Do you want a professionally managed investment? Are you seeking to maximise your return and achieve your financial goals? You may consider investing in mutual funds. It pools money from investors and puts money in stocks, bonds, or a mix of both, based on the investment objectives of the scheme. You may consider putting money in equity funds. It invests predominantly in stocks and may offer an inflation-beating return over some time. However, you may consider your risk appetite before investing in equity funds.
Let’s take a look at four reasons to consider investing in mutual funds today.
1. Diversified Portfolio0
Mutual funds put money in different asset classes depending on their investment objectives. However, most mutual funds invest in two main asset classes of equity and debt. You could put money in equity funds if you are an aggressive investor who wants to invest in stocks. You may consider investing in debt funds if you are a conservative investor who prefers fixed-income investments.
You may invest in mutual funds if you seek exposure to shares of different companies or fixed income securities. For example, you may purchase only a few shares with Rs 5,000. However, you could get a basket of shares with Rs 5,000 if you put money in equity diversified funds.
It spreads your investment in shares of companies in different sectors and industries called diversification. If some shares in the portfolio do not perform well, other shares make up for the loss in performance. You may get access to a diversified portfolio without having to spend time researching stocks.
2. The expertise of a fund manager
You could avail of the services of an experienced fund manager if you invest in a mutual fund. The fund manager makes investment decisions, and the team of researchers picks stocks or bonds depending on the type of mutual fund.
If you don’t have the time or the expertise to pick stocks and fixed income securities for your portfolio, you may consider investing in mutual funds. However, make sure you pick the right mutual funds based on your financial goals and risk tolerance.
3. Pick a mutual fund based on your preference
You may select the mutual fund from a plethora of schemes, based on your investment objectives, time horizon, and risk appetite. You could choose between equity funds, debt schemes, and even balanced funds, which invest in a mix of equity and fixed-income securities.
You may have many choices, even within the broad categories of mutual funds. For example, you could put money in equity funds but may have to choose between large-cap, mid-cap, or small-cap funds. Large-cap funds invest your money primarily in stocks of large companies based on market capitalisation. Mid-cap funds focus on the middle range of listed stocks, while small-cap funds invest in shares of smaller companies.
You also may consider investing in sector funds that put money mainly in shares of companies in one particular sector. However, sector, mid-cap, and small-cap funds are volatile in the short-run. Invest in these funds only if you are an aggressive investor with a longer time horizon.
Also Read: 4 Ways to Select the Right Mutual Fund Plan
4. Invest in a lump sum or through SIP
Mutual funds offer you flexibility when investing your money. You may invest a lump-sum amount in debt mutual funds if you have idle cash. However, you may consider investing in equity funds through the systematic investment plan or the SIP. It helps you stagger your investment in the mutual fund scheme over some time.
You could consider investing in equity funds through the SIP to get the benefit of rupee cost averaging. It is an approach where you invest a fixed amount in the mutual fund scheme at regular intervals. You could buy more units of the equity fund when the stock market falls, and lesser units when the stock market rises. It helps you to average the cost of your units without having to time the market.
Mutual funds may help you reduce your income tax liability. You may consider investing in the equity-linked savings scheme or ELSS, which is a tax-saving mutual fund. It invests mainly in equity and equity-related instruments. Your investment in the ELSS qualifies for the Section 80C tax deduction, up to a maximum of Rs 1.5 lakh per financial year. You could save up to Rs 46,800 a year in taxes if you fall in the higher income tax brackets. In a nutshell, invest in mutual funds if you seek built-in diversification and your money managed by experts.
For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in
I write to make complicated financial topics, simple. Writing is my passion and I believe if you find the right words, it’s simple.
