How 7 things will change the way you approach Mutual Funds?

How do mutual funds work?

The foundation of how mutual funds operate is the pooling of money from many different investors. The fund house raises capital from investors and makes investments in a range of financial products, including stocks, bonds, and so on. The securities are chosen in accordance with the fund's investing goal. For instance, if a fund's investment aim is capital growth, the fund will invest mostly in stocks. If, however, the goal is to make money, the fund will invest in bonds or money markets. Professional fund managers oversee the management of mutual fund schemes with the goal of ensuring the achievement of investment goals.

How 7 things will change the way you approach Mutual Funds?

1. Risk Diversification:

Mutual funds provide risk diversification by purchasing a variety of equities and bonds from different industries and issuers. Risks related to a single stock or bond are lessened by a diversified portfolio.

2. Professional management:

Professional fund managers who specialise in managing mutual funds oversee the achievement of the investment goals of the scheme. a research team that assists fund managers with stock selection and portfolio management.

3. Range of solutions:

Mutual funds provide a variety of options to suit different risk tolerances and investing needs. Equity investments can be made for long-term objectives like retirement, children's higher education, marriage, etc., whereas debt investments can be made if you need quick cash or desire a regular income. For investors with different risk appetites, hybrid mutual funds contain both debt and equity.

4. Modes of investment :

You can invest a lump sum or through systematic investment plans (SIPs) or systematic transfer plans (STPs) depending upon your specific financial situation and needs. Later in this article, we will go over how to invest in lump sums, systematic investment plans, and stock transfer plans. 

5. Tax benefits:

Investment options that are tax-efficient include mutual funds. In equity funds, long-term capital gains (kept for more than 12 months) are tax-exempt up to Rs 1 lakh per fiscal year and are then subject to a 10% tax rate. Short-term capital gains (held for less than 12 months) are taxed at 15%. (excess of Rs 1 lakh of capital gains). In non-equity funds, long-term capital gains (kept for more than 36 months) are taxed at 20% after allowing for indexation benefits, while short-term capital gains (held for less than 36 months) are taxed at your personal income tax rate. Most classic fixed-income investments have interest payments that are taxed at the investors' individual income tax rates.

6. Tax rebate :

         To avail Section 80C tax benefit, you can invest in ELSS mutual funds.

7. Liquidity:

The second most liquid investment after bank deposits is open-ended mutual funds, which are also significantly more liquid than other types of investments like life insurance, infrastructure bonds, post office schemes, etc. Investors in open-ended funds can often redeem their units on a T+3 (transaction + 3 days) basis. On T+1 day, liquid, overnight, short-term, and ultra-short funds can typically be redeemed.