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Mutual Fund
Understanding Mutual Funds
What if you could invest your money and have someone else professionally manage it for you? Do you think this is possible? Services like these do exist, but they come with a requirement of high amounts of capital or money to be invested. But what if you could avail such a service, even with a small investment and get the advantage of professionalism? Well, this is mutual funds.
A mutual fund is a company that brings together money from many people and invests it in stocks, bonds or other assets. Each investor owns a part/ share, which represent a part of these holdings. People who invest will would be allocated with units based on the amount they invest. Each investor experiences profits or losses directly proportional to the amount they invest. Mutual fund, unlike stocks, do not invest only in a particular share. Instead, a mutual fund plan would invest across several investment options to provide with the best possible returns.
All the mutual funds are registered with SEBI. They function within the provisions of strict regulation created to protect the interests of the investor.
All the mutual funds are registered with SEBI. They function within the provisions of strict regulation created to protect the interests of the investor.
Types of Mutual Funds
Equity Funds
Equity funds invests mostly in equity shares of companies. A mutual fund is categorised under equity fund if it invests at least 65% of its portfolio in equity instruments. Equity funds have the potential to offer the highest returns among all classes of mutual funds. The returns provided by equity funds depend on the market movements, which are influenced by several geopolitical and economic factors.
Debt Mutual Funds
Debt mutual funds invest mostly in debt, money market and other fixed-income instruments such as treasury bills, government bonds, certificates of deposit, and other high-rated securities. A mutual fund is considered a debt fund if it invests a minimum of 65% of its portfolio in debt securities. The performance of debt funds is not influenced much by the market fluctuations. Therefore, the returns provided by debt funds are very much predictable.
Balanced or Hybrid Mutual Funds
Balanced or hybrid mutual funds invest across both equity and debt instruments. The main objective of hybrid funds is to balance the risk-reward ratio by diversifying the portfolio. Investing in hybrid funds is an excellent way of diversifying your portfolio as you would gain exposure to both equity and debt instruments.
TAX SAVING SCHEMES
ELSS- Equity- linked savings schemes
This is the only kind of mutual funds covered under Section 80C of the Income Tax Act, 1961. Investors can claim tax deductions of up to Rs 1,50,000 a year by investing in ELSS. However these schemes have a lock in period of 3 years. There are two categories, Growth fund and Dividend payout. Under dividend payout the dividend received is tax-free in the hands of investors.
Advantages of Investing in Mutual Funds
The biggest advantage of investing through a mutual fund is that it gives small investors access to professionally-managed, diversified portfolios of equities, bonds and other securities, which would be quite difficult to create with a small amount of capital.
Investment Handled by Experts
These experts are called as fund managers. They are finance professionals who have an excellent track record of managing investment portfolios. Furthermore, fund managers are backed by a team of analysts and experts who pick the best-performing stocks and assets that have the potential to provide excellent returns for investors in the long run.
No Lock-in Period
Most mutual funds come with no lock-in period. Most mutual funds are open-ended, and they come with varying exit loads on redemption. The money can be withdrawn in just a few clicks, and the requests are processed quickly. On Placing the request, your money will get credited to your bank account in just business 3-7 days.
SIP (Systematic Investment Plan)
SIP provides a feature of investing an amount regularly, it could a small amount or big amount. The frequency of your SIP can be monthly, quarterly, or bi-annually, as per your comfort. You can initiate or stop a SIP as and when you need.
Diversification
Unlike stocks, mutual funds invest across asset classes and shares of several companies, thereby providing you with the benefit of diversification. Also, this reduces the concentration risk to a great extent. If one asset class fails to perform up to the expectations, then the other asset classes would make up for the losses. Therefore, investors need not worry about market volatility as the diversified portfolio would provide some stability.
FAQ
It is the penalty charged by the company if you are not able to stay invested over a particular time frame. Most mutual funds are open-ended and come with no exit load. Investors should read the fund offer carefully before investing.
It depends on the individuals and the market scenario. If you are risk-averse, then investing via SIP is advisable. If the markets have fallen record levels, then a lump sum is advisable. Again, you need to assess your risk profile and requirements.
No, mutual funds don’t invest only in stocks. Only equity funds invest in stocks, while debt funds and liquid funds hardly invest in stocks. In fact, there are some debt funds that don’t invest in stocks at all.