to park their funds for short term to provide safety net and to offer better returns within the traditional set.

Then there are hybrid funds which as the name suggests are a mix or combination of various asset classes including debt and equity. A variant in these funds have gold as asset class for further diversification, also known as asset allocation funds. These offer better returns than bank deposits while not compromising too much on the risk. Then there are multi-asset funds which extend investments into REITs (Real Estate Investment Trusts) that invest in commercial real estate and InVITs (Investment Trusts) which primarily focus on infrastructure projects. These offer a chance for the investors to explore these non-traditional avenues albeit at a much lower denomination.

Then of course, there are arbitrage funds which try to leverage arbitrage opportunities. These try to explore and capitalise the price variation of the same asset across different markets. This kind of insights aren’t easy to identify and requires lots of research which isn’t easily available to an ordinary investor. Balanced advantage funds are hybrid funds with allocation to equity & debt but have a defined model for the allocation.

A targeted and aggressive approach could be achieved by investing through sectoral or thematic funds which specifically direct a particular theme or sector. Investors who have risk capacity and conviction on a specific sector or theme could benefit with such calls. Investors whose risk is limited and are content with benchmark returns could employ index funds to their advantage. Investors could also diversify into international markets by picking active or passive funds targeting international stocks. The passive options include index and fund-of-funds on ETF.They invest in a particular index or ETF (Exchange Traded Fund, a homogenous mix of securities) to try track the index.

Moreover, MFs are highly tax efficient while being convenient to invest. For instance, if one were to directly deal with equity, debt or any other asset class, one is taxed based on the transaction (buy/sell) according to the applicable capital gains taxation laws. But, due to the pooling account arrangement in MFs, the individual investor is not impacted by the day-to-day transactions performed by the fund manager at the fund level. Only upon the redemption or withdrawal initiated by the investor would attract tax i.e., the taxation is upon the realization of investment returns.

This translates MF as an avenue to be graded lower in terms of risk while also generating long term wealth. Most importantly they are professionally run and well-regulated entities protecting the investor’s interests. A portfolio of MFs comprising the risk spectrum from aggressive to conservative making them complimentary to each other matching various needs. Overall, a judicious mix of multiple MFs according to the risk appetite of the investors in-line with the timelines enhances the wealth generation over long periods at a better risk-adjusted return.

(The author is a co-founder of “Wealocity”, a wealth management firm and could be reached at [email protected])