Why Should you Invest in Mutual Fund ?

 Why Should you Invest in Mutual Fund ?

A mutual fund is an investment vehicle where many investors pool their money to earn returns on their capital over a period. This total fund is being managed by  an investment professional known as a  Fund Manager or Portfolio Manager.

It is the job of the Fund Manager or Portfolio Manager to invest  the total fund in different securities such as bonds, stocks, gold and other assets and seek to provide potential returns. The profit or loss on the investment are shared collectively by the investors in proportion to their contribution to the fund.

Why you should invest in

Professional Expertise from Fund or Portfolio Manager

Investing in the financial market requires a certain amount of skill. You need to research the market and analyse the best options available. Knowledge is required on matters such as macro economy, sectors, company financials from an asset class perspective. Also requires a significant amount of time and commitment. To manage all these you need the expertise of a Fund Manager or Portfolio Manager to take  care of your investments

Higher Returns

One of the biggest mutual fund benefits is that you get a higher return that the traditional investment options like fixed deposit where the return is assured. The returns in the MF a linked to the capital market therefore if the stock market performs well , your fund value goes up and you gain a higher returns. But in a poor performing market it impacts your fund and you get a poor return.

Diversification

You have to remember that when you are investing in stock market you have to diversify your portfolio by investing in different asset class otherwise if you invest in a single asset, you have the risk of loosing money if the market crashes. It is time consuming process to select stock carefully from different sectors. This job can be avoided by investing in Mutual Funds. Investment in Mutual Funds helps you in diversifying your portfolio.

Tax Benefits

Mutual Fund investors can claim a tax deduction of upto Rs.1.5 lakhs by investing in Equity Linked Savings Scheme. ELSS fund comes with a lock in period of 3 years. So if you are invested in ELSS Fund, you can only withdraw your money after the lock in period ends.

You get an another tax benefit available in Debt Funds. Normally all traditional products are subject to tax on interest earned. But in Debt Mutual Fund, only the interest earned over and above the inflation rate are subject to tax. This help investors to earn higher post tax returns.

Hybrid Funds

It is a mixture of both equity and fixed income securities.

 

Structural based various type of funds

Open ended mutual funds

Open-ended mutual funds are highly liquid based funds because you can redeem your units from the fund on any working day  of your choice. These funds are bought and sold at their NAV ( Net Asset Value)

Close ended Mutual Funds

You can invest in these funds when it is launched and can redeem units or withdraw money from the fund only at the time of maturity. These funds are listed in the stock market and have pre-defined maturity period.

 

Investment Objective – Type of Funds to be invested

Growth Fund – These funds put the major portion of the money in stocks to get more capital appreciation. These funds are risky due to high exposure to equity and therefore it is good to invest here for the long term.

Income Funds – These funds provide investors stable income. These are debt funds that invest the money mostly in government securities, bonds, certificate of deposits etc. Investment in these funds are suitable for investors with low risk appetite.

Liquid Funds -  In liquid funds money is invested for short term in money market instruments like term deposits, treasury bills, commercial paper etc.

Tax Saving Funds – These funds offer tax benefits under Section 80C up to Rs.1.5 lakhs each year. It is known as ELSS (Equity Linked Saving Schemes)

                                                                                                                                                                                                        

 

Now that you know the different types of mutual funds, the question arises: ‘Which is the best mutual fund?’

Well, there is no single or right answer to this question. This is because fund houses design mutual funds to achieve specific financial goals. And as an investor, you need to know which mutual funds can help you achieve your goals in the best way possible.

All your investment goals can be categorized into three broad groups:

1.     Short-term goals (1-3 years): For instance, going on a family vacation in 18 months, buying a car, etc

2.     Medium-term goals (3-5 years): For instance, doing a short term course in digital marketing in 3/4 years

3.     Long-term goals (5 years or more): For instance, buying a house in the next 5-7 years

For any goals upto 12 months, it is better to invest in liquid funds since they are less volatile. Liquid funds can be a good option to create an emergency fund. For goals between 1-3 years, you may want to invest in short term debt funds.

Hybrid funds are more suited for medium-term goals since they have the potential to provide both capital appreciation and stability. For long-term purposes, equity funds are suitable.