Mutual Funds – Meaning, Advantages, Disadvantages and how to invest in them

The Basics of Mutual Funds that you must know

Mutual funds are a way to invest in multiple asset classes. Fund houses are increasingly adding to the range of Mutual fund products to appeal to every investor. Read on to know the basics:

What are Mutual Funds?

A Mutual Fund is an investment tool that pools funds from all the investors and invests the corpus of funds collected in different asset classes such as equity, stocks, bonds and commodities. All the investments together combine to form the portfolio of the fund. A Mutual Fund generates returns for you from the investments it makes. If you purchase some units of a particular mutual fund, you are partially a stake owner in those companies where the said fund invests.

Benefits of Investing in a Mutual Fund

Here are the key advantages of investing in a Mutual Fund,

Diversified Portfolio

One of the unique attributes of a Mutual Fund is that it brings forth the strengths of each investment tool while simultaneously hedging the risks from these investments. Since Mutual Fund investments are spread across several asset classes and categories, it reduces the volatility, thereby reducing your risk.

Liquidity

Most Mutual Funds don’t have a lock-in period. That means you can liquidate your investment as and when you require the funds. This attribute gives it an edge over investments like fixed deposits, bonds, etc. However, there may be an exit load that you may need to pay to release your funds.

Expertise in Investment

The money you put in Mutual Fundsishandled by a team of experts who are well versed with financial instruments and markets. Their investment expertise clubbed with thorough research helps your money to grow well securely.

Flexibility

Mutual Funds are flexible investment tools. You can invest in Mutual Funds with a lumpsum amount or through small and periodic instalments, also known as SIP (Systematic Investment Plan). Moreover, Systematic Transfer Plan (STP),Systematic Withdrawal Plan (SWP), easy entry and exit are a couple of more features that make Mutual fund an attractive investment avenue. You can choose a Mutual Fund with either a dividend or growth option depending on your financial goals. If you choose the dividend option, you may enjoy regular pay-out based on the fund’s performance. If you choose the growth option, the returns churned are reinvested in the Mutual Fund scheme itself, and your corpus may keep on increasing, and you will enjoy the benefits of compounding too.

Range of Categories and Schemes

There are plenty of categories and schemes in Mutual Funds that can appeal to every kind of investor. Your risk profile will dictate which scheme or type you should pick for investment. For instance, if your risk profile is low, you can choose debt-based schemes, etc., or you could decide to go for small-cap or mid-cap funds if you are looking for a higher risk-return scheme. Mutual Funds keep introducing innovative schemes such as schemes that only invest in IPOs (Initial Public Offerings) to benefit from listing gains and long-term growth. The options are endless.

Taxation Benefits

An Equity Linked Saving Scheme (ELSS) Mutual Funds is a tax-saving Mutual Fund category that offers tax benefits in addition to the growth of funds. You can claim tax deduction benefits if you invest here under section 80C. One ELSS that gives you the double advantage of saving taxes and growing wealth is ICICI Direct Tax Saving Mutual Fund.

Risks of Investing in Mutual Funds

The plethora of benefits that a Mutual Fund investment brings comes coupled with some downsides too. Here are the disadvantages of investing in a Mutual Fund,

Diluted Returns

Mutual Funds are not a concentrated investment. They area diversified form of investment to give you a broader exposure to more asset categories. This feature hedges risks but also dilutes the capacity of the fund to offer higher returns.

Volatile Returns

A Mutual Fund investment is not a guaranteed return instrument. It is subject to market risks. There may be events where the highs and lows of the market adversely affect your fund, and you may suffer losses instead of profits.

How to Invest in a Mutual Fund?

You can invest in Mutual Funds through registered brokers or other financial institutions or from the fund house itself. But before you invest in any Mutual Fund, you must read its prospectus carefully to understand its risk-return profile, objective, charges, performance track record, etc. It is wise to invest in a Mutual Fund if its objectives and associated risks are in tandem with your financial goals and risk appetite.

If you want to invest in a unit of the Mutual Fund, you have to pay the fund’sNet Asset Value (NAV) per share. Additionally, the fund management and service fees are a cost component. This component varies from fund to fund and even though it may seem like a small percentage at the start it translates into a large amount over time. Hence, it’s better to invest in low-cost but well-performing funds. You can sell the Mutual Fund units to the fund house itself as easily as you buy them. Online modes like company websites and mobile applications are great platforms to execute the buy and sell of Mutual Funds quickly and conveniently. Click here to invest in Mutual Funds.

Conclusion

Mutual funds are a great tool to invest even if you are a beginner in investments and are not well-versed with how the different financial instruments and markets work. Ideally, you should park your money in a trusted and experienced financial services company such as ICICI Direct so thatyour Mutual Fundjourney becomes more convenient, successful, and satisfying.

Disclaimer:

ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. – ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai – 400 025, India, Tel No : 022 – 2288 2460, 022 – 2288 2470.AMFI Regn. No.: ARN-0845. We are distributors for Mutual funds. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.Please note, Mutual Fund related services are not Exchange traded products and I-Sec is just acting as distributor to solicit these products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein mentioned are solely for informational and educational purpose.

About RJ Frometa

Head Honcho, Editor in Chief and writer here on VENTS. I don't like walking on the beach, but I love playing the guitar and geeking out about music. I am also a movie maniac and 6 hours sleeper.

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