A mutual fund is a financial intermediary that allows a group of investors with a similar investment objective to combine their money together and invest. There is a fund manager in every mutual fund that is responsible for taking the pooled money and investing it into specific securities. They are actually very easy to invest in, but you need to have some support that Imperial Money can offer when you are getting started.
How does a mutual fund work?
A mutual fund is nothing but a collection of bonds, stocks, and other such securities owned by a group of investors and managed by a professional investment company. It is difficult for an individual investor to have a diversified portfolio, but mutual funds simultaneously help investors come together and invest in equity and debt securities. Investors simply invest their money in mutual funds and become the unit holder of corresponding units. The mutual funds invest this money in different securities to earn dividends or interest which is then distributed to the unitholders. The unitholders can get capital gains if the fund makes money by selling stocks, and so on.
Advantages of Mutual Funds
1. Professional Management
The main advantage of mutual funds is to manage your money professionally. You do not have to spend time managing your individual portfolio. You do not even need great insights into the market. You can always bank upon your mutual fund manager to manage the portfolio and monitor all your investments at negligible expense.
2. Diversification
Shares, known as units in mutual funds, one can own specialties instead of individual stocks or bonds, therefore the risk are uniformly spread out. Because of such diversification, your loss at certain places can be balanced out with huge profits at other places. Large mutual funds have hundreds of different stocks in various industries, so it really expands the portfolio of an individual, which may not be possible in singularity.
3. Economies of Scale
As a group of investors, a mutual fund buys and sells large amounts of securities at a time, and the transaction costs are really less, too, compared to what one pays as an individual. The cost of acquisition of any asset is usually high, be it real estate or gold buying, but in mutual funds, it is mostly low.
4. Liquidity
Like individual stocks, you can sell your units at any time in a mutual fund. Depending on the type of mutual funds – 1 day (liquid funds) to 4 days (equity) – investors can easily redeem their investments. The liquidity of mutual funds gives it a great layer of benefit and makes a good investing experience.
5. Simplicity
The minimum investment amount in mutual funds is really less when something as less as Rs. 500 can be invested monthly for greater returns in the future. Investing in mutual funds is also very flexible and user-friendly, as you can choose for how long you want to invest in any specialty, keeping your goals in mind. Simplicity is the key here as it is easy to invest, flexible, and ready money for long-term goals.
6. Tax Efficient
Mutual funds are actually very tax efficient. You only have to pay 10% tax on the profit after one year of investing in the mutual funds and 15% on short-term capital gain before one year. Debt funds are also good in comparison to fixed deposits, as they get indexation benefit after three taxes.
7. Transparent
In mutual funds, the investor can come across a small part of the portfolio and even the slightest of changes because there is a fund manager present. Be it the addition or deletion of the securities or a change in debt funds; everything is transparent in this asset class.
8. Easy to Track
With the all-in-one app by Imperial Money, you can easily track your mutual fund investments and make a systematic approach. You can even buy, sell, switch, systematic withdrawal plan, or systematic transfer plan without any hassles.
Mutual funds are one of the simplest strategies to accumulate wealth over a period of time by investing regularly at a fixed interval of time. This is almost similar to the concept of recurring deposits, but one must admit that there are higher returns along with increased risk due to equity.
What is a Systematic Investment Plan?
A Systematic Investment Plan includes a commitment from an investor where he/she invests a specific amount for a continuous period at regular intervals. This way, he/she can get more units when the prices are lower and simultaneously lesser units when the prices are higher. Basically, SIPs work on the principle of rupee cost averaging when it is invested at separate levels and automatically factor in the swing of the market.
Advantages of Systematic Investment Plan
1. Compounding
To understand the benefits of compounding, you have to start investing regularly and early. A delayed investment can also create a financial burden to meet the required goals, so we stress upon investing early to compound to a certain goal amount.
2. Rupee-Cost averaging
SIP works great in volatile markets, as it operates on the process of averaging the cost price of your investments. When the markets are down, you can get more units of NAVs and vice versa. But remember, the price mostly gets averaged out in the end.
3. Convenience
SIP is very easy to start and maintain, as you can keep some money aside every month. Investments can be made through post-dated cheques or through ECS instructions in specific fund house schemes. However, it is always recommended to start at an early age. If you are unsure about the opportunities, you can research our state of art app Imperial Money for smarter ways to invest.
Always remember that you can take the full benefit of SIP only when you choose the schemes right for you and stick to them without any deviations. SIP investment has been known to provide financial solutions for long-term goals like child education, marriage, and retirement.