INVESTMENTS IN MUTUAL FUNDS
If we look at the kinds of investment, options available to investors in today’s times, we find that mutual funds are one such instrument which can provide the facility to participate in all available financial instruments.
The following points bring out the importance on mutual funds in financial planning process.
- Mutual funds offer a variety of products suitable for :
i. different return requirements.
ii. Different risk appetite
iii . Different tenures
These instruments also provide for the same or better tax treatment than other instruments viable, therefore various kinds of mutual funds schemes like equity, debt and money market can be used in various proportions to make a portfolio having the risk and return attribute tailor made to an investors need.
- Use of Mutual Funds help financial planners to make own tasks easier. This means that the role of financial planner will be make strategic asset allocation in response to the needs of client and then leave the fund managers of mutual fund schemes to select securities within those asset class.
- Since Mutual Fund portfolios are driven by pre-stated investment objectives, it is easier to match investor objectives with the mutual fund product.
- Mutual funds enable flexible options to invest and withdraw funds, and alter the investment portfolio by changing the mix of funds held by the investor.
On an average less than 5 % of the investors in India have invested in Mutual Funds and rest in other instruments like Bank Deposits, Post Office Savings schemes, Gold etc.
All mutual funds are registered with SEBI and function within the provisions and regulations that protect the interests of investors. A Mutual Fund is a trust that pools together the savings of a number of investors who share a common financial goal. All such investors buy units of a fund that best suits their needs be it capital growth, regular returns or safety of capital. The Fund Manager then invests this pool of money in securities, ranging from shares to debentures to money market instruments, depending on the objective of the scheme.
Benefits of a Mutual Fund: 1. Increases the purchasing power of investments.
2. Enables them to have a well-diversified portfolio even with a very small amount of investment.
3. Reduction of risk.
4. Money would be managed by a professional at low costs.
5. Reduction of transactions costs due to economies of operation at a large scale.
7. Convenience of investing the money and tracking the performance of money ( hassle free investment, consider this : an investor can have exposure in equity shares without having a D-mat account. )
8. Flexibility to change investment objectives.
Mutual Funds offer a wide variety of schemes.
DEBT FUNDS: These funds invest only in only in Debt instruments like company debentures, government securities and money market instruments completely avoiding any investments in the stock markets. Hence, they are much safer than equity funds. At the same time the expected returns from debt funds would be lower.
BALANCED FUNDS : These funds invest in mix of equity and debt instruments. Hence, they are less risky than equity funds, but at the same time provide commensurately lower returns. They provide a good investment opportunity to investors who do not wish to be completely exposed to equity markets, but are looking of higher returns than those provided by debt funds.
EQUITY FUNDS : These funds invest entirely in the share markets and attempt to provide investors the opportunity to benefit from the higher returns which stock markets can provide. However, they are also exposed to the volatility and attendant risks of stock market investments and hence should be chosen by investors who have risk taking capabilities.
Choosing your investment mix depends on factors such as your risk appetite, time horizon of your investment, your investment objective, your age etc.
Advantages of investing in Mutual funds are:
PROFESSIONAL EXPERTISE: Fund Managers in mutual funds are professionals who track the markets on a minute to minute basis. With their mix of professional qualification and market knowledge, they are better placed than the average investor to understand the markets.
DIVERSIFICATION: Since a mutual fund scheme invests in a number of shares or debentures, the attendant risks are greatly reduced. Even if the stock price of one of the companies goes down or a company defaults on payment of interest, it does not result in a substantial loss to the investor, as the other holdings of the fund can compensate for this fall.
RELATIVELY LESS INEXPENSIVE: When compared to direct investments in the capital market, mutual funds cost less. This is due to savings in brokerage costs, demat costs, depository costs etc.
LIQUIDITY : Investments in mutual funds are completely liquid and can be redeemed at NAV related prices on any working day. Since, these are bought back by the mutual fund itself; there is no risk of not finding a buyer. Besides, redemption money can be received by the investor within a week.
TAX BENEFIT : This summery of tax implications is based on the current provisions of the applicable tax laws. Income received by the unit holders in respect of the units of the Mutual Fund is exempt from tax under Section 10 ( 35 ) of the Act.
Tax deduction at Source : In view of the exemption of income in the hands of the Unit Holders, no income tax is deductible at source on income distribution by the Mutual Fund, under the provisions of Section 194 K and 196 A of the Act.
Investment in mutual funds are subject to market risks.
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