What is a Mutual Fund?
Mutual Fund is an investment product that helps you create wealth and just like Fixed Deposits, RDs and Postal schemes, Mutual Funds too are regulated by the Government .
In India, Unit Trust of India (UTI) the 1st Mutual Fund was started in 1963 as an initiative of the Government of India and the RBI. The objective was to move investors from debt products like Fixed Deposits to other investment products. SBI Mutual Fund was the 1st public sector Fund which started in 1987. A lot of private sector funds like Reliance Mutual Fund, Franklin Mutual Fund, Aditya Birla SL Mutual Fund and others have come up since then. The government has been promoting the growth of Mutual Funds in India by offering it’s investors tax exemption and indexation benefits.
The advantage of investing in Mutual Funds is that they are operated by experienced fund managers who are expert at picking stocks/ bonds and handling market fluctuations. The job of the fund manager is to ensure that the fund generates high returns and offset any potential losses. Basically your money is managed by an expert professional who understands the financial market really well and can make better investment choices for you.
Types of Mutual Funds
Mutual Funds are broadly categorised as Equity Funds or Debt Funds.
In Equity Funds, the fund has invested in shares of multiple companies. Equity Funds generate a return of 15% or more. Under Equity Funds you have Large Cap, Mid and Small cap Funds, Balanced Funds, Sector Fund, Thematic fund, Infra Fund, ETF and Arbitrage funds.
Debt Funds just like Fixed Deposits, PPF, NSC and even insurance invest in Loans to Government and Companies. Comparatively they give a higher return of 8-9%. Based on the time horizon, there are long term and short term(liquid funds) debt funds, ultra short funds, Gilt funds etc.
Allotment of units and NAV
When you invest in Mutual Funds, you buy a piece of the fund equal to the amount you invested. In return you receive units at the NAV of the day. NAV in simpler terms is the price of each unit of the Fund. If you invested Rs5000 at a NAV of Rs50 then you will receive 100 units, if the NAV is Rs52 then you get 96.15 units.
When the fund performs well, the NAV rises and vise versa. The higher the NAV at the time of selling the more is your profit. The NAV may also fluctuate because of changes in the market conditions. This is why when you buy Equity Mutual Funds, you should stay invested for at least 5 years.
How does one earn returns in a mutual funds?
Your Mutual fund investment returns can be of two types:
Dividend: When Fund Houses make profits, they share it with its investors in the form of dividends.
Capital Gains: When you sell your units at a higher NAV, then the difference in the price it is called capital gain. It is the profit that you have made.
Why you should invest in Mutual Funds?
1) Mutual Funds offer diversification– One of the main objectives of Mutual Funds is to offer diversification to its investors. So instead of buying 1 or 2 company’s stocks or bonds, the fund invests in multiple (typically 50+) companies or bonds. This ensures that while you get high returns, your risk is lower.
2) Generates High returns– Mutual Funds are highly recommended by financial advisors and wealth managers for the high returns they generate especially when compared to other products like Fixed Deposits, PPF and ULIPs. They also help beat inflation and gives your money a much needed boost.
3) Allows low amount of investments– You can buy stocks, bonds, gold and even real estate with as little as Rs500 through Mutual Funds which otherwise would not be possible. To individually own any of these assets requires a huge capital investment.
4) Tax efficient- Long term capital gain in Equity Funds are tax exempt and that in Debt Funds are taxed at 20% with indexation. This reduces your tax liability. There are no TDS in Mutual Funds which means your tax is deferred until you pay it. This gives you a higher in hand income.
5) Offers liquidity– Mutual Funds offer the highest level of liquidity after saving accounts. You can sell your units as and when you like at any time of the day through your phone.
6) Well regulated– All Mutual Funds are strictly regulated by SEBI to protect the interests of the investors. These Funds are regularly monitored and audited to ensure all the rules and guidelines are followed.
Mutual Funds are an ideal investment product for your long term and short term investments. MintWalk can help you find and invest in the best performing Mutual Funds which will be just right for you.
To start investing in Mutual Funds click here.
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