Beginners Guide to Mutual Funds
Mutual fund investments are becoming very popular with individual investors because of the benefits they provide. Among the many advantages, the most important factors that drive investors to mutual funds are that Investors can
- Start with any amount (as low as 500)
- Diversify across multiple stocks and other instruments like debt, gold etc.
- Start automated monthly investments (SIP)
- Invest without requiring to open DMAT account
What are Mutual Funds
A mutual fund is a type of financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets. Mutual funds are operated by professional money managers, who allocate the fund’s assets and attempt to produce capital gains or income for the fund’s investors. A mutual fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectus.
Mutual funds give small or individual investors access to professionally managed portfolios of equities, bonds, and other securities. Each shareholder, therefore, participates proportionally in the gains or losses of the fund. Mutual funds invest in a vast number of securities, and performance is usually tracked as the change in the total market cap of the fund—derived by the aggregating performance of the underlying investments.
Advantages of Mutual Funds
To diversify is to reduce risk. For example, let’s say you buy milk from one milkman. If someday he falls ill, you won’t have any milk to drink! On the other hand, if you buy milk from two milkmen, If one falls ill, you’ll still have supply from the other.
The chance of both the milkmen falling ill at the same time is very low. This is why diversification is so important in investing as well.
2. Professional Management
Investing is obviously not an easy task. Investing, be it in shares, real estate, gold, bonds, and so on depends on a multitude of factors that constantly need to be studied and understood.
Check out some of the top mid-cap funds of 2019
Many people often think they can understand the market. A great percentage of these people end up incurring a loss.
The advantage of mutual funds is that they are managed by professional experts. Thus, to ensure your money is invested in the right place, you have to choose the right mutual fund.
Once invested in a mutual fund, you can relax with the knowledge that an expert will make necessary changes to the portfolio whenever required.
This isn’t to say that you shouldn’t review your investments in mutual funds. If you’ve chosen your mutual fund carefully, reviewing it once a year is usually enough.
While investing, the availability of information and data is particularly time-consuming. If all the information would be easily available, investing would be much simpler.
In mutual funds, the research and data collection is done by the funds themselves. All you have to do is analyze the performance
Mutual fund dealers allow you to compare the funds based on different metrics, such as level of risk, return, and price. And because the information is easily accessible, the investor will be able to make wise decisions.
One advantage of mutual funds that is often overlooked is liquidity. In financial jargon, liquidity basically refers to the ability to convert your assets to cash with relative ease.
For example: If you want to sell your house, how long would it take for you to sell it and get the cash in hand? It would take you anywhere from a few weeks, to a few months.
Mutual funds are considered liquid assets since there is high demand for many of the funds. You can, therefore, retrieve money from a mutual fund very quickly.
6. Tax Efficiency
Mutual funds are relatively more tax-efficient than other types of investments. Long-term capital gain tax on equity mutual fund is zero, which means, if you sell your investment one year after purchase, you don’t have to pay tax.
For debt funds, long-term capital gains apply when you hold them for 3 years.
Apart from this, there are certain classes of funds, called ELSS funds, that are exempt under section 80 C up to a limit of Rs 1.5 lakhs. Some important features of tax-saving funds are:
1. It is a surrogate route to the direct stock market
2. The minimum investment is Rs 500 per month
3. It has a lock-in-period of only 3-years
4. The returns are tax-free as well
I hope this information will help you to grow your money steadily and safely in future.