Investing in direct equities is often a high-risk, high-reward deal. Stock prices could move beyond anyone’s calculation, which could be rewarding, but at the same time, it increases the risk associated with it. A mutual fund is something that could be of great help here. Consider an expert picking the best equity and other options for you according to a theme that works for you. This is exactly what a mutual fund does. But the benefits of mutual funds scale far beyond that. Let us understand mutual funds in detail and see why you should care about investing in them.
Mutual funds are an investment option where a fund manager creates an investment portfolio, and your money is invested in the same. This portfolio is not random and is created based on a theme. For instance, if the fund manager is creating a highly aggressive portfolio, then the portfolio’s main component could be equities. At the same time, if the portfolio is made as a lower-risk investment option, it could have more debt components. Accordingly, there are multiple options for you to choose from here.
But how is investing in mutual funds a wise option? Here are a few factors that make mutual funds a feasible mode of investment.
Diversification is often a key element of a successful portfolio. The idea is that if your investment pans across a variety of securities, the risk associated with the investment may decrease. For instance, if one security is seeing a downtrend, the same could be offset by other security’s performance. Here, a mutual fund becomes the perfect tool for diversification. Even when it prioritizes particular security, the portfolio will also have the presence of other asset classes. For example, investing in a balanced fund can give the investor access to a wide range of equity-oriented as well as debt-oriented securities.
Managing a portfolio of your own can be a chore. It requires a higher level of expertise and demands a lot of research and time. This is especially true if equities are part of your portfolio, as stock prices could fluctuate every second. But investing in mutual funds is helpful here, thanks to the expert management by the fund manager. In the case of a traditional mutual fund, the fund manager will create a portfolio according to the theme and make sure the same remains valid at all times through regular intervention.
Mutual funds allow you to start your investment journey with capital as low as Rs.500. You can invest more in the fund anytime to increase the corpus. Alternately, it also gives you the option to invest a smaller amount monthly to slowly build a corpus. This is called Systematic Investment Plan (SIP). Through this, supported by the effect of compounding, you can plan and create a substantial corpus in the long term.
Some mutual funds come under section 80C of the Indian Income Tax Act, 1961; hence, they help you save on taxes. An example of this includes ELSS, an equity-focused mutual fund scheme with a lock-in period of three years.
While mutual funds remain one of the most beneficial ways of investment, one factor to consider while investing is the expense ratio. This is a charge levied from the investors of the fund, and it goes towards the upkeep of the fund. A higher charge could cause a serious void in your long-term capital gains, which is why choosing a fund with acceptable levels of expense ratio is important.
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