Mutual funds are one of the best ways to invest for middle-class individuals. This is due to various reasons. Mutual funds offer investment options for risk-averse individuals and those willing to take more risks, like investing in equity funds. This article helps understand mutual fund investments, types of mutual funds, and the benefits of investing in them.
What is Mutual Fund Investment?
- Mutual funds are investment funds managed by professional managers who collect funds from investors and invest on their behalf. The profits of the investments are distributed among investors, who hold investments in units.
- They offer returns at a lower risk than direct investments such as equities.
- A fee is charged by the fund manager, which is deducted while distributing profits.
Benefits of Investing in Mutual Funds
In a period of low returns from fixed deposits, mutual fund debt fund investments can comfortably give higher returns besides tax benefits.
- It has become extremely easy to invest in mutual funds as an investment can be done through as little as Rs 500 through SIP(systematic investment plans) or Rs 5000 per year.
- For investors desiring higher returns and ready to take risks, equity mutual funds are the best option as they can comfortably give returns in the long term.
- Small investors neither have the time nor the expertise to buy stocks in the equity market directly. Mutual funds allow small investors to participate in the benefits of equity markets. Professional fund managers can help generate good returns for your investments.
- There is a possibility of investing in various stocks in different sectors through mutual funds with a minimal amount. There are options to invest in equity shares, bonds, and commodities like gold. Investment can be made in short-term debt funds or long-term equity funds as per your risk profile.
- Another advantage mutual funds offer is liquidity. Mutual funds can be liquidated as per the fund’s NAV(Net Asset Value) and are transparent.
- Mutual funds are regulated by the Securities and Exchange Board (SEBI), which governs mutual fund investments and ensures best practices that ensure investors’ interests are best protected.
- Mutual fund investments made through ELSS (Equity Linked Savings Scheme) give you income tax benefits up to Rs 1.5 lakhs in each financial year under Section 80C of the Income Tax Act, 1961.
There is a long-term tax benefit in capital gains tax, enabling higher returns than banks’ fixed deposit interest income.
Types of Mutual Funds
There are three types of mutual funds. They are:
- A Equity Schemes.
Schemes that invest at least 65 of their funds in equities are called Equity Schemes.
The different types of Equity Mutual Funds are:
- Large Cap funds
- Mid-Cap Funds
- Small-Cap Funds
- Multi-Cap Funds
- Sector Funds
- Index Funds
- ELSS Funds
- B Debt Schemes
At least 65 percent of the investment is made in debt and fixed-income securities.
Types of debt mutual funds are:
- Liquid Funds
- Dynamic Bond Funds
- Short Term Debt Funds
- Fixed Maturity Plan Funds
- Hybrid Schemes
These schemes invest in equity and debt funds to balance the risk.
Types of Hybrid schemes are
- Monthly Income Funds
- Conservative Hybrid Funds
- Aggressive Hybrid Funds
- Arbitrage Funds
Parag Parikh Flexi Cap Fund
- The Parag Parikh Flexi Cap Fund focuses on companies with low debt, high cash flows, and investor-friendly management and quotes at a discount to their intrinsic value when invested in.
- It has the flexibility to invest in both Indian and international companies, in all sectors and regardless of their market capitalisation.
- Sixty-five percent of the corpus is invested in the Indian stock market, ensuring that no tax benefits are lost for long-term investors.
- The fund has investments by its promoters of Rs 292 crore and a more than Rs 21,000 crore corpus. Investment by its promoters increases the confidence of investors in this scheme.
- The fund is for investors with an investment horizon of 5 years or more.
Mutual funds are the best investment vehicles for small, middle-class investors who cannot directly invest in equities. They greatly benefit from equity investments as mutual funds investments can be started with amounts as low as Rs. 500. With strict regulation by SEBI, there is no fear of losing money due to mismanagement and fraud. The returns are higher than bank fixed deposits in debt mutual funds and long-term tax benefits, making mutual funds a great option to invest in.