Why should students invest in mutual funds instead of fixed deposits or shares?
Indian students are more prone to investments nowadays than ever. However, the can't decide where should a student invest: mutual funds, fixed deposits or stock? Find out why students should invest in mutual funds for better and safer returns.
Why should a student invest in mutual funds? In fact, why should anyone invest in mutual funds, instead of other investment instruments like bank fixed deposits, stock markets, or commodities? How will investments in mutual funds benefit students? Students in India are leaning to investments these days more than ever; that is definitely a good sign for the country's economy as well as personal finance. On one hand, average middle-class Indian college and university students get more pocket money nowadays than we were used to get (yes, I am considering the inflation). Secondly, there are more part time earning avenues for students than before. Earlier, the only most popular income avenue for senior students was to offer private tuition to their juniors. These days, they work part-time in BPOs, write blogs, and do a dozen unique things out there. Bottom line, there is more money flowing into the hands of average college and university students in India.Why students should start investing as early as possible?
The benefits of early investments is perhaps one of the most clichéd personal finance topics out there in the web, and I won't discuss it any further. Every reader of this article is well aware of the power of compounding, and perfectly knows that the earlier you save, the greater returns will be yielded by your assets. Happily, Indian students are investing, at least at a greater ratio their US or European counterparts. Frugality seems to be in the very DNA of Indians, but that's a different topic altogether.
However, student often end up parking their surplus money in bank fixed deposits, or even worse, in savings accounts. Mutual funds, especially Systematic Investment Plans (SIP), are perhaps the best investment options for students in India. Unfortunately, due to ignorance, and sometimes due to excessive risk averseness, students often do not make the most of mutual funds. Some, on the other hand, want to make too much too soon, and end up making great losses in the stock market.Should students invest in mutual funds and take a little risk?
Talking about losses, everyone has them. You will never find a single person who has only made profits of any financial instruments that involves some risk. But, is that risk worth taking? Why shouldn't one invest in fixed deposits instead of mutual funds and have zero risk? Let's see!Why mutual funds are better than fixed deposits?
If you want a simple, one-line answer, mutual funds are better than fixed deposits simply because they earn more. For the same reasons, mutual funds SIPs are better than recurring deposits. Here is a brief comparison between mutual funds vs fixed deposits.
Inflation adjustment: Inflation is increasing day by day, all over the world. Last financial year, the inflation rate in India was 7%. Think about it! If your mutual fund yields interest at 8% to 9% p.a. rates, what are your actual returns? Only 1% to 2%, right? If you invest in bank FDs for shorter tenures and lesser interest rates, you can even end up with negative returns. Mutual funds, on the other hand, almost always beats inflation, simply because they depend on the market. If market goes high, they go high too.
Capital appreciation: As you may know, mutual funds do not put all their eggs in a single basket. Especially, if you go for balanced funds, your mutual funds manager will invest your money in various money market instruments like equity, debts, and commodities. And, since mutual funds have their shares of the equity market, they ensure a better capital appreciation and offer more returns.
Liquidity and ease of investing: Do you subscribe to the very popular myth, that investing in mutual funds is equal to a lot of trouble? Break the shell! Investing in mutual funds might have been a complicated process some ten years back, but definitely not any longer. In fact, sometimes it is easier to invest in mutual funds than to invest in bank fixed deposits. If you want to make a fixed deposit in some nationalized bank like State Bank of India, you need to visit the bank in person in most cases. Here, just select the right mutual fund for you, and visit their website. In most cases, they will have options like contact forms or places to leave your mail ID or mobile number. Let them know that you are interested in investing in their mutual funds, and their agent will be at your doorstep sooner than you would expect.
Mutual funds are also quite liquid. If you want your money back at any point of time, you can withdraw any number of units within a couple of business days.
No exit load after one year: In most cases, there is no exit load for mutual funds after one year. Within the time limit of 1 year from the date of investing, most mutual funds will charge 1% exit load or premature redemption fee, but beyond that period it is mostly nil. On the other hand, whenever you will try to take out some or whole of your fixed deposit from banks, you will have to bear 1% penal charges for premature withdrawal.
Risk factor: Nothing comes free in life. Above, I discussed why students can, and should, take a little risk. Should I repeat?Why students shouldn't invest in stocks
Students, in first place, should study. Investments are indeed good, but the best investment a student can do is to ensure a better career. You and your education are your biggest assets! Investing in stock markets needs a lot of time, and patience. Students don't have that much time and patience, and if they try to have, they will probably do miserably in their semesters. Studies first, guys! Also, direct investments in the market requires professional expertise. You don't have them, do you? On the other hand, every mutual fund has a skilled mutual fund manager who has been doing this job for ten, twenty or even thirty years. That person knows the market inside out. If you invest in mutual funds, you can happily shift all your worries and responsibilities to your mutual fund manager and go studying.Only planning makes no money. Start investing!
The biggest mistake we often make is, we don't start. We are all expert planners, but the execution never ultimately happens. Only researching about mutual funds and planning makes no money, do they? Start investing. Are you?
Post your doubts and questions below. I'll be happily answering them all. Happy earnings!