Why You Should Invest in Mutual Funds

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Investing is a necessity and investing in mutual fund has become a very common topic these days. Among all investments, mutual funds are the most convenient and have the potential to give you the best returns. But are you just investing as your friend is investing or do you really know the benefits of investing in mutual funds? If not then this article will help you to understand why investing in mutual funds is the best investment option in India now.

Get Best Returns Compared to typical products

You might be used to hearing about returns from more conventional investments. For example, a fixed deposit will give you around 6.5% per annum. In case of PPF, you would get a return of 7.8% – but then again, PPF locks your money up. Rates in mutual funds are not fixed. They depend on market conditions.

If you are new to mutual funds, the returns might be hard to believe at first. Some mutual funds have given returns in the range of 8-10%. Some up to 15 and 20%. And it isn’t uncommon to see rates go as high as 25% or even 30%. Of course, you have to remember – the higher the return, the higher the risk.

Lock-in Period and Investment Duration

This is another feature that might surprise you. Most mutual funds have no lock-in period.

There are some mutual funds that have a lock-in period. They are called close-ended funds. The ones that do not have any lock-in period are called open-ended funds. When you hear someone talk of investing in mutual funds, they are most likely talking of investing in open-ended funds.

Some funds charge a small fee if you withdraw before a certain period. Usually, this period would be a year and the fee would be 1% of your investment.

Minimum Investment: 

Unlike real estate and gold, mutual funds do not require you to have a lot of money to start investing. You can start investing in most of them with amounts as low as ₹500. So you do not have to wait to accumulate enough money to invest. You can make your money work for you sooner.

Liquidity:

Liquidity refers to the ease of turning your investment into cash. For example, a house may not be very liquid as it may or may not sell easily – usually taking months. Similarly, your investment in gold might also take some time to give you cash.

Mutual funds are very liquid. If you redeem your investments in a mutual fund, you will usually get money in your bank within 5-6 working days. There are certain types of mutual funds that offer even quicker redemption.

Tax Benefits:

If you invest in equity mutual funds (funds that invest in equity/shares), and redeem after a year from investment, you do not need to pay any taxes!

A certain type of mutual funds called ELSS funds allow you tax benefits of up to Rs 1.5 lakh under Section 80C while giving you arguably the best returns. These have a 3-year lock-in period which is the lowest lock-in period among all tax saving instruments under Section 80C.

Share Market Investment

Many people claim to make great returns from the share market. These people are usually professionals who are well versed with the markets. You too may have wanted such results but do not have the time to study the markets.

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Equity mutual funds allow you to invest in the share market indirectly. You invest your money in an equity mutual fund, and the fund manager invests your money carefully and wisely in the equity markets. A fund manager being a full time professional is capable of studying the markets and investing wisely. This way, you do not have to put in too much effort to reap benefits from the markets. You just have to choose your mutual fund wisely.

Easy to Choose a Mutual Fund:

Choosing a fund for yourself used to be quite a task earlier. You had to look at the past returns, alpha, beta, and so on. Now with Groww however, it has become much simpler.

Here’s how to go about it.

Choose the duration you want to invest for and the risk you will be able to take.

Mutual Fund TypeDuration
Debt FundFew weeks – 1 year
Balanced Fund2-3 years
Large-cap Fund (Equity)4+ years
Mid-cap Fund (Equity)5+ years
Small-cap Fund (Equity)7+ years

These are the recommended durations for which you should invest in a certain type of fund. The table is arranged in order of increasing risk. As you would have guessed, you can take greater risk with an increase in the investment duration.

Once you’ve chosen a type of fund to invest in, simply go to https://groww.in/mutual-funds/category and find your category. Upon clicking a category of your choice, you will be lead to a page containing a list of mutual funds. These mutual funds will be arranged in a descending order of stars  with the best funds having a rating of 5 stars.

Choose the best fund from this list and invest. It is that simple!

Types of Mutual Funds:

Of course, by now you must be wondering about the different types of mutual funds. To keep things very simple for you, they are broadly of two types.

  • Debt Mutual Funds: These are of several types too. They invest in money market instruments like bonds, securities, and term deposits. Investment in debt funds is considered to be of low risk as these funds give more consistent returns. You will be able to get around 7-10% annually from this category of funds.
  • Equity Mutual Funds: Again, there are several types of equity funds. They are categorized based on the size of companies they invest in. Funds investing in large companies (large-cap) are considered to be far less risky than funds investing in small companies (small-cap). Depending on the type of funds you choose to invest in, you can get anywhere between 10% and 20% with equity funds. As mentioned earlier, it could be much higher too.

There are more types of mutual funds but if you are a novice, the information above equips you with a good amount of knowledge to start with.

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Disclaimer: Mutual funds are subject to market risks. Please read the offer document carefully before investing.

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