Your complete guide to investing in mutual funds
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Your complete guide to investing in mutual funds

  • Highlights

  • Pick a mutual fund basis the asset class, your investment aim and risk appetite

  • Mutual funds offer liquidity, flexibility, transparency and more

  • Bajaj Finance Mutual Funds have low transaction cost and good returns

  • ELSS funds offer tax benefits

Of all the investments linked to the market, mutual funds are one of the most sought-after options owing to the high rate of interest that they offer. As of 2017, over 60,000 investors are choosing this instrument each day. Like most instruments, mutual funds have advantages and disadvantages, and so, it is important to evaluate your options to select the best fund. It doesn’t matter if you are creating wealth for retirement or saving up for your child’s college expenses, take the time to understand how mutual funds work and the value they add to your portfolio.

What is a mutual fund?

In a mutual fund, money from various investors that have a common financial goal is invested in assets such as stocks, bonds, liquid funds, etc. You don’t need to constantly monitor your investment as an expert manages it. This gives you the opportunity to earn high returns without keeping an eye on everyday fluctuations, and also learn about how the market performs. The returns from mutual funds are market-linked, which means that they vary depending on the performance of the market. So, your investment must be timed accurately.

There are many types of mutual funds you can choose to meet your financial objectives. Here are the most common ones.
Market funds: These are funds that invest in short-term fixed income securities such as government bonds, certificates of deposits, and commercial paper. They offer moderate returns in a short span.
Income funds: These funds invest in instruments such as bonds and debentures that offer a fixed rate of return. As the name suggests, they offer regular income to you.
Equity funds: These funds generate high returns by investing in stocks and carry higher risk too.
Pension funds: Funds of this nature are tailored to suit a long-term goal, primarily to create sufficient wealth for retirement. They comprise investments in equity and debt markets.
Tax-saving funds: Also known as ELSS or Equity Linked Saving Schemes, these funds invest in equity and offer high returns. They are high-risk options too, but are eligible for deductions under the Income Tax Act.
Debt funds: These carry low risk and invest in debt instruments such as debentures, bonds, and fixed income assets.
Fund of funds: These funds invest in other mutual funds and are considered to be low on risk.

You can select your mutual fund based on risk: high, low and medium, on the basis of the asset class: equity, debt, market funds, or on the basis of the investment goal: pension, growth, tax-saving, etc. Also note that there are several other types of mutual funds from the ones mentioned above such as gift funds, hybrid funds, index funds and real estate funds.

Moreover, you can opt for a close-ended fund, which has a defined maturity, or an open-ended fund, which does not have an end date. Optionally, you can choose interval funds that are a combination of open-ended and closed-ended funds.

5 reasons to Invest in SIP

What are the benefits of mutual funds?

There are many benefits associated with investing in mutual funds. Take a look at what they are.
1. Services of professional fund managers
Financial professionals manage your investment in mutual funds after a thorough analysis of companies. They choose to invest the money in various securities based on the type of mutual fund. This saves you a considerable amount of time as you don’t have to understand the market, know the nuances or the ins and outs of the mutual fund segment.

2. Diversification of investment
With mutual funds, you can spread your risk across different types of assets such as stocks, bonds and cash. With a portfolio spread across different sectors and industries, you can accrue benefits through diversification. Assume that you invest in the IT sector and it doesn’t offer desirable returns. This may lead to a loss. However, if your fund manager spreads your investments across different sectors, then a loss in one sector will be balanced by gains generated by investments in other sectors.

3. Liquidity
Unless your mutual fund has a lock-in period, you can withdraw your money at any time. You will have to pay an exit load, which is a fee to exit prematurely, but it will give you access to your money in 2–4 days. This allows you to access cash instantly in emergent situations.

4. Flexibility
With mutual funds you can choose to invest in a plethora of schemes depending on your end goal. In addition, there are open-ended and close-ended schemes that you can invest in, and you can also decide whether you want to make a lump sum investment or through SIPs (Systematic Investment Plans). So, depending on your budget and risk appetite, you can select an option that works for you.

5. Transparency and low transaction cost
This form of investment is completely transparent and offers details on how the market is performing. You will receive fact sheets, annual reports and other material that will help you understand your investment better. Also, due to economies of scale, the transaction cost is lower—a benefit that gets passed on to you, the investor.

6. Regulated and monitored
The Securities and Exchange Board of India (SEBI) monitors and regulates mutual funds, and stresses upon transparency to protect your interests as an investor.

Assess a mutual fund before making an investment

Scrutinise your financial goals before you commit to a mutual fund. Then, check the assets the scheme you are considering invests in, and gauge if it will help achieve your your goals. In addition, look at the history of the fund, its longevity and its success in the past. Aim to invest in mutual funds that have an expense ratio of less than 1%, as this indicates that less than 1% of the fund’s assets will go towards paying for expenses.
Here are the things you need to consider before choosing to invest in mutual funds-

1. Identify your financial goal
It is best to invest with a goal in sight. So, determine what you want to achieve with a mutual fund investment- whether you want to create a safety net for your child, finance a family wedding or save for your retirement. Basis this, craft a plan of action.

2. Measure your risk appetite and choose a mutual fund type
When you choose to invest in a mutual fund, is best to analyse your financial position, goals and ability to withstand risk. Generally, as you grow older, your risk appetite decreases. So, as a senior citizen, you would prefer something secure like a fixed income fund or a pension fund as opposed to a budding professional who may consider equity funds, owing to a higher capacity to absorb losses.

3. Determine your investment amount
Choose an amount that allows you to meet all your responsibilities comfortably while making an investment. After all, you will be investing in a market-linked instrument that doesn’t offer a guarantee on returns. So, only after evaluating your goals and your financial situation should you decide the amount.

What are the tax benefits that mutual funds offer?

When you choose to invest in mutual funds with the express purpose of saving taxes, be sure to pick ELSS funds. Equity Linked Saving Schemes have a lock-in period of just 3 years and give you tax benefits under Section 80C of the Income Tax Act. You can claim tax deductions up to Rs.1.5 lakh per year.

With this information you can assess your needs and select a mutual fund that is right for you. An excellent way to make a beginning is by selecting a Bajaj Finance Mutual Fund. It offers excellent security, low transaction costs, good liquidity and you can apply for one online as well.

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