There may not be an answer to questions like “when did time begin”, “is there an afterlife”, or “what colour is the mirror”. But there certainly is an answer for “why invest in mutual funds”. The answer, in fact, is a long one, as mutual funds can have several benefits.
Keep reading to discover what are mutual funds, some advantages of mutual funds, and why investing in them is a good idea.
What are mutual funds?
Mutual funds are investment instruments that pool money from multiple investors and invest it further in market securities like equity, debt, or cash. There are many types of mutual fund schemes, each with unique uses, benefits, and purposes.
Now that you know what mutual funds are, it is time to understand the reasons to invest in them.
Why invest in mutual funds?
Power of compounding:
The power of compounding adds your profits to the principal amount and reinvests the total money to earn higher profits. Mutual funds offer the power of compounding that can considerably increase your returns over time and help you achieve future goals that may seem out of reach right now.
Multiple investment methods:
A mutual fund investment can be made in multiple ways. You can invest in mutual funds through a Systematic Investment Plan (SIP) or a lump sum. The former lets you invest small quantities at a specific frequency, such as weekly, monthly, quarterly, etc. The latter enables you to invest larger amounts of money in one go. This offers room for choice for different income groups and investment budgets.
Multiple types of mutual fund schemes:
There are five types of mutual fund schemes as per the Securities and Exchange Board of India:
- Equity Schemes
- Debt Schemes
- Hybrid Schemes
- Solution-Oriented Schemes – For Retirement and Children
- Other Schemes – Index Funds & Exchange Traded Funds and Fund of Funds
Each category caters to a unique goal, risk appetite, and purpose, allowing you to select a fund based on your requirements.
Mutual funds are also categorised on other grounds such as their portfolio management style. Thus, you have active funds as well as passive funds to explore. Likewise, you can get access to global markets through international funds.
Tax benefits:
Equity-Linked Savings Scheme (ELSS), a type of mutual fund, offers tax benefits under Section 80C of the Income Tax Act, 1961. You can claim a tax deduction of up to Rs 1.5 lakh per annum on your investments made towards ELSS. This can help you save up to Rs 46,800 in a year in taxes. Additionally, since ELSS has a lock-in period of three years, your returns are categorised under long-term capital gains. These are taxed at 10% on profits exceeding Rs 1 lakh per year.
Professional management:
Mutual funds are professionally managed by a fund manager. The manager makes decisions on buying and selling securities, conducts research, and ensures sticking to the fund’s objectives. With a professional on board, all you need to do is pick a suitable scheme and put your money in. Post that, you can sit back and relax while the manager takes care of the nitty gritty.
To sum it up
Mutual funds can be an effective wealth-creation tool. As you can see, they offer many advantages and help you achieve your varied goals.
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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS. READ ALL SCHEME-RELATED DOCUMENTS CAREFULLY
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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
