What role do mutual funds play in achieving financial independence?

Financial independence can mean different things to different people, but the most popular definition on the internet is “not needing to work for a living.” There may be various reasons for working, such as a passion for your field of work (industry, functional area, etc.), the company’s culture, your coworkers, job satisfaction, and so on, but the primary goal of working is to earn money to cover our living expenses, such as food, rent, EMIs, utility bills, and children’s school fees. Financial independence entails being able to meet your financial obligations without having to work.

Is financial independence relevant for all?

Whether you work or operate a business, financial independence is important to everyone. If you work, there will come a time when you will retire. You will have no income in the form of a salary once you retire, therefore you will have to be financially self-sufficient. Circumstances beyond your control may cause you to resign from your employment, leaving you without a source of income. You will still be responsible for paying your expenses. There may be times when your business income is less than your expenses if you are a business owner. These intervals might be brief or lengthy. Unless you are financially self-sufficient, you will have to delve into your funds.

What happens if you are not financially independent?

If your income is insufficient to cover your expenses, you will have to rely on others, such as your children or relatives. However, you should assess whether the person you are relying on is financially capable of supporting you and for how long. You can pay for your living expenses with your savings, but you risk depleting your savings and losing your financial independence over time. Remember that your expenses will continue to rise due to inflation, whereas if you live off your savings, your savings will deplete with time.

How to achieve financial independence?

If the returns on your assets are adequate to cover all of your costs for the rest of your life, you will be financially independent. It’s critical to remember that assets are investments that can create future cash flows in the form of either regular income or capital appreciation. Electronic devices, watches, jewellery, personal automobiles, and other items that do not create cash flows and decrease in value over time are not considered assets in the strictest sense. Assets include bank fixed deposits, stocks, bonds, and mutual funds, which generate returns in the form of interest, dividends, and possible capital appreciation. You will be financially independent if the profits on your investments are sufficient to cover your costs after accounting for inflation.

Financial independence is not just about retirement

Many investors link financial security with their post-retirement lives. It is critical to be financially self-sufficient by the time you retire, yet financial independence does not only apply to retirement. Many younger investors want financial freedom so that they can pursue their passions, such as travel, art, music, starting a business, doing humanitarian work, and so on. It is feasible to reach financial independence far before your formal retirement age by saving and investing from a young age.

Planning for financial independence

• You must save to invest in assets that will provide you with a profit. Don’t save what’s left over after you’ve spent it; instead, spend what’s leftover after you’ve saved it. If you want to achieve financial independence, you must put savings first.
• It is critical to begin saving at an early age. Time is one of the most significant aspects of wealth growth. Over time, investments pay off and the return invested pay off even more. This is referred to as compounding power.
• You should put your money into assets that will pay you back. The risk/return characteristics of various asset classes vary. You must invest in the appropriate asset class for your age and risk tolerance. Equity is the most ideal asset class for wealth accumulation overextended investment horizons for younger investors.
• Investment discipline refers to sticking to a plan (financial plan) that is designed to help you achieve your financial goals while balancing risk and reward (asset allocation). You should adhere to your plan and avoid making rash judgments based on emotions.

How can mutual funds help?

• Because mutual funds provide risk diversification and competent investment management, they are perfect for building long-term wealth for retail investors.
• Through Systematic Investment Plans, you can begin investing in mutual funds with your regular money (SIP). You can start investing in mutual funds through a systematic investment plan (SIP) at a young age to profit from compounding over time.
• Mutual funds have a wide range of products to suit various risk appetites and investment requirements. You should spend your money on a product that is right for you.
• For long-term investing, mutual funds are one of the most tax-efficient options. Long-term capital gains in equities funds are tax-free up to Rs 1 lakh, after which they are taxed at 10%. After indexation, long-term capital gains in debt funds are taxed at 20%.
• You can use the Systematic Withdrawal Plan service to satisfy your regular cash-flow demands in a tax-efficient manner once you have collected the appropriate corpus for your goal.