Mutual fund investments are a preferred choice for investors with modest stock market knowledge willing to earn good returns. It is an avenue that opened the doors of gaining paralleled returns of stock markets for all the categories of investors. With various mutual fund apps, investing has become easier than ever before. However, it is always wiser to understand the mutual fund in detail before investing in the same.
What are Mutual Funds?
A mutual fund is a professionally managed pool of money raised from investors to further invest in underlying assets consisting of equity, debt, gold, index, or other securities. The fund is managed by a fund manager who makes all the investment and administration-related decisions.
Before you begin your mutual fund investment journey, here’s everything you should know:
- Returns: Returns in mutual fund investments primarily depend upon the scheme and performance of the underlying asset. The scheme plays an important role, and therefore, you will receive returns based on your decisions and selection of the scheme. Mutual funds have historically provided 1-year returns ranging between 6% to as high as 30%. Stock market performance, asset class performance, economic factors, associated risk, etc., all contribute towards the returns. Therefore, it is recommended to have a personal finance roadmap and goals before you begin investing.
- Risk: Your risk appetite plays an important role in the selection of the scheme. If it’s high, you can consider investing in small-cap funds, and if you are risk-averse, then large-cap funds, index funds, and debt funds are the alternatives. Whatever you choose, returns will be affected by your decisions. As the thumb rule goes, ‘Higher the risk, higher the returns.’
- Expense Ratio: The expense ratio in mutual fund investments is the cost associated with the management and administration of the fund. Lower the expense ratio, better the returns for the investors as the investor receives returns after adjusting the expense associated with a mutual fund.
- Tax Benefits: Investment in Equity Linked Saving Scheme (ELSS) mutual funds offers tax benefit under Section 80C of the Income Tax Act, 1961. The deduction allowed is up to Rs. 1,50,000, subject to the lock-in period of 3 years.
- Time Horizon: The longer you stay invested, the higher your investment grows. This is primarily because, in the long run, mutual fund investments offer compounding benefits to the investors.
- Ways of investing: Mutual fund investments can be made in two ways:
- Regular: Regular investments in mutual funds are made through a mutual fund agent or distributor for which he receives the commission. This increases the expense ratio of the fund, which diminishes investors’ returns.
- Direct: Here, investments are made directly through the AMC. This saves commission costs, which in the long run, increase investor’s returns manifold due to compounding benefits.
- Mode of investing: Mutual fund investment can be made through the following modes:
- Lumpsum investment: It is a one-time investment for those investors looking to park their excess funds.
- Systematic Investment Plan (SIP): It is the mode where a specified amount is invested regularly over a period of time. It is directly deducted from the bank account each month on a predetermined date and invested in the plan. SIPs are of two types:
- Regular SIP: This is the normal SIP with no insurance benefit.
- SIP Insured: Here, the investor is also provided insurance protection upon fulfillment of minimal conditions. The sum insured is usually 80 to 120 times the SIP amount.
- Types of schemes: Mutual funds offer various types of schemes, thus offering diversification benefits. You can either invest in small-cap, mid-cap, large-cap, hybrid funds, index funds, gold funds, etc., to name a few. Each scheme has its own set of features and benefits to suit the investor’s needs.
Mutual fund investment can be a great diversification tool for your portfolio if you are a seasoned investor. If you are a novice and new to stock market investing, mutual funds can be a great start. Nowadays, investing has become easier because of various mutual funds app providing investment facilities online. You just need to install any mutual fund apps, determine your needs and goals and start investing.