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September 27, 2021, Monday, 01:09 Hrs

A beginner’s Guide: What is Mutual Fund & its advantages?
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Introduction

Everyone seeks to grow their money along with time without doing anything.  One such tool is the stock market, where you can invest your money for a certain period and ride on the growth wave as the company grows due to the founder and employees hard work. You must have heard about Warren Buffet, who is renowned and known as the ‘Oracle of Omaha’ is worth $107.8 billion and grew most of his assets through investment over a long period. If you want to be rich in the future without doing much work, then mutual fund investment is a good option.

What are mutual funds?

Mutual funds are diversified, low-cost, and tax-efficient ways of investment to grow your savings over a long time horizon. It is an ideal investment instrument for people who are not familiar with the technical knowledge of investing in the stock market or are busy in their routine life, and hence they can choose mutual funds. 

How is your money invested in mutual funds?

There are reputed asset management companies (Commonly known as AMCs) and hedge funds that invest your fund in the pool with other investor’s money to buy a diversified portfolio of potential stocks from the stock market. Each scheme in AMCs is made about wide sectors and topics like energy, infrastructure, technology, overseas funds and more. Moreover, there are three different classes of investment instruments in mutual funds.

Three types of mutual funds:

Check out the three different types of mutual fund investments below.

  1. Equity mutual funds: Equity mutual funds are a more popular investment option among younger investors as they help in gaining high returns than other types of mutual funds. They are considered high-growth asset plans as the AMCs invest in the equities in the stock market. Although with higher return potential, there is also a high risk associated with these types of investments.
  2. Debt mutual funds: These invest in the debt schemes of government, bonds, debentures and more, i.e., fixed income bearing instruments. They have a low-risk-low-return profile and are suitable for people near the age of retirement.
  3. Hybrid schemes: These mutual fund schemes are a mix of equity and debt funds in different proportions to provide a safe yet healthy growth rate for your savings.

Advantages of Mutual Fund Investments:

Check below the list of advantages associated with mutual fund investments.

  • Professional Expertise: The asset managers are professionals in their fields with years of experience managing funds. Some fund managers have more than 30 years of fund managing experience, making it a very easy process to use their learning and experience for your own benefit. If you are unaware of the business and financial world and do not want to indulge in this knowledge, trust the experienced fund managers and invest in mutual funds. 
  • Save Time: Many of the small and medium investors are earning professionals who work at various government and private sector companies full-time. The jobs make them busy throughout their career and hence they are left with very little time devoted to the family members and your loved ones. Hence you also save your precious time by trusting the reputed AMCs, which have a proven track record of good returns. 
  • Start with a very small amount: One best thing related to mutual funds is their investment flexibility. It means that you can start with Rs 500 savings per month and call yourself an investor. Since the AMCs pool money and then buy the stocks and debt instruments, making it easy for every small investor to get the benefits of high priced stocks. 
  • Tax Advantage: The dividends declared by the AMCs are tax-free in your hands. Also, you save your tax due to the investment instrument under Section 80C of the Income Tax Act 1961. Hence, if you are looking to save taxes and grow your money, mutual funds are the best options.
  • Liquidity: You can easily convert your mutual fund investment and get your money in less than 3 days for some schemes.

Conclusion:

Mutual fund give investors the best of both worlds- stock market returns and no hassles in picking right stocks. It is managed by well-experienced industry professionals known as Asset Managers. Due to its simplicity and suitability for all types of investors, mutual funds are becoming a very hot investment instrument for the earning middle-class in India.