Mutual Fund: A Simple Guide On This Investment Vehicle
Investments are a hot topic in the market now. There are various investment opportunities that have come into the market in the last decade, and one very prominent among them is cryptocurrency. The hype around cryptocurrency has increased to a great extent, but for that, we should not ignore the ones that were there for ages now like stocks and many other assets. Here is a simple guide on understanding the idea of the mutual fund.
What Is A Mutual Fund?
A mutual fund is a form of a financial vehicle that is created from a pool of money collected from various investors to make investments in securities like bonds, stocks, money market instruments, and various other assets. They are operated by professional money managers who allocate the assets of the funds and try to produce capital gains or income from the invested money of the investor. The portfolio of this type of fund is structured and kept to match the objectives of investments that are mentioned in the prospectus.
This type of investment provides individual or small investors the availability to professionally handle portfolios of bonds. Equity, and other securities. Every shareholder, therefore, takes part proportionally in the profits or losses of the fund. Mutual funds invest in a wide range of securities, and the performance is mainly tracked as the shift in the total market capitalization of the fund. There are many mutual fund calculators available that help you to calculate the profit or loss amount on the funds invested by you.
Why Invest In Mutual Funds?
There are many advantages to investing in this type of fund. The important ones include:
Professional Expertise
Take for instance a situation where you can buy a new car, but you do not know how to drive. So for that, you have two options. You can either learn how to drive or can hire a driver.
If you choose the first one, then you will have to take driving classes, pass the driving test, and then get a license. But if you cannot dedicate that time to learning then it is better to choose the next option. This theory applies to investments as well.
Making investments in the financial space needs some amount of skills. You will require to do research on the market, understand its analytics of the best options available. You will require knowledge on subjects like macro economy, company financials, and similar topics. This needs a prominent amount of time and commitment from you.
But if you lack the time and skill to get inside the matter, then these are the best options for you. In this case, professional fund managers handle your investments and work hard to offer reasonable returns.
Returns
One of the biggest advantages of this type of investment is that you have the chance to earn possibly higher returns compared to traditional investment options that offer assured returns. This is the case as the returns on mutual funds investments are connected to the performance of the market. So, if the market runs on a bull and it does highly well, the effect would be reflected in the price of your fund. However, a bad performance in the market could adversely impact your investments.
Tax Benefits
Investors of these funds can claim a deduction in tax of up to Rs. 1.5 lakh by making investments in ELSS (Equity Linked Savings Schemes). This tax advantage is eligible under Section 80C of the Income Tax Act. Equity Linked Savings Schemes funds arrive with a lock-in span of 3 years. Hence, if you make investments in ELSS funds, you can only pull out your money after the lock-in period finishes.
Another tax benefit along with the one mentioned above is the indexation benefit accessible on debt funds. In the case of traditional items, all interest received is subject to tax. However, in the case of debt funds, only the returns received over and above the inflation rate are subject to tax. This could also aid investors to receive higher post tax returns.
Different Types Of This Funds
When you go to a car showroom, you see lots of varied cars. There are sedans, hatchbacks, SUVs, and other types of cars. Each car shown in the showroom serves a varied purpose. An adventurous individual may opt for a sports car while a family man may opt for an SUV. In a similar way, there are varied types of mutual funds in India that suit the needs of varied types of persons.
Each type of fund aims to attain specific goals. Here are the most famous types of funds you can find:
Debt Funds
Debt funds are investments in assets like corporate bonds and government securities. These funds aspire to provide reasonable returns to the investor and are thought relatively less risky. These funds are perfect if you wish for a steady income and are reluctant to risk.
Equity Funds
In contrary to debt funds, equity funds are investments of your money in stocks. Capital appreciation is a crucial objective for these funds. But since the yield on equity funds is connected to market shifts of stocks, these funds have a higher amount of risk. They are a good option if you wish to invest for long term intentions like buying a house or retirement planning as the level of risk comes down with time.
Hybrid Funds
What if you want equity along with debt in your investment? In that case, hybrid funds are your choice. These funds invest in a combination of both fixed income and equity securities. Based on the distribution among debt and equity, hybrid funds are moreover classified into diverse sub-categories.
Final Thoughts
Making investments in mutual funds is among the simplest ways to attain your financial goals on time. But before you make any investment, take a good amount of time to do research about the varied fund choices. Do not invest in any kind of fund because your friend or colleague has invested in it. Identify your aims and make investments accordingly. If needed, you can go to a financial advisor who will help you make the correct decisions related to investment and plan your financial voyage.
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