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.
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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.
The other expert mentioned several reasons for mutual funds which help investors achieve financial freedom or independence.
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 thru digital (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
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Mutual fund investors often choose schemes just by looking at the past performance and not paying attention to the risk associated with the category they have chosen for investment, their own risk profile, investment horizon, and goal.
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.
He also shared an example, “To give an example, if an investor has a goal to achieve a corpus of Rs 10 crores at the age of 60 years, considering average returns of 12% per annum, she would need to do an SIP of only Rs 15,000 a month starting at the age of 25 years, versus Rs 1 lakh a month if starting at the age of 40 years. An astonishing 83% of the estimated wealth is lost by delaying investments by just 15 years. Timing the market is not important as compared to time in the market. This is the mantra for financial freedom.”
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
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
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