Mutual funds are getting popular day by day. Now more people are opting mutual funds for the investment. You may be also watching Mutual Fund Sahi Hai campaign. This campaign shows mutual fund as the best option for saving and investment. But, Are you aware of the mutual funds?
In this post, I would tell you 10 most important features of the mutual fund. Everyone must know these features of a mutual fund. I expect that these 10 features would introduce you to the mutual funds and you would be able to invest in right mutual fund scheme.
1. An Expert Fund Manager Takes care of Your Money
You would agree that investment is not an easy task. You may be lost in the financial jungle and there are many wolves to hunt you. That is why it is important to have an expert guidance when you enter this jungle.
A mutual fund gives you the services of such an expert. In a mutual fund scheme, A fund manager takes care of your money along with the other investments. The fund manager would be expert in managing the money.
I would also like to tell you that In a mutual fund scheme, several people, like you, invest their money. The fund manager manages the total corpus of all the investments.
2. Open Ended and Close Ended Mutual fund
There are two basic types of mutual fund, Open Ended and Close Ended. In an Open Ended fund, you can invest money anytime. You are also free to redeem money anytime. It is like a saving account.
In a close ended mutual fund, You have a limited time to invest in mutual fund scheme. You have to invest in that scheme within the given time frame. Similarly, You would get back your money only after the given tenure.
Because of the flexibility to invest and redeem, open ended mutual funds are more popular.
3. Lump Sum and SIP Investment
You have the flexibility to invest in an open ended mutual fund scheme. You can invest in a mutual fund scheme as per your wish. There is no restriction on frequency or amount. An irregular investment is called as the lump- sum investment.
However, mutual funds give you an option to invest regularly. In fact, mutual funds facilitate the regular investment.
When you invest a fixed amount in a fixed interval it is called as the Systematic Investment Plan. In a SIP, you can decide the amount of regular investment. the interval for regular investment can be quarterly, monthly, fortnightly or weekly. SIP is like a recurring deposit in a bank.
4. Returns are not Fixed
A mutual fund scheme invests in bonds and shares. This investment happens through the bond market and share market. The price of bonds and shares changes rapidly as in any other Mandi. Because of this rapidly changing prices of bond and shares, you can’t predict the earning from this investment.
As a mutual fund scheme buys and sells bond and equity from this market, the profit from this buying and selling is dependent upon the price fluctuation. Therefore, the return from the mutual fund scheme is not fixed. It varies according to the market condition. The fluctuation of Sensex shows the volatile nature of the market.
5. Equity Mutual Fund Can Make Loss
Shares are also called as the equity. Hence, those mutual funds which invest in shares are called as the equity mutual funds. As you know that price of shares goes on the roller coaster ride. It may good a very good return in long term. But you may have to go through harrowing period.
You may know about the extreme market downturns. It may happen anytime without any warning. Thus you may also lose the money. If You withdraw money from an equity mutual fund during the market downturn, you may have to bear the loss.
6. Debt Mutual Funds are Safer
I have told you that the return from a mutual fund is dependent upon the share or debt market. You also know that these market can go up or down. But, you should also understand that every market does not show the wild fluctuation. A bond market shows little volatility. The price of a bond does not change drastically. That is why the return from the mutual fund would be stable if it invests in the bond market.
As Debt Mutual Fund scheme invests in Bond market, these schemes give us almost fixed return. You can see some volatility, but you rarely bear a loss. Debt Funds are safer than the Equity Mutual fund.
7. Many Ways of Investment
You may be listening to a lot about the mutual fund investment but where should you go to put our money. It is true that offices of mutual fund companies are limited. You may not find it in your vicinity. But, you have other ways to invest in mutual funds. You can invest in mutual fund scheme through following ways.
Mutual Fund Distributors- These may be in your neighborhood. The MF distributors get a commission for facilitating MF Sale.
Banks – Most of the banks have a partnership with few mutual fund companies. You can buy a mutual fund scheme through their banking partners.
Stockbrokers- Besides Shares, stockbrokers also sell the mutual fund scheme. You should contact them. Online stock brokers such as ICICIDirect, HDFC securities, Kotak securities also sell the mutual fund schemes.
Fund Aggregators- There are some online mutual fund aggregators, which sell mutual fund scheme. The example of such aggregators are FundsIndia, Scripbox, OROwealth, MF Utility etc
Online Portals- Every mutual fund company sell schemes through their own portal. You can also buy a mutual fund from the MF portal.
If you purchase a mutual fund scheme directly through the mutual fund offices or portal, you can subscribe the Direct Option of the mutual fund scheme. The direct plan gives you a higher return.
8. Charges of Mutual Fund Scheme
A mutual fund scheme gives you services of the expert fund manager. This service comes at a cost. The expense of fund manager, research team, and operations is borne by the investor. The charges for these expenses are deducted from your investment.
Every year, the mutual fund schemes deduct a percentage of the amount from your corpus. This amount is used for the functioning of the mutual fund company. If you are not buying a direct plan, you have to also pay the distribution charge. It goes to the mutual fund distributor.
An equity mutual fund has the highest charges as it requires most research. The index mutual fund has the lowest charge as it simply follows the index.
9. No TDS deduction
Tax is part of every earning. It does not even spare the interest from the fixed deposit. Banks deduct TDS in case, your interest exceeds Rs 10,000 in a year. But, there is no TDS deduction on mutual fund earning. Of course, you have to pay tax before filing income tax return. But, You would be spared from TDS.
Moreover, like shares, the earnings from equity mutual fund is also tax exempted. There is zero capital gains tax on earning from the shares. However, your investment should be at least for one year to qualify for this tax exemption.
10. ELSS Gives Tax Benefit
There is a type of equity mutual fund which gives you tax benefit at the time of investing. This type of equity mutual fund is known as the Equity Linked Saving Scheme (ELSS). People also call it tax saving mutual funds.
By investing in the ELSS, you can reduce your tax outgo. Suppose, you earn 5 lakhs from the salary, and your tax liability is 20,000. You can reduce this tax liability by investing in ELSS.
However, investment in ELSS has a condition. Your money gets locked for 3 years in this type of scheme.