What are mutual funds?
Mutual funds are investment vehicles that collect funds from various participants to buy multiple assets. You can use it to invest in different financial products, including stocks, bonds, gold, and money market instruments. A mutual fund unit entitles you to a modest ownership interest in each investment the fund holds. Given their simplicity of use and benefits, mutual funds can become an excellent investment decision.
Types of mutual funds
There are three types of mutual funds divided based on asset class:
Debt Funds: Debt or fixed-income funds invest in assets, including corporate securities, government bonds, and money market instruments. These investments are typically steady and attempt to provide investors with consistent returns. Debt funds are appropriate if your goal is to make a stable income and you are unwilling to take a significant risk.
Equity Funds: Your money is primarily invested in stocks by equity funds. Capital growth is a crucial goal for these funds and hence are also known as growth funds. However, since the returns on equity funds depend on market conditions, they are riskier than debt funds. Due to the spread out risk over a lengthy period, equity funds might be a good option for long-term objectives like retirement planning or home ownership.
Hybrid Funds: Hybrid funds may be the best option if someone wishes to include debt and equity in their investment. They go by the name balance fund as well. They make investments in a variety of fixed-income and equities products. It is split evenly between stock and debt (bonds) according to a set ratio. Hybrid funds aid in portfolio diversification.
Benefits of investing in mutual funds
Mutual funds provide several benefits. Enhanced portfolio management, tax advantages, risk mitigation, convenience, and low initial investments are a few benefits worth mentioning. Let’s look at them below-
Enhanced Portfolio Management: Whenever you purchase a mutual fund, you must pay a fee to manage the portfolio as an element of your cost ratio. The price compensates a fund manager. The fund manager devices the investment plan for your portfolio, and the research team selects appropriate securities based on the fund’s investing goals. This amount is negligible for expert assistance in managing an investment portfolio.
Tax Advantages: Under Sec 80C of the IT Act on specific financial instruments, such as tax-saving mutual funds, investors can save on taxes up to ₹1.5 lakhs per year. Equity Linked Savings Scheme is a popular and one of the most preferred options for investors under Sec 80. It will enable investors to achieve high returns in three years of the shortest lock-in period.
Risk Mitigation: Since investment in mutual funds means investing in various securities, it allows portfolio diversification—the more diversified a portfolio, the lower the investment risk.
Convenience: The procedure of investing in mutual funds is straightforward. Investors can keep an eye on the market and place their bets according to their objectives. Returns align with expectations by moving between mutual fund strategies and portfolio management.
Low initial investments: By making monthly systematic investment plan (SIP) investments in mutual fund schemes of your choosing, you may create a diversified mutual fund portfolio for as little as Rs 100. Additionally, you have the choice to invest using a SIP or a flat payment. A SIP, however, can minimize total investment costs while releasing the potential of compounded gain compared to lump sum contributions.
Key things to consider before investing
Although mutual funds have several advantages, novice investors should approach them with care. First-time mutual fund investors can use the following tips to maximize profits and minimize risks:
Define your investment goals: Invest in mutual funds with particular objectives in mind. Write out your investment goals, spending plan, and timeframe for achieving them. You could use this practice to figure out how much money you should put away each month for investing.
Select the fund type based on your risk appetite: Mutual funds could provide competitive yields, but it does not imply that you will always see a profit. You could even take a loss on your holdings if the market underperforms since returns depend on stock price movements. This is why first-time investors need to contemplate the best mutual funds to invest. Experts suggest a balanced or debt fund to new investors since it carries little risk and provides consistent returns.
Choose a Mutual Fund with care: There are several funds to analyze before choosing one. Shortlist the attractive investments and compare them. Other than returns and costs, take the following consideration before picking a fund house:
- Look into the history of the fund house carefully.
- Consider the group, the fund manager, and their background.
- Check the profiles of the company’s top personnel, including the fund manager, chief investment officer, and CEO.
- Examine the tenure of fund managers and other key individuals.
- Examine the strategies’ results throughout both bull and bear markets
SIP or Lump Sum investments: Novice participants in the equity instruments should consider using systematic investment plans (SIP). A lump-sum investment might allow a possibility of catching a stock market high. However, SIP enables you to distribute your contributions over the period and invest through different market levels. You can even out overall investment costs and increase your long-term returns by using the advantage of rupee cost averaging with SIPs.
Diversify the portfolio: As discussed above, more diversification of the portfolio means lesser risk. Contemplate investing in multiple mutual funds to diversify your portfolio and generate results that take into account risk. You can spread across asset classes and supporting philosophies with the aid of a portfolio of funds. Additionally, it will balance risks such that if one mutual fund doesn’t perform well, the other funds make up for the shortfall and maintain the strength of the portfolio.
People are increasingly using mutual funds to invest and grow wealth. They are a straightforward and quick approach to investing that has the potential to contribute to wealth creation because of the many advantages they provide. With Marwadi Financial Services Limited, you can begin your mutual funds’ investment journey in just three steps:
- Complete the account registration form and complete the KYC.
- Verify in person or schedule an online verification appointment.
- Start investing in the appropriate mutual fund.