The frenzy on the Dalal Street is quite unprecedented over past one year. But unfortunately not everyone is able to participate and there are numerous reason for that. Although as an individual one wants to start investing in the stock market but there is lack of;
- Understanding of risk
However, there is an efficient and simple way to start investing in the stock market, The Mutual Funds.
So What is Mutual Fund?
Essentially a mutual fund is a fund collected by an Asset Management Company (AMC) that invests in a diversified portfolio of securities which includes both equity and debt. The individuals who invest in the units of a mutual fund are known as its unit holders. From the money/ investments of an individual the mutual fund buys shares and bonds from the market.
- A mutual fund is floated by Asset Management Company in which many individual investors, who shares a common financial goal, accumulate or pool their savings in that particular fund.
- Any individual who has surplus money or saving can invest in mutual fund as long as he or she has required KYC documents; viz; PAN Card, Adhaar Card and Bank account.
- The Asset management Company (AMC) appoints professionals known as Fund Managers (FMs) or Portfolio Managers (PMs). These professional than invests the funds in various Equity and Debt securities as per the mandate of the scheme.
- One needs to always keep in mind that these investments are subject to market risk at all time. Since these investments are market link, there are no guarantees or assurance in returns. In case of adverse market movement, the investment can also see negative returns.
- Although the returns are market linked, historically, the trend has shown that anyone with long term horizon of, the returns have the potential to perform better than other assured return products like FDs.
This is how investment in Mutual fund works:
Five benefits of investing in mutual fund
1. Offers professional investment approach
All the mutual fund schemes are run by professional fund managers who bring in their knowledge and expertise in managing funds. These fund managers essentially decide on investment and when to Buy & Sell investments.
Due to lack of knowledge, time and limited understanding, an individual will be always better off by making use of professional fund managers to manage their funds.
2. Offers diversification
The fund manager of the mutual funds invests in diverse portfolio of stocks and bonds from the pool of funds that the mutual funds have accumulated from investors. As there is saying “ Do not keep all your eggs in one basket”, this diversification always helps an individual investor as holding variety of investment helps offset poor performance of some of the investments.
As an individual one may not the knowledge and expertise in handling a diversified portfolio.
3. Offer simple way to participate in investing in stock market
Subscribing to any mutual fund scheme that meets his or her investment objectives is a simple process. With technology and smart phone now it’s even easier to buy and sell mutual funds. One can but the units of any scheme at prevailing Net Asset Value (NAV) and redeems/ sell at anytime he or she wishes to depending on the performance of the scheme or return on the investment.
4. Makes your investment more discipline
Once an individual is committed to participate in stock market, one can become more disciplined in their approach. As all these investments are essentially with long term horizon, it helps an individual to make and accomplish his or her financial goals.
5. Helps you in tax planning
Since there are certain Tax benefits available under section 80C of Income Tax Act, individual can certainly take advantage of this to reduce his or her tax liability. Investments in ELSS schemes of mutual funds qualify for deduction under Sec. 80C.
However the above five are not exhaustive. Investment in mutual fund helps an individual in many ways.
Types of Mutual Funds
Also read: Basic Facts You Must Know About Mutual Fund Schemes
How to make investment in Mutual fund
Illustration of how a disciplined investment in Mutual fund by way of SIP works
Taxation Impact on Mutual Fund (as of FY 2017-18)
Some important terms one needs to know in mutual fund
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