Mutual Funds, Their Types, and Benefits

Mutual Funds, their types, and benefits

A mutual fund is an investment platform where fund managers invest funds on behalf of several investors. The regulatory body Securities & Exchange Board of India (SEBI) controls funds.

Each shareholder participating in a mutual fund earns in proportion to the amount of money they invested. Investing options for mutual funds include stocks, bonds, money market instruments, and other assets. Mutual funds’ Investments may provide tax advantages depending on the vehicle of investment and redemption patterns.

• The drawbacks of mutual funds include that they do not provide investors ownership of the underlying holdings; as a result, they have little influence over the structure and constituents of mutual funds. Compared to index funds, mutual funds are also more expensive and riskier.

Pros of Mutual Funds

The pros of mutual funds are as follows:

• Mutual funds come in various flavors and provide portfolio diversification across sectors and businesses.
• Mutual Funds allow regular investors who are not familiar with the markets to access fund managers who are professionals and specialized in managing funds at an affordable cost.
• Active mutual funds that hold important positions in stocks have the potential to impact the performance of the equity and earn profits for shareholders from those funds.
• The market for mutual funds is liquid, making it very simple to trade and locate a buyer. Multiple assets cannot be described in the same way.

How to invest in Mutual Funds?

• Recognize your tolerance and capability of risk. Risk profiling is the method of determining the level of risk you are willing to accept.
• Asset allocation is your next step. To balance the risks, your asset allocation should ideally include both debt and equity securities.
• Mutual funds can be compared using their past performance and investing goals.
• Select the mutual fund schemes in which you will invest and submit your application either online or offline.
• To ensure that you receive the most out of your investments diversification and follow-ups are vital.

Types of Mutual Funds

Growth Funds: Equity mutual funds are assemblages of corporate stocks. Investors might deploy money to various funds dependent on their objectives. For instance, growth funds concentrate on companies’ stocks that have the capacity to grow in the near future. Companies’ stocks that consistently pay dividends are included in income funds.

Advantages

• Expert management
• Tax benefit
• Diversification
• High returns potential
• Convenience
• Liquidity
• Affordable

Money Market Mutual Funds: Mutual money market funds invest in short-term debt issued by corporates, governments, states, and municipalities. For instance, they might put money into US government bonds and debt from renowned organizations like Apple Inc. or Exxon. This kind of mutual fund seeks to maximize income while reducing risk.

Advantages

• Liquidity
• Safety
• Higher Yields

Income Funds: Bond funds are regarded as prudent investments and give investors a stable income. Their investment portfolio is limited to government and corporate debt just like money market mutual funds. In general, they are preferred for retirement planning.

Advantages

• Greater diversification
• Professional management
• Monthly dividends

Hybrid Funds: Balanced funds seek to achieve a balance between bond and equity investments. They are long-term funds that combine equities and bonds in a specific proportion. They might, for instance, have 60% equities and 40% bonds. These funds’ composition is adjusted to current economic conditions through periodic rebalancing, and some are adjusted based on the investors’ objectives. For instance, they might adopt a more conservative strategy near retirement.

Advantages

• Reduces risk
• Best for First Time Equity Investors
• Stable and Consistent Returns

Exchange-Traded Funds (ETFs) – An ETF trades on a stock exchange and holds a variety of assets including bonds, gold bars, futures contracts for oil, foreign currency, etc. It provides the flexibility of buying and selling shares at any time of day on stock exchanges.

Advantages

• Diversification
• Trades like a Stock
• Lower Fees
• Immediately Reinvested Dividends
• Limited Capital Gains Tax
• Lower Discount or Premium in Price

Tax Saving Funds – Tax-saving plans are an option for anyone who wants to increase their capital while simultaneously paying less tax. Tax saving funds commonly referred to as equity-linked savings schemes, allow investors to take advantage of tax exemptions under Section 80C of the Income Tax Act of 1961.

Advantages

1. Lock-in period of only three years compared to other tax-saving avenues.
2. ELSS or Tax saving mutual funds have more potential to offer higher returns than PPF or NPS.
3. You can invest the maximum as per your capacity.
4. Earnings are taxed only at 10% of the gains.
5. Professionally managed funds.
6. Investing in Tax Saving Fund can save Rs 46,800 in Taxes.
7. Average returns around 15% in last 3 years, better than FD or PPF.