Understanding Mutual funds.




Lately with an increase in investor awareness programs, access to the apps that allow an easy of investing and all the information available on various platforms. The number of people entering or willing to explore more and more investing avenues is increasing with multifold year on year. 

One of the most common and best available avenues for the new and no nothing investor are a mutual fund. The mutual fund industry has grown rapidly in the last decades due to its ease of access and various other benefits. Also, the "Mutual Fund Sahi Hai" campaign has boosted the interest of novice investors. 

In this article, we will be know all about mutual what. How it works and what are its advantages and disadvantages?

Wikipedia defines mutual fund as-  "A professionally managed investment fund that pools money from many investors to purchase securities. These investors may be retail or institutional in nature. Mutual funds have advantages and disadvantages compared to direct investing in individual securities." 



Whenever you invest in a mutual fund you give your money to the mutual fund house (also known as Asset management company or AMC), which collects your and hundreds of other investors and then further invest that money into various avenues likes stocks, debentures, bond, corporate FDs, etc.

Every AMC has a fund manager who along with his team of experts makes the investment decisions on behalf of AMC. So basically your money is managed by an expert fund manager. 

Now that we have a brief idea of how mutual funds work let's look for what are the advantages and disadvantages of investing in mutual funds. 

Advantages of Mutual Funds 

1. Liquidity 

Liquidity means how easily your investment can be utilized or converted into cash. It easy to buy and sell mutual funds as compared to other avenues like Bank FD, gold, bonds, etc. The mutual funds can be sold any time subject to the exit load and lockin period. 

2. Diversification 

Mutal Funds always have there share of risks like to minimize such risk the fund manager always invest in more than one asset class (like equities, debt, money market instruments, etc) and more than one security ( buying share of top 100 companies instead of putting entire money in one company). 
This diversification allows the fund manager to minimize the risk and maximize the return. As he chooses an adequate bundle of securities which will contain some safer assets with lower return and some riskier assets with a higher return.

3. Professional Management 

One of the most important benefits of investing in a mutual fund is that it takes the burden of research and analyzing the asset from the investor. All the head storming related to the selection of investments are made by the fund manager. The fund manager with his years of experience and expertise selects the asset and allocation in each such assets class. So you don't have to worry about choosing the wrong investment class. You just have to choose the right mutual fund. 

4. Allows you to start small. 

The main reason mutual funds have become so popular among all income category investors is that you can start investing in the mutual fund with an amount as low as Rs 500. Yes, the mutual fund allows you to invest a minimum amount of Rs. 500 per month through Systematic investment plan.  

5. Tax Efficiency.

The mutual funds offer more tax-efficient returns as compared to the other asset classes. However, this will also depend upon your annual income and tax bracket. If you are in the highest tax bracket (30%) you can easily take advantage of tax-saving through mutual funds. As the maximum rate of tax will be 15% in the case of equity funds and 30% in case debt fund. 

6. Automation of investments

It is common to forget or delay SIPs or prompt lumpsum investments due to any given reason. More often we end up spending our money rather than just investing it. Through SIP mode you can automate your monthly investments to a specific date and you don't have to keep a specific reminder to invest. 

Disadvantages of Mutual Funds 

1. lock-in period 

Some of the funds like ELSS or close-ended funds may have your money locked in for a certain period say three years or so. That means the money can't be taken out before a certain time period. 

2. Exit Load 

Most of the mutual funds come with an exit load for a certain period. for example,it will charge you an amount say0.5% if you take out the amount within a period of three months.

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Comments

  1. Phani KumarMarch 21, 2020 at 4:42 PM

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  2. AdySeptember 1, 2020 at 3:11 PM

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