We all want to create wealth and meet our financial goals as soon as possible, but the problem arises with the execution of managing our funds.
If a person’s area of expertise is in the management of finances they can easily accomplish their financial goals but what about income groups like us? How do we invest our money into something without burning the midnight oil for complex finance terms? Our parents would suggest we go for Savings, Fixed Deposits, Gold, Real Estate etc.
These conventional methods of investment are either low-risk returns or very high risks.
We need something which gives us a good return without taking the precious and limited time we have for other activities.
Here’s an investment opportunity that does it all.
What is mutual Fund?
Simply, Mutual Fund is a trust which collects funds from a large number of investors and invests those funds into income-generating asset classes like equity, bond and gold etc.
The person who manages this fund on behalf of the investor is known as the Fund Manager.
The trust which helps people to come together for a common financial purpose is called Asset Management Company.
AMCs make combined investments with the help of experts who charges a small percentage of fees and return on investment is shared proportionally by investors according to the contribution of their money.
Types of Mutual Funds
Equity Mutual Funds
Equity Mutual Funds is of investment largely in stocks with growth and good return but it comes with risk which depends on the market fluctuations.
There are lots of sectors and asset classes that make in the list of equity mutual funds and at the end of maturity, investors can earn much more than traditional types of investment methods.
Large Cap Mutual Funds
These funds are invested in companies that have a market capitalisation of more than Rs 20000 crore.
I am sure with this amount you must have guessed that it provides investors with steady returns.
With huge market capitalisation, it falls short of the highly aggressive growth opportunity which small-cap funds can offer but it handles the market fluctuations better than other funds which make it an attractive opportunity for investors.
Mid Cap Mutual Funds
Mid Cap Mutual Funds have a middle range of market capitalization which makes it moderate risk ratio return funds.
It offers better growth than large-cap funds and lower risk than small-cap funds.
Small Cap Mutual Funds
If you think that market capitalisation of less than 5000 cr gives you a low return maybe you are somewhere undervaluing the growth potential of these companies.
Small-Cap Mutual Funds have higher growth opportunities and can earn higher returns than any of the above-mentioned funds.
Large-cap and mid-cap companies can react to negative events in the market suitably without making hefty losses but small-cap companies can make portfolios of investors distressed for a while but with good growth and time, they can bounce back with impressive returns.
Multi-Cap Mutual Fund
We want good returns but as young investors, we want to take high risks too but how can we manage everything in such a proportion that at the end of the maturity period it relieves us with a pretty portfolio.
Multi cap Mutual Fund diversifies the funds with fair return ratio proportion and benefits of all the three mutual funds mentioned above.
Equity-Linked Saving Schemes
These funds are famously known for their Tax Saving Benefit. Investors can claim exemption up to 1.5 lakhs under 80C of the Income Tax Act.
It also have know to surpass the returns from PPF and NPS.
Sector Mutual Fund
This category of mutual funds takes us one step forward. With mutual fund plans, we have comprehended how to diversify our portfolio in various asset classes.
With sector mutual funds the investment is made into a several sector of the economy like health, energy, IT etc.
Hybrid Mutual Fund
Hybrid Mutual funds help to create a balanced portfolio with equity and debt funds. It gives the advantage of capital appreciation of equity fund and stability of debt fund.
Aggressive Mutual Funds
It has a mix of 80% of equity and 20% debt. The main aim is to get capital appreciation and highly growth making characteristics with the assurance of not losing the investment due to high fluctuations and generating regular earnings too.
Conservative Mutual Funds
This fund gives less exposure to equity and a high preference to debt for the stability of the fund and little additional growth earning capacity for better returns.
Debt Mutual Funds
Debt Mutual Funds invest in fixed securities for stable returns and low-risk factors. It prevents the volatile market asset class of income generation.
Low, Short, Medium and High Debt Mutual Fund
As the name suggests the risk and returns ratio to these mutual funds are similar too.
Low Debt Mutual Fund is of 6-12 months of investment.
Short Debt Mutual Fund is of 1-3 years of investment in short term securities with a return more than low duration fund somewhere between 6.5-7.5%.
Medium Debt Mutual Fund is of more than 3 years.
Long term Debt Mutual Fund empowers the decent growth firms for long time more than 5 years with fair returns over the period of time stabilising the interest rate characteristic.
Gilt Mutual Fund
Gilt funds is invested in government issued securities which promise minimal risk and return on investment. The lock-in period can vary from 3-5 years and more.
Liquid Mutual Fund
This mutual fund is gaining attention with its feature of quick conversions into cash ie liquidity and low risk.
It matures from 1- 91 days which gives the best opportunity to grow the idle funds in a short period with the interest near 5-6 %
Advantages of Mutual Funds
Mutual funds offer growth and stability and professional management which is a haven for new investors but knowing these advantages of mutual funds can boost your investment journey.
The first lesson of finance class is never put your eggs in one basket but I would say this is the most important lesson to remember. A mutual fund is based on this principle – Diversification.
Your fund is put in different asset classes so that your portfolio shines even during a crisis. It saves the funds with the heavy fluctuations in the markets and gives us the positive result of the finance journey.
Time, Risk and Return are the major factors for the allocation of funds in different classes.
A new investor can lose much of their investment if they are mistaken with this rule but a mutual fund gives you the expert management of funds with a small percentage of fees from your investment.
Mutual Funds are regulated by the Securities and Exchange Board of India. It safeguards investors and creates transparency in the structure.
One thing that discourages us from beginning the investment is affordability its hard to put a high chunk of your salary into portfolios.
but mutual fund helps us with a Systemic Investment Plan that starts with a minimal amount of Rs. 500.
Age groups between 15-20 can easily go for SIPs and have better wealth creation in future.
When we invest our funds the first thing we think of is tax and how we can save it.
How to invest and save tax together is our dilemma. ELSS helps us save in tax with investment.
Disadvantages of Mutual Funds
With numerous benefits and enthusiasm of investment endeavours, we forget to evaluate the expense ratio and a big amount of our money is gone for nothing.
The expense ratio covers management fees, sales cost and marketing etc which directly affects our returns.
ELSS and some fixed mutual funds come with the lock-in 3 years and due to its illiquidity feature there is no usage of our saved fund in the emergencies
Too much of anything is bad but it can result in worse in the case of finances.
Diversification generates gains and over-diversification dilutes the profits by too much investment in too many assets resulting into losses.
How to start investing in mutual funds:-
Through AMC Website
- Visit the website of AMC and open a new account
- Provide your details for investment you want to make
- Fill the relevant form ( FATCA) Foreign Account Tax Compliance Act
- Provide your bank details and upload the image of the cancelled cheque
- Verify your KYC which can be easily done with AADHAR.
If you want to go for the offline mode you can visit the AMC local office with the relevant documents mentioned above and pay the applicable fee for the same.
Through DEMAT Account
If you already hold a DEMAT Account you don’t need to make any extra effort for mutual funds investment.
You can log in to your DEMAT account and choose the plan by adding money to the Account.
This method can be costly as you have to pay an agent for the services and it can be time-consuming.
You need to contact your mutual fund distributor and go through the KYC application process with a cancelled cheque.
AMC have their own has an app and there are third-party apps that pro that provider for mutual fund investment some of the apps don’t charge any hidden charges or brokerage with easy wintertime-consuming support etc.
Mutual funds have got you covered in every domain of investment.
From diversification to tax-saving benefits and Innumerable options to choose from according to your goal.
It can concern us with over-diversification and expense ratio but if evaluate properly it can lead to major growth of your funds in future.