A mutual fund is an investment vehicle that pools money from various investors and invests the collected corpus in a variety of asset classes such as equity, debt, gold, foreign securities, and so on. Mutual funds are becoming increasingly popular in India as a result of the numerous benefits they provide. Mutual funds have an appealing performance history, with returns that are higher than those earned on traditional investment instruments. Mutual funds allow investors to build diversified investment portfolios with as little as Rs. 500.
The professional management of funds is another feature that makes mutual funds a popular choice among investors. A mutual fund is managed by a fund manager, who is an expert in the investment industry with extensive experience. This assures investors that their money is in safe and secure hands. Another factor that adds to investors’ trust in mutual funds is that they are regulated by capital markets regulator SEBI (Securities and Exchange Board of India) and AMFI (Association of Mutual Funds in India) (Association of Mutual Funds in India).
Shares of a company are purchased by equity investors with the expectation that their value will rise in the form of capital gains and/or capital dividends. If the value of an equity investment rises, the investor would receive the difference if they sold their shares or if the company’s assets were liquidated and all of its obligations were met. Equities can improve a portfolio’s asset allocation by diversifying it.
In India, there are various types of mutual funds.
According to SEBI, mutual funds are broadly classified into three types: equity funds, debt funds, and hybrid funds.
An equity fund is a mutual fund that invests at least 65% of its assets in equity and equity-related instruments. It can invest the remaining 0-35% in debt or money market securities. Equity funds can provide relatively high returns because they invest primarily in stocks of companies that are sensitive to changes in the stock market and the economy. As a result, equity funds have a higher risk quotient than debt funds. There are 11 types of equity funds, according to SEBI classification. ELSS (Equity Linked Savings Scheme) – one of the most popular – is one of them.
An ELSS invests at least 80% of its total assets in equities. An ELSS is the only equity fund that is eligible for a tax deduction of up to Rs. 1.5 lakh under Income Tax Act Section 80C. An ELSS has a three-year lock-in period.
Debt funds are mutual funds that invest the majority of their assets in debt and money market securities. According to the Income Tax Act, a debt fund is a mutual fund that invests less than 65 percent of its total assets in equities. Debt funds are preferred by investors primarily because they carry lower levels of risk. Debt is less risky for them because they take on less risk. In India, funds provide long-term returns that, while higher than those provided by fixed-income investments, are lower than those provided by equity funds. According to SEBI classification, there are up to 16 different types of debt funds.
Liquid funds are the most popular type of debt fund in terms of AUM (Assets Under Management), as they are frequently used by corporations to park excess cash for short periods of time. A liquid fund primarily invests in debt and money market securities with maturities ranging from one to ninety days. Liquid funds are the least risky of all debt funds due to their shorter maturity period. Liquid funds typically outperform savings accounts in terms of returns while being significantly more liquid than fixed deposits
As the name implies, a hybrid fund is a mutual fund that invests in two or more asset classes, such as equities, debt, money market instruments, gold, foreign securities, and so on. A hybrid fund typically only invests in two asset classes: equity and debt. The combination of equity and debt allows a hybrid fund to generate returns comparable to equity funds while taking on lower risk levels than debt funds. There are seven types of hybrid funds, according to SEBI classification.
The Dynamic Asset Allocation Fund is the most popular type of scheme in this category. A Dynamic Asset Allocation Fund can invest any percentage of its assets in either equity or debt, ranging from 0% to 100%. Typically, this type of fund seeks to sell equities and book profits in overvalued equity market conditions, while doing the opposite in attractive equity market valuations. During a bull market, a Dynamic Asset Allocation Fund reduces its debt exposure in undervalued markets and increases its debt holdings.
The following are some of the advantages of investing in mutual funds:
A mutual fund investment can be started with as little as Rs. 500, and there is no maximum amount that can be invested. However, keep in mind that in the case of ELSS investments, the tax benefit is only available up to the Rs. 1.5 lakh 80C limit in a fiscal year.
An investor can benefit from the professional management of his or her funds by an expert fund manager by investing in a mutual fund. For the administration and management of a mutual fund scheme known as Expense Ratio, fund houses charge a nominal fee. A mutual fund’s expense ratio typically ranges from 0.5 percent to 1.5 percent and cannot exceed the 2.5 percent limit set by SEBI. The returns generated by a mutual fund scheme after deducting the applicable expense ratio are always mentioned by fund houses.
Over a five-year period, mutual funds provide long-term returns ranging from 7% (in the lowest risk-carrying liquid funds) to 15% or higher in the case of most equity funds. These inflation-beating returns provided by mutual funds are one of the primary reasons why many people prefer these market-linked investments to fixed income instruments like fixed deposits.
Mutual funds provide investors with access to a diverse investment portfolio that can include equities with varying market capitalisations as well as debt and money market instruments for as little as Rs. 500. A mutual fund’s diversified investment portfolio enables it to provide an unrivalled balance of risk and return.
A systematic investment plan (SIP) is a method of investing in mutual funds that allows investors to invest a set amount in a mutual fund scheme at regular intervals (daily, weekly, monthly, bi-annual or annual). SIP investments mitigate the financial risk associated with a lump sum investment. It also allows an investor to increase or decrease their investment based on their current financial situation.
An Equity Linked Savings Scheme (ELSS) is a type of mutual fund that provides an investor with a tax benefit in addition to the benefits listed above. An ELSS has a three-year lock-in period, and each ELSS investment is eligible for a tax deduction of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act. Even in the case of other (non-ELSS) equity schemes, capital gains from unit redemption are tax-free up to Rs. 1 lakh per fiscal year.
While many experts will tell you that investing in mutual funds is one of the best ways to grow your wealth, it is perhaps even more important to understand how mutual funds work. Let us examine the operation of mutual funds from the time an Asset Management Company (AMC) or fund house decides to launch a mutual fund until it begins to provide attractive returns:
A mutual fund is an excellent choice for all types of investors. The diverse range of mutual funds has something to offer every type of investor, regardless of risk tolerance or investment objective. Mutual fund investments can thus be made by both individual retail investors and institutional investors.
The appropriate time to invest in a mutual fund scheme is determined by the following factors:
Funding Availability
Stock Market Condition
National Economic Situation
That being said, if you are investing systematically, you should begin investing right away and stay invested for as long as possible to reap the benefits of compounding.
It is critical to be aware of and comprehend the tax implications of mutual funds. Dividends and capital gains are the two types of earnings from a mutual fund investment, and they are taxed differently. While the mutual fund company deducts Dividend Distribution Tax (DDT) at a rate of 10% from the dividend paid to you, capital gains tax is taxable in the investor’s hands.
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