An investment is an asset or item that is bought with the hope that in the future it will generate revenue or appreciate at some point. In hopes of a greater payoff in the future than what was originally put in, an investment always involves the outlay of some asset today. Investment process is governed by the two important facets of investment: risk and return. The characteristics of investment can be understood in terms of return, risk, safety & liquidity.
A mutual fund is a type of investment in which investors pool their money together to purchase a portfolio of shares, bonds or other securities in order to benefit from reasonably expensive diversification and professional portfolio management. A team of investment managers and research analysts choose securities in actively managed funds. Investing in mutual funds allows those who invest a modest amount of money to benefit from the same benefits that large institutional investors enjoy.
At the end of each trading day, the ‘net asset value’ (NAV) or price of a fund is calculated by dividing the total value of the securities in the portfolio by the number of outstanding shares of the fund. The NAV changes every day based on the value of the individual securities held by the fund at market close.
Different types of mutual funds are available on the market with different options. Equity funds play a very important role in all types of investment options. The 3 main categories of equity funds are:
- Index Funds
- Sectoral Funds
- Tax Saving Mutual Funds
The Systematic Investment Plan (SIP) is an investment route provided by Mutual Funds in which, instead of making a lump-sum investment, one can invest a fixed amount in a Mutual Fund scheme at regular intervals, say once a month or once a quarter. The amount of the instalment may be as little as a minimum of INR 500 per month and is similar to a recurring deposit. It is convenient as you can give standing instructions to your bank to debit the amount each month.
Among Indian mutual fund investors, SIP has gained popularity as it helps to invest in a disciplined manner without worrying about market volatility and market timing. Mutual Funds’ Systematic Investment Plans are easily the best way to enter the world of long-term investment.
Mutual funds at their core should be lower-risk investments. Many mutual funds are aimed at providing broad-based exposure to a specific asset class, stocks, bonds, etc. With that diversity, mutual fund options for investors with better returns should have a lower risk profile.
Under Section 80C of the Income Tax Act, 1961, mutual funds, also known as the Equity Linked Savings Scheme (ELSS), are great tax-saving tools. If they opt to plough money into certain investments, this section enables the investor to claim benefits from their taxable income.