As more consumers aspire to grow wealth, getting strategic when building your portfolio is important. Diversification is the key to having a well-balanced wealth creation plan and securing your future. Within this mix, mutual funds are one of the attractive and popular asset groups, which more and more retail investors are betting on. In 2020, the total value of mutual funds held by retail investors in India amounted to INR 12 trillion, and this number is only set to grow. If you’re wondering, “what is a mutual fund?” then this article is meant for you. Read on to enjoy a headstart on your financial education, and in turn, your investment journey.
Advantages of investing in Mutual Funds
Mutual funds are a beautiful asset for Indian investors to bet on for several reasons.
- Mutual funds typically offer higher returns than traditional assets such a fixed deposits, to the tune of 10 to 10%,
- Every mutual fund has a dedicated manager who actively or passively manages how your funds get invested.
- You always have access to your funds and can withdraw them within 24 hours in an emergency.
- There are many mutual funds to choose from based on your financial and life goals. Choose based on your risk appetite – there’s something for every type of investor.
- Choose from a wide range of international and Indian mutual funds.
- Mutual funds of the Equity Linked Savings Scheme (ELSS) category come with tax benefits.
How To Save Taxes
As you progress from asking “what is mutual fund” to “how can I save tax by investing in mutual funds,” you’ll be thrilled to know that you can successfully leverage the benefit of ELSS mutual funds to save taxes.
- ELSS mutual funds have the lion’s share of investments in the equity markets. However, a dedicated manager looks after the fund. Hence, you reap the rewards while having your risk professionally managed for you, unlike when directly investing in the stock market.
- There’s a three-year lock-in period for ELSS mutual funds, unlike tax-saving FDs, which have a five-year lock-in period, and a much lower interest rate. If you withdraw your mutual funds prematurely, capital gains above INR 1,00,000 will be taxed at 15%. On the other hand, it will be taxed at 10% if withdrawn after three years.
- Get a tax deduction up to INR ₹150,000 under section 80C of the Income Tax Act.
The Benefit Of Compounding
Investors are advised to look at mutual fund investment from a long-term horizon of five to ten years. This is because no matter what types of mutual funds you invest in, all function on the principle of compounding interest. This means that you earn interest not only on the principal amount invested but also on the interest successively earned. Hence, while the three-year lock-in period for ELSS will help you optimize your investments, you can continue to stay invested so that your money compounds and yields a higher return on investment.
Leverage The SIP Option
While some investors prefer to invest a lump sum, not everyone has access to large amounts of money. In this case, you can choose the Systematic Investment Plan (SIP) option and invest smaller amounts on a monthly, quarterly, or bi-annual basis. This practice ensures that a fixed amount gets automatically invested per month, preferably at the start of the month when your salary hits your savings account. Leveraging SIP empowers you to show up as a consistent investor and cultivate the investment habit. You can start with an amount as low as INR 500 and top it up when you have excess funds.
Start investing today
It’s never too early or too late to start investing in mutual funds. There are options for every profile of the investor and financial goal. So, get started by reading up on the various types of mutual funds, and kickstart your investment journey!