Mutually Beneficial

The foundation of the financial pyramid should include an emergency fund of three to six months of living expenses. Next, make sure you have enough life, health and disability insurance. Before building that pyramid any higher, pay off your high-interest consumer debt, such as your credit card bills. Once you8217;ve got a handle on your debts, the rest of your pyramid should be investment-oriented. Plan for short, medium and long-term goals, such as saving for a car, a house, college education for your children or your retirement.

A series of disappointing facts surround mutual funds today. Mutual fund dividends are taxable now. The interest rates are down, which will drag the return of bond funds, the top fund flavour in recent times. Technology fund investors are still in deep red. The oldest Indian fund, the Unit 8217;64 has been in trouble.

But there are many reasons why you should still consider mutual funds. Today, we have a wide variety of mutual funds tailored to meet our financial goals with the advantage of diversification, convenience and professional management. These benefits alone justify why you might choose mutual funds over other investments, such as individual stocks and bonds. Besides, returns on mutuals also look good see graphic. Over the last three months, for instance, diversified equity funds have given returns of 12.7 per cent.

The main reason for investing in mutual funds is diversity, which can both increase your potential returns and decrease your overall risk. MFs allow an investor to spread out his or her money across as few as a handful to as many as several thousand companies at one time. This is especially advantageous for small investors who either don8217;t have the time to research their own investments or who don8217;t trust their own investment expertise. Liquidity, or the ability to readily access your money, is another benefit of MFs.

BOND FUNDS: A good choice for conservative investors seeking stable income with a lower risk of capital loss. More so, for an investor who lack the capital to properly diversify with individual bonds. And even for aggressive investors, these funds help in diversifying against the risk of equity ownership.

In the recent past, these funds have provided much more than the standard expectations with an average return of 15.45 per cent as on March 31, 2002 with reasonable stability. Though these returns are not sustainable, successive interest rate cuts in 2001 largely helped funds in this category post handsome gains. The series of interest rate cuts boosted the bond prices and debt funds gained in value. But the new money pouring into funds will yield lower return as price of bonds realign to the prevailing interest rates. Over a longer time horizon, bond funds will only deliver marginally superior returns than alternative fixed income options, but with higher tax efficiency and liquidity.

EQUITY FUNDS: Over the long run8212;10 to 20 years or more8212;stocks may provide the best potential for returns that exceed inflation. But, identifying and exploiting market inefficiencies is the key to successful long-term equity investing. Ideally, though, one should not be investing in stocks, if one cannot define any of the following words8212;gross margin, operating margin, EPS, dilution, share buyback, revenues, receivables, inventories, cash flow, estimates, depreciation, capital expenditure, market capitalisation, shareholder8217;s equity, assets, liabilities and return on equity.

It8217;s hard to discourage anyone from investing in stocks as it is so enjoyable. But picking stocks is a tough job. As Warren Buffett once said, 8216;You can8217;t tell who8217;s swimming naked until the tide goes out.8217;

With equity funds, you overcome the problem of investing in individual stocks directly. And you also get the convenience, reduced risk with diversification and professional fund management. And the fact that you can invest as little as Rs 500 every month makes it all the more attractive as a saving avenue to build wealth.