Mutual funds are gaining popularity in India as a viable investment option. You might be curious about the fundamentals of mutual funds and want to learn more about mutual fund investing. This beginner’s guide on mutual fund investing will explain to you the meaning of mutual funds and all the necessary information and specifics regarding mutual fund investing. But before you get started with investing, it’s important to master the fundamentals of mutual fund investing. Without any further ado, let’s understand what mutual funds are.
What is a Mutual Fund?
A mutual fund is a professionally administered investment option that pools money from several individuals to buy securities. When you purchase a single unit in a mutual fund, you purchase a modest share in all of the fund’s investments. Mutual funds can be a lucrative investment option given their simplicity of use and benefits.
How do Mutual Funds Work?
An asset management firm (AMC) creates mutual funds by pooling contributions from diverse individuals and institutional investors with similar investment goals. A fund manager is a professional who manages a pooled investment by carefully investing in assets to maximize returns for investors while staying true to the fund’s investment objectives.
Fund managers are professionals with a proven track record of managing investments and a thorough market understanding. The cost ratio is the annual fee charged by the fund managers to operate the mutual fund. Regular dividends/interest and capital appreciation provide income to investors. They can either reinvest their capital gains in the form of a growth option or receive a consistent income in the form of a dividend option.
Mutual Fund Types
Mutual funds are divided into seven categories based on their investing objectives: equities or growth funds, fixed income or debt funds, tax-saving funds, money market or liquid funds, balanced funds, and exchange-traded funds (ETFs).
Here are some types of mutual funds:
Growth or Equity Funds: These funds invest in equity shares to maximize capital gains over the medium or long term. They are associated with high risk because they are tied to highly volatile stock markets, but they provide good profits over the long run. As a result, individuals with a high-risk appetite will find these plans to be an excellent investment alternative. Another type of growth or equity fund is a mid-cap mutual fund. Some of the best mid-cap mutual funds can help you grow your money by investing it in mid-sized companies. These are some of the fastest-growing firms in India
Debt funds: Also known as fixed-income funds, these funds invest in debt securities such as debentures, corporate bonds, government securities, and different money market instruments. Debt funds are a good option for people looking for a consistent, risk-free income. Debt funds are divided into liquid funds, short-term plans, income funds, and MIPs.
Tax Saving Funds – Tax saving funds are available to everyone who wants to expand their money while saving money on taxes. Tax saving funds, commonly known as equity-linked savings programs, provide tax benefits under Section 80C of the Income Tax Act of 1961.
ETFs (Exchange-Traded Funds) – An ETF is a stock exchange-traded fund that owns a basket of assets such as bonds, gold bars, oil futures, foreign currency, etc. It allows you to buy and sell units on the stock markets during the day.
Benefits of Mutual Fund Investing
- Professional knowledge
When you invest in a mid-cap mutual fund, your money is managed by a professional fund manager. Every fund manager comes with a team of researchers that monitor the market in real-time. Fund managers make appropriate changes to your mutual fund portfolio based on their inputs to enhance returns. This option is a good fit for paid workers (and business owners) who don’t have the time to watch markets or make timely investments.
Investing in mutual funds is a simple and hassle-free procedure. Investors can keep an eye on the market and make investments based on their needs. Furthermore, portfolio rebalancing and rotating across mutual fund schemes help keep returns in line with the expectations.
Tax deductions are available for particular investment options under Section 80C of the Income Tax Act, up to Rs 1.5 lakh every financial year. Tax-saving mutual funds are one of them has become an increasingly popular tax-saving option for Indians owing to their high returns and the short lock-in period of three years, among other options.
Investing in mutual funds is a great way of making your money grow slowly but surely over a fixed period. Mutual fund investing is a great way to begin if you are a beginner. But it is important to first determine your objectives and goals. You need to be careful and do thorough research while researching the best mutual fund investment options.