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Mutual Funds
Mutual funds are an investment that allows investors to pool their money and invest in a diversified portfolio of stocks, bonds, and money market instruments. Mutual funds give small or individual investors access to professionally managed portfolios of equities, bonds, and other securities.
There are many mutual funds available in the market today that are tailored to different investor requirements. Depending on income level and financial goals, one can choose to invest in a fund that caters to their specific requirements.
Investing in mutual funds is one of the easiest ways to participate in the stock market while managing risk smartly. Understanding how mutual funds work is a great way to plan for a financially secure future.
SIP stands for Systematic Investment Plan. It is an investment strategy offered by mutual funds that allows investors to regularly invest a fixed amount of money at predetermined intervals, typically monthly Under a SIP, investors commit to investing a fixed amount in a mutual fund on a regular basis, regardless of market conditions. The invested amount is used to purchase mutual fund units at the prevailing Net Asset Value (NAV) of the fund. SIPs provide several benefits to investors. They promote disciplined investing by encouraging regular contributions and helping investors avoid timing the market. By investing a fixed amount regularly, investors can take advantage of rupee-cost averaging, where they buy more units when prices are low and fewer units when prices are high. This helps smooth out the impact of market volatility and potentially achieve a better average purchase price over time. SIPs offer flexibility in terms of investment amounts, allowing investors to start with as little as a few hundred rupees. They are also convenient, as the investment amount is automatically deducted from the investor's bank account on the chosen dates. SIPs are popular among long-term investors who want to build wealth gradually over time and benefit from the power of compounding. They provide a disciplined approach to investment and can be an effective strategy for achieving financial goals such as retirement planning, education funding, or wealth creation.
Lumpsum refers to a one-time investment of a significant amount of money into an investment or financial product, typically in a single payment. When investing a lumpsum amount, the entire sum is deployed into the chosen investment at once. Investing a lumpsum amount offers certain advantages. It provides immediate exposure to the chosen investment, allowing the investor to potentially benefit from market movements right from the start. However, investing a lumpsum also carries some risks. The investor's returns are directly influenced by the market performance at the time of investment. If the investment is made at a market peak or during a period of high prices, there is a risk of experiencing short-term losses. Timing the market accurately is challenging, and market fluctuations can impact the immediate returns of a lumpsum investment. The decision to invest a lumpsum or follow a systematic investment approach depends on individual circumstances, risk tolerance, investment goals, and market conditions. It is often advisable to consult with a financial advisor to determine the most suitable investment strategy based on your specific situation.
SWP stands for Systematic Withdrawal Plan. It is an investment strategy offered by mutual funds that allows investors to withdraw a fixed amount of money at regular intervals from their investment holdings.
Under a SWP, investors set a withdrawal frequency (such as monthly, quarterly, or annually) and specify the desired amount to be withdrawn. The withdrawn amount is transferred to the investor's designated bank account.
SWPs are commonly used by investors who want to create a regular income stream from their investments without having to liquidate their entire holdings at once. It is particularly popular among retirees or individuals seeking regular cash flow to meet their living expenses.
STP stands for Systematic Transfer Plan. It is an investment strategy offered by mutual funds that allows investors to transfer a certain amount or a fixed number of units from one mutual fund scheme to another, systematically and at regular intervals.
Under an STP, investors can choose to transfer funds from one mutual fund scheme, known as the source scheme, to another mutual fund scheme, known as the target scheme. The transfers can be made based on a predetermined frequency, such as monthly or quarterly, and can involve a fixed amount or a fixed number of units.
Advantages of Investing in Mutual Fund
Risk Diversification : Buying shares in a mutual fund is an easy way to diversify your investments across many securities and asset categories such as equity, debt and gold, which helps in spreading the risk. With diversification, the risk associated with one asset class is countered by the others. Even if one investment in the portfolio decreases in value, other investments may not be impacted and may even increase in value. In other words, you don’t lose out on the entire value of your investment if a particular component of your portfolio goes through a turbulent period.
Well Regulated : Mutual Funds are regulated by the capital markets regulator, Securities and Exchange Board of India (SEBI) under SEBI (Mutual Funds) Regulations, 1996. SEBI has laid down stringent rules and regulations keeping investor protection, transparency with appropriate risk mitigation framework and fair valuation principles.
Tax Benefits : Investment in Equity Linked Savings Scheme (ELSS) Mutual fund upto ₹1,50,000 qualifies for tax benefit under section 80C of the Income Tax Act, 1961. However, please note that the units of ELSS have a 3-year lock-in period and can be liquidated only thereafter.
Professional Management : A mutual fund is managed by full-time, professional money managers who have the expertise, experience and resources to actively buy, sell, and monitor investments. A fund manager continuously monitors investments and rebalances the portfolio accordingly to meet the scheme’s objectives.
Affordability & Convenience (Invest Small Amounts) : For many investors, it could be more costly to directly purchase all of the individual securities held by a single mutual fund. By contrast, the minimum initial investments for most mutual funds are more affordable.
Liquidity : You can easily redeem (liquidate) units of open ended mutual fund schemes to meet your financial needs on any business day (when the stock markets and/or banks are open). Upon redemption, the redemption amount is credited in your bank account within one day to 3-4 days, depending upon the type of scheme e.g., in respect of Liquid Funds and Overnight Funds, the redemption amount is paid out the next business day.
Low Cost : Mutual funds schemes have a low expense ratio. Expense ratio represents the annual fund operating expenses of a scheme, expressed as a percentage of the fund’s daily net assets. Operating expenses of a scheme are administration, management, advertising related expenses, etc. The limits of expense ratio for various types of schemes have been specified under Regulation 52 of SEBI Mutual Fund Regulations, 1996.
Why Mutual Funds
- Regulated by SEBI
- Managed by professional fund managers
- Diversification of Risk
- Retail investors who want to invest in equities are either too intimidated or do not have the time nor inclination to do detailed research before investing. Hence mutual funds come to the rescue for many such investors. Mutual funds pool money from multiple retail investors. Retail investors receive a share in the form of units. The fund managers, using their expertise, then invests in stocks and bonds on behalf of the investors. Once the fund earns returns, it is distributed to the investors in the proportion of their investment. Mutual funds give retail investors access to large, well-researched portfolios at affordable costs. Asset Management Company – The AMC is the fund manager, which manages the money of the investors and charges a fee for its service. The day-to-day operations are handled by the AMC. The AMC launches various mutual fund schemes in the market as per the needs of the investors and the nature of the market and also oversees the development of these funds. The design for a mutual fund scheme is initially given to SEBI for verification and final approval. Only after SEBI’s approval, the AMC can roll out the scheme. In order to maintain integrity and trust and prevent misuse of investor money, SEBI has strict rules, regulations and guidelines for running the business and the AMC has to function based on these.
SWP
SWP stands for Systematic Withdrawal Plan. It is an investment strategy offered by mutual funds that allows investors to withdraw a fixed amount of money at regular intervals from their investment holdings.
Under a SWP, investors set a withdrawal frequency (such as monthly, quarterly, or annually) and specify the desired amount to be withdrawn. The withdrawn amount is transferred to the investor's designated bank account.
SWPs are commonly used by investors who want to create a regular income stream from their investments without having to liquidate their entire holdings at once. It is particularly popular among retirees or individuals seeking regular cash flow to meet their living expenses.
STP
STP stands for Systematic Transfer Plan. It is an investment strategy offered by mutual funds that allows investors to transfer a certain amount or a fixed number of units from one mutual fund scheme to another, systematically and at regular intervals.
Under an STP, investors can choose to transfer funds from one mutual fund scheme, known as the source scheme, to another mutual fund scheme, known as the target scheme. The transfers can be made based on a predetermined frequency, such as monthly or quarterly, and can involve a fixed amount or a fixed number of units.
