What are Mutual Funds?

Mutual funds offer a way for a group of investors to effectively pool their money so they can invest in a wider variety of investment vehicles and take advantage of professional money management through the purchase of one mutual fund share. Mutual fund companies essentially collect the money from their investors, or shareholders, and invest that pooled money into individual investment vehicles according to some risk profile, money management philosophy, or financial goal. The mutual fund then passes along the profits (and losses) of those investments to its shareholders.

More & more people are learning about mutual funds as a means of investment. From putting one's money into fixed deposits or investing in real estate, people are becoming aware of mutual funds as lucrative choice of savings & investments. It is becoming the most sought-after method of investing but having limited or no knowledge of it can hamper one's plan to go ahead with mutual funds completely. Here, we will give you a summarized info about all you need to know about mutual funds & the benefits it carries.

Why to Invest In Mutual Funds?

Let's glance at why one should 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 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 Funds:-

• 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.

What Is SIP?

Systematic Investment Plan (SIP) is a very easy & convenient mode of making investments in mutual funds on a regular basis. SIP allows one to cultivate a habit of savings & creating wealth for the future by starting early. Offering ease & flexibility, through SIP one can create a planned approach towards investing right. SIP gets auto-debited from the investors account and the amount is invested into a mutual fund scheme that has been specified. The investor then gets a certain number of units which is based on the current ongoing market rate. Every-time a SIP is made additional units keep getting added to the investor’s account. SIP has proved to be an ideal choice of investments for retail investors who lack resources to pursue active investments.

Why SIP?

Build Your Wealth Through SIP!​​

Many investors now take the SIP (Systematic Investment Plan) route to begin their savings and take advantage of compounding returns in a best way. As SIP is considered as the most convenient way of investing in the equity markets, Financial Planners suggest investors to opt for it. SIPs are generally advised to investors who look to invest a certain sum of money in mutual funds at regular intervals to build corpus for meeting any long term financial goals.

SIP allows investor to choose the mode of investment as per their convenience- monthly, quarterly or annually, for investing in funds of their choice. Investors can choose from various investment vehicles to invest their money including stocks, mutual funds, ETFs, etc.

SIP brings about a discipline in terms of investment habits. It helps the investor in maintaining a focused and dedicated approach towards investment. Starting with an amount as low as Rs.500-Rs.1000 per month, SIP offers a number benefits that make investment quite comfortable and enjoyable experience.

Power of Compounding

Time has the greatest influence on your investment portfolio than any other force. Investments have the potential to increase in value over time and hence longer the time frame the greater the value. That’s why, financial planners always recommend to start saving early in order to gain benefits from the power of compounding. Let’s explore this concept further.

Compounding basically is long term investment strategy which means to re-invest ones earnings from interest or dividend for receiving additional units.

The benefit from compounding comes primarily from the fact that income keeps growing the principal to generate higher returns as time progresses.

Higher rate of returns or longer investment duration plays a key role that leads to increase in principal amount.

Hence, we can say that a successful investment planning is all about making the most of compounding by getting time on one’s side. Hence the earlier you start investing, the greater will be the power of compounding.

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.

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.

What is ELSS Fund?

ELSS stands for Equity Linked Savings Scheme. It's a type of mutual fund in India that primarily invests in equities (stocks) and related instruments. ELSS funds offer investors the dual benefit of potential capital appreciation from equity markets and tax savings under Section 80C of the Income Tax Act.

Here are the key features of ELSS funds for tax saving:

• Tax Benefit: Investments in ELSS funds are eligible for a tax deduction of up to ₹1.5 lakh under Section 80C of the Income Tax Act, which helps in reducing taxable income.
• Lock-in Period: ELSS funds have a lock-in period of three years, which means investors cannot redeem their investment before completion of this period. This lock-in period is the shortest among all tax-saving investment options under Section 80C.
• Equity Exposure: ELSS funds primarily invest in equities, offering the potential for higher returns compared to other traditional tax-saving options like PPF, NSC, etc. However, this also comes with higher market risk.
• Flexibility: Investors have the flexibility to invest either through lump sum or SIP (Systematic Investment Plan) mode based on their convenience and investment strategy.
• Diversification: ELSS funds invest in a diversified portfolio of stocks across sectors, which helps in spreading risk.

Overall, ELSS funds serve as a tax-efficient investment avenue for individuals seeking wealth appreciation along with tax-saving benefits.