An investment vehicle called a mutual fund allows multiple participants to pool their funds and earn returns on their initial investments over time. An investing expert known as a fund manager or portfolio manager oversees and manages this pool of funds. His or her responsibility is to invest the corpus in various types of available tools for investment such as securities, including bonds, equities, gold, and other assets, in an effort to generate maximum possible returns. The investors split the investment’s gains (or losses) proportionate to their individual contributions to the fund.
Why should we buy mutual funds?
The advantages of investing in mutual funds are numerous. Here are a few crucial ones:
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- Lack of Technical knowledge
Financial market investing required a certain level of expertise. You must conduct market research and evaluate the finest available options. You must be knowledgeable about things like the macroeconomic environment, specific industries, corporate finances, and asset classes. You’ll need to put a lot of effort and time into this.
But investing in mutual funds can be a great alternative if you lack the knowledge or the time to research the market extensively. Here, a qualified fund manager looks after your investments and works hard to deliver fair returns. The professional administration of your mutual fund investments requires you to pay specified fees
- Returns from investments
One of the major advantages of mutual funds is the potential for larger returns than those offered by traditional investing options with guaranteed returns. Here traditional investment options are such as investments in Gold and Fixed deposits.
*Mutual funds performance data is taken from moneycontrol.com
You can see how much returns we get from mutual funds while investments for long period.
This is so because mutual fund returns are correlated with stock market performance. Therefore, the value of your fund would be affected if the market is experiencing a bull run and performs exceptionally well. However, a weak market performance could have a bad effect on your investments. Mutual funds do not guarantee capital protection, in contrast to traditional investments. Do your homework and invest in funds that can assist you in achieving your financial objectives at the appropriate stage of your life.
- You will get benefit of Diversification of your investment
Don’t put all your eggs in one basket, as the adage goes. This is a well-known maxim to keep in mind when making financial decisions. When you just invest in one asset, you run the risk of losing money if the market declines. By diversifying your portfolio and investing in a variety of asset classes, you can, however, avoid this issue.
You would need to carefully choose at least ten stocks from various industries if you were investing in stocks and required diversification. It may take a lot of time and effort to do this. But you immediately gain diversification when you invest in mutual funds. You could gain access to up to 30 equities from several sectors in a single fund, for example, if you buy in a mutual fund that tracks the BSE Sensex. Your risk could be greatly diminished as a result.
- Advantages related to Tax
By participating in Equity Linked Savings Schemes, mutual fund investors can deduct up to Rs.1.5 lakh in taxes (ELSS). The Income Tax Act’s Section 80C allows for the eligibility of this tax relief. Three years are the lock-in period for ELSS funds. As a result, you can only withdraw your money if you invest in ELSS funds after the lock-in period has passed.
Indexation benefits, which are available on debt funds, are another tax benefit. In the case of conventional products, all interest is taxable. Only the profits earned above inflation (as measured by the cost inflation index, or “CII”) are taxed in the case of debt mutual funds, though. Investors might benefit from increased post-tax returns as a result of this.
What kinds of mutual funds are there?
There are many different bikes to be seen when you walk into a bike showroom. There are Sports bikes, Mountain bikes, Road bikes etc. Every vehicle in the dealership has a certain function. A person with a sense of adventure could favour a sports bike or mountain bike whereas a man for daily purposes will prefer a road bike. In a similar way, there are various kinds of mutual funds all around the world.
Each sort of fund seeks to accomplish certain objectives. The most common varieties of mutual funds are listed below:
Fund types according to asset class:
- Debt mutual funds
Debt funds, commonly referred to as fixed income funds, invest in securities including corporate and government bonds. These funds are regarded as being somewhat less hazardous and attempt to provide investors with respectable returns. If you want a reliable income and are risk-averse, these funds are perfect for you.
- Equity Mutual funds
Equity funds, as opposed to debt funds, put your money into stocks. A key goal of these funds is capital growth. However, because the returns on equity funds are based on stock market fluctuations, these funds are more risky. As the level of risk decreases with time, they are a suitable option if you wish to save for long-term goals like retirement planning or home ownership i.e. you have keep invested in mutual funds for more than 10 years.
- Hybrid Mutual funds
What if you wish to invest in equities as well as debt? Hybrid funds are the solution, therefore. Investments made by hybrid funds include both fixed income and equity securities. Hybrid funds are further divided into numerous sub-categories based on the allocation between equity and debt (asset allocation).
Types of funds based on structure:
- Mutual funds that are open-ended
Open-ended mutual funds allow investors to make investments every working day. At their Net Asset Value, these funds are purchased and sold (NAV). Because you can redeem your units from an open-ended fund at any time during business hours, this makes them very liquid.
- Open-ended mutual funds
Closed-end funds have a predetermined maturity time. Only at the moment the fund is launched may investors invest in it, and only at maturity can they take their money out. Similar to shares on the stock market, these funds are listed. However, due to the low trading volumes, they are not highly liquid.
Fund types according to the goal of the investment:
Mutual funds can also be categorised based on their investment goals.
- Capital Growth Mutual funds
The primary goal of growth funds is capital growth. A sizeable amount of the money in these funds is invested in equities. Due to their significant equity exposure, these funds can be comparatively riskier, making long-term investments in them wise. But you might want to stay away from these funds if you are getting close to your goal, for instance.
- Income mutual funs
Income funds aim to give investors a steady income, as the name suggests. These debt funds primarily invest in certificates of deposit, bonds, and other government assets. They are appropriate for varied long-term objectives as well as for investors who are less risk-averse.
- liquid assets
Treasury bills, CDs, term deposits, commercial papers, and other short-term money market instruments are some examples of the short-term money market products that liquid funds invest in. Liquid funds can be used to store extra cash for a few days to several months or to start an emergency fund.
- Tax-saver mutual funds
Under Section 80C of the Income Tax Act, tax-saving funds provide you with tax advantages. You are eligible for annual deductions of up to Rs 1.5 lakh while investing in these funds. Tax-saving funds include equity linked savings schemes (ELSS), for instance.
How are investment objectives and mutual funds related?
Which mutual fund is the finest now that you are aware of the various kinds of mutual funds?
To be honest, there isn’t just one correct response to this question. This is so that mutual funds can attain specified financial objectives, which fund houses create. Additionally, as an investor, you must be aware of the mutual funds that can best assist you in achieving your objectives.
All of your financial objectives can be divided into three categories:
- Short-term objectives (1-3 years): Purchasing a car in 18 months, taking a family trip, etc.
- Mid-term objectives (3-5 years), such as finishing a short-term course in digital marketing in 3/4 of that time.
- Long-term objectives (5 years or longer), such as purchasing a home within the next 5-7 years
It is preferable to invest in liquid funds because they are less volatile for any goals that are due within a year. A smart alternative for starting an emergency fund is liquid assets. You might choose to invest in short-term debt funds if your ambitions are 1-3 years away.
Since hybrid funds have the potential to offer both capital growth and stability, they are better suited for medium-term objectives. Equity funds are ideal for long-term goals.
Systematic Investment Plans (SIP) are what are they?
The fact that you don’t need a lot of money to get started investing in mutual funds is one of their best qualities. Through Systematic Investment Plans, the majority of fund houses in the nation allow investors to start investing with as little as Rs. 500 (others start at Rs. 100) per month (SIPs). Although this may seem like a small sum to start with, if you invest consistently over a long period of time, you can accumulate a sizeable sum.
A particular sum is invested at set intervals using the SIP technique of investing in mutual funds. By avoiding market timing, you can slowly build your money.
Here’s an illustration of the SIP concept using an example:
Consider making a 15-year investment of Rs. 5,000 each month in an equity fund. The fund promises a 12% yearly return. You will have accumulated a corpus of more than Rs. 25 lakh by the conclusion of the investment period. The total amount you would receive after 25 years of investing the same amount would be close to Rs. 95 lakh! This will be nearly four times as much in ten more years.
This is how compounding works. Your income starts to increase as a result of the returns you receive. Therefore, your gains also increase when you invest for a longer period of time. But in order to profit the most from compounding, you should start investing as soon as you can and keep investing for as long as you can. You may have a longer window for making investments as a result, increasing your returns.
Tips for buying mutual funds
Mutual fund investment has grown simple in recent years. Even better, you can conduct it from your house. The measures you can take to start your investment career are as follows:
- Register for an account with a mutual fund house.
- Complete the KYC procedures (if you have not yet done so)
- Fill in the appropriate information as needed.
- Determine your desired investment amount depending on your financial objectives.
- Decide on the fund and send the necessary cash.
- If you invest in a SIP on a monthly basis, you can also set up a standing order with your bank.
last thoughts
One of the simplest ways to accomplish your financial objectives on schedule is to invest in mutual funds. But spend enough time considering the various fund possibilities before you invest. Don’t put money into a fund just because a friend or coworker did. Set goals and make investments to achieve them. To make the best investments and plan your financial future, you can, if necessary, consult a financial counsellor.