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Here’s how you can make the most of Diwali cash gifts with mutual funds

Mutual fund advisors say that a small amount invested over a long time can become a sizeable amount. Thanks to the power of compounding- your money can get multiplied beyond your imagination.

, ET Online|
Oct 29, 2019, 02.16 PM IST
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Compounding
Diwali has just gone by and many of you must have got a lot of cash gifts. Before you think of how and where to spend these cash gifts, here is an interesting idea. Why not invest the money in mutual funds?

If you are thinking of protesting that you only have modest amount with you, here is the scoop. You can invest as little as Rs 100 or Rs 500 in mutual funds.

What difference would a paltry sum of Rs 5,000 make to my financial life? Mutual fund advisors say that this is the favourite line of most investors. Advisors say that a small amount invested over a long time can become a sizeable amount. Thanks to the power of compounding- your money can get multiplied beyond your imagination.

“Investors generally forget that re-investing the interest earned on a small amount of money over, say, 10 years can become a big amount. When you earn a return of Rs 500, it gets invested again and again and you earn more return which earns you more return and so on,” says Puneet Oberoi, Founder, Excellent Investment Advizors.

Here’s an example: if you are investing the cash gift of Rs 5,000 that a relative gave you on Diwali, in an equity mutual fund scheme. Assuming, the scheme offers you a return of 15% annually, you would have around Rs 20,000 In 10 years. That is more than four times of your initial investment.

“The market has seen a downturn lately and valuations are reasonable. If an investor invests at this point in equity schemes, you can buy cheap and get good returns in the future. So, it makes sense to invest whatever little you have in a good equity mutual fund scheme and make the most of your cashgift,” says Neeraj Chauhan, CEO, The Financial Mall.

Mutual fund advisors caution investors to not choose schemes based on how much returns they have given in the past. If you are a new investor, stick to the basics or consult a seasoned mutual fund advisor. If you are investing for a long term (7-10 years), and you have a high risk appetite, you can opt for equity mutual fund schemes. However, many of you might want to park the cash gifts for a travel plan in the next few years. In this case, you should opt for debt mutual fund schemes.

“For short-term goals like vacation plans, investors can park the money in liquid funds. If you are sure you don’t want the money before one year, you can look at arbitrage funds also,” says Puneet Oberoi.

Read more: Mutual funds for short-term goals

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