Mutual funds have been shining brighter by the year in the country. But you may wonder why invest in mutual funds? The answer is simple: they are considered to be the ideal investment option for people not well-versed with the world of finance. You don’t need deep pockets to invest in them either. In this article, we look why invest in mutual funds makes sense. To start investing in mutual funds you need to know the reasons in detail as to why mutual funds can be an ideal option, especially if finance is not your forte.
It’s easy to get started with mutual funds. There are many fund houses that offer online facility to invest. Unlike demat accounts for stocks, there is not much paperwork involved in mutual fund investments. Systematic investment plan (SIP) by mutual funds is a convenient investing option for beginners. In systematic investment plan, money will be directly debited from your account on a monthly basis towards fund investment. It’s that simple. Along with offering convenience, it also inculcates a habit of investing.
There are many investors who step away from stock markets because they lack capital. However, mutual funds are affordable. You can start with as little as Rs.500 a month. The best part is that it gives you an opportunity to invest in a wide variety of stocks at a minimum account. Unlike direct equities, mutual funds offer you a maximum exposure at a minimal cost.
Mutual funds can help diversify your investment across various asset classes like equity and debts. Unlike individual stocks which are risky, equity mutual funds diversify the risk by investing in stocks of various companies across various sectors. For example, a balanced fund invests your money in both equity and debt instruments. This means that even if your equity investment isn’t doing too well, you can rely on your debt investment to get a return on investment. Therefore, diversification can help reduce risk along with optimizing returns.
Mutual funds are highly liquid, meaning they can be bought or sold easily. Except tax saving schemes like ELSS (Equity Linked Savings Scheme), mutual funds don’t have a lock-in period. Further, mutual funds also offer liquidity by providing facilities like systematic withdrawal plans (SWPs) and systematic transfer plans (STPs). While STPs afford you the flexibility to move from existing fund to better performing fund, SWPs allow you to withdraw a fixed amount from your invested fund at fixed intervals.
✓ Professional management
Mutual funds are managed by professional managers and experts who are in tune with the world of finance. Unlike with direct stocks, which needs you to do a lot of research, mutual funds reduce your burden by leaving this job in the hands of fund managers. Stock picking, tracking their performance and rebalancing if needed are done by fund managers.
✓ Competitive returns
Above all, mutual funds can offer ‘higher returns’ when compared to many other investment options. After all, everyone’s objective is to maximize their income. For example, debt funds have consistently delivered better returns than traditional bank deposits.
Mutual funds provide operational transparency. Net asset value of funds are declared and published on a daily basis. Mutual fund houses issue monthly fund factsheets that provide you details of portfolio holdings along with its performance.
✓ Regulated industry
The mutual fund industry is regulated by the Securities and Exchange Board of India (SEBI), a non-statutory body that oversees securities market in India. As mutual fund houses operates under well-regulated structure, it focuses on protecting the interest of investors.
To sum up, it now makes sense to know why start investing in mutual funds. Armed with a variety of options like growth funds, income funds, sector funds and ELSS funds etc., there is a fund for every need and investment objective. You investment decision will have a significant impact on the growth of your hard earned money. Invest smartly!
Now that we know how to start investing in mutual funds online in India and the reasons, it’s important to be aware of certain misconceptions that shroud mutual funds. That’s because clarity can help you take rational decisions. Speak to a financial expert to know where to start investing in mutual funds that aligns with your goals and risk appetite.
Disclaimer: Investments in the securities market are subject to market risks. Read all the related documents carefully before investing.
Types of mutual funds
Mutual funds are versatile and can fit into any investing style. That’s because there are different types of mutual funds in the market. Each mutual fund serves a different purpose. These funds vary in their investment objective, risks, returns as well as taxation. The wide range of mutual funds, therefore, helps you invest in the right fund. Therefore, it is important you understand the different types of mutual funds. It can help you make the right decision. So, let’s enlist the different types of funds for a better understanding of the mutual fund market.Mutual fund categoriesOn a broader level, mutual funds are categorized as equity and debt funds. A mix of the two is known as a hybrid fund. ▪ Equity funds Equity funds mainly invest in stocks of companies. There are various types of equity funds available in the market. They are: ✓ Diversified equity funds: Diversified equity mutual funds are pure equity funds which spreads your invested money across various sectors and companies regardless of their market capitalization. These are multicap funds and are suitable for a moderate risk-taker. Staying invested for five to six years may deliver potential returns. However, study the fund’s past returns and its objective before investing. ✓ Sector funds: Such funds invest in one particular sector. For example, Banking and Financial Service Fund invests in banking and financial services sector only. Sector funds can be a good choice for long-term investing. However, this entails higher risk. So, before you invest, it is important to study the sector and analyse how it may outperform the market in future. ✓ Equity-linked savings schemes(ELSS): These are the tax-saving mutual funds that qualify for deduction under Section 80C of the Income Tax Act. Although ELSS funds come with a lock-in period of three years, using the SIP route can make such investment affordable. ✓ Hybrid funds: These are balanced funds that invest in both stocks and bonds. They are considered equity-oriented funds as they invest at least 65% of total money in equity. These are good investment options for beginners. ▪ Debt funds Debt funds are mutual funds that principally invest in debt instruments like bonds, treasury bills and other fixed income investments. These funds can be further categorized: ✓ Income funds: These funds majorly invest in fixed-income instruments like bonds, government securities and corporate debentures etc. The major focus is on income generation. It’s important to consider the interest rate. That’s because interest rate volatility has an impact on these funds. Investing during a falling interest rate scenario and exiting when rates tend to rise can benefit you in such funds. If you have one to three years’ time frame in mind, these funds can be a good option. ✓ GILT funds: These funds majorly invest in government securities. Generally, these funds are safe since there is no default risk. However, gilt funds are subjected to interest rate risk. For example, if the interest rate moves up, the yield of a GILT fund goes down as it becomes less attractive and vice versa. Thus, you need to keep a track on the interest rate movements. ✓ Short-term funds: These funds primarily invest in money market instruments like treasury bills and certificate of deposits. The average maturity of such papers are low and the investment is thus suitable for a short-term horizon like three to six months. ✓ Monthly income plans (MIPs): These are debt-oriented hybrid funds with a small allocation in equity and a majority of the investment in debt. MIPs usually pay a monthly dividend. Investors with low to moderate risk profile can consider this as an option in order to receive a regular income. But do remember that the monthly dividend is not a guarantee. ✓ Liquid funds: These invest in short-term debt instruments like commercial papers, treasury bills and corporate deposits. These are a good short-term option. Now that you know how different mutual funds work, you can choose to invest based on your needs. Disclaimer: Investments in the securities market are subject to market risks. Read all the related documents carefully before investing.
Myths about investing in mutual funds
There’s a popular adage that goes like this: A little knowledge is a dangerous thing. That’s true because you are bound to trip at some point if you don’t have the right information on you. It’s no different in the world of investing either. And like with every aspect in life, misconceptions do weave itself into a popular narrative. This article will act as a Good Samaritan and help bust myths on mutual funds investment that have inevitably become a part of mutual funds’ success story.Myth 1. Mutual fund investments require lot of moneyReality: The reality is that there are a variety of mutual fund investment types. Most of them can be started with as low as Rs. 500 through the systematic investment plan (SIP) route. SIPs allow you to invest a certain amount of money on a monthly basis in most mutual fund investment options. This way, you don’t have to invest a lump sum amount in one go.Myth 2. Mutual funds with lower NAV are always betterReality: A mutual fund’s return-generating capacity depends on its underlying assets, past performance, fund management quality and future prospects. Contrary to popular mutual fund investment myths, the size of the net asset value (NAV) has nothing to do with its future performance.Myth 3. You need to be an expert to invest in mutual fundsReality: This is one of the myths about investing in mutual funds; however, it is partially true. You do have to research which mutual fund suits you the best. But once you have selected your kindred fund, leave the rest to the fund manager. You don’t have to be a savant, a consummate number-cruncher to strike gold. That’s because the fund manager, along with a team of analysts, put in their skill and expertise to manage your money. All said and done, it is still advisable to keep monitoring your investment’s performance from time to time. Myth 4. Investing in high-rated funds can deliver better returnsReality: A fund that has done well in the past may not necessary do well in future. You need to remember that you are playing the market, and that markets are dynamic and ever-changing. Therefore, performances of funds are fluid too. The list of high-rated funds keep evolving. It is very difficult for a fund to keep delivering high returns year on year. So, even though you should look at the fund’s past performance to gauge its strength, it is not gospel either. It cannot guarantee you high returns in future. Myth 5. Investing in debt funds is risk-freeReality: Debt funds invest in fixed income securities like bonds, government securities and other debt instruments. Though risk is on the lower side, performance of such funds can vary due changing interest rates and credit risk.Myth 6. Mutual funds are for long-term investors onlyReality: Many investors believe there is no scope for short-term income in mutual fund investments. While it’s true that for higher returns you need to stay invested for longer, there is an opportunity for short-term investors too. That’s because there are many types of mutual funds. For instance, there are liquid funds, ultra-short-term funds and short-term funds that can offer decent returns over a shorter time frame.To sum up, it is important to weed out the fake news associated with mutual funds. Even though we are currently living in a post-truth era, the world of finance is still very well ensconced in the world of facts and numbers. Bending them to your advantage can backfire in the long run. Instead, let myths play truant in the minds of those living in an altered reality. Disclaimer: Investments in the securities market are subject to market risks. Read all the related documents carefully before investing.
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