Mutual Funds for Self-Employed - Knowing the Benefits

Published On: 03-Jan-2020

Mutual funds have been instrumental in channelising the household savings into financial markets, as the investors need not have expert knowledge about the financial markets to invest in mutual funds. Investors may rely upon professional fund management for their investments in mutual funds. Further, with the availability of a wide range of mutual fund schemes, investments in mutual fund schemes can be made as per personal risk appetite and financial goals. 

The financial plans must be realistic and practical. While the mutual funds do not differentiate between the investments by salaried people and self-employed, the trend in the income may call for differentiation in the types of mutual fund options suiting them. Unlike salaried people, self-employed individuals may not have consistent cash flow, and the savings/ disposable income may fluctuate every month. As such, the investing strategies must be aligned accordingly. 

How self-employed individuals may make the most of their financial plans with mutual fund investments:

1. Regular Investments with Systematic Investment Plans (SIPs)

Owing to consistent and regular cash flows through salary income, SIP may be considered as preferred way to invest. However, self-employed individuals may not have consistent cash flows every month to meet their financial goals. Therefore, to continue staying on the investing journey, individuals must analyse the consistent minimum savings that one may generate regularly. After that, one may start an SIP with such savings amount, so that one continues to make regular investments into the markets and continue with other investment strategies to achieve their financial goals. 

2. Emergency Fund Corpus with Liquid Funds

One must maintain an emergency fund corpus of at least to the extent of one’s combined six months expenses to cope with any financial contingencies. This becomes even more important for self-employed, to deal with the periods of low cash flows and the times of financial stress comfortably. Such emergency fund corpus may be invested in liquid funds, which provide relatively higher liquidity and potential of higher returns over the savings bank account.   

3. Save taxes with investment in Equity Linked Savings Schemes (ELSS)

While the salaried investors avail tax benefits under Section 80C of the Income Tax Act for investment in Employee Provident Fund (EPF) Contribution etc., self-employed people may invest in invest in ELSS for tax benefits. ELSS carries the lowest lock-in period of 3 years for the investors, as compared with other tax saving investment options. Such lock-in period starts from the date of investment in an ELSS.

4. Investing windfall incomes

There might be the months of low cash flows where emergency fund corpus may be used, likewise, there may also be the periods when the cash flows are higher than the regular averages. It might be possible that one has received some one-time income such as Annual Incentives, Bonuses etc. One may invest such windfall receipts into low-risk mutual funds and gradually switch such investment into equity funds through Systematic Transfer Plan (STP) considering the medium to long investment goals. Such investments through STP allows the investors to average their cost of investments in equity funds while trying to generate better.

5. Retirement Planning

Since self-employed individuals may not have any defined social security schemes for their retirement, they must create and maintain a sufficient retirement corpus for themselves. One may accumulate a healthy retirement corpus by investing early and continue investing consistently and reviewing the investment portfolio regularly to sustain the portfolio health. 

As mutual funds provide a wide range of investment options while rendering flexibility to align the investing strategies with regular cash flows, mutual funds may turn out to be the preferred investment vehicle for self-employed individuals.