What is a Mutual Fund? and investment procedure

What is a Mutual Fund?

For many, the term ‘mutual-fund’ may feel complicated or daunting. This is an investment procedure where many people deposit their money to earn good returns within a certain period of time. The mutual fund is managed by experts in fund managing. A good advisor can guide you in maximise your returns and minimise the risk. The investors of mutual fund share a common investment goal. You can invest money in equities, bonds or securities. The profits can be distributed collectively by the depositors in percentage for their shares to funds.

Why do we invest in Mutual Funds?

There are many reasons for people to invest in mutual funds. We can analyse a few advantages of investing in mutual funds.

1. A Differentiated Portfolio

The main benefit of investing in mutual fund is that the investors have a big exposure to variety of shares or fixed income ways. For example, if you want to invest Rs.1000 in stocks, you will get only one or two shares. On the other hand, if you invest through mutual funds, you will get a bunch of several stocks for the same amount. In case a few securities in portfolio do not work, others may compensate. Mutual funds promise diversification in this way.

2. Fund for Everyone

One of the significant features of mutual fund is that you have more than 2000 active schemes to choose from. Investors can choose their funds according to the risk, personal goals and investment range. If you analyse them risk wise, we can understand debt funds are less risky, hybrid funds are moderate and equity shares are high risky. Even within these categories, there are more choices. Equity funds are less volatile with low and steady returns. Hybrid funds can fluctuate mildly but would provide a higher returns. Whereas, debt funds that invest in corporate paper would offer high returns.

3. High Liquidity Benefits

Investing in open-ended mutual funds allow you to buy or sell your units any time. The total redeemable value can be based on the net asset value of a particular fund for that day. Close-ended funds also can be too liquid. Even if they are for a fixed period, they may be put for an exchange once the New Fund Offer closes. Hence, there is always a high level of liquidity for open-ended or close-ended funds.

4. Lump sum or SIP?

The flexibility to choose the plan is another major advantage of mutual funds. Either you can choose a lump sum investment plan or Systematic Investment Plan (SIP). Lump sum plan is a good option for those who have idle cash. By opting SIP, you can invest in lesser amounts on a regular basis which would be a great choice. This is advisable for beginners and lump sum investment can be ideal for investors who have better understanding of mutual funds.

5. Invest in Small Amounts

Mutual Funds provide you the flexibility of investing in SIP with a least amount of Rs.500. You can start the investment anytime and do not want to wait until cash accumulates. So investors get the chance to make maximum use of the available amount in their hand and get returns for that.

6. Cost-Efficient

Mutual funds investments are really cost-efficient. Buying equity directly can have brokerages and security taxes. So if you have a larger number of transactions, the costs will also be higher. Mutual funds have the benefits of cover investors in that, they don’t charge more and have no-load index funds also.

7. Save Taxes

One of the most important advantage of investing in mutual fund is that you can save income tax through Equity Linked Saving Scheme (ELSS). The maximum amount of investment in mutual fund is eligible for up to 1.5 lakhs of tax reduction as per the Tax Act in 1961.

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