Mutual Funds

Mutual funds reduce risk of direct investment in stock market

Investment in Stock markets offers higher returns on your investments.  But Investment in stock markets requires a certain amount of knowledge about the Equities or Shares, Debentures, Bonds, etc. Normally, people do not possess the same. Yet people venture into investing in the stock market and burn their fingers by losing their hard-earned money. To overcome this problem and utilize the advantage of higher returns on investments, Mutual Funds have been established.

How Mutual fund Works:

As layman understanding, Mutual funds pool the money received from the individual investors called Corpus and invest in the Stock market in Equities, Debentures, bonds, etc. Mutual Funds have in- house research team and investment professionals who regularly advise and monitor the performance of the investment so made.

Investment in Mutual Funds can be done either in a lump sum or by way of monthly contribution, which is called Systematic Investment Plan, popularly known as SIP. A SIP can be started with as low as Rs. 500 per month.

Investment

Various Plans of Investment

Mutual Funds offer various types of investment plans as per the requirement of the investors. It may be Short Term, Medium Term or Long Term plans as per the investment horizon. Schemes could be open-ended or Close-ended. Open-ended schemes can be subscribed at any time on the present NAV or Net Asset Value of the scheme. Open-ended schemes continue ongoing basis and have no fixed maturity period. Whereas Close-ended schemes have a fixed maturity period. One can invest in close-ended schemes only when it is open for subscription.

The following are some popular investment plans offered by Mutual Funds:

Equity-linked Tax Savings Scheme (ELSS)

Investment in this scheme offers tax benefits under Section 80 C of the Income Tax Act. In the scheme, there is a lock-in period of three years. We cannot withdraw the amount before completion of three years. This is the most popular scheme for tax savings purposes.

Debt Fund

In this scheme, investment is made in highly rated Debentures and Bonds of the reputed companies. It offers moderate returns but stable.

Equity Fund

In this scheme, the amount is invested in the Equities or Shares of the reputed public limited companies. The return in the scheme depends upon the performance of the company. It offers high returns, but not certain.

Hybrid Fund

In this plan, investment is made in a combination of equity and Debentures to get the advantage of both Equity and Debentures.

Sectoral Fund

Pharma Fund, Energy fund, Infrastructure Fund
In this plan, investment is made in companies of a particular sector to get advantage of the flourishing of the sector.

Blue-chip Funds

In this plan, investment is made in Blue Chip companies which are flourishing and registered high growth.

Large Cap, Mid Cap, and Small Cap Fund

The companies are categorized in Large, Mid, and Small Cap as per their market capitalization. Mid and Small Cap companies are emerging companies that are on the path of high growth and expected to offer good returns.

Advantages of Mutual Funds

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Easy investment option

Investment in Mutual Funds is easy. We can invest either in a lump sum or through a Systematic Investment Plan or SIP. It suits every class of people. Even a small amount of Rs 500 per month can be invested.

No expertise needed for buyer

Mutual funds are organized my provider’s team who have expertise in investment. Teams are backed-up by in-house research team and professional funds managers. Mutual funds Charge a nominal fee known as Expense cost for managing the funds. It ranges from 1-3 % only.

Easy Liquidity

It offers easy liquidity. We can anytime redeem our investment on Net Asset Value of the scheme prevailing on the day of redemption.

Transparency

It offers transparency in their work. Mutual funds periodically publish the details of their investments. Net Asset Value of schemes is calculated daily and published on their websites.

Governed by SEBI

Mutual Funds are regulated by SEBI. They are subject to various statutory compliances. This ensures the safety and security of investors’ funds.

Eligible for certain Income Tax benefits

Investment in Mutual Funds is eligible for certain Income Tax benefits also. Investment in Equity Linked Savings Scheme (ELSS) qualifies for exemption under section 80C of Income Tax Act. Whereas capital appreciation also qualifies for Long term Capital Gain (LTCG) up to Rs 1.00 lakh.

Variety of Plans

Mutual Funds offer a variety of plans as per the requirement of the investor. It offers Equity Plans for high returns and debt Plans for steady but fewer returns. It also offers short term, Medium Term and Long-term plans as per the investment horizons

Potential of huge returns in the long term

Investment in Mutual funds is capable of generating huge returns in the long term. It gets the benefit of compounding returns. It helps investors to generate huge funds for their long-term requirement for Marriage, Higher education of children, and purchase of a house.

Offer online facilities for Investment

Mutual funds are technology-driven. They offer online facilities for Investment, Redemption, upgrade of KYC, etc. We can do all these activities on the click of the mouse.

Low risk compared to direct investment

Investment in Mutual Funds is less risky compared to direct investment in the Stock market. Mutual funds have diversified portfolios to minimize risk.

Offer both growth and dividend options

Mutual funds schemes offer both growth and dividend options. In growth option dividend amount is reinvested to reap the benefit of compounding.

Schemes are easy to understand

Mutual Fund schemes are easy to understand. There is no rocket science involved. A person of normal prudence can easily understand the scheme guidelines.

Shortcomings of Mutual Funds

  1. Investment in Mutual Funds is subject to market risks. Returns are market-driven. Hence returns are not guaranteed or assured.
  2. One has to stay invested for the long term to reap the benefit of high returns. In the short term, there are chances of losing the capital also.
  3. Return depends upon the expertise and acumen of the fund manager.
  4. Returns are subject to Income Tax provisions. Hence, the effective return may be less than the actual return

The historical performance of Mutual Funds has shown great returns over the years. Hence Mutual funds have emerged as the most popular way of creating of wealth.

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