Mutual funds have grown steadily in popularity over the years. Investing in mutual funds seems to be the best option for those looking to grow their wealth quickly. Mutual fund investments come with a number of risks, but diversification ensures the risk is minimised to a certain extent.
It is important to know why mutual funds are worth investing in before setting out to know how it will help you create wealth.
Managing risk through diversification:
A mutual fund invests in a variety of stocks or bonds across different sectors or issuers, thus diversifying risk. A diversified portfolio minimizes the risks associated with individual stocks and bonds.
Management by professionals:
It is the responsibility of professional fund managers to ensure that mutual funds are managed in accordance with their investment objectives. Research teams assist fund managers in selecting stocks and managing portfolios.
Offering a wide range of solutions:
A wide variety of mutual funds are available to meet the investment needs and risk appetites of investors of different levels of experience. The purpose of investing in equity funds is to meet long-term goals like retirement, children’s higher education, marriage, etc., while investing in debt funds is to meet short-term needs like regular income or shorter investment periods. An investor with varying risk appetite can choose a hybrid mutual fund that combines both equity and debt.
The tax efficiency of mutual funds makes them an attractive investment option. Short term capital gains (held for less than 12 months) in equity funds are taxed at 15% and long-term capital gains (held for more than 12 months) at 10% (over Rs 1 lakh capital gains). Capital gains on non-equity funds are taxed at your income tax rate, while long-term capital gains on non-equity funds are taxed at 20% after indexation. Traditionally, interest income from fixed income investments is taxed according to the investor’s income tax rate. In comparison with traditional fixed income investments, mutual funds offer significant tax advantages to investors in higher tax brackets.
In order to take advantage of Section 80C tax benefits, you can invest in ELSS mutual funds.
There is no doubt that open ended mutual funds are among the most liquid investments after bank deposits, and are far more liquid than investments such as life insurance plans, infrastructure bonds, and post office schemes. There is usually no problem redeeming liquid, overnight, low duration, and ultra-short funds on the next working day.
How to make the most of your investment?
All investors want high returns from their investments, but mutual funds do not always deliver them due to market conditions. In spite of this, there are a few strategies that can be used to maximize returns on mutual funds.
Diversifying your portfolio
In order to achieve risk-adjusted returns, you need a diversified mutual fund portfolio. Depending on the volatility of the stock market, all categories and subcategories of mutual funds perform differently. By investing in a variety of instruments, you can lower your risk. In addition, investing in large, small, and mid-cap stocks will expand your portfolio further. This can increase your return on investment over time.
Choosing an SIP
The Systematic Investment Plans (SIPs) are a great way to invest in mutual funds. Investments in SIPs are relatively low-risk and tend to yield better returns even when markets are low. Moreover, it may protect your investments from the effects of any potential market crashes. In SIPs, timing isn’t as crucial to earning higher returns as it is in traditional investing. In addition, SIPs generate higher returns because interest is compounded. Investing in a SIP is also convenient because you can make small instalments per month and it won’t burden your financial planning.
The best way to invest in mutual funds is to set a specific goal in mind. A financial goal may be to fund the education of a child, purchase a home or car, or even fund retirement. A reclassification can be done once the intended goal has been achieved.
Assessing your risk appetite
With mutual fund investments, it is generally a good idea to take your age into consideration when assessing your risk-taking capacity. You should invest most of your money in equity funds when you are young. When you get older, you should gradually reduce your investment in equity funds and invest more in debt instruments. You can seek the guidance of a qualified financial planner.
It is extremely beneficial to review the performance of your fund on a regular basis. As a result, you can make calculated decisions about asset allocation and diversification of your investments. As a result, you will also be able to continuously assess your risk appetite and how it affects your financial goals. Additionally, regularly reviewing the performance of your fund ensures that your investment is active and in line with market conditions. You can use this knowledge to earn higher returns over time.
An investment in a mutual fund might be the perfect solution for those who are in a hurry to achieve a particular financial milestone. It is widely believed that investing early on in life will help one to achieve financial goals and generate wealth.
(By Abhinav Angirish, Founder, Investonline.in)