Introduction to Mutual Funds & How it is a Better Option

Have you ever invested in Mutual Funds? If not, then you must know that it is considered an excellent investment option. Especially for those who want to spread out the risk factor. Not only do they offer better returns but also improve your knowledge about the market.

Financial goals of a person cannot be achieved until he learns to invest in diversified fields. One aspect of which is Mutual Fund. Let’s explore together about Mutual funds, their benefits and whether or not they are a superior option.

What Are Mutual Funds?

We all watch ads on TVs about Mutual Funds. Have you ever tried to know the basic concept of it? Companies that have MF managers (usually CAs, CMAs or CFAs) that pool investor’s money and invest it into multiple companies’ shares. This portfolio of stocks is called MF.

There are two main reasons why a person will invest in it. Either they are confused as to which stock/instrument is the best and prefer MF to access the diversification. Or they know and understand that to overcome the risk factor MFs are the best option.

When we talk about risk, it doesn’t mean that there is no risk in mutual funds. Obviously some stocks will decline and you might suffer loss. But some will appreciate and balance out such that your loss is minimized.

Did you know that in 1980, only 6% of Americans invested in MFs? You might be wondering about now! It is 52%. Very high, right?

Benefits of Investing In Mutual Funds

There are many benefits of investing in MFs. Here is a list of a few of them.

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1. Diversification

Mutual Funds always invest in diverse stocks which helps to mitigate the risk factor from your portfolio. 

2. Liquidity

These are highly liquid as you can buy or sell them anytime. If you invest via Demat then also you will have the same level of liquidity. Do remember that a Demat account is not necessary to invest in mutual funds.

3. Tax Benefits

Mutual funds offer a lot of tax benefits to its investors. One is long term capital gains which are taxable at lower rates. Second is investing in ELSS funds which comes under 80C.

4. Affordable

The most affordable form of investment is through mutual funds. You can put as low as 100/-. You might be wondering if a share costs 1000/- how can we get it in 100/-. Actually, mutual funds allow you to get fractions. It means the units allotted to you can be in decimals. It depends on how much money you put in.

5. Safe 

SEBI is the regulatory body that makes sure that everything happens in a transparent manner. Thus, mutual funds are a safe option.

6. Financial Goals

Mutual Funds offer ample diversification and features that will help you in your financial goals. It does not matter which income bracket you fall in or what your investment style is. Every person can invest a minimum 100/- every month. It will develop a good habit without the stress of risk. Ultimately after sometime you will be able to align your goals with investment habits.

How Does an Investor Earn from Mutual Funds?

Once an investor puts money into Mutual funds, he earns in 3 ways:

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1. Interest Income

Also known as dividend income. Companies declare dividends and  distribute it to shareholders. Now an investor has two options. He can either receive that dividend in his account or he can reinvest it into the same fund. The rate of dividend is different for every company so you can earn great this way!

2. Portfolio Distributions

If the shares are sold by the fund then they often give some portion of it to the holders. It is important to note here that mostly those shares that have appreciated are sold. Only then Capital Gain will be realized. This is another way to earn via mutual funds.

3. Capital Gains

If you sell the shares when they have grown in value then you will get Capital gains. It simply means selling the shares in the market for profits.

Mutual Funds: Is It A Better Option?

A country like India is known to have a habit of preferring risk averse options like Fixed Deposits, Gold etc. But not with technology and financial literacy people are shifting to other options like Mutual Funds, ETF etc.

Wherever you go and whoever you ask, everyone will have a different perspective about investing money in mutual funds. Some only like property while some like Gold & Silver. How will you ever form an opinion? The answer is simple- Educate yourself with financial concepts and apply practically. 

What do you think is the best investment option? Is Mutual Fund actually a better option? Comment down below.

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