Take a step towards financial freedom with mutual funds

Financial independence is important for a fulfilling life. However, financial independence isn’t necessarily about being wealthy. Instead, it is the freedom to live a desired life without monetary concerns coming in the way. Such independence can be within reach with some financial discipline. A steady investment habit can help generate wealth over time.
One such route to financial freedom can be through mutual fund investments. These have the potential for significant gains over long term but also come with a risk component, because their performance is linked to the fate of the financial market. However, a robust investment strategy and an experienced fund manager can help manage some of the market volatility when you invest in mutual funds.
Read on to find out see if you can consider a mutual fund investment to get closer to financial freedom.

Table of contents

1. What is financial freedom and how can mutual funds help?
2. Types of mutual funds to consider for achieving financial freedom
3. Suggestions for potentially achieving financial freedom with mutual funds
4. You can choose what to invest in
5. You can choose a desired tenure
6. Invest a little or a lot
7. Choose your risk-appetite:
8. Tax benefits to boost your financial freedom goals

What is financial freedom and how can mutual funds help?

Financial freedom refers to a situation where an individual has built sufficient financial resources to meet living expenses without needing active employment, offering greater flexibility over time and personal choices.

Mutual funds can help play a role in long-term wealth creation by offering exposure to diversified asset classes such as equity and debt. Equity-oriented funds are typically used for long-term growth potential, while debt-oriented funds may help provide relatively lower volatility. Systematic Investment Plans (SIPs) allow investors to invest at regular intervals, which may help manage market-timing risks through rupee cost averaging and support disciplined investing over time.

Types of mutual funds to consider for financial freedom

Here are the various types of mutual funds you may choose from to help potentially achieve financial freedom.

• Equity funds: Categories such as large cap, mid cap, or flexi cap funds are generally used for long-term wealth creation due to their growth potential. These funds are typically considered for longer investment horizons, given their exposure to market volatility.
• Hybrid funds: Hybrid funds invest in a mix of equity and debt instruments. They may be considered by investors seeking a balance between growth potential and relative stability, particularly as they move closer to specific financial goals.
• Debt funds: Debt-oriented funds, such as liquid funds or corporate bond funds, primarily invest in fixed-income securities. They are generally used for managing lower volatility or meeting shorter- to medium-term needs, including cash flow planning during the post-retirement phase.
• ELSS funds: Equity Linked Savings Schemes (ELSS) are equity-oriented mutual funds with a statutory lock-in period of three years. They offer tax benefits under Section 80C of the Income Tax Act, 1961 (under the old regime) along with exposure to market-linked returns.

Suggestions for potentially achieving financial freedom with mutual funds

While everyone’s journey to financial freedom may look different, here are a few things that may help you stay on track:

• Starting early and investing regularly: Beginning investments earlier and using Systematic Investment Plans (SIPs) may allow investors to benefit from compounding over longer periods.
• Diversification and periodic review: Spreading investments across different funds or asset classes may help manage concentration risk. Periodic portfolio reviews can help assess whether the asset allocation remains aligned with changing goals and risk appetite.
• Goal-based planning: Linking investments to specific financial goals and using planning tools or calculators may help estimate required savings and investment levels over time. Some investors also consider gradually increasing investment amounts as income grows.
• Emergency preparedness: Maintaining an emergency corpus before taking higher market exposure is often discussed as a prudent step in financial planning. Liquid or low-duration instruments may be suitable for this.

Read Also : How can mutual funds help you achieve financial freedom?

You can choose what to invest in

Based on the assets in which they invest, mutual funds are divided broadly into equity and debt funds. An equity fund invests primarily in company stocks, while debt funds invest in fixed-income securities such as corporate and government bonds, treasury bills, certificates of deposit and more.
Equity investments have the potential for high rewards but also entail greater risk, while most debt funds carry a lower risk with moderate return potential. There are also hybrid funds, which combine debt and equity investments in varied proportions and can also put money in other asset classes such as gold and real estate.

The mutual fund investment horizon you’re looking at and your risk tolerance threshold are important factors in deciding whether to opt for debt, equity, or a hybrid portfolio. Equity-heavy portfolios are usually recommended only if you invest in mutual funds for a long duration because markets can see major fluctuations in the short term but tend to stabilise over a longer duration, say 7 to 10 years.
Debt funds, on the other hand, are considered better for short-to-mid-term investment horizons (roughly between one and five years) because they tend to yield relatively stable returns, less volatility compared with equity but may not offer significant growth.

You can choose a desired tenure

From a few months to several years, you can choose a mutual fund investment period that fits your needs and goals. If you’re saving up for retirement, you would typically have a long investment horizon of more than 10 years.
Other goals or investment objectives may require different durations, based on which you can choose your mutual fund type or category. There are also mutual funds tailored for very short-term investments of less than a year, which invest mainly in debt and money market securities.

Invest a little or a lot

You can invest in mutual funds in a lumpsum or through regular instalments through a Systematic Investment Plan. An SIP allows you to choose an instalment amount and frequency (weekly, monthly, quarterly etc) that fits your income, expenses, and other priorities. The amount can start from just a few hundred rupees. These small instalments have the potential to build wealth over time through capital appreciation, compounding gains and other factors, especially if you start early.
You can also hold multiple mutual fund schemes, so your SIP amounts can vary in each scheme depending on what your investment goal is.

Choose your risk-appetite

The risk level of a mutual fund scheme is indicated by a ‘riskometer’ that ranges from low to very high. This helps you choose a mutual fund type or portfolio combination that aligns with your risk threshold and goals.
Equity-heavy portfolios carry higher risk. Even within that, those investing in large-cap companies carry lower risk than those that put money into smaller companies even though both would be categorised as very high risk. For more aggressive and risk-tolerant investors, there are also contra funds which follow a contrarian investment strategy that goes against the market tides.
Sectoral funds are another high-risk mutual fund category where money is invested into equity instruments of a particular sector, such as energy, infrastructure or pharmaceuticals.
Credit risk debt funds, meanwhile, invest in debt instruments of companies that are not so highly rated, which increases the uncertainty of the returns but has the potential for a relatively better growth if those companies perform well.
High-risk funds are suited to aggressive investors or those with high income levels who are freely willing to bet on the market. You can also opt for a diverse portfolio with a mix of high-risk and low-risk funds.

Read Also : SIPs for financial independence: The power of disciplined investing

Tax benefits to boost your financial freedom goals

Apart from potential market-linked returns, some mutual funds also offer certain tax benefits. Equity mutual funds held over 1 year qualify for 12.5% LTCG tax only on gains above ₹1.25 lakh annually. Additionally, ELSS funds are eligible for up to ₹1.5 lakh deduction under Section 80C of the Income Tax Act, 1961, under the old regime.

Conclusion

With mutual funds, you have the flexibility to build a portfolio that best fits your investment goals. If it’s possible, consult a financial advisor before making investment decisions.

FAQs

How can mutual funds contribute to financial freedom?

Mutual funds provide opportunities to invest in diverse portfolios managed by professionals, potentially growing wealth and creating a path to financial independence over time.

Are mutual funds suitable for beginners?

Yes, mutual funds can be a good starting point for beginners due to their diversification and professional management, helping individuals with limited financial knowledge build wealth gradually.

What types of mutual funds can be suitable for achieving financial freedom?

Diversified equity funds, growth-oriented funds, and long-term equity funds can be considered for achieving financial freedom, depending on your risk tolerance and investment horizon.

Can mutual funds guarantee financial freedom?

Mutual funds carry market risks, and returns aren't guaranteed. However, the equity-oriented funds offer the potential for substantial growth over time, making them a valuable tool in the pursuit of financial freedom.

Why is starting early important to achieve financial freedom with mutual funds?

Starting early gives investments more time to potentially grow through the effect of compounding, where returns may generate further returns over longer periods. Additionally, beginning early can reduce the pressure of investing larger amounts later, as contributions are made over a longer time horizon.

How do Systematic Investment Plans (SIPs) aid in financial independence?

Systematic Investment Plans (SIPs) help investors invest regularly over time, which supports disciplined investing and potential long-term wealth creation. By investing fixed amounts at regular intervals, SIPs can also help reduce the impact of market timing through rupee cost averaging. Over longer investment horizons, this approach may allow investors to benefit from compounding and gradually build a corpus aligned with long-term financial goals, including financial independence.

What tax benefits do mutual funds offer for financial freedom seekers?

Mutual funds may offer certain tax-related advantages depending on the fund category and holding period. For example, Equity Linked Savings Schemes (ELSS) provide tax deductions under Section 80C of the Income Tax Act,1961, under the old regime, subject to prevailing limits and conditions.

Additionally, equity-oriented funds have concessional long-term capital gains tax rates. Capital gains on units held for more than one year are taxed as LTCG. Gains of up to Rs. 1.25 lakh in a financial year are tax-exempt. Thereon, the tax rate is 12.5%. In comparison, STCG are taxed at 20%, with no exemptions.

So, adopting a long investment horizon and considering ELSS funds can help optimise tax outgo when working towards financial freedom.

In addition, capital gains from mutual funds are taxed based on factors such as asset allocation and holding duration, with different tax rates applying to short-term and long-term gains. Understanding these tax aspects can help investors make more informed decisions, though tax benefits alone should not be the sole criterion for investment selection.

How can I balance risk while investing in mutual funds to achieve financial freedom?

Balancing risk in mutual fund investing typically involves aligning investments with individual risk tolerance, time horizon, and financial goals. Diversifying across different asset classes and fund categories may help manage volatility, while periodic portfolio reviews can help ensure that asset allocation remains appropriate as goals and circumstances evolve. Maintaining a long-term perspective and avoiding frequent, emotion-driven decisions are also commonly discussed approaches in long-term financial planning.

How long should I invest in mutual funds to attain financial freedom?

There is no fixed investment duration that applies to everyone. The time required to potentially achieve financial freedom depends on factors such as financial goals, income levels, savings capacity, risk tolerance, and market conditions.

Mutual fund investing is generally discussed in the context of long-term horizons, as longer time frames may allow investments to navigate market cycles and potentially benefit from compounding. However, investors must note that mutual fund returns depend on market conditions, so financial freedom is not guaranteed.

Can mutual funds help build a retirement corpus?

Mutual funds can play a role in retirement planning by offering access to diversified investments across equity and debt markets. Over long investment horizons, equity-oriented funds are often used for growth potential, while debt-oriented funds may be considered for managing volatility or generating relatively stable income closer to retirement. However, the suitability of mutual funds depends on individual factors such as time horizon, risk tolerance, and overall financial planning objectives.

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