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Risk Diversification: One of the biggest benefits of mutual funds is risk diversification. Every stock is subject to three types of risk – company risk, sector risk, and market risk. Company risk and sector risk are unsystematic risk, while the market risk is known as systematic risk. Mutual funds help investors diversify unsystematic risks by investing in a diversified portfolio of stocks across different sectors. While individual stocks have both unsystematic and systematic risks, mutual funds are only subject to systematic risk or market risk.

Liquidity: Open-ended mutual funds are one of the most liquid investments after bank deposits and far more liquid than investments like life insurance plans, infrastructure bonds, post office schemes etc. Investors can redeem their units in open-ended funds usually on a T+3 (transaction + 3 days) basis. Superior liquidity is one of the major advantages of mutual funds compared to some investment options like life insurance plans (which have policy surrender charges) and Government small savings schemes (which have fixed maturity periods).

Let’s see how much money can be accumulated through an SIP investment of  1000/month.

It is evident from the above table that as the number of years increases, the money compounds at a much higher rate. Even though the original investment is very low, the capital appreciation is much higher.

This is the Power of Compounding

Term Insurance and Mediclaim
Buy a Term Insurance policy that may help the surviving family members in case of an eventuality. Buy a Medical Floater Policy to cover medical expenses for the entire family.

Goal-Based Investments through Lumpsum or SIP
Start investing for your Children’s Education and your own Retirement through Goal-Based Funds. These funds create wealth and also maintain discipline. You should also consider Topping up your existing SIPs.

Contingency fund
Invest a reasonable amount in a Liquid fund for any near-term contingencies (should ideally be 3-4x of Monthly Income).

Strategic Asset Allocation:

• Risk profiling
  To identify whether you are a conservative investor or an aggressive investor.
• Time frame
  To identify how much time is there for each of your goals.
• Return requirement 
  Return requirement is expected returns, based on which calculations are made for the desired corpus.

One of the simple examples of Strategic Asset Allocation is Age-based asset allocation. 100 minus your age is your equity allocation, as you grow old your equity allocation will decrease and debt allocation will increase.

Tactical Asset Allocation:

Tactical asset allocation is view-based and decision is made based on the behavior of the market. If you believe that the market will move up, you will increase your allocation towards equity or if you believe the interest rate is going to fall, you will increase your allocation towards GILT funds (which is part of Debt).