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To many people, Mutual Funds can seem complicated or intimidating. But to be honest, it is one of the most simple, easy, and flexible modes of investments
It is a trust that collects money from a number of investors who share a common investment objective. Then, it invests the money in equities, bonds, money market instruments and/or other securities depending on the mandate or type of each fund. Each investor owns units, which represent a portion of the holdings of the fund. The income/gains generated from this collective investment is distributed proportionately amongst the investors after deducting certain expenses, by calculating a scheme’s “Net Asset Value or NAV.
Investing can be complicated and overwhelming. If you invest on your own, it's up to you to pick your investments, monitor their performance, and modify your investment strategy over time. Another option for investors is to partner with a mutual fund. You can still build wealth through investing, but a mutual fund helps make investment decisions for you. Here are some key reasons on why you should consider investing through mutual funds
Pooling of Money
Mutual funds pool money together from a group of investors and invest that capital into different securities. Each mutual fund has a goal that defines its risk profile, investing objective, and overall strategy.
Diversification
Diversification may be the greatest benefit of mutual funds. The beauty of investing in mutual funds is that you can buy one fund and obtain instant access to hundreds of individual stocks or bonds.
Transparency
Mutual fund holdings are publicly available (with some delays in reporting), which ensures that investors are getting what they pay for. Investors can also see the underlying securities (stocks, bonds, cash, or a combination of those) that the mutual fund portfolio holds.
Investment flexibility
Mutual fund investors can have the beneficial ownership of a diversified portfolio of stocks with a much smaller capital outlay. Investors can buy units of a diversified equity mutual fund with an investment as low as Rs 5,000/- only or even lower at Rs 500 for ELSS schemes.
Investment cost
Since mutual funds buy and sell securities in large volumes transaction costs on a per unit basis is much lower than what retail investors may incur if they buy or sell shares through stock brokers.
Build wealth
Short-term financial markets swing up and down way more than long-term markets. When you start investing in top mutual funds from a early age, it gives your investment time to transform itself into a bigger corpus. Over a longer period, you can change your investment strategy basis your financial plans.
Equity Funds
These invest predominantly in equities i.e. shares of companies. The primary objective is wealth creation or capital appreciation. They have the potential to generate higher return and are best for long term investments. Examples of such funds are large cap, midcap, small cap, flexicap, multicap, sectoral and international funds.
Debt Funds
These funds invest a majority of the money in debt - fixed income i.e. fixed coupon bearing instruments like government securities, bonds, debentures, etc. They have a low-risk-low-return outlook and are ideal for investors with a low risk appetite looking at generating a steady income. However, they are subject to credit risk. Examples of such funds are ultra-short, low duration, corporate bond, medium duration funds etc.
Liquid or Money Market Funds
These funds invest in short-term debt instruments, looking to give a reasonable return to investors over a short period of time. These funds are suitable for investors with a low risk appetite who are looking at parking their surplus funds over a short-term. These are an alternative to putting money in a savings bank account.
Hybrid Fund
Hybrid Funds are mutual fund schemes which invest in more than one asset class i.e. equity, debt and other asset classes depending on the investment objective of the scheme. These funds invest in a mix of different asset classes to diversify the portfolio with an aim to minimise the risk involved..
Compounding is earning returns from existing returns. Because of compounding, with time, your investments grow at a relatively faster pace as compared to the scenario when you invest late So, the earlier you start to invest, the better mutual fund returns you are going to get at the time when you require the money to fulfill your goal.
Also, mutual funds are a straightforward form of investment. You, in your twenties and thirties, won't have complex financial needs. Because mutual funds are easy to buy, they are an excellent choice for young investors to invest in and benefit from the power of compounding, twenty-thirty years down the line. Basis your goal and time horizon that you want to stay invested, you can select from different forms of mutual funds and start investing.
With dual advantage of tax-saving & potential for better returns than traditional tax-saving investment products, this category of mutual fund schemes is must have for every investor. These funds also have the lowest lock-in period of just 3 years amongst all the options available in Section 80C.
Investment up to Rs.1,50,000 every year is eligible for tax deduction under Section 80C of The Income Tax Act Starting a monthly SIP for long-term gets you a lifetime tax-savings (subject to Rs.1.5 lakh annual limit & no changes in Tax Laws)
Potential for better long-term returns than traditional options like PPF & Fixed Desposits
A systematic Investment Plan, commonly referred to as an SIP, allows you to invest a small sum regularly in your preferred mutual fund scheme. By activating an SIP, a fixed amount is deducted from your bank account every month, which gets invested in the mutual fund of your choice. Unlike a lump sum investment, you spread your investment over time with an SIP. Therefore, you don’t need to have a large amount of money to get started with your mutual fund investment through SIPs. By investing via an SIP, you are forced to set aside a sum at regular intervals, which help you instil a sense of financial discipline in the long run. SIP has proved to be an ideal choice of investments for retail investors who lack resources to pursue active investments.
Systematic Transfer Plan (STP) is a strategy where an investor transfers a fixed amount of money from Source scheme to Target scheme (usually from a debt fund to an equity fund).
STP helps rebalance the portfolio by allotting investments from debt to equity or vice versa
STP has some integral features of the Systematic Investment Plan (SIP). One of the differences between STP and SIP is the source of investment. In the case of the former, money is transferred usually from a debt fund, and in the case of the latter; it is the investor's bank account. Since it is similar to SIP, STP also helps in Rupee Cost Averaging
Money invested in a debt fund generally yields returns till the time it is transferred to an equity fund. The returns in debt funds are usually higher than in savings bank account and aim to assure relatively better performance.
Systematic Withdrawal Plan (SWP) allows investors to redeem their investment from a mutual fund scheme in a phased manner. According to the investor requirements, the periodic intervals could be monthly, quarterly, half-yearly or annually. On each and every withdrawal, the value of your investment in the fund is reduced by the market value of the units that you have withdrawn. In other words, it is just the opposite of a Systematic Investment Plan (SIP)
Create your own pension
Through, SWP investors can create their own pension plan. Accordingly, you can create a corpus around two or three years before your retirement and invests the same in a mutual fund scheme according to your risk tolerance. After retirement, you can opt for an SWP on a monthly basis which serves as your own pension.
Generate a secondary income
Given the pandemic, additional source of income is required by almost everyone to manage the rising cost of living and other expenses. Investing in mutual funds and withdrawing via an SWP is a great way to create a regular source of secondary income.
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