Did you know it’s possible to invest in small amounts and gain big returns? But that’s not what makes mutual funds so appealing. The major attraction of Mutual Funds is that it comes with a Mutual Funds Manager to guide inexperienced investors to select from a variety of funds with the added benefit of portfolio diversification.
A mutual fund is a system where money is collected from multiple investors and invested in securities such as stocks, bonds, and short-term debt. As you buy shares in mutual funds, all the holdings are put together to form your portfolio.
Mutual funds can profit you as an investor in three ways:
1) from stock dividends and bond interest
2) profit from the sale of securities
3) an increase in the value of the mutual fund scheme.
Whenever you make a decision, take into account how much risk you are willing to take on. Financial goals, budget, risk tolerance capacity, and time horizon all have a significant impact on how you invest in any kind of securities. That’s why when it comes to novice investors, mutual funds are quite often the most preferred option because they have a track record of outperforming other instruments in terms of returns. So, choose one of the following mutual fund schemes based on your requirements;
Based on the Structure of Mutual Funds
- Open-ended funds: There are no limits on these funds as to when and how much can be invested with no lock-in periods thus making it very easy to liquidate the funds.
- Close-ended funds: These funds have predetermined fixed amounts for specific time periods.
- Interval funds: A mix of open-ended and close-ended funds, which allow you to invest at specific intervals, and investors can buy or sell shares when the trading window opens up.
Based on the Mutual Fund Asset Class
- Equity or Growth Funds- These funds invest primarily in equities, or shares of companies, in order to generate wealth or capital appreciation. They have the potential for higher returns and are best suited for long-term investments.
- Income or Bond Funds- These invest in fixed income securities such as Government Securities or Bonds, Commercial Papers and Debentures, Bank Certificates of Deposits, and Money Market instruments such as Treasury Bills, Commercial Paper, and so on. These are relatively safe investments that can be used to generate income.
- Hybrid funds-These funds invest in both equities and fixed income, providing the best of both worlds: growth potential and income generation.
Based on Investment Goals
- Growth funds: These invest primarily in high-performing stocks for wealth creation.
- Tax-saving Funds (ELSS): These invest in company securities which qualify for tax deductions under the Income Tax Act.
- Liquidity-based funds: These funds invest in securities based on how liquid they can be and they are ideal for short-term goals.
- Capital protection funds: These funds invest partially in fixed income instruments and the rest into equities to ensure capital protection.
- Fixed-maturity funds: These funds invest in debt market securities which have a maturity period same as the fund.
- Pension Funds: These schemes provide regular returns in the future after a long period of investment.
Let’s go through some features of Mutual funds that makes it a popular pick for most novice investors:
Mutual funds are managed by full-time, professional money managers with the expertise and experience to buy, sell, and constantly monitor investments to ensure that the scheme’s objectives are met.
Buying shares in a mutual fund is an easy way to diversify your investments across many asset classes so that you don’t risk everything on the success of one venture, especially in the event of market fluctuations. Diversification offsets the risk associated with one asset class, so even if one security loses value, other investments may not be affected and may even gain value.
Directly purchasing all of the individual securities held by a single mutual fund may be more expensive for many investors. On the other hand, you can start investing in mutual funds with a very low minimum initial investment.
Mutual fund shares can be bought and sold on a daily basis, allowing you to easily liquidate your mutual fund schemes to meet your financial needs. Please keep in mind that some mutual fund schemes can only be redeemed at maturity. For example, ELSS mutual funds have a lock-in period and can only be liquidated after the maturity period.
Mutual funds are governed by the Securities and Exchange Board of India (SEBI). With an appropriate risk mitigation framework and fair valuation principles, SEBI has established stringent rules and regulations to protect investors and ensure transparency. Mutual fund managers are expected to provide investors with regular updates on the fund’s performance, holdings, and fees, ensuring transparency and clarity.
Mutual funds have become popular among investors because they offer the dual benefit of tax savings and healthy returns. Investment in ELSS up to Rs 1.5 lakh is tax deductible under Section 80C of the Income Tax Act of 1961.
Flexible Investment Options
Mutual funds provide a variety of investment options, including SIP, STP, SWP, and Lump Sum. Investors can select investment options based on their needs, time horizon, and risk appetite. Systematic Investment Plan (SIP) is a smart way to invest in mutual funds over time by investing a small amount at a fixed frequency. Because of advancements in banking facilities and ever-changing investment schemes, SIP investment for NRI is no longer a pipe dream.
Although mutual funds are subject to market risks, you can diversify your holdings using the attack-defense strategy to strike a balance by investing in a mix of low-risk return and high-risk return funds. To accumulate large sums to meet one’s financial goals or beat inflation, certain investment risks must be taken. In fact, investing is all about taking calculated risks and managing them, not avoiding them entirely.