Have you heard this before? "Mutual Funds Sahi Hai". The question is that are mutual funds really good and what exactly are they. Let's understand what are mutual funds and different types of mutual funds available in the market.
Mutual Fund is a financial instrument where money is collected from multiple investors and this big sack of money is used to invest in stocks, bonds, gold or any other financial instrument. This investment is managed and monitored by professional Fund Managers of Asset Management Companies (AMC's). This is just like travelling in a metro/local trains rather than owning a car and self-driving. We can also consider this situation as hiring a Ola/Uber pool where driver will take you and other peers to your destinations.
What are the advantages of investing in a mutual fund? For the people who believe that a professional fund manager can handle his/her money better and do not want to spend efforts/time in understanding and continuously managing/monitoring their money should definitely invest in mutual funds. This also prevents from greater risks one might face during self-investing. The another benefit mutual funds offer is affordability. At a personal level, you might not be able to buy few financial instruments that are out of your budget but with Mutual Funds you can buy a small piece of those financial instruments. Third benefit is that it offers great diversification i.e investments in Mutual Funds are done in multiple financial instruments to reduce the risk of losing money.
One has to look at the possible cons of mutual funds also to understand it properly. As an investor in mutual funds you have to pay the Mutual Fund scheme fees for managing your money, this is called as expense ratio. This is generally 0.5-3% of your returns i.e if your mutual funds returns are 12% compounded annually and if expense ratio of your fund is 2%, then your actual returns are 10%. A good fund will have less expense ratio. Liquidity in mutual funds can create a huge problem. If suddenly everyone starts withdrawing their money, it is difficult for the fund managers to handle the mutual fund. Do read about Franklin Templeton MF Crisis 2020. Also, if you want to sell the mutual funds, it will take at least 3 working days for money to reflect into your account.
What are the different types of Mutual Funds? Mutual Funds can be broadly categorized into 3 types.
1. Equity Mutual Funds :- Investing into stock market and buying company shares. These are popular for great returns over long-term. One can consider that when he/she invests into Equity Mutual Funds he is the owner/shareholder of the companies. Goal here is to grow your wealth.
2. Debt Mutual Funds :- These are also sometimes called as Fixed income funds as investment is done into Government Bonds, Debentures, Commercial Papers, Bank Certificates, Treasury Bills. One can consider that when he/she invests into Debt Mutual Funds he is acting as a lender to someone. Goal here is generally to get stable and regular income.
3. Hybrid Mutual Funds :- It is a mix of Equity MFs and Debt MFs. Sometimes investments like gold are also added into these mutual funds. Goal here is to have a moderate risk and have balance between growing wealth and getting stable income.
There are key things or jargons one should know before investing into mutual funds. Let's do reverse engineering i.e take few examples of Mutual Fund schemes and understand the details about this. Following are few Mutual Funds example :-
1. Kotak Bluechip Fund - Direct Plan - Dividend
2. Aditya Birla Sun Life Small Cap Fund - Direct Plan - Growth
3. HDFC Corporate Bond Fund - Direct Plan - Dividend
4. Axis Arbitrage Fund - Regular Plan - Growth
How to invest in Mutual Fund? The easiest way of doing this is to create a account with a Mutual Fund Online Platforms such as ETMoney App, Paytm Money App, Zerodha Coin, Groww App, Scripbox, etc. Other way is by creating account on particular AMC's official websites. It is not advisable to register it offline as government are slowly putting regulations to get things online and avoid unnecessary paperwork.
What is NAV? It stands for Net Asset Value. In simple words, it is the price for 1 unit of the mutual fund. This is analogous to buying 1 share of a company. If you want to invest Rs 10,000 in say Kotak Bluechip Fund which has NAV of Rs. 200. Then you will get 50 units (10000 / 200) or 50 shares of Kotak Bluechip Fund. As the investment grows, the NAV of Mutual Fund scheme will grow. If after 2 years the NAV becomes Rs. 300 and you decide to sell the mutual funds at this NAV then your profit will be (Sell Price - Buy Price) i.e 15,000 (300*50) - 10,000 = Rs. 5,000.
Let's come on to the important part i.e Taxes. How much does government tax on Mutual Fund?
Tax exemption under 80C : Investment in Equity Linked Savings Scheme (ELSS) Mutual funds are tax exempted upto 1.5 lakhs.
For other mutual fund investments, taxes are categorized as Long Term / Short Term Capital Gains (LTCG/STCG). The period and (tax rate) is defined as following :-
There are many sub-types of mutual funds. One can see the below flow-map to see different varieties of products in Mutual Fund industry.
We'll discuss about each type of mutual fund and how to choose suitable mutual fund for you in next article. Thank You.
Enjoyed reading the article above , really explains everything in detail, the article is very interesting and effective. Thank you and good luck for the upcoming articles. 80c deduction list
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