Know why people opt for mutual fund investments

Know why people opt for mutual fund investments
June 29 08:58 2018 Print This Article

There are many reasons why people opt for mutual funds investment. We will discuss today some of these very important reasons –

  • Customized solutions for various investment needs: One of the primary reasons for mutual fund investment is that it offers products for various investment needs. You may have investment need for few days to few months to many years, but all this can be fulfilled by selecting the appropriate products. Let us see example of few fund categories and how they can be useful for different investment needs of people –

Liquid funds – investment needs of few days to a few months

Short term funds – investment needs of few months to few years

Income Funds and hybrid funds – investment need of 3 years and above

Equity and balanced Funds – for long term investment needs of 4-5 years and above

ELSS Funds – for savings taxes under Section 80C of the Income Tax Act 1961

  • Products which suit people’s risk profile – The other important reason for mutual fund investment is that you can select a scheme based on your risk appetite. While investing in a fund you can refer to the Fund Riskometer which clear shows the risk attached with investing in it.

Following could be some suggested category of funds based on risk profile –

Low risk – Liquid funds

Moderately low risk – Ultra Short-Term Funds and Short Term Funds

Moderate risk – Income Fund and Hybrid Debt Funds

Moderately high risk – Equity Savings Funds, Balanced Funds and Large Cap Funds

High risk – Diversified Equity Funds, Mid and Small Cap Fund and Sector or Thematic Fund

  • Professional Management: Selection of securities, either debt or equity is a complex task which requires careful analysis of different factors like capital structure of the company, financial performance, financial risks, competition, industry growth and many other factors. Asset Management Companies (AMC) have teams of research analysts who have the necessary experience and expertise to analyze these complex factors. Each mutual fund scheme is helmed by a fund manager(s) supported by the team of analysts. Mutual fund investors can benefit from the experience and expertise of the fund management team and get better returns on their mutual fund investment.
  • Risk Diversification: When you invest directly in stocks, you are exposed to company risk, sector risk and the market risk. By investing in a diversified portfolio of stocks across different sectors, and various kinds of debt instruments, you are able to diversify specific risks related to sector risk, interest risk etc. upto to a large extent. Significant investment is required to build a diversified portfolio of equity and fixed income. Since mutual funds work on the concept of pooling of money, mutual fund investors can achieve risk diversification with a much smaller investment in equity, debt and balanced funds.
  • Systematic Investing: In the earlier days, our mothers would keep these little savings in an envelope or their jewellery boxes or cupboard drawers for the rainy day. One hears of stories where these little savings accumulated over the years helped families tide over emergency financial needs or buy jewellery for children’s weddings etc.

Mutual Fund systematic investment plan offers a convenient mechanism of investing small amounts of money every month to build a corpus for your future financial needs.

  • Tax Advantage: From taxation point of view mutual funds investment is classified into two groups – Equity and non-equity. Equity, as an asset class, enjoys significant tax advantages compared to other asset classes. Long term (investments held for more than 12 months) capital gains from equity mutual funds are taxed at 10% if your total long term capital gains is Rs 1 Lakh in a financial year. Short term (investments held for less than 12 months) capital gains are taxed at 15%.

On the other hand non-equity mutual funds, enjoys significant tax advantages compared to fixed income products. Long term (investments held for more than 36 months) capital gains from non-equity mutual funds are taxed at 20% after applying indexation. Short term (investments held for less than 36 months) capital gains are added to the income of the investor and taxed at the tax rate applicable to the investor.

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