Ashish’s comfort with government saving schemes comes from the prespecified return and the guarantee of safety of the principal. These investment choices are traditional because the rate of return used to be decided by the government, even though they are now in alignment with the market rates. The rates are announced by the government quarterly. This has altered the return features of these instruments, while the risk still remains low.
Choosing market-linked instruments such as equity mutual funds would mean that Ashish has moved into a new growth asset class, rather than confining himself to debt investments. His returns would align with the market rates on an everyday basis. This will mean three things for Ashish.
First, he can look forward to a fair return as available in the market instead of settling for a lower return.
Second, he can hold the investments for as long as he needs. Open-ended mutual funds would not have a fixed maturity period, enabling him to save and redeem as he wishes.
Third, the risk in his investments will alter. While the investment in a mutual fund would be diversified well across various securities, it would be subject to the ups and downs of the market.
If Ashish makes the transition, he will face the risk-return trade-off of a possible better return, coming with a higher risk. Ashish can instead choose to allocate his money between both choices, so he manages his risk even better.
He can begin with a small amount in a mutual fund along with his traditional investments and build it up as per his comfort, over time. He will find that the volatility in his market-linked investments is well countered by the stability of his investments in traditional schemes. In the long term, he may find this strategy quite rewarding in terms of returns.
Content on this page is courtesy Centre for Investment Education and Learning (CIEL).
Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.
