Mutual funds are considered as safest of all investment tools available. It allows the investors to diversify their capital investments across multiple asset classes. Fund managers guide investors with their expertise for balancing their portfolios. Moreover, the fund manager also keeps track of the investment objectives of different plans. The operation and investment strategies of funds vary depending on types of mutual funds based on risk. Corresponding fund managers are responsible to create a proper mix of asset allocation. It keeps the investment safe against market fluctuations and also helps in the fulfillment of financial objectives. The effort of the fund manager helps investors to earn multiple rewards from their investment. This article talks about the different risks and returns associated with mutual fund investments.
Different Types of Rewards from Investing In Mutual Funds
Mutual funds can provide a substantial appreciation of capital growth, generate regular income, and also provide liquidity. Following are some of the notable benefits of investing in mutual fund plans.
- Regular Income Generation
Mutual funds not only help in wealth compounding but also provide a stable source of income for the investor. Debt funds are the most reliable tool for generating regular income. These units typically invest in bonds, debentures, and money market instruments for regular cash flow.
Even though there are multiple risks associated with mutual fund investments. Returns from the schemes are also on the higher side. Especially if you invest in equity funds you can earn a considerable profit on your investment. Besides, fund managers offer diversification options by putting your money across different sectors. If you are planning for a long-term investment plan it is best to invest in liquid funds. These schemes offer inflation-adjusted returns in the form of dividends and capital gains.
- Diversification of Portfolio
Portfolio diversification is one of the key factors that will help your mutual fund stand out from the rest. You must always put your money across various debt and equity instruments. Equity schemes provide an appreciation of money, and debt schemes give regular income. It is always beneficial to keep an eye on the performance of securities. This helps reduce the risk in mutual fund both in high and low market situations.
- Value of Investment
Mutual fund investments are an excellent value proposition, as a beginner, you can start investing with as low as 500. Systematic investment plans allow newbies to start a disciplined investment habit through small contributions. The intervals vary between daily, monthly, quarterly, half-yearly, or annually. Investors can opt for lump sum plans or one-time investment options. You also have the flexibility of switching your portfolios as per your transfer plan.
Mutual fund plans give high liquidity as investors can redeem their capital investment at any point in time. Among the different types, liquid funds are the best option if you're looking for liquidity. It offers an instant redemption amount that is credited to the corresponding bank account.
- Strict Regulations
Mutual fund houses have to comply with strict regulations of the Securities and Exchange Board of India. The agencies must provide all the details of the transactions to the concerned authorities. Transparency of processes is essential for retaining investors.
- Tax Benefits
Equity-linked savings schemes provide tax benefits to investors. Investments of 1.5 lakh are tax exempted in a financial year. You can benefit from tax deductions under Section 80C of the Income Tax Act. However, there is a lock in 3 years on ELSS funds.
- Achieving Financial Objectives
Mutual fund schemes are excellent investment tools for achieving financial objectives. It also helps in generating a regular income.
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Risk Associated With Mutual Fund Investment
Even though mutual fund schemes are an excellent way of compounding wealth but there are chances of loss of money in mutual fund. Factors like liquidity, market fluctuations, and changes in the economy affect the performance of mutual funds. So it is best to be aware of the risks associated with the process of fund appreciation and capital gain.
Investors are required to pay tax on both dividend payout and capital gains from mutual fund investment. For equity funds, the tax rate is 15% on short-term gains. Long-term equity fund gains are tax exempted. However, debt funds that offer short-term gains are added to the overall income in a financial year. Similarly, the long-term gains from debt funds are taxed at 20% with indexation benefits. Investors can benefit from distribution tax in the following circumstances
- If the asset management agency pays 15% of the dividend as tax.
- An investor earns more than 10 lakh in dividend and pays 10% of it as taxation.
Market risk is one of the most prominent risks associated with mutual funds. Returns are largely dependent on the market conditions and investors do not have any control over regular or fixed returns. If the market has a bearish trend there are chances of making negligible profits. If a bullish trend exists in the market investors can earn substantial returns.
Beginner investors often tend to overlook additional costs involved in mutual fund investment. Decide the cost of starting a new mutual fund you also need to pay a series of fees for fund management.
Availability of Cash in Funds
Mutual fund holdings are owned by multiple investors. This results in a huge pool of money but investors look for withdrawal opportunities. It creates a constant demand for liquid cash. However, keeping a lot of liquid cash is a wastage of overall fund value.
Lack of Adequate Control
You have little or no control over mutual funds as the asset allocation and investment decisions are taken by the fund manager. Active and knowledgeable in restaurants in the market preferred to be in control of their portfolios. At times this control mechanism limits the profit-making capabilities of investors.
As an investor, you must always know how much risk in Mutual funds investment. Therefore, knowing both sides of the mutual fund is crucial. No form of investment tool is safer than term deposits in nationalized banks. There is always some amount of risk associated with all investment tools. Market revolves around risk-taking capabilities and investors that right choices earn profits. You should always invest in mutual funds according to your risk-taking ability and investment horizon. It will help you to achieve your financial objectives without stressing your existing commitments. Seasoned investors always keep track of the market and diversify their portfolios. It allows them to reduce the impact of market fluctuations on their investments.
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