Concept of Mutual Funds
A mutual fund is nothing but a basket of investment funds as it consists of a combination of equities, securities, bonds, etc.; managed by fund managers. Fund managers are certified financial analysts who know about investing in the stock market. Every mutual fund has a fund manager who makes the investments on behalf of the investors. In exchange for the expertise of the mutual fund advisor, a small percentage of the investment is charged by them as commission. This percentage is SEBI- approved and usually ranges between 0.5 to 1%. Investments in mutual funds can be done in two ways:
Lump-sum Option: One-time investment in a mutual fund
SIP Option (Systematic Investment Plan): Systematic investment to be made every month, quarter, half-yearly, annually
Some of the many benefits of mutual funds are:
1.Diversification of investment funds
The financial advisors have been suggesting a diverse portfolio to individuals as a sound investment solution. A mutual fund is made up of a diversified combination of securities. It can consist of bonds, equities, debts, and various market securities in different quantities according to the financial objective and duration. This process is called diversification. It’s a good scheme as even if one of the asset classes is suffering a loss, the entire mutual fund, as a whole, won’t get affected by it.
2. A lower degree of risks
Mutual funds are made up of a combination of diversified securities and hence, the degree of loss involved in them is spread over the same. Even if one of the asset classes is underperforming, there is a chance of low or no loss because there’s a possibility that some other asset class is performing well. On average, a mutual fund is made up of 50 to 200 investment securities. Hence, the more the number of variants in a mutual fund, the lesser would be the loss.
3. Portfolio management handled by professionals
For the inception of a mutual fund, a tremendous amount of research and market analysis is required. The combination of the investment securities, the holding period of the mutual fund, and all of the other major decisions are taken by the fund manager. Every fund has a fund manager. It is the fund manager who invests in the mutual fund on your behalf.
As a matter of fact, before investing in a mutual fund, many a time, an investor looks up the expertise and experience of the fund manager just to be affirmative about his/ her decision.
Systematic Investment Plan (SIP) is a means of investing in mutual funds monthly or quarterly. The cost of some SIPs is as low as Rs. 500 per month. The brokerage charged varies from 0.5 to 1%. In fact, with digitization coming into the picture, various apps are made just to be user- friendly means for the investors to invest. Such apps usually don’t even charge brokerage, making it extremely affordable.
5. Comprehensible or easy to understand
These days knowledge on mutual funds is imparted even at the college level. Having prerequisite knowledge of finance and economics is not a necessity. The topic of mutual funds is not at all complex and hence, anyone can learn the mechanism of it in a short period.
6. A wide array of variety or types
There is a broad variety of the different types of mutual funds from which an investor can ‘choose’ keeping in mind their financial objectives. There are three types of mutual funds: Equity mutual funds, debt mutual funds, and hybrid mutual funds. Equity mutual funds consist of investment funds like equities and shares of a company, debt mutual consists of investment funds like debentures and government bonds and hybrid mutual funds consist of a combination of both, equity and debt mutual funds.
7. Tax benefits
Equity Linked Savings Scheme (ELSS) is a type of tax saver fund. It is more helpful for the people who belong to the high-income bracket. One doesn’t have to pay tax on the amount invested in this fund. For instance, if your income is 10, 00,000 p.a. and you have a SIP of this fund of Rs. 5,000 per month, then by the end of the year a total of Rs. 60, 000 would be the tax-free amount. This means that the investor would only be required to pay tax on Rs. 10, 00, 000- 60,000 = Rs. 9, 40, 000, thus saving tax.
8. Magic of compounding
Mutual funds are said to be the perfect pick of investment in the long run. This is so because mutual funds follow the system of compound interest. If in the first year the profit is calculated on the principal amount, the next year considers a new principal amount in which the previous profit is included. Hence the amount keeps growing. Moreover, as mentioned above, the degree of risk involved in mutual funds is comparatively very less. So, even after considering the inflation rates, the returns generated by mutual funds are extremely good.
Brokerage firms, mutual fund companies, banks, and most importantly mobile apps are the main sources where mutual funds are available. There’s no need for an investor to open a Demat account to deal with mutual funds. The availability of it on mobile phones makes it possible for an individual to invest in SIPs just by the click of a button, without even physically going somewhere and it’s a completely safe procedure. Most of the mobile apps don’t even charge brokerage and even showcase the statistical figures of the percentage of returns given by each SIP.
10. Liquidity factor
It is very easy to exit (and enter) a mutual fund scheme. So, unlike fixed deposits, if you urgently need the money you had invested in mutual funds, you can get it back. In other words, you can sell back the units of mutual funds purchased by you at any point in time and depending upon the rate going on in the market, you even get the returns on the amount.
All the investment funds that are combined to form a mutual fund can be looked up online. Moreover, asset management companies are regulated through various government bodies like AFMI and SEBI which evaluate the activities carried out by them closely.