- A mutual fund is the trust that pools the savings of a big number of investors who share a common financial goal.
- Every one with an investible leftover of as little as a few hundred rupees can invest in Mutual Funds.
- The money thus collected is then invested by the fund manager in different types of securities. These could range from shares to debentures to money market instruments, depending upon the scheme’s stated objective.
- It gives the market returns and not assured returns. In the long term, market returns have the potential to perform better than other assured return products. Mutual Fund is the one of the most cost efficient financial products.
As the value of securities in the fund increases, the fund’s unit price will also increase. There would be capital appreciation when you sell your available units at a price higher than the price at which you bought.
By way of Income Distribution:
The fund passes on the profits from distributable surplus it has earned, in the form of dividends in two ways, Pay Out or Reinvestment.
As the value of securities in the fund increases, the fund’s unit price will also increase. You can make a profit by selling the units at a price higher than at which you bought. Although – Mutual Fund does not guarantee the same or does not guarantee returns.
- The amount invested in tax-saving funds/Equity Linked Saving Schemes (ELSS) and some Retirement Funds is eligible for deduction under Section 80C upto a limit of Rs.1,50,000/- (in a financial year)
- Dividend from Mutual Fund Schemes is Tax-Free in the hands of the Investor/recipient. Dividend from Equity Oriented Mutual Fund Scheme doesn’t attract Dividend Distribution Tax whereas Debt Oriented Mutual Funds attract Dividend Distribution Tax.
- Long Term Capital gain (After 365 days of investment) from Equity Oriented Mutual Fund Scheme is Tax Free u/s 10(38). Short term Capital Gain is taxed @ flat 15%.
- Long Term Capital gain (After 3 Years of Investment) from Debt Oriented Mutual Fund Scheme has benefit of indexation and net gain will be taxed @ 20n % flat. Sort Term Capital gain from Debt Oriented Mutual Fund Scheme will be taxed as per income tax Slab.
Market risk: At times the prices or yields of all the securities in a particular market rise or fall due to broad outside influences. This change in price is due to ‘market risk’.
Inflation risk: Synonym to ‘loss of purchasing power’. Whenever the rate of inflation surpasses the earnings on your investment, you have the risk that you’ll actually be able to buy less, not more.
Credit risk: In short, how stable is the company or entity to which you lend your money when you invest? How certain are you that it will be able to pay the interest you are promised, or repay your principal when the investment matures?
Interest rate risk: Interest rate movements in the Indian debt markets at times can be volatile leading to the possibility of large price movements up or down in debt and money market securities and thereby to possibly large movements in the NAV.
Other risks associated are:
Changes in the government policy
Parameters you should consider Investing in mutual Funds:
- Understand your Risk Profile
- Know your financial goals
- Choose your category of funds
You might be thinking which fund? We at Swaraj Wealth suggest you the best fund depending on your profile and financial goals.
Below we have some suggestions:
Equity linked savings scheme (ELSS) , these are the favorites of most retail investors. The reason is that the investment is eligible for tax deduction under Section 80C of the Income Tax Act. These are diversified equity funds with a three-year lock-in and are the first choice of many first-time mutual fund investors.
Systematic Investment Plan:
It is an Investment vehicle offered by mutual funds to investors, allowing them to invest small amounts periodically instead of lump sums. The frequency of investment is usually weekly, monthly or quarterly.
Fixed income funds:
Fixed income investments generally pay a return on a fixed schedule, though the amount of the payments can vary.
Equity Mutual funds would give you 10% to 14% annual returns and are ideal for a period of more than 5 years.
Mutual Funds are versatile, diversified, professionally managed, low expense, and regulated. Even Warren Buffett himself suggests that most investors should just pick a low cost mutual fund and ride it for the long term.
- Need of money and no alternative source of getting it.
- When taxation period of fund is over.
- When the fund with weak basics under performs for a considerable long time.
- When the market is high and you want to lower your risk profile slowly.
- When you don’t know when to invest. Valuations may be expensive in one month & cheap in another month. SIP averages price of shares, which reduces the risk of getting shares at high valuations.
- SIP pays best returns when you have chosen longer period for investment.
- SIP is a good way to invest your savings out of your monthly income regularly into market. It inculcates habit of saving and investing.
- When you have a regular source of income, then SIP is best way to invest your money at regular intervals.
Lump sum is better when:
- When you can analyze, and invest amount at a time when valuations of shares are cheap. It helps getting shares at a low price which obviously increases returns.
- When you have received a lump sum amount and your financial goal is decided, its better you invest the money as lump sum.
SIP or Systematic Investment Plan is the most popular tool of investing money, where you invest a small amount at regular time intervals. The money invested is funneled in stock markets and generate returns over time. It is one of the easiest ways to as you can start from as low as INR 500 and it also inculcates the habit of saving money.
It is a flexible and easy investment plan: your money is auto debited from your bank account and invested into a specific Mutual Fund scheme. You are then allocated a certain number of units based on the NAV of the day.
Every time you invest money, additional units of the scheme are purchased based on that day’s NAV. The benefits of investing systematically include taking out the risk of market timing and providing investors the benefit of rupee cost averaging and power of compounding.
One therefore doesn’t have to worry about when to invest and doesn’t have to consider daily market movements.
An SIP also smoothens the impact of market fluctuations thereby reducing the risk of investing in volatile markets. The risk of market volatility gets negated with more units purchased when the price is low and fewer units purchased when the price is high.
- Daily and Weekly is the best frequency as it would capture market movements in the best possible way.
- Every month is recommended as stock market index will go through changes every day in a month and you can buy mutual fund units every month with which you will get rupee cost averaging benefit.
- For Quarterly and Yearly frequencies, there is a large possibility that you would miss major up/ down swings in the market depriving you of the cost averaging SIP is famous for.