Mutual Funds are considered to be a popular and safe investment option that gives good returns over a long period of time.
When funds from various investors are collected together to be used for bigger purchases like listed company stocks, corporate bonds, government bonds, and money market instruments, a mutual fund is formed.
The responsibility of the mutual fund manager, often referred to as the portfolio manager, is to invest the funds into a variety of assets, such as bonds, equities, gold, and other assets, in order to ultimately generate returns for the investors.
The profit and loss experienced eventually are shared among the investors depending upon their percentage of the contribution of the fund.
In this article, we will dig deeper to understand if Mutual Funds are a safe investment option for you.
wHAT IS a mutual fund?
When mutual funds buy firm equities, investors don’t own those stocks directly. The other pool investors and you split any gain or loss equally. This is how A mutual fund is referred to as “mutual”.
There are certain advantages and disadvantages attached to mutual funds. Before taking a step towards investing in mutual funds you need to consider a few things. A detailed insight is essential into factors like expense ratio charged by the fund, front-end & back-end load charges, control over investment decisions, and diluted returns.
Why should you invest in mutual funds?
It is an easy and safe practice of indulging in mutual fund investments because of its low risk-taking in diversifying the investing options.
Advantages of investing in mutual funds
- The amount of return gained by mutual fund investments is comparatively much higher than traditional investment options.
- If an investor has studied the market performance with deep insights, then the bull run gives an immensely high rate of return to the investors.
- It is advantageous for investors to gather huge returns due to the market’s diversification options. It significantly lowers the risk level.
- Indian Government has given considerable facilities to mutual fund investors. They can claim a tax deduction of up to INR 1.5 Lakhs by investing in Equity Linked Savings Schemes (ELSS).
- In case an investor chooses a debt mutual fund, then there is an ample advantage to him/her. In a debt mutual fund scenario only, the returns earned exceeding the inflation rate i.e., embedded in the cost inflation index CII are subject to tax. Hence giving a higher return to investors.
- Due to the presence of financial advisors, it is easy to invest in funds to reach the financial return goal. These people charge for their services but eventually make the investing journey much easier and smooth.
- There is a vast growth potential for investment due to the enormous scale of the economies.
- Index mutual fund benefits investors due to the diversity of the portfolio. It can be started at as low as INR 1000.
- Liquid funds are helpful in need of money in the short term.
- The choice is complete to the individual if he/she desires to invest on a daily basis or remain for a lifetime. The decision can be made anytime if you want to continue the journey or walk down the road to quitting with the desired profit earned due to the rise in the market. Or gamble to see if it rises higher and higher.
- If there is a need for money, investors can easily sell their shares at the running market rate. Mutual fund offers the opportunity to withdraw money at the ideal rate according to the scheme’s rules. As per the SEBI guidelines, money is transferred within 3 working days to the attached bank account.
- There is a lenient tax treatment for mutual fund investors for their capital gains when compared to interest income.
- Due to transparency in the rules and regulations imposed by the SEBI Securities Exchange Board of India, it has been seen to have worked for nurturing investors’ interests. All the key important factors of the scheme like objectives, policies, past records, etc are shared regularly with the investors.
- The process is simple and easy for people to generate wealth to reach the desired goal of financial stability without consuming the regular leisure time of the investors.
The disadvantages of investing in mutual funds
Mutual Fund investments are subject to market risk.
- Another reason for a mutual fund being at a disadvantage is the diluted returns. Due to certain rules, regulations, and restrictions, many funds provide diluted returns.
- The depreciation might occur over a year and is contingent on deferred sales charges. It ranges from 2% to 4% Mutual funds are less appealing to investors who want to often exchange their shares since they cut into the returns provided by those funds.
- It is advised never to invest the entire amount in a single asset just to save oneself from the market crash scenario.
- Investors of Equity Linked Savings Schemes (ELSS) is that they can withdraw their money only after the lock-in period ends which is 3 years.
It is essential to have expertise in the skills to research, analyze and evaluate market scenarios like the micro economy, sectors, and company financials. Due to a lack of skill and experience, it is tough to read the fine lines of rules and clauses that come up.
An experienced financial expert can help you turn your risks into profits and make mutual funds investment a safe and secure investment option for you.
