Should you be investing in Mutual Funds?

A decision like investment should never be made in haste and that is exactly what most of the salaried individuals do. This can have serious implications in the long run. A strategically planned investment portfolio is definitely a wiser way to earn some wealth alongwith saving taxes.

One of the most interesting investment instrument is mutual funds. An individual investor from a non-industry background might think that this kind of investment is not his cup of tea. However, it is imperative to understand here that investment in mutual funds is definitely not rocket science. Also, it is one of the most tax efficient and simple way of investment to make some money.

Let us discuss some of the common questions that come to our mind while deciding this instrument as an investment path.

What is a Mutual Fund?

In simpler terms, it is a fund managed by technically sound experts who collect money from investors and put in that money in wide range of securities like shares, debentures, etc to earn a return.

Why Mutual funds?

Professional management: Mutual funds are managed by experienced technical experts who are best in their fields and understand the industry well. Thus, the investor’s money is into safe hands.

Outsourcing: Since investment decisions are quite complex and require a lot of time and attention to earn good profits, it is always better if a professional industry person is given the responsibility to invest on your behalf. It is just like outsourcing your investment decision to an expert.

Enables diversification: It helps you diversify your investment portfolio as mutual funds invest in a broad range of securities. Thus all your eggs are not in the same basket!

Economical: It is comparatively economical as you can invest with a small amount of INR 500 instead of huge capital investment which is required if you directly invest into the market.

Invest in tax saving mutual funds: Tax saving mutual funds (also called Equity linked saving schemes) are one of the best instruments to save taxes.

Opportunity of higher returns: Investment in mutual funds would give you an opportunity to earn higher returns as it is linked to the market. However, this depends on the degree of risk you are willing to take.

Transparency: Since mutual funds are regulated by SEBI guidelines which ensure transparency, regular information is available about your investments.

What are equity linked savings schemes (ELSS)?

ELSS is an equity mutual fund scheme, which is one of the most efficient schemes with the sole purpose to save your taxes. It is an eligible deduction under section 80C. Let us see some of its features:

1. 3-year lock in period which is quite reasonable for a regular investor.
2. Benefit of equity returns come as a bonus to you.
3. It is best for beginners as it can be done through monthly SIPs. Thus not much of a burden and you can plan effectively.
4. Since market linked, have the ability to earn decent returns in the long run.
5. It is most suitable to investors with moderate to high risk appetite.
6. Returns from such schemes are absolutely tax free.
7. Offers both dividend and growth schemes.

Some of the top tax saving ELSS are Tata India Tax Savings Fund-Direct (G), Escorts Tax Plan-Direct (G), Axis Long Term Equity- Direct (G), to name a few.

It is imperative to evaluate the performances of various mutual fund schemes for a certain period before deciding to invest into one. This is because although mutual fund investment seems interesting and professionally managed, certain degree of risk cannot be waived off as it is directly linked to the market, which fluctuates with emotions and not always by rational logic!