About Mutual Funds
All About Mutual Funds
From Tendulkar to Dhoni, just about everyone seems to think, “Mutual funds sahi hai”. Investors, young and old, can’t seem to boost their investments in mutual funds enough. Amidst all this, do you find yourself nodding when people talk about money matters? When people talk about mutual funds, do you wonder how this investment tool is such a wonder? If you do, fret not. We’ve got you covered!
Remember how you went Dutch with your friends/ classmates when you wanted to go to a fancy restaurant? When each of you just had a few hundred bucks, which wasn’t enough to get a decent pizza. What did you do? Clubbed your money to buy a giant-size pizza that everyone could enjoy? Well, that is somewhat similar to how a mutual fund works.
What is Mutual Fund?
A mutual fund is a type of investment where a number of investors pool their money. A professional, called a fund manager, invest the accumulated money as per the fund’s objectives. The most significant benefit that you get as an investor is that you have access to a number of stocks of companies, and corporate/ government bonds, with someone else doing the hard work. The manager will not just choose funds on your behalf, but also rebalance them depending on your short-term or long-term goals. Without directly owning the stocks of a company, you will share its profits, and sometimes losses, along with the other investors who are in the same pool.
Types of Mutual Funds
Let us now try and understand the types of mutual funds that are commonly available in the market. Once you know how these mutual funds work, you will be able to analyse which one works best for you.
Most financial experts consider equity mutual funds to be the most promising way to invest. Equity mutual funds invest a minimum of 65% of their assets in the stocks of numerous companies, which makes them more suited for investors with a higher risk-taking capacity. Keep in mind that it is this risk-taking that makes equities highly probable to provide higher returns without having to expose your funds as openly as when you invest in the stock market directly. You also have the option to opt for ELSS, Equity-Linked Savings Scheme, if tax-saving is on your mind. Another big benefit of equity is the option of diversification it offers through the theme-based MF categories:
- Large-Cap Equity Mutual Funds
- Mid-Cap Equity Mutual Funds
- Small-Cap Equity Mutual Funds
- Large and Mid-Cap Equity Mutual Funds
- Multi-Cap Equity Mutual Funds
Who should invest in Equity Funds?
Despite the temptation of high returns, your investments must be in sync with your risk profile. If you have time and are willing to invest for a minimum of 5 years, equities are a good option for you. Equity MFs are also suitable for someone who is just starting their investment journey as well as for those who are well-versed with market nuisances.
Also known as bond funds, debt funds are the ones where almost 65% of the corpus is invested largely in fixed-income securities, for example, treasury bills, debts, bonds etc. While the investments are in the capital market, unlike equities, debt MFs are less volatile. As they are less dependent on market fluctuations, they offer lesser but stable returns. Easy to liquidate, debt mutual funds are considered to be much better than the traditional ways of investment. When you redeem your debt MF units, you get short-term capital gains within a holding period of 3 years, which are added to your taxable income. When you sell the units after a 3-year holding, there is a flat 20% tax after indexation.
Who should invest in Debt Funds?
If you wish to invest some of your hard-earned money in the market without really exposing it to too much risk, then debt mutual funds can be a great option for you. Debt MFs give you the flexibility to invest in a lump sum or in SIP and thus allow you to earn returns without the worry of lock-ins or premature withdrawals.
A combo of equities and debts, a hybrid MF allows a balanced portfolio, which offers security along with the possibility of good returns. Your fund manager buys or sells assets in equities and debts in varying proportions, as per your investment objective. This means that on the basis of your portfolio, your investment can be equity-oriented, where you invest more in equity, or debt-oriented, where it’s more debt and less equity. The asset allocation can also be in the:
- Balanced funds
- Monthly income plans
- Arbitrage funds
Who should invest in hybrid mutual funds?
For those who wish to enjoy the best of both worlds, a hybrid mutual fund is an excellent choice. If you are a budding investor who wants to explore the market without taking too much risk, then hybrid MFs will offer you the stability you may be looking for. Retired individuals who wish to invest some surplus money, or investors who have some short-term financial goals in the coming 3 to 4 years, can also opt for hybrid funds.
What is it about Mutual Funds that makes them so special?
When it comes to reaching a financial goal, mutual funds can be an excellent option. With the multiple options available, you have the freedom to diversify your portfolio, and this is probably why mutual funds are an attractive option for investors from even the most diverse backgrounds. However, the two major players in any investment are your risk tolerance and the time horizon. You would have to consider your investment goal, as that would help you design your investment journey.
FAQs about Mutual Funds
Anyone over the age of 18 years can invest in mutual funds. However, a KYC is a prerequisite before one can make an investment. Minors can invest with the help of their parents or guardians.
Like every other investment, mutual funds also come with an element of risk. As the returns are market-related, there cannot be any guaranteed returns. However, low-risk investors have a number of mutual funds options that offer safer investments. It’s always better to have a diversified portfolio of investments, and a mutual fund is one of the financial instruments you invest your savings in.
The decision on an investment product should depend on your financial goals and risk-taking capacity. While FDs/ gold/ mutual funds can offer you the potential of building a considerable corpus, taxation, rate of return and market volatility are all important factors to consider. While FDs are seen as a safe way to grow your money in today’s times when the inflation rate equals the rate of interest offered by an FD, you may want to diversify your investments and put your money to work.
If you wish to invest a lump sum amount, you can start from INR 1,000. However, SIP, systematic investment plans, can be started with as low as INR 100. The minimum investment amount may sometimes be determined by the fund within the mutual fund house you choose. However, to encourage all segments of society to invest in a mutual fund, the minimum investment for SIP (Systematic Investment Plans) starts from INR 500.
The minimum investment amount differs for each fund and also the Fund House (AMC’s). Please check the fund information document once.
Mutual funds are an easy way to invest your money. You have the option to invest as per your short or long-term financial goals and risk appetite. Mutual funds are also a great option to diversify your investments and get the best returns. Depending on the mutual fund you opt for, you can get good returns while beating inflation.
ELSS, Equity-Linked Savings Scheme, allows you a tax benefit of up to INR 1.5 lakhs under Section 80C. At the time of redemption of your funds, the fund type, dividends, capital gains, and the holding period affect the taxability.
