Mutual Funds
Why is it Important!
Mutual funds reduce the risk of direct investment in the stock market.
Investment in Stock markets offers higher returns on the investments, but to benefit from stock markets it requires a certain amount of knowledge about Equities, Shares, Debentures, Bonds, etc.
Normally, people have limited knowledge about market functioning, yet they invest in the stock market and lose their hard-earned money. To overcome this problem and utilize the advantage of higher returns on investments, Mutual Funds were established.
Popular Investment Plans offered by Mutual Funds
Equity-linked Tax Savings Scheme (ELSS)
Investment in this scheme offers tax benefits under Section 80C of the Income Tax Act. 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.
Equity Fund
In this scheme, the amount is invested in the Equities or Shares of reputed public limited companies. The return in the scheme depends upon the performance of the company. It offers high returns, but not certain.
Sectoral Funds
Pharma Fund, Energy fund, Infrastructure Fund. In this plan, investment is made in companies of a particular sector to get the advantage of the flourishing of the sector.
Large / Mid / 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.
Hybrid Fund
In this plan, investment is made in a combination of equity and Debentures to get the advantage of both Equity and Debentures.
Debt Fund
In this scheme, investment is made in highly rated Debentures and Bonds of reputed companies. It offers moderate returns but is stable.
Mutual Fund Advantages
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.
Mutual funds are organized by the provider’s team who have expertise in investment. Teams are backed up by an in-house research team and professional fund managers. Mutual funds charge a nominal fee known as Expense cost for managing the funds. It ranges from 1-3 % only.
It offers easy liquidity. We can anytime redeem our investment on Net Asset Value of the scheme prevailing on the day of redemption.
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.
Mutual Funds are regulated by SEBI. They are subject to various statutory compliances. This ensures the safety and security of investors’ funds.
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 the Income Tax Act. Whereas capital appreciation also qualifies for Long term Capital Gain (LTCG) up to Rs 1.00 lakh.
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.
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.
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.
Investment in Mutual Funds is less risky compared to direct investment in the Stock market. Mutual funds have diversified portfolios to minimize risk.
Shortcomings of Mutual Funds
- Investment in Mutual Funds is subject to market risks. Returns are market-driven. Hence returns are not guaranteed or assured.
- 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.
- Return depends upon the expertise and acumen of the fund manager.
- Returns are subject to Income Tax provisions. Hence, the effective return may be less than the actual return.
The Verdict
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 wealth.
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