MUTUAL FUNDS

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A mutual fund is an investment vehicle where many investors pool their money to earn returns on their capital over a period. This corpus of funds is managed by an investment professional known as a fund manager or portfolio manager. It is his/her job to invest the corpus in different securities such as bonds, stocks, gold and other assets and seek to provide potential returns. The gains (or losses) on the investment are shared collectively by the investors in proportion to their contribution to the fund.

 

What are different types of mutual funds?
When you enter a car showroom, you see lots of different cars. There are hatchbacks, sedans, SUVs and maybe even sports cars. Each car in the showroom serves a different purpose. An adventurous person may prefer a sports car while a family man with kids (and a pet) may opt for an SUV. In the same way, there are different types of mutual funds in India.

• Debt funds

• Equity funds

• Hybrid funds

• Liquid funds

• Tax saving funds

• Dynamic allocation fund

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Why invest in mutual funds

There are many benefits of investing in mutual funds. Here are some important ones -

Professional expertise
Consider a situation where you purchase a new car. But the catch here is that you don’t know how to drive. Now, you have two options:

i) you can learn how to drive
ii) you can hire a full-time driver

In the first scenario, you would have to take driving lessons, pass the driving test and obtain a license. But if you don’t have the time for driving classes, it is better to opt for a driver. Same is the case with investments.
Investing in financial markets requires a certain amount of skill. You need to research the market and analyse the best options available. You need knowledge on matters such as macro economy, sectors, company financials, from an asset class perspective. This requires a significant amount of time and commitment from you and here comes Mutual Fund to the rescue.

Diversification
You may have heard the saying: Don’t put all your eggs in one basket. This is a famous mantra to remember when you invest your money. When you invest only in a single asset, you could risk a loss if the market crashes. However, you can avoid this problem by investing in different asset classes and diversifying your portfolio.

Tax benefits
Mutual fund investors can claim a tax deduction of up to Rs. 1.5 lakh by investing in Equity Linked Savings Schemes (ELSS). This tax benefit is eligible under Section 80C of the Income Tax Act. ELSS funds come with a lock-in period of 3 years.