Life is full of choices these days; from your favorite toothpaste to your TV channel. But, sometimes choices = confusion. Things get little more complicated when it comes to finances and money management as choice of action today determines the future financial well-being and standard of living. That is why people generally rely on expert advice of their financial advisor. In the world of investing, where choice= chaos= confusion, expert opinion and information play a critical hand.

These days, equity mutual funds have garnered importance as equity markets have jumped 35% YTD and assets under management of the mutual funds has increased by 34% (September, 2014) as investors re-gain confidence in capital markets.

Different types of Equity Mutual Funds for different investing needs:

Mutual funds are professionally managed pool of money collected from large number of investors. They are utilized for wealth creation, tax savings, regular income and savings for future. There are various options in mutual funds.

a.      Generally for long-term wealth creation: Advisors recommend investors to invest in growth option as geometric returns helps investors make money on returns as well. In growth option the number of units allocated remains the same and the NAV keeps on growing as per the performance of the mutual fund.

b.      For regular Income:  Usually dividend option is recommended for income from mutual funds. Even though AMCs usually don’t declare dividends on regular and consistent manner, it also works as a strategy for timely profit booking. Within dividend option, there are sub-options including payout, reinvestment and sweep. In payout option, dividends are transferred to investor’s account directly; whereas in reinvestment option, declared dividend is transferred as units in existing investment and finally, in sweep option dividend amount is transferred as units in any other mutual funds, specified by investor beforehand

c.       Bonus Option:  Allocates bonus units to the investor, on any sustainable appreciation. This scheme comes in handy for HNI investors to reduce their taxation on capital gains.

Identify your needs before investing in any Equity Mutual Fund:

It is important to understand that choice of options in any mutual fund category can significantly impact the potential risk and return. The selection of option should be aligned to financial goal and to maximize the utility of investing.

Growth Option:

1.      Parking Any Surplus Funds like bonus for a long term (10-15 years).

2.      Small and regular savings per month for retirement, child education or marriage (SIP).

3.      Accumulating funds for pre-closure of loans in 5-10 years (SIP).

4.      Long term wealth creation.

Dividend Option and Bonus Option:

1.      Tax reduction in the short term.

2.      Income requirement from your portfolio.

3.      Automatic profit booking.

4.      Re-investment in different avenues for portfolio diversification and rebalancing

Investing in equity Mutual Fund is not an option but a necessity for average investor. It is the only investment avenue which has historically matched the returns of Real Estate but has very low threshold for investment (as low as 1000/- per month). Since the risk is spread over so many stocks, the liquidity is in 3 days and the entry price is so low, mutual fund becomes a must have investment avenue in every long term investor’s portfolio.