Mutual Fund

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Mutual Fund

A mutual fund is an investment vehicle where many investors pool their money to earn returns on their capital over a period. This corpus of funds is managed by an investment professional known as a fund manager or portfolio manager. It is his/her job to invest the corpus in different securities such as bonds, stocks, gold and other assets and seek to provide potential returns. The gains (or losses) on the investment are shared collectively by the investors in proportion to their contribution to the fund.

Benefits Of Mutual Fund

1) Professional expertise

Consider a situation where you purchase a new car. But the catch here is that you don’t know how to drive. Now, you have two options:

i) you can learn how to drive
ii) you can hire a full-time driver

In the first scenario, you would have to take driving lessons, pass the driving test and obtain a license. But if you don’t have the time for driving classes, it is better to opt for a driver. The same is the case with investments.

Investing in financial markets requires a certain amount of skill. You need to research the market and analyze the best options available. You need knowledge on matters such as macro economy, sectors, company financials, from an asset class perspective. This requires a significant amount of time and commitment from you.

But if you don’t have the skill or the time to delve deep into the market, investing in mutual funds can be an excellent alternative. Here, a professional fund manager takes care of your investments and strives hard to provide reasonable returns. And just as you would pay the driver for his chauffeuring services, you have to pay specific fees for the professional management of your mutual fund investments.

2) Returns

One of the biggest mutual fund benefits is that you have the opportunity to earn potentially higher returns than traditional investment options offering assured returns. This is because the returns on mutual funds are linked to the market’s performance. So, if the market is on a bull run and it does exceedingly well, the impact would be reflected in the value of your fund. However, poor performance in the market could negatively impact your investments. Unlike traditional investments, mutual funds do not assure capital protection. So do your research and invest in funds that can help you meet your financial goals at the right time in life.

3) Diversification

You may have heard the saying: Don’t put all your eggs in one basket. This is a famous mantra to remember when you invest your money. When you invest only in a single asset, you could risk a loss if the market crashes. However, you can avoid this problem by investing in different asset classes and diversifying your portfolio.

If you were investing in stocks and had to diversify, you would have to select at least ten stocks carefully from different sectors. This can be a lengthy, time-consuming process. But when you invest in mutual funds, you achieve diversification instantly. For instance, if you invest in a mutual fund that tracks the BSE Sensex, you would get access to as many as 30 stocks across sectors in a single fund. This could reduce your risk to a large extent.

4) Tax benefits

Mutual fund investors can claim a tax deduction of up to Rs. 1.5 lakh by investing in Equity Linked Savings Schemes (ELSS). This tax benefit is eligible under Section 80C of the Income Tax Act. ELSS funds come with a lock-in period of 3 years. Hence, if you invest in ELSS funds, you can only withdraw your money after the lock-in period ends.

Another tax benefit is the indexation benefit available on debt funds. In the case of traditional products, all interest earned is subject to tax. However, in the case of debt mutual funds, only the returns earned over and above the inflation rate (embedded in cost inflation index {CII}) are subject to tax. This could also help investors earn higher post-tax returns.

How are Mutual funds and investment goals related?

Now that you know the different types of mutual funds, the question arises: ‘Which is the best mutual fund?

Well, there is no single or right answer to this question. This is because fund houses design mutual funds to achieve specific financial goals. And as an investor, you need to know which mutual funds can help you achieve your goals in the best way possible.

All your investment goals can be categorized into three broad groups:

1) Short-term goals (1-3 years): For instance, going on a family vacation in 18 months, buying a car, etc
2) Medium-term goals (3-5 years): For instance, doing a short term course in digital marketing in 3/4 years
3) Long-term goals (5 years or more): For instance, buying a house in the next 5-7 years

Life insurance is a financial resource for your family and loved ones in case of your death. It is a cover that allows your family to maintain a standard of living as they are currently, and meet their financial obligations.
It also serves as an effective investment and tax-saving tool.