Mutual Funds Through my blogs, I have explored some of the various assets in which you can invest and grow your money. Today, we will talk in detail about one such specific asset- mutual fund. Yes, you heard it right. The very same term you have heard popping in ads between your favorite TV show where your favorite stars advocate taking risks and start investing in them. This blog will go into detail of what really is a mutual fund, and its various other characteristics, and whether it is really the correct choice for you. Without any further digression, let’s get the balls going!
A mutual fund is a collective pool of money that is gathered from the people who decide to invest in a fund and this collected money is then parked (or in turn, invested) in any other asset that the investor wants. Such investments are often regulated or managed by a fund manager. When the investments made by the fund manager using this pooled money has returns, the loss/profit is shared equally by all the contributors in the fund in the proportion of their contribution in the same.
Let’s say SBI Mutual Funds
comes up with an open-ended equity scheme, then this would mean that whoever invests in the fund, the person’s money will be automatically invested in equity shares. Let us suppose that the price of an original unit in the fund is Rs. 1000. Therefore, to invest in the fund, you put in Rs. 1000. When the share prices rally, the net value of the assets also starts to increase. So, the asset that was worth Rs. 1000 when you purchased it, will now be worth more than that depending on how much did the asset value rise. Now you, that is, the investor, has the option to either keep the money invested, or you can sell it back to the mutual fund at this new increased price. If someone buys this unit in the future, they will now have to pay the new increased price as opposed to the Rs. 1000 you paid.
Mutual funds are a good start to a person’s investing habits because they can be started at as low as an investment of Rs. 500 a month through SIP (Systematic Investment Plan). SIP that is the most popular choice for new investors, lowers the overall cost of investment along with giving the benefit of compounding belief as opposed to that of a lump sum investment. Apart from this, under Section 80C of the IT Act, returns up to a maximum of Rs. 1.5 lakhs per financial year are given tax deductions. Due to its higher returns and shortest lock-in period of 3 years among all the Section 80C options, Equity Linked Savings Scheme has become a renowned tax-saving option for Indians. Another factor that makes investors choose mutual funds is that they are handled by professional fund managers. Backed by intense research and study, these people make the best strategies for what you need and devise an investment plan accordingly. So, you don’t have to worry about investing the money in a wrong asset or at a wrong time, because you have experts monitoring the markets and looking out for your interests.
To invest in mutual funds, you need to have some pre-requisites apart from your general research of the field. First and foremost, you need to be a “KYC compliant” which is basically a submission of your photographs, address proof, PAN card, and date of birth proof. After that, you have to approach either the mutual fund house, or you can approach the brokers for investment purposes. And this is how you get started with your journey.
The type of mutual fund you should invest in depends on your ability to take risks and also your age, which is linked to the first and vice versa. If you are a young person, you can literally invest in any mutual fund scheme out there, as long as it is in accordance with your goals. If you have just started your career, you can also invest in equity related mutual funds. In this type of mutual fund, as high as 80% of the money you invested is put in shares. This however, involves high risks. You might face both high returns, or a loss. Since, it involves risk taking, investors in their older ages are advised to refrain from such investments. For them, the ideal mutual fund category would be the debt related mutual funds. These funds, as opposed to equity ones, put their money in instruments like government securities. Hence, the risks involved are also lower. For people who are able to take medium level of risk, can choose to invest some part of their money in equity related while the rest in debt related mutual funds, the proportion depending on the risk taking capacity of the investor.
The investor receives returns from mutual funds either in the form of dividends or capital gains. The investments made wither rise in their price through capital appreciation, or the companies pay a portion of their own profits to shareholders in the form of dividends. In simple words, capital gain is the profit after you sell a long-term asset, whereas dividend is the income that is received from the profits of a company. So, while the former coverts your share/asset into one time cash, the latter can provide you steady periodical income. Also, capital gains are taxed differently depending on whether they were short-term or long-term, whereas dividends are charged at a flat rate. Well, isn’t your head buzzing and tired with all this technical terminology? Mine sure is. So, let’s put a pause to this discussion. I am sure this must have been a jam-packed blog to go through. In lieu of the heavy introduction we just had to mutual funds, let’s take a break, relax and then come back to see what more mutual funds have to offer for us. Until this break gets over !ss