KNOW MUTUAL FUND
Mutual funds offer a mechanism for a collective group of investors to pool their resources, enabling them to diversify their investments across a wide range of financial instruments and benefit from professional fund management through the purchase of mutual fund shares. Fund management companies gather funds from their investors (shareholders) and allocate these pooled resources into individual investment assets, guided by specific risk profiles, investment philosophies, or financial objectives. The resulting profits and losses from these investments are subsequently distributed to the mutual fund’s shareholders.
An increasing number of individuals are recognizing mutual funds as an attractive avenue for savings and investments, surpassing traditional options like fixed deposits or real estate. While mutual funds are gaining popularity, a lack of knowledge can hinder one’s ability to fully embrace this investment method. Here, we provide concise information about mutual funds and the advantages they offer.
WHY INVEST IN MUTUAL FUNDS?
LET’S EXAMINE WHY ONE SHOULD CONSIDER INVESTING IN MUTUAL FUNDS OVER OTHER AVENUES TO ACHIEVE FINANCIAL GOALS:
CONVENIENCE
For those seeking time efficiency and convenience, mutual funds are an excellent investment choice. With low initial investment requirements, multiple options catering to various life and financial objectives, and the ability to redeem investments on any business day, mutual funds are highly sought after.
DIVERSIFICATION
Mutual funds offer a substantial risk mitigation strategy by evenly distributing investments across a diverse range of asset classes. The principle of “Don’t Put All Your Eggs in One Basket” aptly applies to mutual fund investing.
HEDGING AGAINST INFLATION
Investing in mutual funds provides a savvy approach to combating inflation by allowing investors to generate inflation-adjusted returns without excessive effort or attention. This method safeguards the purchasing power of your money over time.
AFFORDABILITY
Compared to direct investment in the stock market, mutual funds offer the advantage of cost- effective investment. Most stock options require substantial initial capital, while mutual funds can be initiated with as little as Rs. 500 per month, allowing investors to benefit from long-term equity investments.
SECURITY AND TRANSPARENCY
Mutual funds are regulated and managed by SEBI, ensuring the safety of your investments. SEBI has established multiple regulations and legal frameworks to ensure disciplined fund management.
While all investments carry certain risks, careful selection, market knowledge, and diversified portfolios can mitigate these risks and yield high returns on investments.
WHAT IS SIP?
Systematic Investment Plan (SIP) is a straightforward and convenient method for regular investments in mutual funds. SIP encourages the development of a savings habit and wealth creation by initiating investments early. With ease and flexibility, SIP facilitates a systematic approach to investing. The SIP amount is automatically debited from the investor’s account and allocated to a specified mutual fund scheme based on the prevailing market rate. Each SIP installment adds more units to the investor’s account. SIP has proven to be an ideal investment choice for retail investors who lack the resources for active investments.
BENEFITS OF SIP
DISCIPLINED SAVING
SIP instills a commitment to regular savings, helping investors create a path toward their financial goals while maintaining discipline.
FLEXIBILITY
SIP allows investors to adjust the investment amount as needed, although it is advisable to maintain a long-term perspective.
LONG-TERM GAINS
Investing through SIP leads to long-term gains through the power of compounding and rupee cost averaging. Rupee cost averaging eliminates the need to time the market, ensuring consistent returns.
TYPES OF MUTUAL FUNDS:
Mutual funds can be categorized into various types based on their investment objectives and assets. These categories include:
DEBT FUNDS
Debt funds are considered safe investments and provide fixed returns. They invest in debt instruments such as corporate bonds, government bonds, and fixed income assets.
BALANCED FUNDS
Balanced funds maintain a mix of fixed income and equities, typically in a distribution of 60% equity and 40% fixed income. Asset Allocation Funds have similar objectives but do not hold a specific percentage of any asset class.
DIVIDEND FUNDS
Dividend funds invest in stocks of companies that pay dividends to their shareholders, providing regular income and lower risk compared to other fund types.
SYSTEMATIC TRANSFER PLAN (STP)
Systematic Transfer Plan is a strategy used by investors to efficiently manage their investments and achieve specific financial goals. Here’s how it works:
Predefined Transfers
The investor sets a predetermined amount and frequency for transferring funds from the source scheme (debt or liquid fund) to the target scheme (usually equity or other high-risk assets) within the same mutual fund The transfers can be daily, weekly, monthly, or as per the investor’s preference.
Risk Management
STP helps in managing risk by gradually transitioning from safer debt instruments to potentially higher-yielding equity or other asset It reduces the impact of market volatility on the investment and allows for a smoother entry into riskier assets.
Returns and Asset Allocation
STP provides the potential for generating higher returns in the long term, as the money is gradually invested in assets with growth It also aids in maintaining a balanced asset allocation, crucial for long-term financial planning.
EQUITY LINKED SAVINGS SCHEME (ELSS)
LSS is a specific category of equity mutual funds in India that offers tax benefits under Section 80C of the Income Tax Act. Here are the key features of ELSS:
Lock-in Period
ELSS has a lock-in period of 3 years, which is relatively shorter compared to other tax-saving instruments like Public Provident Fund (PPF) or National Savings Certificate (NSC). After the lock-in period, investors can redeem their investments or continue holding.
Equity Exposure
ELSS predominantly invests in equities and related instruments, aiming for capital appreciation over the long It offers the potential for higher returns but is also subject to market volatility.
SIP Option
Investors can choose to invest in ELSS through a Systematic Investment Plan (SIP), which allows them to invest a fixed amount regularly, making it convenient for long-term financial
SYSTEMATIC WITHDRAWAL PLAN (SWP)
SWP is a facility provided by mutual funds that allows investors to withdraw a fixed amount or a specified number of units from their investment at regular intervals. Here’s how SWP works:
Tax Benefits
Depending on the type of fund and the holding period, the tax implications of SWP can be more favorable compared to traditional interest income from fixed deposits or savings
Capital Protection
SWP allows investors to maintain their principal investment while generating income from their returns. It can be useful for those who want to safeguard their capital while enjoying a steady cash
Investment Goals
SWP can be tailored to meet specific short-term goals, such as funding regular expenses, vacations, or any other financial