Mutual Funds.....Perception - Risk & Volatility.....Reality - Asset Allocation (Part I)

Right from the first post on Friday Financials, I have tried to stress upon three very simple yet very very important concepts in Financial Planning.

1. Goals

2. Compounding

3. Inflation

In this post I would like to add another concept of 'Asset Allocation' to the Financial Planning Process and what better product can I choose other than Mutual Funds(MF's) to further my case.

Did you know that this is the only (transparent) product, with a well diversified basket of options, having low management costs, which can be directly linked to your financial goals?

For example:

1. You want to create an emergency fund: Invest in a MF's liquid fund, this not only offers better tax adjusted returns than your savings account but also protects your principal investment.

2. You want to save for your retirement: Chose a balanced fund. This should help you combat inflation and generate wealth at the same time...after all, you are saving for your retirement right?

Also, Long Term Gains from investments in Equity MFs are tax exempt and you can avail of indexation benefit on Long Term Gains on Debt MFs (both subject to IT rules)

But wait, despite all this why aren't MF's the No 1 choice of Indian investors?

Perception: MF's offer only Equity related products.

Reality: Various Debt(fixed returns) related options, with variable maturities are also available within MF's.

Perception: MF's are subject to market risk please read offer document before investing.

Reality: After investing in Equity MF's(for long term) only do you realise, that risk and return go 'hand in hand' and thus help achieve your long term financial goals.

Having said that, Asset Allocation(AA) plays a crucial role in the financial planning process, may it be for short or long term financial goals.

To be continued.........