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Popular, easily understood and ideal for investors with limited knowledge, time or money, Mutual Funds offer many benefits. This article may help you in finalizing whether investing in mutual funds is the right choice for you.
Mutual Funds
Mutual Funds (MF) is a Professionally Managed Trust. It accumulates money from various individuals, to be invested (on their behalf), in the securities. To maximize your benefits, you can choose from the below options such as stocks, bonds, short-term money market instruments and commodities. In India, these are registered and regulated under SEBI (Mutual Funds) Regulations, 1996.
A Mutual Funds Trust has a Sponsor, Trustees, Asset Management Company (AMC). Here the AMC consists of trained professionals who research and select the ideal stocks and bonds to invest in, according to the option you choose to earn from investing your money. These Fund Managers study and understand the market. They would then buy and/or sell securities, to make a diverse and all-inclusive investment portfolio. An MF can have thousands of different holdings, in its portfolio.
Having to research as to which company’s equity or shares to buy/sell, and when, maintaining a DMAT account, can be a daunting task for general investors, who lack the know-how.
Precautions before Investing
Make sure you are clear about certain factors before putting your money in the hands of an MF Trust:
- Goal: what are the financial objectives you want to achieve with your Funds? it may be Child’s education, marriages in the family or your retirement plan.
- Amount to Invest: the Input you can set aside for Mutual Fund Investment.
- Professional Help: Your manager would be able to devise an investment scheme, based on the risk you can tolerate. And would give you the best advice on How to Meet your Goals with Mutual Funds?
- Duration of Investment; Do you need the money back, in 10 years or 20 years? With longer duration investments, you can take more risks, which means better benefits.
- Portfolio Selection: The Mutual Fund Portfolio would be chosen based on the criteria that you give to your manager. Higher the risks, higher is the possibility of Good Returns, and vice versa.
A major factor among the above is generally, the Duration and Age of the Investor. Usually, the younger you are, the more risks you can take, the higher the returns that would accrue to you. Hence, it is advised to start investing at the earliest.
Mutual Funds Benefits
Mutual Funds come with a hoard of advantages that include simplicity, cost, diversification, and professional management. These and other features of mutual funds make them a lucrative choice for investors who want a wisely planned and informed choice of investment, according to their objective.
Only a few benefits could be listed here. These are:
- Affordable: Most Mutual Funds have minimal initial investment requirements, therefore you can start investing with less money. Also, you can choose lump-sum investment or a Systematic Investment Plan (SIP) mode, that you put money aside monthly.
- Diversified: Individually, you may not have enough money to combine a gainful portfolio for your investment. But with Mutual Funds, the Trust would pool and invest your money into a broad category.
- Low-Cost Investment: Since money from a large number of investors is pooled, so the Mutual Funds Trust is able to take advantage of Volume Trading. The transaction costs are much less than individual investments.
- Higher return: Mutual funds benefits by generating better returns as compared to traditional instruments, such as Bank Deposits, etc. Even for those with a low risk-appetite, there are options of debt mutual funds, etc.
- Multiple Options: Depending on the motive of your investment, you can best derive your goals through Mutual Funds, with the variety available. Whether you want a Tax Saving Mutual Fund or not.
- Professionally managed: Along with investments, Mutual Funds benefits include that you have hired a manager to safeguard your investments. A professional who studies, researches and analyses various factors such as market risks better, and invests accordingly. He would also make the necessary changes, as and when required, according to the market conditions.
- Market Cycle Planning: Because the investment is in stocks, you may think of going to a broker. You may feel it would be better investing in stocks directly, instead of investing in mutual funds. However, the managers understand and move the portfolio as per changes in market conditions. With active management, they place your funds in equities when the market is on the upswing and move into money market mutual funds on the downswing or take any steps to ensure that your investments are meeting your needs in changing market climates.
- Ease in Purchase, Redemption or Return: Except ELSS, most open-ended Mutual Funds can be converted into cash any day. Easier than any other Fixed Asset.
- Transparency: All Mutual Funds Trusts need to make necessary disclosures, regulated by SEBI. They have to follow Transparent Processes, publishing the performance-related data, periodically.
- Tax Saving on Mutual Funds also proves to be beneficial to investors. The schemes, for instance, ELSS Funds, qualify as a Tax saving investment. Moreover, capital gains earned on Equity Mutual Funds held for more than a period of 12 months, are subject to tax exemptions under the Income Tax Act.
To Maximize your benefits, choose your option
There is a wide variety of Mutual Funds Plans available in India. By and large, these can be divided into below categories:
based on Investment Objective:
| Growth/Equity Mutual Funds | The high-risk funds which are invested in equity, Stock or Shares of companies. Best suited to achieve Long-term Financial Goals. |
| Debt Mutual Funds or Income Funds | A major chunk of this fund is invested in Fixed Income instruments, such as Bonds, Debentures and Govt Securities. As these are much less volatile than Equity Funds, they are known as Safe Returns Investment. |
| Balanced Mutual Funds | These funds are invested in both Equity and Fixed Income Securities, creating a perfect balance. |
| Liquid Mutual Funds | Invested in Liquid Instruments, such as Treasury Bills and Certificates of Deposit, with immediate but very moderate returns. |
| Gilt Funds | Invested exclusively in Govt Securities, there is no risk involved for default of payment. the only risk is in terms of Interest rates. Minor Returns. |
based on Structure:
| Open-Ended Funds | This offers Liquidity and Flexibility to the investor. allowing them to purchase or redeem units, at any time, at the prevalent NAV (Net Asset Value). |
| Close Ended Funds | These come with a fixed maturity date only. And can be purchased at the Initial Launch or New Fund Offer (NFO). These are listed on the Stock Exchange. |
| Interval Funds | These are a hybrid of the Open-ended and Close-Ended Funds. |
others:
| Tax-Saving (Equity Linked Saving Schemes/ELSS) Funds | investing highly in the specific equity shares. These are High-risk funds, market-based. The investor earns tax benefits with ELSS Funds under section 80C of the Income-tax Act. |
| Sectoral Funds | attached to a particular Industry, the returns being directly proportionate to the performance of that industry. For example, Pharmaceutical Funds would be invested exclusively in the Pharmaceutical industry. |
| Index Funds | these funds are linked to specific Indexes on the Stock Exchange. Offering ease in monitoring movement and returns. |
Risks involved
As all other instruments of investment, Mutual Funds also is not devoid of risks. These investments don’t just mean sharing in the profits or dividends from the various companies invested in. It also means dividing the losses amongst the investors, depending on the performance of a particular company. Some of the risks involved are listed below:
- Market Risk: Due to market fluctuations, the value of the investment may decline.
- Interest Rate Risk: When interest rates rise, bond prices of the Govt Bonds decline, causing the investments to decline.
- Liquidity Risk: The MF Trust can’t sell an investment when there is no demand in the market.
- Currency Rate Risk: For investment done in a currency of other countries.
However, there are ways to safeguard your investments and reduce the levels of risk, by choosing an optimum variety in your personal portfolio. Every Mutual Funds Trust tries to eliminate the known risks involved, as well as, attempting to assess and minimize the unknown ones.
Mutual Funds are relatively simple to understand and easy to understand than other investment options. For a majority of savers and investors, investing in Mutual Funds is a smart choice. It helps them to gain higher returns with lesser risk. Only you need to be careful in selecting the right Mutual Fund Investor and, make your financial goals, time horizon, and risk appetite, very clear to them. They’ll be able to choose the best scheme that is in alignment with your objectives,
To make the best profits on your money, let us at Wealth Bucket, chalk out the best investment plan for you. Using our vast experience in market research, you can feel at peace regarding your investments. To avail services like Equity Mutual fund, Debt mutual fund, Large Cap mutual fund or Multi-Cap mutual fund, visit our website.
Or call us at +91 8750008881. You can also email us at contact@wealthbucket.in
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