Let's glance at why should one consider investing in mutual funds over other options to achieve their financial goals:
Professional Managers
Mutual funds are managed by professional people who have years of experience handling different types of assets. They are a group of dedicated team that handles all financial decisions based on the performance & prospects available in the market.
Offers Convenience
If saving time & convenience is what you seek then mutual funds are an ideal choice for investment. Because of low investment amount options, multiple choices based on one's life & financial goals, offering the ability to redeem them on any business day, mutual funds are much sought after.
Diversification
Mutual funds help counter risks to a large extent by equally distributing your investments across diverse range of asset classes. Mutual funds work by the adage “Do Not Put All Your Eggs in One Basket”.
Counter Inflation
Investing in mutual fund is a smart way of beating inflation as it helps investors to generate inflation-adjusted returns, without spending much time or energy on it. This ensures that the purchasing power of your money remains strong over time.
Less Expensive
As compared to investing directly in capital market, mutual funds offer investors the advantage of low cost investment. Most stock options require a huge capital to begin with, on the other hand mutual funds can be started with as low as Rs.500 per month & investors can derive benefit from the long-term equity investment.
Safe & Transparent
Since every mutual fund is managed & regulated by SEBI, you need not worry as your investments are safe. SEBI has several regulations & legal frameworks in place which ensures that your investments are managed in a disciplined manner. While every investment carries risk, proper diversification and expert management can help generate strong returns.
Equity Funds
These are type of funds that primarily invest in stocks and main investment objective of this class of funds is long term capital growth. Further, there are many types of equity funds which are categorized based on the size of the companies like large, medium or small.
Debt Funds
These funds are known as safe investments and provide fixed returns. In these, funds are invested in debt instruments like company bonds, government bonds, fixed income assets.
Money Market Funds
A money market mutual fund is a kind of mutual fund that invests in ultra-safe or low-risk securities. The purpose of the fund is to conserve the capital of the fund and it is unusual to see the NAV of a money market mutual fund go below one. The NAV can go below one if the securities do badly but it is quite rare to happen.
Income Funds
Income Funds mainly focus on generating regular income for the investors by investing in high dividend generating stocks, government securities, certificate of deposits, corporate bonds, money market instruments, and debentures.
International Funds
The international fund usually refers to an investment or mutual fund composed of international bonds and foreign company stocks.
Bond Funds
A bond mutual fund invests in debt instruments issued by governments and/or corporations. Most of these funds are designed to provide interest income for shareholders in the form of dividends that represent the total interest payments made by all bonds in the fund's portfolio.
Dividend Fund
This type of mutual funds invests in stock of companies that pay dividends, which are profits that a company shares with its stakeholders. These are income generating funds & tend to be less risky than other types of funds. It is a good choice of investment for those who seek regular payments over appreciation.
Balanced Funds
The strategy used by these funds are to maintain a certain percentage mix of both fixed income & equities. Normally, a typical balanced fund will maintain a distribution of 60% equity & 40% fixed income. A similar type of fund known as “Asset Allocation Fund” follows similar objectives but does not hold any fixed percentage of any asset class.
Systematic Investment Plan (SIP) is a very easy & convenient mode of making investments in mutual funds on a regular basis. SIP allows one to cultivate a habit of savings & creating wealth for the future by starting early.
Offering ease & flexibility, SIP enables a planned approach towards investing. The investment amount gets auto-debited from the investor’s account and is invested into a selected mutual fund scheme. Based on the current market rate, units are allocated and continue to accumulate with each installment.
SIP has proved to be an ideal investment option for retail investors who may not have the time or expertise to actively track the market.
Convenience
Offering a hassle-free mode of investing, SIP allows automatic deduction from your bank account through a standing instruction.
Disciplined Saving
SIP encourages regular investing, helping you build a strong habit of saving and achieving your financial goals.
Flexibility
You can increase or decrease your investment amount as per your needs, though long-term continuation is recommended.
Long Term Gains
SIP benefits from the power of compounding and rupee cost averaging, helping you generate better returns over time without timing the market.
STP is a method where an investor puts a lump sum amount in one scheme and systematically transfers a fixed amount into another scheme of the same mutual fund house.
Over time, STP helps reduce risk and generate better returns by gradually shifting investments from one asset class to another.
In simple terms, STP means transferring investments from one asset type to another in a phased manner.
Fixed STP
A fixed amount is transferred at regular intervals from one scheme to another.
Capital Appreciation STP
Only the profit portion is transferred to another investment.
Flexi STP
The investor can transfer a variable amount based on market conditions.
Helps in Re-balancing Portfolio
Allows shifting between equity and debt to maintain a balanced portfolio.
Consistent Returns
Enables investment in equity while keeping part of the funds safe in debt instruments.
Averaging of Cost
Helps in buying units at different price levels, reducing overall cost.
Time plays a crucial role in building wealth. Investments grow significantly when earnings are reinvested over a long period.
Compounding means reinvesting your returns so that your money generates more returns over time.
The longer you stay invested, the greater the growth of your investment due to compounding.
Higher returns and longer duration lead to exponential growth of wealth. That is why starting early is always recommended.
ELSS (Equity Linked Savings Scheme) is an equity-based mutual fund that helps investors save tax under Section 80C while also offering wealth creation opportunities.
Key Advantages
• Avail tax deductions under Section 80C
• Benefit from the power of compounding
• Returns are tax-free after the lock-in period
• Potential for higher returns
• Minimum lock-in period of 3 years
ELSS funds are diversified equity funds that provide both capital appreciation and tax benefits. They are ideal for long-term investors willing to take moderate risk.
Equity's Potential in Getting Return
Equity investments offer higher long-term growth potential compared to traditional tax-saving instruments.
Tax Saving Instrument
Investments qualify for deductions under Section 80C, and long-term gains can be tax efficient.
Outperforming Funds
ELSS funds have the potential to deliver higher returns compared to many traditional options.
Financial Goal Planning
Helps achieve long-term goals like home purchase, education, and retirement.
Less Lock-in Duration
Only 3-year lock-in, lower than PPF, NSC, and many other schemes.
Investment Option
You can invest via lump sum or SIP depending on your preference.
Fixed Deposits and Debt Mutual Funds are popular low-risk investment options. However, they differ in returns, taxation, and flexibility.
Fixed Deposits are known for safety and fixed returns. However, interest earned is taxable based on your income slab, and TDS may apply.
These funds invest in debt securities and offer better flexibility as there is no fixed maturity date. Investors can withdraw anytime and may benefit from tax efficiency depending on holding period.
Risks include credit risk, interest rate risk, and liquidity risk, but they are generally less volatile than equity funds.
Returns
Mutual Funds: Market-linked returns
Fixed Deposits: Fixed returns
Capital Gain
Mutual Funds: Possible gains or losses
Fixed Deposits: No capital gain
Taxation
Mutual Funds: Tax only on redemption
Fixed Deposits: Interest taxed annually
Liquidity
Mutual Funds: Easy withdrawal anytime
Fixed Deposits: Penalty on premature withdrawal
Flexibility
Mutual Funds: No fixed maturity
Fixed Deposits: Locked till maturity
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