Investing in mutual funds has become a highly favored option for those seeking to increase their wealth in the long run. These are financial instruments for investing that combine the funds of several individuals and use them to purchase a variety of securities, including bonds, equities, and money market instruments. Professional fund managers oversee them, and they base their investment choices on the goals of the fund.
Key Points about Mutual Funds
Here are some key points about mutual funds:
1. Diversification
Mutual fund investments provide diversification by investing in a variety of assets, reducing the risk associated with investing in a single security.
2. Professional Management
Fund managers conduct research and analysis to make investment decisions, aiming to achieve the mutual fund’s investment objectives.
3. Liquidity
Mutual fund units can typically be bought or sold on any business day at the fund’s net asset value or NAV, providing liquidity to investors.
4. Affordability
Mutual funds allow investors to access diversified portfolios with relatively small amounts of money.
5. Types of Mutual Funds
Mutual funds come in a variety of forms: equity funds, which invest in stocks; bond funds, which invest in bonds; money market funds, which invest in short-term debt securities; index funds, which seek to replicate a particular market index; and sector funds, which concentrate on particular industries or sectors.
6. Fees and Expenses
Investors in mutual funds typically pay fees and expenses, including management fees, administrative fees, and operational expenses. These costs can impact the overall returns of the fund but these need to be paid as there is a cost of managing the funds professionally.
7. Performance
Mutual fund performance can vary, and past performance does not guarantee future results. Investors should carefully review a fund’s performance, investment objectives, and strategy before investing.
Read more: ULIP vs ELSS: Which is the Better Investment Option
8. ELSS
After getting an in-depth understanding of mutual funds, let us understand more about a type of mutual fund called ELSS funds:
Equity Linked Savings Scheme or ELSS mutual funds are a popular investment avenue in the realm of personal finance, especially for tax-saving purposes. With their unique blend of potential high returns and tax benefits, ELSS mutual funds have gained significant traction among investors.
Tax-saving mutual funds are a category of mutual fund that primarily invests in equity and equity-related instruments. What distinguishes ELSS funds from other equity funds is their tax-saving feature under Section 80C of the Income Tax Act, 1961. Investors can claim a deduction of up to Rs 1.50 lakhs in a financial year by investing in ELSS funds, making them an attractive option for tax planning.
Read more: Things to Consider Before Investing in Mutual Funds
Considerations for Investors
- Risk Profile: ELSS funds carry market risk, and their performance is subject to fluctuations in equity markets. Investors should assess their risk tolerance and investment horizon before allocating funds to ELSS schemes.
- Lock-in Period: While the three-year lock-in period promotes long-term investing, investors should be aware that they cannot redeem their investments before the completion of this period except under specific circumstances like death or disability.
- Past Performance: While past performance is not indicative of future results, investors may consider evaluating the historical performance of ELSS funds, along with other factors, before making investment decisions.
- Costs and Fees: Investors should be mindful of the expense ratio and other charges associated with ELSS mutual funds, as these can impact their overall returns.
Conclusion
In this read, we focused on the concept of mutual funds, especially tax-saving mutual funds, also known as ELSS funds, which give retail investors dual benefits and make their portfolios more diverse.
