Beating Inflation With Mutual Funds

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You work hard to earn your money. It helps to meet your monthly expenses and the rest – you put away in a savings account for safekeeping. This way, you can easily access your money if you come across any unplanned expenses.

Keeping some money aside is a good habit, but by keeping substantially large sum in a savings bank account, you may be actually losing the value of your money. The reason being the value of your money is getting eroded by inflation. Increase in prices i.e. inflation is responsible for reducing the value of your money.

Moreover, depending on your income level, you have to pay tax on the interest that you earn on your savings bank account – which can further reduce your returns.

Therefore, you need to look for investment avenues that help you fight inflation. One such investment option is Mutual Fund.

Saving Solutions from Mutual Funds:

There are various savings solutions available depending on the time period that you would like to invest for:

  1. 1 day to 3 months

  2. 3 to 6 months

  3. 6 months to 1 year

  4. More than 1 year

Benefits of saving solutions from mutual funds:

  1. Make inflation work in your favor: Inflation affects your returns from any investment including mutual funds. But, in case of savings solution, you can use it to your advantage through indexation – which can help you to reduce the amount on which you have to pay tax. You can benefit from indexation, if investing for more than one year.
  2. Preserve your money: These schemes generally invest in instruments like bonds of reputed companies and securities (bonds) issued by the government, which are considered relatively safe.
  3.  Provide liquidity: If you need to withdraw your money, all you have to do is submit a redemption slip and your money is normally credited to your bank account within one working day.

  4. Tax efficient returns: You can earn returns in form of monthly/quarterly dividends which are completely tax-free in your hands.

Regular Income Solutions from Mutual Funds:

An extra monthly income can come from various conventional options like Fixed Deposits (FDs) and Monthly Income Schemes (MIS), but the monthly income that you receive may be fully taxable.

But, the regular income solutions offered by mutual funds have certain benefits like:

  1. They aim to preserve money and provide regular income: These schemes generally invest in instruments like bonds of reputed companies and securities (bonds) issued by the government, which are considered relatively safe in order to generate regular income for you.
  2. They aim to fight inflation: A small part is invested in equity i.e. stocks of various companies to help you stay ahead of inflation.
  3. Tax-efficient returns: You may opt for a monthly dividend option where, in addition to the growth of your invested amount, a portion of the same comes to you as monthly income in the form of dividends. These dividends are completely tax-free!

Tax Savings Solutions from Mutual Funds:

Tax saving solutions from mutual funds like Equity linked Saving Schemes (ELSS) help reduce your tax burden and at the same time, aim to grow your money through equity investments.

The advantages of ELSS include:

  1. Low lock-in period: Your money may be locked-in for just 3 years, as against the much longer lock-in periods in other options.
  2. Potential to earn dividends: You can opt for the dividend option and receive returns in form of tax-free dividends.
  3. Earn market linked returns: Since investments are made in stocks of reputed companies, the value of your investment moves with stock market and you are likely to earn higher returns in the longer run. Although it comes with market related risks, your investment is monitored by an investment expert with an aim to minimize such risks.
  4. Tax-free returns: When you withdraw your investment after 3 years, the returns are totally tax free.
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