What is a mutual fund?
One of the first questions that potential investors get while recommending mutual funds to potential investors is “what are mutual funds?” In simple terms, mutual funds are a type of investment tool which is a professionally managed investment fund that pools money from several investors. The said pool of funds is used to buy securities by the fund manager. It is the fund manager’s job to invest the funds in different securities such as bonds, stocks, gold and other assets. The resulting gains or even the losses on the investment are shared collectively by the investors in proportion to their contribution to the fund.
What are the advantages of investing in mutual funds?
Here are some of the major advantages of investing in mutual funds:
Investors of mutual funds can enjoy professional help:
To invest in financial markets, one needs to have a certain amount of skill. If you are considering investing in mutual funds, you firstly need to thoroughly research the market and determine the best investment options available there. Apart from that, you need to be knowledgeable about things such as macroeconomy and the different sectors, from an asset class perspective. To put it in simple terms, all of this requires a significant amount of time and commitment from you. But, if you don’t possess the skill or the time to research the market, investing in mutual funds may be an excellent alternative as in these schemes, a professional fund manager takes care of your investments and works to provide reasonable revenue. For their work, you must pay specific fees for the professional management of your mutual fund investments. In a mutual fund, a fund manager regularly takes care of investments and rebalances the portfolio accordingly to meet the scheme’s objectives. Portfolio management by professionals is one of the most important advantages of a mutual fund.
There are tax benefits:
Another benefit of mutual funds is that investors can claim a tax deduction of approximately ₹ 1.5 lakh by investing in equity-linked savings schemes (ELSS). This tax benefit can be enjoyed by investors as per Section 80C of the Income Tax Act. However, it is important to remember that ELSS funds come with a lock-in period of 3 years. Therefore, if you are thinking of investing in ELSS funds, please remember that you can withdraw your money only after the lock-in period ends. Other than tax benefits for ELSS, another advantage is the indexation benefit available on debt funds. In traditional investment tools, all interest earned is subjected to tax. However, in the case of debt mutual funds, only the revenue earned over and above the inflation rate is subjected to tax. Through this benefit, investors get to earn post-tax revenue.
Mutual funds are affordable:
The notion that investment tools might be expensive is one of the things that cause prospective investors to think twice. While it is true that some of the investment tools might be costly, the same can’t be said for an investment in mutual funds. The minimum initial investments for most mutual funds are affordable.
Mutual funds offer liquidity:
These funds can be easily redeemed i.e., liquidated if an investor has some financial emergencies. A mutual fund portfolio can be redeemed on any business day i.e., whenever the market or banks are open. This ensures that you have easy access to your money. After redemption, the redeemed amount will be credited into your bank account within one day to 3-4 days, depending upon the type of scheme. In the case of liquid funds and overnight funds, the redemption amount is paid to the investors on the next business day.
Things to consider while investing in mutual funds when the market is performing well:
The market is a highly volatile investment space. There are times when the market performs well and there are sometimes when they go through a bear phase. While an investor might be hesitant to invest in the market during a bear phase, they might not feel that cautious when the market is performing well. But that does not mean that the investor should throw caution to the wind. Listed below are the five things that one must keep in mind if you are investing in a mutual fund scheme when the market is performing well enough:
Re-evaluating the investment portfolio:
Just imagine this scenario. The market is currently at its peak and is enjoying its all-time high. Looking at the market, you may feel inclined to withdraw your investments. But, before taking a decision, please get in touch with a good financial advisor and get your portfolio re-evaluated from them. In case you are a pure equity investor, then, some of your investments can be shifted to some of your investments to debt funds. Taking this action might protect your investments in case of volatility.
Diversifying the investment portfolio:
Instead of withdrawing your investments from the investment portfolio, you can opt to systematically transfer your portfolio to things like international funds, commodity funds or even debt funds. Doing so might mitigate risks from your investment portfolio. Apart from that, you may continue your systematic investment plan as a balanced portfolio might protect your portfolio from value erosion.
Re-evaluate the investment goals:
If the mutual fund scheme helps you to achieve your goals, it’s time to re-evaluate them. Instead of withdrawing, you can set up newer goals that will assist you in moving your money efficiently. In case you followed aggressive investing before, now, you can follow a slightly conservative policy. Doing so might help you to avoid falling into traps.
Do not stop SIP:
Rupee cost averaging is one of the biggest benefits of SIP. Essentially, it averages out your purchasing costs over the tenure of the investment period. Through this, wealth is created in the long term. Therefore, do not liquidate your SIP at any cost.
Do not try to time the market:
Timing the market is a mistake every investor has made during their investing journey. Doing so not only results in missed opportunities but also, timing the market may lead to erroneous decisions that can hamper the growth of an investment portfolio. Remember, the time in the market is more important than the timing of the market.
Apart from the five above, please do not hesitate to invest in the market regardless of market condition. Rise and fall are part and parcel of the market. A really experienced financial advisor can help you formulate a strong financial plan that can help you to create wealth in the long term.
Disclaimer: Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.