A New Investor's Guide to Mutual Fund Investment

Understanding the mutual fund market takes some time, but it becomes easier as the days pass. We provide a simple guide to MFs and why they benefit your wealth creation plans.

Every investor worth their salt invests in a variety of top mutual funds to create wealth. Are mutual funds beneficial for you?

What are mutual funds?

Mutual funds (MFs) are schemes that help you invest in the stock and share markets in a structured manner. They are the most preferred investment option for most people today, offering reliable growth over investment over the long run. There are several types of mutual funds to choose from, depending on your risk appetite, investment horizon and size of capital investment. Whether a novice or experienced investor, whether young or old, there is always a mutual fund investment that suits you to the letter.

Prevalent mutual funds in India

There are four main mutual fund investment categories in India:

1 Equity funds: This is a type of mutual fund that offers high exposure to stocks in India. They carry higher risk than debt funds, but they also offer higher returns. The longer you stay invested in this type of mutual fund, the higher the growth of the fund.

2 Debt funds: These are MFs investing in fixed income money market instruments like Government bonds, debentures, etc. They carry lower risk than equities but the returns are more stable.

3 Balance or Hybrid funds: This type of mutual fund combines the benefits of debt and equity securities to align with your investment strategy. With this approach, the mutual fund investment reduces risk while offering good returns.

4 Miscellaneous funds: Mutual fund investments classified under ‘Others’ comprise Special Situation Funds and Money Market Funds. Money market funds further comprise liquid funds for short term gains, while Special Situation funds offer MFs that you can invest in in the name of a family member, such as your child.

The benefits of investing in mutual funds

* They minimise risk and diversify your portfolio. Though there is never a no-risk investment, top mutual funds do offer lowered risk and high returns when you stay invested for a longer time. However, do note that the risk depends on the proportion of asset allocation, maturity time frame, etc.

* They are tax efficient. Mutual fund investments offer tax benefits under the current IT laws. Most MFs get tax benefits under Sec 80C of the Income Tax Act, 1961. The exemption is given up to Rs 1.5 lakh for tax saving mutual fund investments (ELSS, ULIP, etc.)

* They are liquid. Top mutual funds are highly liquid in case you need money urgently. Your fund manager can advise you on the best time to liquidate the asset.

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