Why You must include Mutual Funds in your portfolio?
Benefits of mutual funds?
Buy n Sell with Great Convenience: Investors who have the time and the money can build their portfolio by buying one security at a time. But identifying, researching and monitoring securities can be a full-time job that requires a lot of commitment. Alternatively, investors can simply buy a mutual fund in the market that will save them a lot of time and regular monitoring of the performance of the individual securities that make up the fund.
Do not Put all Eggs in One Basket, Be Diversified: A single fund can hold securities from 100s of different issuers or companies, far more than what an individual investor can realistically manage to hold in their individual portfolios. This diversification reduces the risk of a loss due to problems in one particular company or industry.
Mind your Own Business, let it manage by Professionals: A mutual fund is managed by professional investors who do this full time. The resources available to them like traders who have practical experience in when to buy and sell securities, research team and access to company management is far more than what an individual investors can achieve on his own.
Get Your Money When You Want, It’s Liquid: Like shares, mutual funds are also liquid investments that can be bought or sold freely so that investors have access to their money when needed. However, certain shares might not trade freely because there is not market for them, and then the investor is stuck. Mutual funds do not face this problem of illiquidity.
Role of funds in a consumer's portfolio
Hedge against Inflation & Get Growth also: Traditional savings instruments cannot keep pace with inflation and the rising cost of living. They give only 3.5% in a savings account. You can use a mixture of mutual funds to achieve a better return than what you can get in a savings account
One more Source of Earning: Can provide you with income if you invest in an income or dividend paying fund, along with giving you a modest capital appreciation
Different from Life Insurance: A mutual fund is a capital market investment product that gives you a return based on the amount of risk taken by you.
Life insurance on the other hand is not an insurance product, but rather a protection product that will compensate your family or survivors in case something happens to you.
There are some types of life insurance that have an investment feature attached to them. Please understand that such type of hybrids can be recreated by you by simply combining a pure life insurance product along with a mutual fund. And, you will pay lesser in fees if you do this on your own, because these hybrids have much higher fees.
These hybrids have a purpose in your portfolio if you are looking for some capital appreciation along with life/risk cover. Ultimately, you need to decide what your needs are and whether the product you are looking at meets your needs or not.
Selecting The Right Mutual Fund
There are over 750 different mutual funds in India today and about 35 different companies that run these funds. So, how will you choose which fund to invest in?
Firstly, know your own needs. Are you investing to fulfill a short-term or a long-term goal? Or, are you investing just because you heard in your office cafeteria that you should invest in a certain fund? Not all mutual funds serve the same purpose, so you should know why you are investing. If you want capital appreciation for your son's education 20 years from now, you should not invest in a bond fund. However, if you want to save and protect your capital for funding your son's education in 2 years time, then you should consider a conservative fund like a bond or money market fund, which will also give you some income
Secondly, this brings us to time horizon. What period are you ready to invest in the market for? Equity funds should be held for at least 3-5 years because equities are long-term investment vehicles. Debt or money market funds, however, can be invested in for shorter periods of time.
Thirdly, how comfortable are you with thepromoter of the fund? Many new companies are starting fund houses. Many of them will not be as successful as the ones that already have a successful track record that they have built over the past 5-10 years. So, invest in mutual funds that have been launched by companies that have a track record and are not new into the Indian market.
Finally, many investors look at past performance and assume that the fund will continue to return the same in the future. This is not always true and can often be wrong. Any fund can do well over a short-term because luck and other factors can come into play. So, do not choose a fund to invest in just because it has done well in the recent past. You should be interested in the long term performance of the fund. Invest in funds that have done well across market cycles and investment cycles.
Mutual Funds and Taxes
Different types of Mutual Funds attract different types of taxes. Here is all you would want to know about taxes applicable on Mutual Funds in India.
80C benefits through ELSS:Under the current tax laws, you can get an annual income tax benefit of up to Rs. 1Lakh if you invest in Equity Linked Savings Schemes, ELSS. However, the minimum term for these schemes is 3 years and you cannot withdraw your money before that time
*The education cess of 3% shall be levied on all investors.
*Short Term Capital Gain Tax indicated above is inclusive of education cess
**Dividend Distribution Taxes indicated above are inclusive of additional surcharge and cess.