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Points HNI investors need to keep in mind while investing in Mutual Funds


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High net-worth individuals (HNIs) look for different investment avenues to grow their capital. Recently, investment options like investing in startups have opened up for them, which offers diversification. But investing in mutual funds continues to be one of their favorite financial assets for them.  

HNIs belong to a class of individuals with an investible surplus of more than Rs 5 crore. Once you have a large corpus for investment, you need to be careful when making your investments – even for debt and mutual funds, which are considered comparatively safer options. In this article, we will discuss the points that HNI investors need to know before investing in mutual funds.  

Points for HNIs to keep in mind while investing in mutual funds

Diversification is possible, and they must use it: Diversification is one of the crucial points for HNI investors, as they want to minimize their portfolio risk. Mutual funds come in categories – equity, debt, balanced (mix of equity & debt), gold, and international funds. HNI investors must invest in mutual funds across categories and create a balanced portfolio. HNIs who are more evolved could use ETFs, Sectoral and Global Funds more effectively. The percent allocation in each category will depend on many parameters. You can get in touch with expert advisors at Right Horizons to know the right asset allocation for you.  

How to invest in mutual funds: There are two options for HNIs to invest in mutual funds – lumpsum amount and via Systematic Investment Plan (SIP). HNI investors may be tempted to invest everything at once if they have a large corpus at their disposal. HNIs who understand market cycles, could use entry and exit strategies more effectively.  However, it is not always advisable and not the best option. The rule of thumb is to deploy money in the equity market via SIP. For debt and gold, you may invest a lumpsum amount. Alternatively, you can put all the money in a debt fund and move a fixed percentage monthly into the equity via a SIP. If you are unsure of the best way to invest a large corpus – consulting a financial advisor is a better option than going wrong.  

Know and plan the taxes: Different categories of mutual funds have different tax structures. For example, with equity mutual funds, short-term capital gains (investment period less than 12 months) are taxed at 15%, and long-term capital gains (investment period more than 12 months) are tax-exempt up to Rs 1 lakh in a financial year and taxed at 10% thereafter (excess of Rs 1 lakh of capital gains).  Considering that dividend is now added to income of the recipient, it is advisable to use the Growth Option which helps convert the returns into capital gains. HNIs should not use the dividend option for equity funds and for debt funds that are likely to be held for long term.

You can generate regular income via mutual fund investment: If you want an option to generate regular income and grow your capital, mutual funds are one of the best options to explore. You can explore the Systematic Withdrawal Plan (SWP) option. It is a facility that allows you to draw fixed amounts from your mutual fund investment at regular intervals – monthly, quarterly, etc. SWP works by redeeming the required units at prevailing NAVs to meet your cash flows. The advantage of SWP is that you get fixed cash flows according to your needs. Also, these are more tax efficient than other income options like dividends or interest.

Don’t try to time the market: The one thing HNIs without deep expertise in markets must avoid is to try to time the market for higher profits. It is always better to set goals and make regular investments to achieve them. Evolved HNI investors with deep expertise of market cycles can look to time the market.

Conclusion

For long-term wealth creation, mutual funds, as a category, have been evolving as one of the best options available for HNIs for nearly a decade. HNIs have preferred this option because it offers liquidity, diversification in terms of the various categories available, and tax efficiency compared to other financial products.  HNIs with expertise can take advantage of mutual funds in a better way as outlined above.

You can start your mutual fund investments if you have not done so yet. The first step in the process is that HNIs should do is to understand their risk profile; and set their goals and investment horizons to achieve the same. Right Horizons can help you at every step of your financial journey.

       

 

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