Mutual Fund
A mutual fund is an investment vehicle, which pools money from investors with common investment objectives. It then invests their money in multiple assets, in accordance with the stated objective of the scheme. The investments are made by an asset management company. Mutual fund has been preferred by retail investors to invest money and for wealth creation in long term.
Benefits of investments in Mutual Funds
Investments in mutual funds can be made in both ways, lump sum and systematic investments. Depending on the needs of the investors, momentum of the financial markets and other economic factors, we help you to take the decision for investments in mutual.
Advantages of investing in mutual funds vis-à-vis direct equity
Professional Management: Mutual funds offer investors the opportunity to earn an income or build their wealth through professional management of their investible funds based on adequate research, and ensuring that prudent investment processes are followed.
Affordable portfolio diversification: Units of a scheme give investors exposure to a range of securities held in the investment portfolio of the scheme. Thus, even a small investment of Rs. 500 in a mutual fund scheme can give investors a diversified investment portfolio.
Economies of Scale: The pooling of large sums of money from so many investors makes it possible for the mutual fund to engage professional managers to manage the investment. Individual investors with small amounts to invest cannot, by themselves, afford to engage such professional management. Large investment corpus leads to various other economies of scale. For instance, costs related to investment research and office space get spread across investors. Further, the higher transaction volume makes it possible to negotiate better terms with brokers, bankers and other service providers.
Liquidity: Investors in a mutual fund scheme can recover the value of the moneys invested, from the mutual fund itself. Depending on the structure of the mutual fund scheme, this would be possible, either at any time, or during specific intervals, or only on closure of the scheme.
Tax Deferral: Mutual funds offer options, whereby the investor can let the moneys grow in the scheme for several years. By selecting such options, it is possible for the investor to defer the tax liability. This helps investors to legally build their wealth faster.
Tax Benefits: Specific schemes of mutual funds (Equity Linked Savings Schemes) give investors the benefit of deduction of the amount subscribed (upto Rs. 150,000 in a financial year), from their income that is liable to tax. This reduces their taxable income, and therefore the tax liability. Also the Rajiv Gandhi Equity Savings Scheme (RGESS) offers a rebate to first time retail investors (in equity or mutual funds) with annual income upto Rs. 12 lakhs.
Dividends received from mutual fund schemes are tax-free in the hands of the investors. However, dividends from certain categories of schemes are subject to dividend distribution tax, which is paid by the scheme before the dividend is distributed to the investor.
Long term capital gains arising out of sale of some categories of schemes are subject to long term capital gains tax, which may be taxed at a different (and often lower) rate of tax
Convenient options: There is a great transaction convenience like the ability of withdraw only part of the money from the investment account, ability to invest additional amounts to the account, setting up systematic transactions, etc
Benefits of investment in SIP
- SIP is a disciplined and hassle way manner of investing in mutual funds and creation of wealth, including:
- Disciplined investment: SIP cultivate the habit of staggered and continues investment in mutual funds in long term in a timely manner. SIP helps impart financial discipline and inculcates regular saving habits. The money gets automatically invested in a scheme at regular intervals, without any effort from your part.
- Rupee cost averaging: SIPs is a wealth creation tool that allows investors to invest a certain predetermined amount on a regular basis (weekly, monthly, quarterly, etc.) in a mutual fund scheme. An efficient SIP investor is one who takes into account the performance of the equity market and buys 'low' and sells 'high'. This simply means that you need to purchase more units of a mutual fund at the time when the markets are down and fewer units when the markets are up. Thus, the overall investment cost is averaged.
- Compounded benefits: The earlier you start investing, the more wealth you are able to create for yourself. SIP functions quite like a recurring deposit. The main difference is that in SIP, a sum that you choose gets invested in a mutual fund scheme of your preference on a specified date regularly for the pre-determined duration, and not in a bank deposit, as is the case with recurring deposits. Thus investments for a long period helps you to get the better compounded returns over time, i.e., the returns earned gets reinvested thus helping in earning better.
- No need to time investments in market: SIP allows individuals to invest regularly without wrestling with market sentiment, index level, etc. Say, for instance, you have opted for a mutual fund scheme where you have to put a certain sum of money every month. Not only would you have to make time to do it, you may also have concerns about the market conditions and possibly even think about postponing your investments
- Can start with small investment and gradually increase: For the convenience, an investor could start a SIP with as low as Rs 500; however, this amount may differ from one fund house / scheme to other. Schemes of various mutual funds also provide a top up facility wherein an investor can periodically increase the monthly investment after a certain specified period
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