Equity Mutual Funds are a popular investment option for investors looking for long-term investment opportunities. Let us give you an introduction to Equity Mutual Funds, shall we?
Buckle up as we take you through the basics so that you’ll come out sounding like a pro.
What are Mutual Funds?
In simple terms, a Mutual Fund collects money from several investors and invests this accumulated money in various types of investments. The collection of investments is called an investment portfolio.
Where is your money invested?
The money that you put into Mutual Funds is invested by the Mutual Fund in either debt instruments or stocks.
A broad classification of Mutual Funds
To give you a simple classification of Mutual Funds, there are three broad types of Mutual Funds based on the investment category they fall under. These are:
- Equity Funds
- Debt Funds
- Money Market Funds
Let us tell you more about Equity Mutual Funds
Equity Mutual Funds invest the investors’ money in shareholdings of different companies. The profits or losses that result from an increase or decrease in the company’s share prices have an impact on the Mutual Fund’s performance.
Additional Reading: Watch Out For These Worst Investing Mistakes
What is Net Asset Value?
The price that investors pay for each unit of a Mutual Fund when they want to invest is called the Net Asset Value (NAV) of a fund.
The Net Asset Value is the book value of a Mutual Fund.
Book value? What’s that?
The book value is understood as the difference between what a Mutual Fund owns i.e. its various assets and what the fund owes i.e. its liabilities.
What are a Mutual Fund’s liabilities?
A Mutual Fund’s liabilities are the expenses that are incurred towards operating a Mutual Fund.
Simple, isn’t it?
Did you know? The Net Asset Value of a Mutual Fund is directly affected by the price fluctuations in the stock market.
Who manages the investments in a Mutual Fund?
Investments in all Mutual Funds are managed by professional fund managers. A fund manager will be responsible for managing your investment portfolio and rebalancing your asset allocation to minimise risks across your investments.
Ready to get started?
How do you invest in Mutual Funds?
There are two ways in which you can consider when deciding to make investments in Mutual Funds.
You can make a one-time investment. If you find you have a sudden windfall of money, giving you a lump-sum amount, you can stash it away to appreciate in a Mutual Fund.
But wait. There is a better way. You can even mitigate your risk exposure through this investment method. Ready to read about it?
Invest in Mutual Funds through Systematic Investment Plans. Salt away small amounts of money from you monthly pay cheque with a Systematic Investment Plan. This allows you to invest without worrying about timing the market. It also makes a disciplined investor out of you. You can begin investing with a Systematic Investment Plan with as little as Rs. 500 per month.
Additional Reading: Understanding Mutual Funds
Still confused about how to invest in Mutual Funds? Let’s tell you
How to invest a large sum of money
Should you invest all your money at once or over a period of a few years? You must know that a Mutual Fund’s performance depends on market fluctuations. The markets can be uncertain. There is no best time to invest.
The word going around the block is that if you have money, you should invest it as soon as possible. The markets can fluctuate at any time. Investing as soon as you have the money can minimise the risk of market volatility.
Let’s give you a scenario to consider.
Say you have Rs. 10 lakh to invest. Assume that the market dips by 5%. You lose Rs. 50,000. (Ouch! That hurt!) Yes, it is upsetting, we agree.
But what if the markets rose by 5%? Then you rake in Rs. 50,000. If you did not invest because of the fear of market volatility, you will have not have had a chance to make that profit. This is called loss aversion.
Therefore, it is recommended that you should invest the money over an extended period – ideally over a few months. Make it a monthly habit, why don’t you?
But remember, making a monthly investment does not eliminate the possibility of encountering market risks.
How do you go about it?
Consider spreading out your investments at a frequency of every few weeks, say Rs. 10,000 every two weeks for 5 months. You can choose to make monthly investments on different dates throughout the month.
It is assumed that you are willing to keep this money invested in equities for at least five to six years.
How can you benefit from investing in Mutual Funds?
Here’s how you can stand to benefit from investing in Mutual Funds.
Growth of the Net Asset Value
The Net Asset Value of the Mutual Fund will increase if the market value of the fund’s portfolio holdings sees an increase i.e. after deducting expenses and liabilities.
Remember, an increase in the Net Asset Value of the fund shows a higher value of an investor’s invested capital because any profit made by investors is reinvested by the Mutual Fund if you chose the ‘growth’ option. Thus, the investors benefit from the effect of compounding. This helps an investor build long-term wealth.
If an Equity Mutual Fund sees a profit on the stocks held in its portfolio, the fund pays investors through a dividend pay-out. If you want to gain from the effect of compounding, such dividends must be reinvested in the Mutual Fund.
BB Tip: It is important that investors should not rely solely on a Mutual Fund’s past performance when choosing the funds to invest in.
Read About: How To Meet Your Goals With Mutual Funds
Tax benefits of Equity Mutual Funds
With investments in Equity Mutual Funds, if you remain invested in the funds for more than a period of one year, the long-term capital gains that accrue are exempt from tax. The dividends received by investors from Equity Mutual Funds are tax-free.
Tax-saving Mutual Funds
There are tax-saving Equity Mutual Funds. These are called Equity Linked Savings Schemes (ELSS) which have a mandatory lock-in period of 3 years. An Equity Linked Savings Scheme is an ideal investment option for beginner investors who are looking to save taxes.
Investments in Equity Linked Savings Schemes are eligible for tax deductions upto Rs. 1,50,000 per year under Section 80C of the Income Tax Act.
The last word
In conclusion, Equity Mutual Funds offer a lucrative opportunity for investment diversification to investors who are reasonably comfortable with making medium to high risk investments through Mutual Funds. It is a good investment option to create long-term wealth and gain high potential returns.
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Now that you are wiser about Equity Mutual Funds, do you want more information about Mutual Fund investments? You are in the right place, my friend!