Everything you need to know about mutual funds

Mutual Funds are known to be one of the best investment avenues in India. Learn about Mutual Funds, how they work, benefits, and how to invest.

What are Mutual Funds?

Mutual funds Definition: How can I benefit by investing in Mutual Funds?

Types of Mutual Funds

Mutual Funds are broadly classified into Debt, Equity, Hybrid, and tax-saving funds. You can choose the fund(s) based on your investment portfolio.

Benefits of Mutual Funds

Investing in Mutual Funds with calculated risk offers higher returns than conventional options like PPF, NSC, and FDs.

How to Invest in Mutual Funds

Set a financial goal and then choose the right Mutual Fund to achieve it.

What are mutual funds?

A Mutual Fund (MF) is formed when capital collected by various investors is invested in purchasing company shares, stocks, or bonds. Shared by thousands of investors, mutual funds investments are collectively managed by a professional fund manager to earn the highest possible returns. This is how mutual funds work, not only in India but, anywhere in the world.

A Mutual fund

Money pooled from various individuals (investors)

Well-regulated (by SEBI)

Access to large portfolios

Professionally Managed

Higher returns than conventional investing

Allows to invest in small amounts

Investing in Mutual Funds is the easiest way to grow your wealth. The fund manager’s expertise is an important factor to consider while choosing the fund. All Mutual Funds are registered with the Securities Exchange and Board of India (SEBI) and hence, your investment is safe.

Types of mutual funds

Mutual funds are broadly classified into three categories based on their investment traits and risks involved. Understand all mutual fund types and analyse them to check if your requirements would be served by investing in a particular type of mutual fund. Following are the types of mutual funds:

Equity Funds

Equity funds primarily invest in shares of different companies. Your equity funds investment would make a profit when the share prices surge, while they suffer a loss when the share prices fall. Investing in equity funds is apt for those who stay invested for an extended period and are comfortable with moderate to high risk.

Debt Funds

Debt funds primarily invest in fixed income government securities such as treasury bills and bonds, or reputed corporate deposits. Investing in debt funds is less risky than equity funds. Debt Funds are apt for those who are risk-averse and looking for a short-term investment.

Balanced or Hybrid funds

As the name suggests, balanced or hybrid funds invest in both equity and debt instruments to balance the risk and maintain a specific rate of return. The fund manager decides the ratio to reap the best of both debt and equity instruments.

Why Mutual Funds?

Mutual Fund investment offers various benefits that make them the most lucrative investment option.

Expert Money Management

Diversification

Systematic Investment Planning

Safe and Secure

Expert Money Management

Mutual fund companies have fund managers to choose the company shares, sectors, and debt papers in which the pooled mutual fund investment would be invested. This decision would be made by keeping the investors’ interest in mind.

Lock-in Period

The Lock-in period is the duration in which investors cannot withdraw their Mutual Fund investment or sell their Mutual Fund units. It varies across Mutual Funds. Generally, open-ended funds do not have a lock-in period while the tax-saving funds (ELSS) have a lock-in period of 3 years.

Low Cost

Mutual funds investment is a very affordable option for those who wish to invest in small amounts. MF houses levy a small fee called expense ratio, and it ranges from 0.5% to 1.5% of the Mutual Fund investment. The expense ratio cannot exceed 2.5% as per SEBI regulations.

SIP Option

If you don’t have a lump sum to invest, then you can invest in a Systematic Investment Plan (SIP). Our experts at ClearTax have handpicked best mutual fund to invest based on your requirements. The best thing about investing in mutual funds with ClearTax is that you can invest as low as Rs 500 an instalment.

Flexibility to Switch Funds

A good investor knows when to switch funds to keep up or stay ahead of the market. There are various MF schemes that allow you to switch funds. The fund manager will have an eye on the market to ensure the best returns while not getting burnt by the market volatility.

Investments Based on Goals & Focus Sector

Each investor invests in MF with a financial goal to achieve. There are funds with varying risk factors that help you in achieving all kinds of goals.

Diversification

MFs invest across various asset classes and company shares to mitigate risk. When one asset class underperforms, gains from other asset classes will negate the loss. However, it is recommended not to invest in too many (more than 5) as it may get difficult to monitor the performance of all avenues.

Flexible Tenure

EEquity-linked savings scheme (ELSS) is the only MF scheme that comes with a lock-in period of three years. This gives investors enough flexibility in terms of their financial goals, whether short-term or long-term. Investing over a certain timeframe makes it easier to plan when and how to invest.

Liquidity

Investing in Mutual Funds offer liquidity. You are allowed to redeem your investment at any time. There is no requirement of justifying your decision or searching for a buyer. You just have to place a request with your fund house and they will credit the money into your bank account within 3-7 working days.

Handpicked Funds

There are various MFs based on investment goals, individual risk appetite, sectors, and fund size, among others. Considering the number of available options, it can be a difficult task to research and compare the performance of various funds. ClearTax has handpicked best mutual fund which suits your profile.

Ease of Trading & Transaction Experience

Buying, selling, and redeeming fund units at the current market price per unit (NAV) is quite simple. All you have to do is place a request with the MF House and the fund manager will take care of the rest. The liquid nature of MFs can help you in case of an emergency situation.

Tax Efficiency

Investing in ELSS offers a twin benefit of tax deductions and wealth accumulation. Investments in ELSS are eligible for tax deductions under Section 80C of the Income Tax Act, 1961. You can deduct a maximum of Rs 1,50,000 a year. ELSS offers the highest returns among all Section 80C instruments.

Investment Safety

All MF houses are under the purview of the Securities and Exchange Board of India (SEBI) and the Association of Mutual Funds in India (AMFI). Both SEBI and AMFI are government bodies and hence, you can consider your Mutual Fund investments to be as safe as bank deposits.

Ease of Tracking

Investors might not have the time to analyse the performance of their MF investment. To make things simpler, MF houses provide investors with regular statements which makes it easy to track the performance of the fund(s).

Get Better Returns with Mutual Funds

Rs 1,000 invested monthly for 20 years in different investment options will become

Bank

3.65 Lakh

@4% p.a

Fixed Deposit

4.82 Lakh

@6.5% p.a

Gold

4.3 Lakh

@5.5% p.a

Mutual Fund

15.2 Lakh

@15% p.a

Who should Invest?

MFs make investing easier for you. Each fund is designed to fulfil different goals. It is particularly useful for those who do not have enough time to research and choose wisely.

When to Invest?

Factors to consider before investing

Funds Availability

Market Conditions

Investment Duration

Expected Returns

Investors may find it difficult to analyze funds by considering the factors mentioned above and hence, investing in SIP is the best option they have. There is no specific time that is considered the best to invest. The best time to invest is when you have money in hand. You shouldn’t worry about the market volatility, and not every Mutual Fund invests in equity instruments.

How to Invest?

Thanks to the digital wave, you can easily access MFs nowadays. How to invest in mutual funds depends on person to person. Indian MF investors are given the following options:

Direct Investment

Visit the nearest branch of the fund house to collect an application form or download it from the web. You must go through the fine print carefully and clear all your doubts before investing.

Agents

These are sales professionals who reach out to potential customers and inform them about the various fund options. You can choose a fund based on your income, investment goal, and risk appetite. The agent helps you with the application process, transactions, redemption, and cancellation. They charge a commission for their services.

Online (Distributors/Fund Houses)

Buying/selling MF units online is common today. This helps in saving time and efforts, and most importantly, makes it easier to compare various funds to make an informed decision. ClearTax is one such portal that handpicks the best Mutual Funds from the country’s top fund houses for you, absolutely free of cost. All you need to do is enter your personal details and make the payment. The entire process can be done in less than five minutes.

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