The pandemic made people realise the need for extra income.When life and day-to-day work were restricted tothe home, a lot of young professionals started to realise that if they ever wanted to live a comfortable life, it would be prudent on their part to look at places other than full-time employment for earning extra income. That’s where financial planning stepped in. The procedure of financial planning requires you to ascertain how much of your income is to be invested in an investment plan. After determining the required amount of investment, you are supposed to choose the investment option that will help youto reachyour financial goals. Amongst the prominent investment options that are available in India are mutual funds.
What are mutual funds?
Simply put,mutual fund plans are investment tools that are known for pooling money from a group of investors. This action is done to purchase different financial securities. The fund that consists of the moneypooled from different investors is used to invest in various financial securities like gold, money market instruments, and stocks.When you purchase a unit in a mutual fund, you get to own a small stake in all the investments that are considered a part of the fund. Because of the numerous benefits associated with mutual funds, they are considered a smart investment choice.
How do mutual funds work?
To sign up for a mutual fund scheme, you need to contact an AMC, i.e., an asset management company.After finding an AMC, you need to select a mutual fund variant. Each variant of mutual funds has a specific investment objective that provides for distinct investment needs.Depending on the fund’s objective, the money from the pooled fund is directed to various securities such as stocks, gold, bonds, and other money market instruments.
A professional called a fund manager is responsible for overseeing each fund. The fund manager has one main goal.It is to help earn optimum returns on the fund’s investments. Then, therevenue generated by the fund is divided and distributed among the investors proportionately.
Are there any benefits associated with mutual funds?
The advantages associated with mutual funds are:
- These funds don’t burn a hole in your wallet:
A common reason why prospective investors hesitate about investing in the market is the notion that it might be expensive.While some investment schemes might be costly, the same can’t be said for an in mutual fundsinvestment. The amountrequired for investment in most mutual fundschemesis affordable, making them light on the wallet.
- Mutual funds are very highly liquid:
Mutual fund schemes can also be easily redeemedi.e., liquidatedif you have some financial emergencies. It is possible for you to redeem your mutual fund portfolio on any business day. Liquidity means that you have easy access to your money. After redeeming your mutual fund portfolio, the redeemed amount will be credited to your bank account with in a few days. The number of days is dependent upon the type of scheme. In the case of overnight funds, the redeemed amount is paid to you on the next business day.But, if you have opted to invest in close-ended mutual fund schemes, your funds can be redeemed only on maturity. Likewise, ELSS has a 3-year lock-in period and can be liquidated only after that.
- Mutual funds are professionally managed:
For investing in financial markets, a certain amount of skill is required on your part. To invest in a market, you need to have knowledge aboutaspects such as company financials, and different sectors, from the perspective of asset classes. Simply put, all of this requires a significant amount of time and commitment from you.However, in case you don’t possess the skillto delve deep into the market, signing up for mutual fundschemesmay be an excellent alternative. In mutual funds, a professional referred to as a fund manager takes care of your investments and strives hard to provide reasonable revenue.
Where do mutual funds invest in?
Mutual fund schemes are known for directing your investments towards different financial securities such as equities and debt. Moreover, different variants of mutual funds can be classified based on the financial securities they invest in. Furthermore, there is also a variant of mutual fund schemes that combines both equities and debt schemes. The said type is hybrid funds.