Mutual funds are a vital tool to ensure your financial well-being. They help you to get better returns even from relatively smaller investment amounts, and are quite flexible in nature. Whether you want to invest a small amount at regular intervals or a big lumpsum amount at once, you will find a mutual fund product suitable for your needs. With options like SIP (Systematic Investment Plan) and SWP (Systematic Withdrawal Plan), mutual funds can help you plan for short-term as well as long-term goals and financial liabilities.
Expert Guidance – Your funds are invested by a professional manager who studies financial markets, analyses trends and understands the potential of companies in different sectors. So you can be assured that your money is being invested thoughtfully, to maximise returns.
Returns and Risk analysis – When you invest in a single security, your profit depends on how that company fares. However, mutual funds invest in a group of companies, so the performance gets averaged. Even if one of them does not do well, performance of the other companies makes up for it. And because mutual funds invest a large pool of resources together, even the returns are significantly higher than individual investments.
Availability of money – If you invest in an open ended mutual scheme, your money continues to earn you returns and is still available for use when you need it. You can withdraw your money any time you want to. And if you have invested in a close ended scheme, you can sell off the units, at current market rates, on the stock exchange where they have been listed.
Affordability – Mutual funds are affordable financial investment tools as you can invest in them and create wealth even if you have relatively smaller amounts of money to begin with.
Transparency – When you invest in a mutual fund, you have a right to know every detail of where and how your money is being invested and can track the performance of the fund on a periodic basis.
Tax Benefits – There are some mutual fund schemes whose returns, in the form of dividends, are tax free. So you can invest and create wealth without needing to pay a tax on that income. However, since this may not be the case for all schemes, it is important to understand the tax benefits of a fund before you invest in it.
Regulated by SEBI – All mutual funds are regulated by the Securities and Exchange Board of India. They function in accordance with the provisions and regulations that protect the interests of investors and prohibit fraudulent and unfair practices.
There are three ways in which you can classify mutual funds, according to their according to their structure, their objective and the sectors they invest in. Here’s a quick round-up of mutual fund categories for all three classifications.
Open Ended Schemes: Schemes without a fixed maturity period, that let you subscribe for or redeem units any time. They offer the benefit of liquidity.
Close Ended Schemes: Schemes with a fixed maturity period, which are open for subscription for a specified duration during the launch, and allow you to invest in them from 3-10 years. After the launch, interested investors can buy or sell units of the scheme on stock exchanges where they are listed. As an exit route, closed mutual funds necessarily have to offer either a repurchase at market value, for a specific time frame or allow trading of units on stock exchanges.
Interval Schemes: A combination of open ended and close ended schemes, interval schemes are open for sale and repurchase only during a specific duration.
Growth Schemes: Schemes that invest in equities and are designed to offer maximum growth over medium and long term, ideal for investors who are in their prime earning years. These schemes are comparatively high risk, and offer investors options like capital appreciation and dividend option.
Income Schemes: These schemes invest in fixed income securities, are less risky, and a good option for investors who want to generate steady income streams.
Balanced Schemes: Investments are done in equity and debt securities to generate regular income and moderate growth. They invest 40% and 60% in equity and debt respectively, and their NAVs are likely to be less volatile than those of pure equity schemes.
Liquid Schemes: Safe, short term instrument investments to generate quick returns while still offering liquidity. Returns on these schemes fluctuate much less as compared to other funds and they are a good option for individual investors who want to park their surplus funds.
Gilt Funds: For investors who are looking for extremely safe investments, these schemes invest only in government bonds and securities. While these schemes have no default risk, their NAVs still fluctuate as a result of change in interest rates and other economic factors.
Tax Saving Schemes: Investments in funds that offer tax deduction or whose returns in the form of dividends are not taxed. These tax rebates are offered by the government to incentivize investments. The funds are mainly invested in equities and growth and opportunities associated with tax saving schemes are similar to those of equity schemes.
Index Funds: These funds invest exactly according to the portfolio and weightage of a specific stock exchange index. Their NAVs rise and fall according to the changes in the index, with a slight difference in percentage. These could also be Exchange traded Funds (ETFs), which get traded on stock exchanges.
Sector Specific Funds: Invest in funds of companies based on certain sectors that are booming or are expected to do well in light of the prevalent market situations. The returns of these funds depend on how the sector performs, and it is important to track sectors carefully, or seek help from an expert while investing in these funds. Though high on returns, these funds tend to be more risky as compared to diversified funds.
A Systematic Investment Plan (SIP) is a plan that lets you invest specific amounts of money at regular intervals to gradually build a large corpus. By investing in a SIP, your investments get disciplined. Also, since you are investing regularly, the setbacks to your investments when markets are low get balanced by your investments’ gains when the market is high. And as you gain returns and keep investing higher amounts during the investment tenure, your returns keep multiplying and growing.
An NFO or a New Fund Offer is a new opportunity for investors to invest. An NFO could be the offer for a new mutual fund scheme that is being launched by the company, and alternately, the NFO could also be the launch of additional units of existing close-ended funds, that are available for investing.
Equity Linked Savings Scheme, popularly known as ELSS are close-ended, lock-in period of 3 years diversified equity schemes offered by mutual funds in India. They offer tax benefits under Section 80C of Income Tax Act 1961. ELSS can be invested using both SIP and lump sums investment options .