How mutual fund SIP, NPS can help in achieving financial freedom
Financial freedom as a term is understood differently by different people. Some understand it as buying what you want and when you want whereas some understand it as the ability to live a comfortable and stress free life without worrying much about the money.
Financial freedom means having enough financial resources to cover living expenses and fund life goals without working or committing time to generate money. Financial freedom is defined as having sufficient income, savings, and investments to lead the life of one's choosing without dependence on a traditional job.
“For achieving financial freedom, it is important to start early, even if the investible amount is small, to take advantage of compounding,” said Rajesh Minocha, a Certified Financial Planner (CFP), Founder of Financial Radiance.
Many investors achieve their financial goals by making investments in different financial products. ETMutualFunds reached out to experts to know how mutual fund SIP and NPS can help in attaining financial freedom.
Many investors achieve their financial goals by making investments in different financial products. ETMutualFunds reached out to experts to know how mutual fund SIP and NPS can help in attaining financial freedom.
“MF and NPS are great ways to achieve financial freedom. NPS has the advantage of a lower expense ratio and a simple automated way of investing without much involvement from investors. But has restrictions in terms of equity proportion that can be invested and also lock-in of funds till retirement (for Tier 1) and then a compulsory taxable annuity after retirement. Mutual funds, on the other hand, provide more flexibility and a bouquet of products depending on the needs of the investors.
However, they need regular reviews by the investors themselves or based on the recommendations of their mutual fund distributors or financial advisors,” recommends Rajesh Minocha.
According to Naresh Bulchandani, Head of Products, Merisis Wealth, mutual funds have proved to be a preferred route of HNIs to NRIs and small retail investors in their journey to financial independence for several reasons:
- Accessible ticket sizes: as low as Rs 10 for Navi MF and Rs 100 or Rs 500 for many other AMCs make it within most investors' reach.
- Low-cost investment offerings: cost effective WM offering with management fees / expense ratios prescribed by the regulator for each asset category basis AUM.
- Investing convenience: investors can invest through digital (i.e. on (i.e. online / paperless mode) or physical mode basis their comfort
- Easy modes of investment: investors can choose to invest lumpsum or stagger it via SIPs or STPs (Systematic Transfer Plan)
- Transparency in portfolios: AMCs are mandated by SEBI to publish their portfolios on websites on a monthly basis and nearly all MFs also post their factsheets on public domains in the same frequency. Transparency improves trust in SEBI.
- Ease of withdrawal and ready liquidity: Most MF categories enjoy good liquidity and investments can be easily withdrawn with defined redemption periods.Access to multiple asset classes: Various MF categories take exposure to asset classes such as Equity, Debt, Arbitrage, Cash (Liquid) and Precious Metals or a combination of asset classes such as thru Hybrid or Multi-asset MFs.Access to sub-asset classes: Within the above asset classes, investors may desire exposure to sub asset classes.
Mutual fund advisors and experts often recommend that one should always choose schemes based on their risk tolerance ability, investment horizon, and goal.
The next question that comes is how can one go about picking mutual funds to achieve financial freedom?
“There are many products within mutual funds that investors can choose based on their risk appetite, time horizon and goals. Investors can invest in equity, debt, commodities, real estate etc, or in a combination of these asset classes. Within equities also, investments can be done in large-cap, mid-cap, small-cap, thematic, sector funds etc, or in a combination of these categories. Portfolio diversification can be achieved easily within mutual funds,” recommended Minocha.
Naresh Bulchandani shared some strategies that investors should keep in mind to pick mutual funds. The key strategies are:
- Given that equity market valuations are not cheap, the deployment in equity-oriented funds to be staggered over 6 to 12 months preferably via a weekly STP or monthly SIP form.
- Cash, Debt, Hybrid and Gold fund allocation may be done in lumpsum.
- Thematic equity funds carry higher risk than diversified equity funds
- International equity funds carry higher risk than domestic equity funds
- Number of funds can be further reduced by choosing Hybrid funds which are a mix of cash, debt, equity and gold