Mutual Funds
Why To Invest In Mutual Funds?
Let's glance at why should one consider investing in mutual funds over other options to achieve their financial goals:
Professional Managers
Mutual funds are managed by professional people who have years of experience handling different types of assets. They are a group of dedicated team that handles all financial decisions based on the performance & prospects available in the market.
Offers Convenience
If saving time & convenience is what you seek then mutual funds are an ideal choice for investment. Because of low investment amount options, multiple choices based on one's life & financial goals, offering the ability to redeem them on any business day, mutual funds are much sought after.
Diversification
Mutual funds help counter risks to a large extent by equally distributing your investments across diverse range of asset classes. Mutual funds work by the adage “Do Not Put All Your Eggs in One Basket”.
Counter Inflation
Investing in mutual fund is a smart way of beating inflation as it helps investors to generate inflation-adjusted returns, without spending much time or energy on it. This choice of investing makes sure that the purchasing power of your money doesn't go downhill over some years.
Less Expensive
As compared to investing directly in capital market, mutual funds offer investors the advantage of low cost investment. Most stock options require a huge capital to begin with, on the other hand mutual funds can be started with as low as Rs.500 per month & investors can derive benefit from the long-term equity investment.
Safe & Transparent
Since every mutual fund is managed & regulated by SEBI, you need not worry as your investments are safe. SEBI has several regulations & legal frameworks in place which ensures that your investments are managed in a disciplined manner. Now it's true that every investment is subject to certain risks, however, prudent selection based on strong market knowledge & fundamentally sound securities with diversification can help hedge such risks and generate high returns on your investments.
TYPES OF MUTUAL FUND
Equity Funds
These are type of funds that primarily invest in stocks and main investment objective of this class of funds is long term capital growth. Further, there are many types of equity funds which are categorized based on the size of the companies like large, medium or small.
Debt Funds
These funds are known as safe investments and provide fixed returns. In these, funds are invested in debt instruments like company bonds, government bonds, fixed income assets.
Money Market Funds
A money market mutual fund is a kind of mutual fund that invests in ultra-safe or low-risk securities. The purpose of the fund is to conserve the capital of the fund and it is unusual to see the NAV of a money market mutual fund go below one. The NAV can go below one if the securities do badly but it is quite rare to happen.
Income Funds
Income Funds mainly focus on generating regular income for the investors by investing in high dividend generating stocks, government securities, certificate of deposits, corporate bonds, money market Instruments, and debentures.
International Funds
The international fund usually refers to an investment or mutual fund composed of international bonds and foreign company stocks.
Bond Funds
A bond mutual fund invests in debt instruments issued by governments and/or corporations. Most of these funds are designed to provide interest income for shareholders in the form of dividends that represent the total interest payments made by all bonds in the fund's portfolio.
Dividend Fund
This type of mutual funds invests in stock of companies that pay dividends, which are profits that a company shares with its stakeholders. These are income generating funds & tend to be less risky than other types of funds. It is a good choice of investment for those who seek regular payments over appreciation.
Balanced Funds
The strategy used by these funds are to maintain a certain percentage of mix of both fixed income & equities. Normally, a typical balanced fund will maintain a distribution of 60% equity & 40% fixed income. A similar type of fund known as “Asset Allocation Fund” follows on similar objectives that of Balanced Funds but then these kinds of funds do not hold any specified percentage of any asset class.
STP (Systematic Transfer Plan)
STP is a way through which one invests a lumpsum amount in one scheme & regularly transfers a pre-defined amount into another scheme of the same mutual fund house. In the long run, STP helps in cutting down risks to a considerable level & earning good returns. Basically, STP means transferring an investment from one asset or asset type into another asset or asset type. This transfer process happens gradually over a period of time.
Further, STP can be classified into three parts
Fixed STP - Here the investors take out a fixed sum from one investment to the another.
Capital Appreciation STP - Here the investors take out the profit part of the investment & invest it in another.
Flexi STP - Here, the investor has a choice to transfer a variable amount towards the investment.
Benefits
Helps in Re-balancing Portfolio
Through STP, one can balance their portfolio effectively as this method allows the allocation of investments from equity to debt or vice versa. If your investment equity goes up then it can be switched from an equity to a debt fund.
Consistent Returns
Through STP one can transfer the set amount to a target equity fund while still being invested in a debt or liquid fund. So, an investor stands to gain benefit from the returns of the equity fund to which the funds are being transferred to & at the same time remain protected as a part of the investment remains in debt.
Averaging of Cost
STP helps in averaging out the cost as it assists in buying units when the rates are lower & vice versa
SWP (Systematic Withdrawal Plan)
SWP is a facility offered by mutual funds to enable the investors to redeem the units in small portions at regular intervals so that short term goals or monthly income needs are met. The intervals period can range from monthly or quarterly. SWPs are preferred choice by retired individuals as it can help in creating regular flow of income from their investment corpus in mutual funds. Other investors can opt for this to pay EMIs, pay bills, & to take care of other expenses.
SWP can be effectively used to make better use of surplus funds as it allows you to invest that amount in mutual fund schemes & facilitates withdrawal as per your requirement. It also offers capital protection as returns on arbitrage funds are risk-free.
Benefits
Tax Advantage
When one withdraws through SWP, the amount doesn’t attract any tax. All the money withdrawn will be capital itself.
Fixed Income:
This facility is a good choice for those who are looking for regular income over a period of time.
Rupee Cost Averaging:
This method allows an investor to invest a fixed amount at regular intervals which ensures that the investor buys more shares of an investment when the prices are low & less when the prices are high.