What are Mutual funds?
A mutual fund is a type of investment vehicle that pools money from various investors to purchase securities such as stocks and bonds. Each investor owns units of the fund, which represent a portion of the holdings. The securities are selected based on the fund’s investment objective. Asset management companies (AMCs) manage mutual funds by appointing fund managers to ensure that the investment objectives are met. AMCs charge a fee to investors for fund management and other services.
Advantages of Mutual Funds:
Risk Diversification: One of the main benefits of investing in mutual funds is risk diversification. Stocks are subject to three types of risk: company risk, sector risk, and market risk. Company and sector risks are unsystematic, while market risk is systematic. Mutual funds diversify unsystematic risks by investing in a diverse portfolio of stocks across different sectors. Unlike individual stocks, mutual funds are only subject to systematic risk or market risk.
Smaller capital outlay: Another advantage of mutual funds is that you can start investing in mutual funds with relatively small amounts.
Investment expertise: Investing in stocks and bonds requires expertise in financial markets, industry sectors, individual companies, and research. Mutual funds offer the advantage of being managed by professional fund managers with the desired qualifications and experience in selecting the right stocks or other instruments for the best risk-adjusted returns. The fund managers are supported by AMCs’ research teams.
Variety of products: Mutual funds offer a variety of investment products, including equity, hybrid, debt, liquid, and tax savings schemes to match diverse investor needs and risk profiles. Investing in mutual funds allows for tailored product selection and risk assessment.
Disciplined investing: Mutual funds encourage long-term investment and systematic investment plans (SIPs) help investors remain disciplined to meet their financial goals and maintain a consistent approach.
Liquidity: Open-ended mutual funds are highly liquid investments, surpassing life insurance plans, post office schemes and infrastructure bonds. Investors can typically redeem their units within three days of the transaction, or within one day for liquid, overnight, low-duration, and ultra-short funds.
Tax advantage: Tax advantages of mutual funds are one of the biggest benefits compared to traditional fixed income investments. Short-term capital gains (held for less than 12 months) in equity funds are taxed at 15%, and long-term capital gains (held for more than 12 months) are tax exempt up to Rs 1 lakh in a fiscal year and taxed at 10% thereafter (excess of Rs 1 lakh of capital gains).
Systematic Investment Plan (SIP)
SIP is a type of investment where a fixed amount of money is invested regularly, usually monthly, into a mutual fund. The investment amount and frequency can be changed over time, but the investment duration remains fixed. The key advantage of SIP is that it helps investors create disciplined saving habits and invest regularly over the long term. This approach helps to average out market ups and downs and benefit from the power of compounding.
Why SIP :
Rupee Cost Averaging:
The unique feature of a Systematic Investment Plan (SIP) is Rupee Cost Averaging. This strategy involves purchasing more units when the market is low and fewer units when the market is high. With every market correction, an investor buys more units, which reduces the cost of investment and yields higher gains.
Power of compounding:
SIP works on the principle of earning compound interest on long-term investments, which yields better returns than a one-time investment.
Flexibility:
SIPs offer flexibility in the amount, frequency, and duration of investment, enabling tailored financial goals and needs. In India, SIPs can be started with as low as ₹500/month.
Long-term benefits:
SIPs are a great option for long-term investment. They allow individuals to invest regularly over an extended period, taking advantage of compounding. Returns are reinvested, resulting in exponential growth.
How can Wealth Tree help you choose the right Mutual Fund for your investment portfolio?
The Wealth Tree Research Team will study various factors and recommend suitable funds to clients.
⦁ Whether the fund is beating the Benchmark index or not?
⦁ Objective of Fund
⦁ Consistency in performance
⦁ Cost of operation & expense ratios
⦁ Capacity of Innovation
⦁ Investor Servicing
⦁ Market trends
⦁ The Outlook for the Economy
⦁ Transparency in Fund management
⦁ Fund manager Track record
⦁ Asset under Management
After studying all these factors, we narrow down the list of funds and provide recommendations to clients based on their age, objectives, goals, and investment time horizon.
For Consultation
