Mutual Fund is another option for investments. In Simple Terms, Mutual Fund collects the amount from multiple people and creates a common pool of money and this money will be invested in the share market.
How Mutual Fund Works?
Mutual Fund is also a part of the share market. In Traditional share market investing, we research the stocks which are listed in the share market exchange and we buy the stocks directly. In this way, One has to keep the eye on the stocks regularly. We have to create our own portfolio and ourselves we have to decide the stocks, sector, company and much more.
In the traditional way, It is required more expertise in company analysis, fundamental analyses, etc.
On the other hand, a Mutual fund is the best option if you don’t have to take the burden of analyzing the stocks, we can invest in the share market. A Fund Manager is assigned to maintain the people’s money and diversify the money into different sectors and companies. The fund Manager will always maintain the portfolio and generate profits. A Fund Manager charge a small fee for this investment works, it is called expense ratio.
How to choose mutual fund?
Before choosing the mutual fund, You have to choose your investment goal like short-term or long-term. Usually, long-term investments give higher returns. Mutual funds are best if you stay invested for at least 5yrs. Below are a few points to remember:
- Invest for Long-Term
- Choose Mutual Fund Scheme with low Expense Ratio
- Invest in SIP over a Lump sum
- Select Direct plan over Regular plan
- Choose ELSS Mutual Fund for tax saver
Direct Plan vs Regular Plan
Direct Plans are purchased from direct AMC (Asset Management Company) and No broker is involved. Hence, we get higher returns because it has a lower expense ratio.
On the other hand, in Regular Plan a middle man is involved called Broker. In the expense ratio broker charges are also added and the total expense ratio becomes higher. Initially, the expense ratio may look like very few charges but in the long run, it makes a huge difference. So Select the Direct plan.
SIP vs Lump sum
SIP is abbreviated for Systematic Investment Plan. In this approach, we can invest a little amount for every month or quarterly, etc. for as many years as we want. A lump-Sum investment is a one-time investment where we put a huge amount and leave for the long term.
SIP is the safest option because you invest the money in the downs and ups of share prices. If any month’s stock price falls then you get more NAVs and when the price raise you get a little low NAVs. But this risk is balanced if we invest for the long term.
Lump-Sum is the best if you know that market has fallen very low. But if you invest the lump sum amount when the market is high then you will get lower returns.
Tax Saver Mutual Fund
In India there is special category of mutual fund called ELSS where you get exemption for long term gain tax. I hope other countries also will have similar scheme. But in this ELSS mutual fund you cannot withdraw the amount whenever you like. there is a lock-in period for 3years.
For example: If you invest a lump sum amount then this amount can be withdrawn only after three years. If you invest a SIP amount for a month, then this SIP amount can be withdrawn after three years of this specific SIP month.
is Mutual fund risk?
Share markets are subject to market risks. A mutual fund is also part of the share market and the risk is also involved with it. if the share market crashes your investment value will get lower. The key to mitigating this risk is to stay invested for the long term and history has proven that mutual funds gave good returns with lower risk.
Types of Mutual Funds
- Equity Funds – Money invested in the equity market has high risk and good returns.
- Debt Funds – Money invested in the debt market and has very low fixed returns.
- Money market funds – Money invested in short-term instruments.
- Hybrid funds – This will be a combination of equality or debt or money market.
How to invest in Mutual Funds?
To invest mutual funds, we have to open a Trading and Demat account from any available brokers. Discount brokers are the best option because of the charge of very low brokerage. Groww is the trusted discount broker and has a large number of investors and select the mutual fund section and choose the right mutual fund for you and choose the investment type SIP or lump sum.