Mutual fund investments are gaining immense popularity among individual investors due to their diverse benefits. Among the several benefits of mutual fund investments, some of the most significant factors driving investors to buy mutual funds include starting with a small amount, diversifying across several stocks and other instruments, and starting with an automated monthly SIP. In this guide to mutual funds, you will explore how mutual funds work and why you must consider investing in them.

Mutual Funds: How Do They Work?

Consider a mutual fund as a huge pot filled with money collected from different people like you and me. Now, an asset management company invests the amount in bonds, stocks, or other assets on the basis of the goal of the funds. The aim is to diversify everyone’s cash towards making investments that are tough to perform solo.

A professional known as a fund manager runs the entire process. Similar to a ship captain, these fun managers hold a solid track record and an in-depth understanding of the markets. They aim towards investing that money smartly to generate the best possible returns, along with sticking to the plan of the fund. The asset management company levies a small fee for this, which is known as the expense ratio and is the cost of having someone invest and manage your funds.

Now, how do you generate money? You get to earn through interest, regular dividends or capital gains when the value of the fund rises. You have multiple options here, including reinvesting these profits to allow your money to compound, the growth option or taking the cash as income.

Why Invest In Mutual Funds?

Mutual fund investments are simpler than you think. You can begin with amounts as small as rupees one hundred in a month via an SIP, or a one-time lump sum amount. Most of the other investment instruments do not allow you to start investments for that small amount.

Additionally, it is flexible; when you invest in mutual fund, you get to switch between funds or edit your portfolio to align with your goals. However, if you are concerned about taxes, mutual funds, such as equity-linked savings schemes, can help you save around Rs. 1.5 lakh in a year, according to Section 80C. Equity-linked savings scheme is one of the most favourite schemes for investors as it comes with higher returns and only locks your money for three years, which is quite shorter than other tax-saving options.

The best part of mutual fund investments is that you do not have to be a pro. A fund manager, along with their research team, handles the entire process for you. Furthermore, mutual fund investments are a straightforward and paperless process that helps you monitor the market and make investments according to your needs.

Some of the key benefits of mutual fund investments include:

• Mutual funds are regulated and managed by the Securities and Exchange Board of India. According to the SEBI regulations, these funds are completely transparent, along with a risk mitigation framework, protecting the investors from losses.
• These funds are flexible, and you can invest even with a very small amount.
• Mutual funds are easily accessible and easy to purchase from anywhere across the world.
• The lock-in period of a tax-saving mutual fund, such as ELSS, is just three years, which is less than other tax-saving investment tools like FD, PPF, etc.

Conclusion

Mutual fund investments are the most straightforward and hassle-free investment tools to create wealth. However, make sure to define your financial goals and time horizon, and then choose the correct mutual fund type for investments. You can also prefer investing in different mutual funds for portfolio diversification and additional returns.