The frenzy on Dalal Street has been quite unprecedented over the past year. But unfortunately, not everyone can participate and there are numerous reasons for that. Although as an individual one wants to start investing in the stock market there is a lack of;
- Knowledge
- Time
- Expertise
- Awareness
- Understanding of risk
However, there is an efficient and simple way to start investing in the stock market, The Mutual Funds.
What is a 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 an Asset Management Company in which many individual investors, who share a common financial goal, accumulate or pool their savings in that particular fund.
- Any individual who has surplus money or savings can invest in a mutual fund as long as he or she has the 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 professionals then invest 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 times. Since these investments are market links, there are no guarantees or assurance of 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 a long-term horizon of, returns has the potential to perform better than other assured return products like FDs.
Also read: Process of Portfolio Management: Objectives & Definition
How Investing Mutual Fund Works?
5 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 investments and when to Buy & Sell investments.
Due to a 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 a diverse portfolio of stocks and bonds from the pool of funds that the mutual funds have accumulated from investors. As it is said “ Do not keep all your eggs in one basket”, this diversification always helps an individual investor as holding a variety of investments helps offset the poor performance of some of the investments.
As an individual one may not have the knowledge and expertise to handle a diversified portfolio.
3. Offer a Simple Way to Participate in Investing in the Stock market
Subscribing to any mutual fund scheme that meets his or her investment objectives is a simple process. With technology and smartphones now it’s even easier to buy and sell mutual funds. One can buy the units of any scheme at prevailing Net Asset Value (NAV) and redeem/ sell at any time 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 participating in the stock market, one can become more disciplined in their approach. As all these investments are essentially long-term horizons, they help an individual to make and accomplish his or her financial goals.
Also read: ULIP vs ELSS: Which is Better Investment Option
5. Helps You in Tax Planning
Since there are certain Tax benefits available under section 80C of the Income Tax Act, an 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 funds helps an individual in many ways.
Types of Mutual Funds
Also Read: Top 5 SIP Equity Mutual Funds to Invest
1. How to Make Investment in Mutual Funds?
2. Illustration of How a Disciplined Investment in Mutual Fund by Way of SIP Works
3. Taxation Impact on Mutual Fund (as of FY 2017-18)
Some Important Terms One Needs to Know in Mutual Fund
