Investing in mutual funds? Here's all you need to know

Over the last few years, mutual funds have gained immense popularity among Indian investors. The Assets Under Management (AUM) of the mutual fund industry grew by 41% in fiscal 2021 to Rs. 31.43 lakh crore.

Today more and more people are investing in the mutual funds because they are transparent, easy to understand, and can generate decent returns and don't require them to be an expert while they begin investing. Besides, mutual funds offer a low-cost, well-diversified and tax-efficient way of growing your money.

This article sums up everything you need to know about mutual funds to start your investment journey.

What is a mutual fund?

A mutual fund is an investment vehicle that pools money collected from different investors to purchase various instruments such as stocks, bonds, money market instruments and other similar assets. These funds are managed by professional fund managers who buy and sell securities on your behalf, track the market on a real-time basis, and oversee your investment portfolio to provide optimum returns. Thus, mutual fund investment is ideal for investors who do not have much experience and expertise to invest directly in the stocks. You have to invest in the fund, while the fund manager will do the job for you.

After understanding mutual fund meaning, let us know the reasons to invest in mutual funds.

Why should you invest in mutual funds?

Mutual funds offer numerous advantages to investors. Some of which are:

• Diversification

  Mutual funds are designed to provide a diversified portfolio to investors. An average mutual fund holds over a hundred different securities from varying industries which helps you make a diversified portfolio at a low cost.

• Tax benefit

  Few mutual fund investments are eligible for tax deduction under section 80C of the Income Tax Act, 1961. You can claim a deduction of up to Rs. 1.5 lakh per year by investing in Equity Linked Saving Scheme (ELSS) funds.

• Professional management

  Since a team of experts professionally manages mutual funds, a novice investor who may not know how and where to invest can easily participate. The experts keep a watch on timely entry and exit and take care of all the portfolio challenges.

• Small investment

  Another essential benefit of mutual funds is that you can start investing with an amount as low as Rs. 500 per month. A Systematic Investment Plan (SIP) allows you to invest in small amounts regularly.

• Convenience

  Once you find a fund house with a good track record, you have a minor role to play. The fund manager will take care of your mutual fund portfolio. That makes mutual fund investment a hassle-free and convenient process.

• Liquidity

  In comparison to other assets, mutual funds are easier to buy and sell. It allows you to redeem the units at any point in time and receive the money in your bank account within 3-4 working days.

Things to consider before investing in mutual funds

When you are starting your mutual fund investment journey, there are a few things you should keep in mind.

• Determine your goals

  Before investing in mutual funds, it is wise to pen down your financial goals, time horizon, budget and risk tolerance. Investing with specific goals in mind helps you effectively achieve these goals.

• Ensure capital protection

  Invest only that much amount in mutual funds that you can afford to lose. Although mutual fund investment is safe, it is wise to keep aside money you might need for an emergency or shortly.

• Consider risk-return ratio

  Consider your return expectations and risk appetite before investing in any mutual fund scheme. Remember, high returns come with high risks; hence it is crucial to align your risk-return expectation or financial goals.

• Lump-sum vs SIPs

  You can choose to invest in mutual funds either through a systematic Investment Plans or lump-sum. Lump-sum investment is recommended for experienced investors as it requires timing the market and investing at the right moment. At the same time, SIP is recommended for novice investors who can invest a fixed amount of money either monthly, quarterly or annually regardless of the market performance. That allows them to invest at different market levels and earn better returns over time.

• Mutual fund investment can be an effortless way of achieving your financial goal. All you have to do is determine your goals, choose an appropriate fund house and start investing.

  Disclaimer : ICICI Securities Ltd.( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, 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. 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.