Mutual Funds are among the hottest favorites with all types of investors. Investing in mutual funds ranks among one of the preferred ways of creating wealth over the long term. In fact, mutual funds represent the hands-off approach to entering the equity market. There are a wide variety of mutual funds that are viable investment avenues to meet a wide variety of financial goals. This section explains the various aspects of Mutual Funds.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS. READ ALL SCHEME RELATED DOCUMENTS CAREFULLY
What is Mutual Fund and Why Mutual Fund?
- A mutual fund is the trust that pools the savings of a number of investors who share a common financial goal.
- Anybody with an investible surplus of as little as a few hundred rupees can invest in Mutual Funds.
- The money thus collected is then invested by the fund manager in different types of securities. These could range from shares to debentures to money market instruments, depending upon the scheme’s stated objective.
- It gives the market returns and not assured returns.
In the long term, market returns have the potential to perform better than other assured return products. Mutual Fund is the one of the most cost efficient financial products.
Advantages of Mutual Funds
- Professional Management
- Convenient Administration
- Return potential
- Return potential
- Low cost
- Choice of schemes
- Well regulated
- Tax benefits
How do I make money from a mutual fund?
- Capital appreciation:
As the value of securities in the fund increases, the fund’s unit price will also increase. There would be capital appreciation when you sell your available units at a price higher than the price at which you bought.
- Coupon / Dividend Income:
Fund will earn interest income from the bonds it holds or will have dividend income from the shares.
- Income Distribution:
The fund passes on the profits it has earned in the form of dividends
As the value of securities in the fund increases, the fund’s unit price will also increase. You can make a profit by selling the units at a price higher than at which you bought. Although – Mutual Fund does not guarantee the same or does not guarantee returns.
How to invest in Mutual Funds, Selection Process- 3 steps
Step 1 Identify your investment needs
- What are my investment objectives and needs?
- How much risk am I willing to take?
What are my cash flow requirements?
Step 2 Choose the right mutual fund.
- The track record of performance over the last few years in relation to the appropriate Benchmark and similar funds in the same category.
- How well the mutual fund is organized to provide efficient, prompt and personalized service.
- Degree of transparency as reflected in frequency an d quality of their communications
Step 3 Select the ideal mix of schemes
- Investing in just one scheme may not meet all your investment needs.
- You may consider investing in a combination of schemes to achieve your specific goals.
Taxation Benefit investing in Mutual Funds
- The amount invested in tax-saving funds/Equity Linked Saving Schemes (ELSS) is eligible for deduction under Section 80C upto a limit of Rs.1,00,000/- (in a financial year).
- Dividend from Mutual Fund Schemes is Tax-Free in the hands of the Investor/receipient.
- Indexation Benefit under Long term Capital Gain in Debt schemes.
Types of risks associated with Mutual Fund Investment
- Risk is an inherent aspect of every form of investment. For Mutual Fund investments, risks would include variability, or period-by-period fluctuations in total return.
- Market risk: At times the prices or yields of all the securities in a particular market rise or fall due to broad outside influences. This change in price is due to ‘market risk’.
- Inflation risk: Sometimes referred to as ‘loss of purchasing power’. Whenever the rate of inflation exceeds the earnings on your investment, you run the risk that you’ll actually be able to buy less, not more. Credit risk: In short, how stable is the company or entity to which you lend your money when you invest? How certain are you that it will be able to pay the interest you are promised, or repay your principal when the investment matures?
- Interest rate risk: Interest rate movements in the Indian debt markets at times can be volatile leading to the possibility of large price movements up or down in debt and money market securities and thereby to possibly large movements in the NAV.
Other risks associated are:
- Investment risks
- Liquidity risk
- Changes in the government policy