Investing can be an exciting and rewarding journey, especially when you start to see your money grow over time. With so many options available, it can be challenging to know where to start. One of the most popular investment options is mutual funds. In this blog, we’ll explore what is mutual funds, including different types available, and the benefits they offer to investors.
“Equity mutual funds are the perfect solution for people who want to own stocks without doing their own research.” – Peter Lynch
List of contents
- What is mutual funds?
- Types of mutual funds
- Things to consider before investing in mutual funds
- Why Should You Consider Investing in Mutual Funds?
- Disadvantages of mutual funds
- Conclusion
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What is mutual funds?
A mutual fund is a popular investment option that allows individuals to invest in a diversified portfolio that includes stocks, bonds, money market instruments, real estate, and alternative investments. It is managed by experienced, professional experts who make investment decisions on behalf of the investors.
It can help investors achieve their financial goals by providing access to a wide range of investments and potentially higher returns over the long-term.
Here are some examples of popular high return mutual funds in India. Mirae Asset Large Cap, Axis Bluechip Fund, ICICI Prudential Bluechip Fund and SBI Small Cap Fund.
Types of mutual funds based on asset class
The categorization of mutual funds based on asset class depends on the type of assets that the fund has invested in for its investment objectives.
- Equity mutual funds:- this type of fund primarily invest in stocks of companies listed on stock exchanges, with the aim of generating high returns for investors over the long term. These funds are considered a high-risk investment option, as the stock market can be volatile and unpredictable. However, these funds also offer the potential for higher returns over the long term, making them a popular choice for investors who are comfortable taking on higher levels of risk. The taxation of this type of funds offers investors certain advantages, such as no tax on gains up to Rs. 1 lakh. However, for gains exceeding Rs. 1 lakh, short-term capital gains tax of 15% applies if sold within one year and a long-term capital gains tax of 10% if sold after one year.
- Debt mutual funds:- These are investment options that primarily invest in fixed income securities, such as bonds, debentures, government securities, treasury bills, and other debt securities. These funds are ideal for investors looking for steady income who are willing to take on moderate to low risk. this funds are relatively less volatile compared to equity mutual funds. Taxation for debt mutual funds is calculated based on the investor’s income tax slab rate.
- Hybrid mutual funds:- These funds, also known as balanced funds, are investment vehicles that invest in a combination of both equity and debt mutual funds, for example, 70% in equity and 30% in debt or 60% in equity and 40% in debt. They can offer higher returns with moderate risk than debt mutual funds.
Things to consider before investing in mutual funds
Before investing in mutual funds, there are several important things to consider:
- Investment objectives: Make sure you understand the investment objective of the mutual fund and how it aligns with your investment goals.
- Performance history: we must check past 5-10 year average returns on a long-term horizon.
- Fees and expenses: An expense ratio of 1-2% is fine and also considers entry and exit load charges.
Why Should You Consider Investing in Mutual Funds?
People buy mutual funds for various advantages of mutual funds, such as:
- Returns: With mutual funds, investors have the potential to earn higher returns than traditional savings accounts, while keeping the risk at a moderate level. Additionally, they can help investors stay ahead of inflation over time, making them an attractive investment choice.
- Diversification: As the saying goes, “don’t put all your eggs in one basket.” Mutual funds provide diversification by investing in a variety of stocks and securities, which helps spread out risk and improve the overall return.
- Professional management: Mutual fund investors can benefit from the investment knowledge and research capabilities of professional fund managers, who are well-versed in the financial markets and use their expertise to make informed investment decisions, potentially leading to higher returns for investors.
- Affordability: Mutual funds are affordable for most investors as they can be purchased with small amounts of money. This makes them accessible to a wide range of people who want to invest in the financial markets.
- Liquidity: They provide high liquidity to investors, which means that they can buy or sell their unit whenever they need to.
Disadvantages of mutual funds
- High Volatility and Risk: Investing in mutual funds involves a level of risk and high volatility. This means that the value of the fund can fluctuate rapidly in response to market conditions. Investors should carefully consider their risk tolerance before investing in mutual funds.
- Fees and expenses: Mutual funds charge management fees and other expenses, which can reduce the overall return. Normally, mutual funds in India have an expense ratio ranging from 0.05% to 2.5%. It’s important to understand the fees associated with a mutual fund before investing.
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Conclusion
We have learned about ‘what is mutual funds’ in this blog. These are a popular investment option for growing wealth in the financial markets. There are various types of mutual funds to choose from, each with its own investment objective and risk profile. Common uses for mutual funds include long-term goals such as funding children’s weddings, education, and retirement planning.
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