Here's What You Must Know About Mutual fund schemes if You Don’t Already

Mutual fund schemes have become an increasingly popular investment option for many Indian investors, especially those in Tier II and Tier III cities (Tier II and Tier III cities in India are the smaller urban centre’s experiencing growth and development, having population of Tier II cities range between 50000 to 99999 and Tier III cities range between 20000 to 49999). Understanding mutual fund schemes can be a game-changer for your financial planning and wealth creation journey. This guide aims to provide you with everything about mutual fund schemes, from the basics to the hidden facts that you might not know.

Mutual fund schemes are investment vehicles that pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. Managed by professional fund managers, mutual fund schemes offer a way for individual investors to gain exposure to a broad range of assets without having to pick and manage investments themselves.

What Exactly Are Mutual fund schemes?

A mutual fund is a pool of money managed by a professional Fund Manager. It is a trust that collects money from a number of investors who share a common investment objective and invests the same in equities, bonds, money market instruments and/or other securities. The types of mutual fund schemes vary, including equity schemes, debt schemes, hybrid schemes, and more. Each type has its own risk and return profile, catering to different investment goals and risk appetites. (You are recommended to seek advice from financial advisor before you take any/refrain from any action).

Why Should You Consider Mutual fund schemes?

Investing in mutual fund schemes comes with several benefits:

1. Diversification and Risk Management: By investing in a variety of assets, mutual fund schemes help spread risk. This means that the poor performance of one asset can be offset by the better performance of another.
2. Professional Management: Mutual fund schemes are managed by experienced fund managers who make investment decisions based on thorough research and analysis.
3. Accessibility and Affordability: You can start investing in mutual fund schemes with relatively small amounts of money, making them accessible to a wide range of investors.
4. Capable for Wealth Creation: Over the long term, mutual fund schemes possibly have the capability to generate significant returns, helping you achieve your financial goals.

Getting Started with Mutual fund scheme

Starting your mutual fund schemes investment journey is straightforward:

1. Understand Your Financial Goals: Determine what you want to achieve with your investments. Are you saving for retirement, a child's education, or a down payment on a house?
2. Choose the suitable Mutual fund schemes: Based on your financial goals and risk tolerance, select a mutual fund schemes that aligns with your needs. Consider factors like the schemes past performance, expense ratio, and the reputation of the fund house.
3. Complete the KYC Process: Before you can invest, you need to complete the Know Your Customer (KYC) process, which involves submitting identification and address proof.
4. Start Investing: You can invest in mutual fund schemes through a lump sum investment or a Systematic Investment Plan (SIP), where you invest a fixed amount regularly.

Debunking Common Myths About Mutual fund schemes

There are several misconceptions about mutual fund schemes that can deter investors:

1. Myth: Mutual fund schemes Are Only for the Wealthy: Fact: Mutual fund schemes are accessible to everyone, with minimum investment amounts as low as Rs. 100. (You are recommended to seek advice from financial advisor before you take any/refrain from any action)
2. Myth: Mutual fund schemes Are High-Risk Investments: Fact: While some mutual fund schemes are riskier than others, there are many low-risk options available, such as debt schemes.
3. Myth: You Need to Be an Expert to Invest in Mutual fund schemes: Fact: Mutual fund schemes are managed by professionals, making them suitable for both novice and experienced investors.

The Costs Involved in Mutual fund scheme Investments

Investing in mutual fund schemes comes with certain costs:

1. Expense Ratio: This is the annual fee that covers the scheme’s operating expenses. It is expressed as a percentage of the scheme’s average assets.
2. Exit Load: Some mutual fund schemes charge a fee when you sell (exit load) units of the fund. (May vary scheme wise, thereby you are recommended to seek advice from financial advisor before you take any/refrain from any action)
3. Other Charges: These may include transaction fees, custodian fees, and more.
    

These costs can impact your overall returns, so it's important to understand them before investing.

What You Need to Know About Taxes and Mutual fund schemes

Mutual fund schemes investments come with tax implications:

1. Short-Term Capital Gains (STCG): If you sell your equity mutual fund schemes units within three one year, the gains are considered short-term and are taxed at 20 %rate.
2. Long-Term Capital Gains (LTCG): Gains from units held for more than one year are considered long-term and are taxed at 12.5% without the benefit of indexation.
3. Equity Linked Savings Schemes (ELSS): Equity Linked Savings Schemes (ELSS) offer tax benefits under Section 80C of the Income Tax Act, allowing you to save up to Rs. 1.5 lakh in taxes. Unlike other mutual funds schemes, ELSS come with a mandatory lock-in period of three years, which means you cannot redeem your investment before this period.
    

For latest tax legislations, you are requested to seek advice from your tax advisor.

Tips for Your Mutual fund scheme Investments

1. Regular Investing (SIP): Systematic Investment Plans (SIPs) allow you to invest a fixed amount regularly, such as monthly, daily , weekly , or at predetermined frequency helping you build wealth over time.
2. Stay Invested for the Long Term: Mutual fund schemes are preferably suited for long-term investments. Staying invested helps you ride out market volatility and benefit from compounding.
3. Regularly Review and Rebalance Your Portfolio: Periodically review your investments to ensure they align with your financial goals. Rebalance your portfolio if necessary to maintain your desired asset allocation.

Summing Up: Your Mutual fund schemes Journey

Mutual fund schemes offer a versatile and accessible way to invest and grow your wealth. By understanding the basics, debunking common myths, and being aware of the costs and tax implications, you can make informed investment decisions. Remember, the key to successful investing is to start early, stay disciplined, and keep learning.

By understanding these key aspects, you can confidently embark on your mutual fund scheme investment journey and work towards achieving your financial goals.

The information is for general purposes only and not an investment advice. Readers should seek professional advice before taking any investment related decisions.

Additional Links:

Tax Regime Specific to Mutual Fund Investors in India

Let’s Learn How to Invest in Securities Market

AMFI - What Are Mutual Funds?

What is a Mutual Fund? - Beginner's Guide to Investing

AMFI - Introduction to Mutual Funds

Know everything about SIP