Mutual fund investment nowadays is a popular way to invest in the financial market. It is an easy way to invest in the financial market and doesn’t require active monitoring. A mutual fund is an investment scheme formed when an asset management company create a corpus by collecting funds from several investors and invest it in various investment vehicles. A fund manager is a professional, who manages the fund and invest the fund in multiple securities, stocks, and bonds. The primary intension is to generate an optimum return by investing in securities in sync with the fund’s objective.
Nowadays, it has become easier to invest in mutual funds as the process has become online.
Types Of Mutual Funds
Here is a genreal classification of mutual funds basis – objective, structure, and nature of asset allocation. When classified based on asset allocation, mutual funds are of three types – equity mutual funds, debt mutual funds, and balanced mutual funds. Hence, the risk of investment depends on the kind of scheme selected.
Equity mutual funds
Equity funds invest up to 65 percent of the corpus into various company stocks, means it generates the highest return among all types of mutual fund schemes.
The returns offered by equity funds depend on market movement, influenced by several eco-political events.
Debt mutual funds
As the name suggests, debt funds invest in various debt instruments, to generate fixed income for the investors, and hence, is low in risk. A debt fund invests up to 65 percent of the capital into debt vehicles. The market doesn’t influence the performance of debt funds, so it appeals to risk-averse investors.
Balanced or hybrid funds offer the best of both worlds. These funds invest in both equities and debt vehicles to generate an attractive return. Hybrid funds appeal to low-risk investors. The primary objective is to diversify the portfolio for a balanced risk-reward. Fund managers would shift the fund between assets depending on market condition, to optimise return and benefit investors.
The modern mutual funds are truly innovative products that cater to a wide range of customers. Select a mutual fund that suits your investment profile.
How To Invest In Mutual Funds Online
The online process has made it really simple to invest in mutual funds. Here are the simple steps to follow while applying for mutual fund schemes online.
- Analyse your risk-appetite and tolerance. The process of understanding the amount of risk one is capable of digesting is called risk profiling. Return on mutual funds depends on market performance. Hence, before you invest, understand how much risk you can digest.
- The second step is asset allocation. After risk profiling, you must consider dividing your fund among various assets to create a diversified portfolio. Ideally, you should invest in both equities and debt funds for balanced return.
- The next step involves researching various mutual fund schemes available for investment that invest in different asset classes. Nowadays, you can perform the homework online. There are numerous websites where you can compare all available MF products and make an informed decision
- Selecting the mutual fund and applying online is the final step of investing in MF. You can also apply offline, the traditional way, but the online process saves time and effort
- Monitoring your investment and diversification is essential to ensure that your investment aligns with your goals
Advantages Of Investing In Mutual Funds
Investing in mutual funds offers several advantages like – flexibility, diversification, portfolio management by professional, and more. Here is a list of all benefits of investing in mutual funds.
As compared to investing in the equity market, mutual funds investment is low-cost, making it ideal for small investors. Mutual funds companies or the asset management firms charge a small amount called expense ratio between 0.5 to 2.5 percent (SEBI has set the upper limit at 2.5 percent) of the total investment amount for managing your fund.
Wide product selection allows investors to pick funds that suit their financial needs. Mutual funds provide schemes to meet both short-term and long-term financial goals, matching individual risk profile, investment horizon, and investing style.
Unlike traditional investment options such as FD, EPF or NSC, mutual funds don’t have any lock-in period.
Lock-in period in investment parlance is the duration during which investors can’t withdraw the money or need to pay penalty for an early exit. But most mutual funds are open-ended, meaning there is no lock-in period, although they come with varying exit load.
Professional Fund Manager
Mutual fund suits investors who don’t have the time to research the market or lack knowledge regarding equity market investment. Through mutual funds investment, they can avail services of professional fund managers. These fund managers have excellent track records and support team to assist with market analysis and pro tips.
Advantage of SIP
You can leverage the power of SIP by regularly investing in the share market through mutual funds and take advantages of rupee cost averaging.
SIP refers to methodical investment through all market conditions to benefit in the long run. Mutual funds investments usually have very low thresholds, which makes it appealing to small and new investors. SIP investment alleviates the need for arranging a lumpsum fund for investing. You can select SIP frequency, ticket size, and even increase or decrease SIP amount to suit your needs.
Fund Switch Option
A good investor continuously monitors funds’ performance and know when to exit one option and invest in others. Mutual funds allow investors to switch funds to a better performing scheme, usually at a much lower cost.
Cost-effective Portfolio Diversification
While investing, portfolio diversification is a necessity. Mutual funds allow low-cost portfolio diversification. It invests in various company stocks across several asset classes and reduces the risk concentration of the portfolio. The asset managers ensure that when one asset class performs poorly, the risk gets offset by other asset classes in the portfolio, keeping return ratio high.
Mutual funds offer flexibility like investing through SIP, no lock-in, and free fund switches, unlike traditional investment options. Because of these features, mutual funds appeal to a broad class of investors.
With mutual funds, one doesn’t need to time the market. Mutual Funds allow investors to invest through SIP and leverage the benefit of rupee cost averaging in the long run. You accumulate NAV according to market condition, which keeps adding to your portfolio. When the market is booming, you receive fewer units than when NAV value is less. Therefore, over the long run, the cost of purchasing units gets averaged out. Hence, with mutual funds, you can invest any time, regardless of market condition.
You can utilise tax advantages offered u/s 80C by investing in ELSS.
ELSS or equity-linked saving schemes is the only equity-linked investment plan which gives you tax benefit under 80C. Section 80C of the IT Act 1961 offers tax deduction of up to Rs 1,50, 000 a year. Utilising the limit available investors can save up to Rs 46,800 annually by investing in MF.
Mutual funds investment is regulated by SEBI and RBI. Also, the Association Of Mutual Funds In India (AMFI), a self-regulatory body formed by all the asset management companies oversees fund plans and management. It makes mutual funds investment safer compared to other forms.
Easy To Track
Fund management companies publish regular reports and statements, making it easier for investors to track portfolio performance. If you invest in MFs via a third-party, you can also use the performance tracker on their portal. Unlike equity investment, you don’t have to monitor the market when investing through mutual funds.
The Bottom Line
Mutual funds offer hassle-free investment opportunities to investors. Innovative product design, low investment-threshold, flexibility, and professional fund management services make it particularly appealing to young and new investors who don’t have experience and time researching the market. Now apply in mutual funds following the online application process and start your investment journey today.