Mutual fund is a pool of money. It is managed by a professional investor. People purchase mutual funds because of diversification, professional management and convenience. Here are few reasons why people invest in mutual funds:
1. New/more types of funds
2. Few or no sales charges
3. Some performed better than common stock
4. Widespread marketing
5. Selection is easier
6. Dispense profits to investors
7. Investors expect dividend income
8. Investors expect price appreciation
10. Professional Management
Following are some of the reasons that make debt mutual funds a better investment choice than other options with fixed income.
MORE LIQUID THAN FIXED DEPOSITS: A debt fund is very liquid i.e. you can withdraw your investments at any time and money will be in your account next day. Most debt funds don’t levy a charge if investment is redeemed after one month. So, it provides lot of flexibility.
TAX EFFICIENT: In long term, debt funds are far more efficient than fixed deposits. The longer you hold the debt fund, the bigger is the indexation benefit. No TDS is deducted in case of debt funds. But in case of fixed deposits, if your income exceeds Rs 10,000 in a year, bank will deduct tax @ 10.3% from your income. And if you are not liable to pay tax, you will have to submit either Form 15H or 15G to escape TDS. Income from fixed deposits is taxed on annual basis and you will get money after maturity i.e. may be after 5-6 years, but you have to pay tax every year.
HIGHER RETURNS: The pre-tax returns from debt funds are comparable with those from other debt options such as fixed deposits and bonds. But if there are changes in interest rates, your debt fund could give higher returns. Funds that invest in long term bonds are more sensitive to changes in interest rates.
GREATER FLEXIBILITY: Debt funds are more flexible. You can invest small amounts every month by way of an SIP or whenever you have surplus cash. But you can’t open fixed deposit every time you have an extra Rs 2,000-Rs 3,000. Another advantage is that you can easily shift the money from a debt fund to an equity fund or any other scheme from the same fund house. One more and main advantage is that there is no penalty if the STP stops due to insufficient money in your debt fund.
Despite decline in overall assets managed by Indian Mutual Fund Industry, it is growing. The loss of investor confidence is only a temporary phenomenon for mutual fund industry and it expects to win over its lost investors gradually with the recovery of Indian economy and equity markets.
Due to this confidence only mutual fund industry is launching new schemes, despite the fact that the existing and well established schemes are finding it difficult to sell.
Till now in this financial year 5 equity schemes have been launched which is almost double of what was launched in last year in this period. Of the five three have been launched in this month of June only.
All of you must have heard of Mutual funds and many of you must have invested in these also to save income tax. But how many of you know what are mutual funds?
Mutual fund is a fund managed by an investment company with the financial objective of generating high rate of returns. These investment management companies collects money from the investors and invests those money in different stocks, bonds and other financial securities in a diversified manner.
Before investing they carry out thorough research and detailed analysis on the market conditions and market trends of stock and bond prices.
People invest in mutual funds rather than investing individually because of lack of knowledge about stocks, bonds, etc. Through mutual funds they get expert’s suggestions for their investment and they can also reduce their risk.
In next post I would be discussing about various forms of securities.
Suggestions and comments are welcome