New Era Of Investment Through Hedge Funds Vs Mutual Funds (50:30:20 Saving Principle) !!

Before understanding the benefits of investing in hedge funds and mutual funds, one should always follow a simple rule of monthly investment, which is the 50:30:20 rule. So basically, out of the monthly earnings, whether it is from salary, business, or any other mode, one should always have the habit of saving to meet future needs, which may be ad hoc or planned in the form of medical expenses, educational requirements (higher studies), family functions, and planning retirement. There is no correct age for investment, but if it starts at the beginning of one's career, nothing is more perfect than that. There is a saying (my own) that if you invest early, there is always a possibility of planning retirement early, and why wait till age 60 to retire when it can be achieved before with financial stability?

Talking about 50:30:20 Investment principal where:

50% of earning should be used for Needs which are highly important and one cannot avoid or make compromises:

• Rent/Monthly EMIs (Home Loan)
• Utility Bills such as Electricity, Gas, Water, Maintenance charges
• Groceries - Adhoc and daily use

30% Earnings should be used for Wants which are negotiable / adjustable basis requirement and people can survive.

• Spending Money on Subscriptions like Amazon prime , Netflix etc
• Family vacations
• Hobbies which includes money involvement
• Party and Dinning out 

20% of earnings should be kept aside to fulfil our financial goals via the different investment modes available in the market. So I can say that 20% is as important as 50% because in the remaining 30% we are enjoying life at a younger age, and with the help of 20% we will enjoy our old age (no dependency on money) and fulfil future family goals.

• It includes all the investment done via multiple but correct saving options or modes.
• Debt or Loan repayment also falls here but some part also falls under 50% category.

Now the most asked question is which financial instrument is perfect in terms of highest return ? 

To answer that, we can say it totally depends upon the investor's risk appetite because investing through traditional plans like life insurance, fixed deposits, or recurring deposits is never going to fulfil retirement goals for sure, considering the time value of money and the current inflation rate. The biggest mistake investors make is considering life insurance as one of their investment options. If anyone really wants to secure their family from unfortunate situations, instead of investing via life insurance (no offence), they should opt for term insurance (which is a real insurance plan). When it comes to risk appetite, then comes the actual investment options available in the market today, which can multiply the invested amount from 3% (saving rate of interest) to 100% (mutual funds, stock market).

 

To get 100% (on the higher side) or more than 10%  (on the lower side), one should always focus on a long-term investment strategy. So considering the current trend, investors have a trust factor with insurance or fixed deposit plans, along with more awareness specific to redeeming or withdrawing money. But mutual funds, hedge funds, and share trading become favourites too, as there are multiple platforms, detailed information (transparency), ease of investing or withdrawal, and the availability of a diversified portfolio with minimal entry or exit loads. This leads to a change in mindset. More risk, more money, which means investors always have the option to opt out or decide based on their financial goals.

Why Hedge Funds are emerging as one of the alternative or possible investment option amongst high end customers ?

Hedge fund investments are done to maximise profit via returns and minimise risk, as investments are done through pooling (a diversified portfolio) by qualified fund managers. The most common objective of a hedge fund manager is to make money from the invested amount despite market fluctuations, whether they are up or down. So sometimes hedge fund managers act as traders for investors. There are both long- and short-term investment options available where fund managers invest in different securities, assets, and equities based on fund goals. Most hedge funds operate on a 2 and 20 compensation scheme (in foreign countries). So basically, it gives hedge fund managers 2% of the assets and 20% of the profit made in a year. So if the investor gets a loss for a particular year, the fund manager still gets 2% of the invested assets, making its structure criticised by big investors.

In India Hedge fund operates or with a fee structure of 1 and 10-15 compensation scheme.

Sample Investment Example - If a hedge fund manager sets up a fund and an investor wants to invest 1 crore (the minimum requirement), the fund manager will get 2% (2 lakh) of that amount no matter what, and if the fund manager doubles the invested amount for the investor, which is 2 crore, then the fund manager will again get an additional 20% profit share, which is 40 lakh.

 

Hedge funds are very aggressive in nature, but lucrative in terms of profit returns. Basically, hedge funds are not for retail investors, as they are for HNI investors only, considering the minimum amount to enter is 1 crore with a lockup period of 1 year. Hedge funds basically use investment instruments like derivatives and short-selling techniques to hedge against market risks while also creating wealth by maintaining a conservative investment portfolio. In India, hedge funds are primarily known as AIFs (alternative investment funds).

Hedge Fund Benefits

Now comes the best investment plan available for retail investors, which is far better than insurance or other investment plans, which is the one and only mutual fund, either via a systematic investment plan or a lump sum amount. The current mutual fund industry is worth Rs 34 trillion and is expected to grow to Rs 92 trillion by 2030. Is it fascinating?

 

Actions speak louder than words, so before giving a brief analysis of the mutual fund investment strategy, let me show you all the actual returns (not at all photo-shopped or edited) considering the risk factor is always involved based on current or future market movement. The current stock market is at an all-time high, which also plays a vital role considering most of the sectors are giving good returns, hence it is worth every single penny as investment is done for the long term. Again, another key factor is that the first investment entry age does matter, along with correct selection and switching of funds in between. Also, investors should always know that if the market is high, your investment percentage will be high with an increase in NAV, and if the market is low, investors will get more units, which in the long run will benefit them when the share market recovers.

Investment Return %

This portfolio of Mutual funds includes selection of diversified funds based on Debt, Equity, Balanced and in SIP - Systematic Investment Plan & through Lump-Sum. 53.76 % return is considered a decent percentage compared to Bank Fixed deposits or Insurance fixed amount after 15 to 20 Years.

Investment Return %

87.87 % return is completely Equity based portfolio. As equity is directly linked to Current share market which is at all time high  (NIFTY/SENSEX) is the key factor an investor is getting good return. As per experts one should invest in Equity based on simple formula which is 100 - Your Current age. So if the age of the investor is 30 then 100-30 will be 70. So out of the total investment 70% should be in Equity based financial instrument.

Below is the SIP - Systematic Investment Calculator

So as per the above snapshot, if an investor invests Rs 10,000 per month for 15 years, the total invested amount will be Rs 18,00,000. If the rate of interest at the time of withdrawal is 10% (considering a normal return), the actual value or total value of the invested amount will be Rs 41,79,2343. The main reason for such a good return is because of the money multiplier approach, or we can say compound interest, that an investor is getting out of the total investments done.

One should always think positively, and if the interest percentage is 20%, then on the same example above, the investor will get more than Rs. 1 crore. If the investor increases the term from 15 to 20 years again, the return percentage will increase based on the compounding rate of return.

Why to opt Smart Investment plans / options available rather than Traditional plans - Benefits of Compounding interest via Mutual Funds are:

• Mutual Funds are basically pooling of funds where an investors money invested through multiple diversified portfolio by Fund manger. So advantages of pooling is diversified portfolio, Less risky and more returns. Funds are managed by highly qualified Asset or Portfolio Managers.

Pooling Of Funds - How it works !!

• Mutual funds are for all, unlike hedge funds, which are applicable to HNI investors only. Retail investors can apply with a minimum amount of Rs 100 via SIP or lump-sum amount based on fund selections or preferences. In today's digital world, when everyone has smart phones with Internet access, there are multiple online platforms through which investors can opt to invest in mutual funds, which was not the case 10 years ago. e-Kyc and all other details can easily get updated within a day or so after first applying. It's just that investors must have PANCARD as their first mandatory document requirement.

• There are multiple mutual fund categories, which include Tax Saving (ELSS) under 80 C, Balanced, Debt, Equity, etc., out of which investors can opt for funds. Also, for most of the funds, entry and exit loads are zero if the investor is opting for a long-term investment. Investors should prefer to select DIRECT mode instead of REGULAR at the time of investment, as it will save a good amount of commission at maturity, which will be added as a return amount.

• Another best part of the systematic investment plan or mutual fund is the redemption part, where one has the option to stop the SIP at any point in time and apply online for its redemption in case of a monetary requirement. Based on the latest NAV (net asset value) and interest percentage, investors will get the complete amount on the registered bank account within 3 to 7 days. So we can say that liquidity is at its best considering other financial instruments have locking periods like fixed deposits (5 years), the Public Provident Fund (PPF) (15 years), and vice versa.

Retail Investors Investment Into MF By Asset Class