It isn’t surprising that mutual funds remain amongst the most popular choice for investors in the market. With professionally managed portfolios that offer the freedom from constantly watching the market at all times, mutual funds certainly make investing easier. They are also considered a safer choice, with the risk significantly lower when compared to other investment options, without having to compromise too much on the returns. With the Mutual Funds Sahi Hai campaign increasing awareness about the product, it is attracting new investors every day. This include both young tech savvy investors keen to inculcate the habit of savings in their lives and experienced investors moving away from traditional products.
Since a variety of diverse portfolios are offered by different fund houses, investors can easily choose whether they want to invest in long-term or short-term, and in equity or debt. This gives investors with all sorts of investment objectives an opportunity to invest in mutual funds. With almost the entire financial industry having gone digital, investors can also invest in mutual funds online.
If these benefits are tempting enough, there are a number of facts that you must know before you start investing in mutual funds. Let’s discuss 6 of the most critical ones:
#1 – Different Types of Mutual Funds
Fund houses have been launching new mutual fund investment schemes on a regular basis. But do investors know how these differ? There are a few common types of mutual funds:
- Equity Mutual Funds: Equity mutual funds invest primarily in equity securities or stocks. These come with higher risk since they are directly affected by the stock market and its volatility. At the same time, they also provide good returns to investors. Further, in equity, you can have growth funds (that do not usually provide regular dividends) and income funds (which pay large dividends).
- Debt Mutual Funds: These are those funds that invest in fixed-income securities. These are considered safer than equity mutual funds. Income is earned usually through the interest that is paid on these securities.
- Balanced Mutual Funds: Balanced mutual funds invest in a mix of equity and debt mutual funds. They give the returns of equity, but the safety net of investment in debt.
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- Speciality funds: These funds invest in specialized commodities such as real estate or any other industry. Their returns depend upon the performance of that particular industry. Some examples of these kind of funds are Banking, Pharma, Technology, Metals and FMCG funds.
#2 – Expenses incurred in investing
There are various ratios that you should consider while investing in mutual funds, as these are the expenses that will be deducted from your profits. The most important numbers to look at are:
- Expense Ratio: The expense ratio involves annual charges incurred on fund management. These are charged by the AMC (Asset Management Company) that manages your fund for analysis, administration, research etc. The lower the expense ratio of the firm, the better.
- Entry Load: This is a percentage of the fees that is charged for purchasing a certain mutual fund. Thus, an investor would purchase a mutual fund at Net Asset Value, plus the entry load applicable From August 2009, however, SEBI has done away with this practice of charging entry load for mutual funds.
- Exit Load: More often than while purchasing, but mutual funds can also charge if you exit the fund before the stipulated amount of time.
#3 – Types of Investment Plans
To invest in a mutual fund, you can proceed via two primary methods. You can either invest in a lump sum or go for a SIP (Systematic Investment Plan). In a lumpsum option, an investor invests their capital in one go. This works for mutual funds that are debt-oriented. Most investors won’t have the capital required to make significant returns from a lumpsum investment. For them the following method makes more sense.
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In a Systematic Investment Plan or SIP, an investor invests a fixed sum of money in different instalments at a regular time period (usually once a month on a particular date). These are considered safer, as the investments are staggered over the whole year, and investors can take advantage of market volatility and snap up units at lower costs.
#4 – Time Period of Investments
Mutual funds are generally considered long-term investments. However, that’s not entirely true. Mutual funds are available for short-term as well as long-term plans. Some of the short term mutual funds even range from a maturity period of a few days to a few months. While equity funds perform better in the long term, debt funds are suitable for the short term.
Since every mutual fund has a different objective and the maturity period differs with it, it is important to research about it and choose the one that aligns with your investment objective.
#5 – Taxation policies
Like all the other investment options, returns from mutual funds are also taxable. These differ on the basis of equity or debt orientation.
- Equity Funds: Equity funds are subject to capital gains tax. A short-term capital gains tax of 15% is applicable if an investor withdraws within a year. However, the long-term capital gain tax charged on investments for longer than one year, is fixed at 10%.
- Debt Funds: A short-term capital gains tax is charged if funds are sold in less than three years, while long-term capital gains tax is charged if they are sold post three years.
Mutual fund incomes are exempted from Wealth Tax.
#6 – Actively and Passively Managed Funds
Mutual Funds can also be classified on the basis of their management, whether they are actively managed or passively managed.
Actively managed funds generally deliver superior returns as they try to beat the benchmarks of Sensex and Nifty. They aim to keep investors aligned for the long haul and try to generate higher returns.
Passively managed funds have the objective of replicating the index benchmarks and do not try to beat the market.
The costs associated with passively managed funds are therefore lesser.
With the popularity of mutual funds as a safe investment option, it is important to research and analyze all the facts before making a decision to invest in mutual funds online.