What is Mutual Funds?
a great source to help you achieve your financial goals. Mutual funds aim to generate returns by investing in a diversified mix of assets, reducing the risk associated with single-stock investments. They cater to various risk profiles, from conservative to aggressive, offering options suitable for different investment objectives and time horizons. Investing in mutual funds involves purchasing units of the fund, with each unit representing a portion of the total
assets. As the fund’s holdings appreciate or generate income, investors benefit proportionally. The inherent diversification helps spread risk, and investors can choose funds aligned with their financial goals, risk tolerance, and preferences.
In essence, mutual funds provide a convenient and accessible way for individuals to participate in the financial markets, offering the potential for growth while minimizing the complexities associated with direct investment in individual securities.
How Do Mutual Funds Work?
Types Of Mutual Fund
Equity mutual funds primarily invest in stocks and equities of various companies. They aim to generate long-term capital appreciation by capitalizing on the growth potential of the stock market. These funds can be further categorized as:
Invest in well-established and financially stable companies, offering relatively stable returns.
Invest in companies with moderate market capitalization, potentially offering higher growth compared to large-cap funds but with increased risk.
Invest in small-sized companies, carrying higher growth potential and risk due to their volatility.
2.Debt Mutual Funds:
Debt funds invest in fixed-income securities like government bonds, corporate bonds, and other debt instruments. They aim to provide stable returns and are suitable for investors seeking regular income. Types include:
Invest in government securities, considered low-risk due to the sovereign backing.
Corporate Bond Funds: Invest in bonds issued by corporations, varying in risk based on the issuer’s creditworthiness.
Invest in short-term money market instruments, providing high liquidity and safety.
3.Hybrid Mutual Funds:
Hybrid funds, also known as balanced funds, invest in a mix of both equity and debt instruments. They aim to balance risk and return, offering diversification. Subtypes include:
Conservative Hybrid Funds: Predominantly invest in debt with a small equity component, suited for conservative investors.
Aggressive Hybrid Funds:
Maintain a higher equity allocation while balancing with debt, suitable for moderate risk-takers. Each type of mutual fund caters to different risk appetites, investment goals, and time horizons. It’s important for investors to assess their financial objectives and risk tolerance before selecting a mutual fund that aligns with their
How To Invest In Mutual Funds
Start by clarifying your investment goals and risk tolerance. Determine whether you’re investing for long-term
wealth accumulation, short-term goals, retirement, or any specific purpose. Assess your risk appetite – whether you’re comfortable with higher risk for potentially higher returns or prefer lower risk and stability.
track record of performance, low expense ratios, and well-managed portfolios. You can use online platforms, financial news, and investment advisors to gather information about the best mutual funds in India or your desired
asset class (equity, debt, hybrid), investment style (large-cap, mid-cap, etc.), and thematic preferences.
they are in line with your goals. Periodically review your portfolio and make adjustments if necessary.
providing your identity proof, address proof, and other necessary documents to the fund house or intermediary.
Why Mutual Funds?
Diversification of assets
Offer high liquidity
Safety and transparency
Mutual fund planning process
Under Section 80C, you can claim tax deductions of up to Rs 1.5 lakh on equity linked saving schemes (ELSS). You also get long term capital gains tax in equity funds which is 10% + 4% cess provided the gain in a financial year is over Rs 1 Lakh. Long term capital gains upto Rs 1 Lakh is totally tax free. Short term capital gains (if the units are sold before one year) in equity funds are taxed at the rate of 15% plus 4% cess.
Largely there are three types of mutual funds-
- Hybrid Funds: These invest in both Equities and Fixed Income, thus offering the best of both, Growth Potential as well as Income Generation
- Equity or Growth Funds: These invest predominantly in equities i.e. shares of companies, and the primary objective is wealth creation or capital appreciation
- Debt mutual fund: Bonds, corporate debt securities, money market instruments, and other fixed-income instruments that offer capital appreciation are examples of debt funds. Funds that invest in debt are also known as income funds or bond funds.
- Professional Management
- Asset Allocation
- Best Tax Saving Option
- Schemes for Every Financial Goal
- High Return on investments
- Easiest Form Of Investment
- Safety & Transparency