Ever heard of an investment option that can not only provide you huge return but also manages your funds in diversifying portfolios. Yes, we are talking about mutual funds which are a good investment tool and can provide you reasonable returns for short-term as well as for long-term horizon.
Are mutual funds ideal for short term or long term?
Mutual funds can be suitable for short-term or long-term investments. Short-term investments can be ideal for investors who are new to the market. However long-term investments are best for people with vast experience in the market. This blog will guide you about the mutual fund investments for short-term as well as long-term.
But what is a mutual fund?
A mutual fund is an investment fund which is managed by professionals who have extensive research on the market. This fund is run by asset management company that brings together the group of investors and pool their money in different stocks, securities, bonds etc. The main motive of mutual fund investments is to diversify the portfolio of investors and provide a high return to them.
Why choosing mutual funds over other investments?
Mutual funds can provide you several benefits. These benefit of investing in mutual funds are as follows-
- Diversification- Mutual fund let us invest in any product cumulatively like equity fund, debt fund, gold fund as per our preference. Diversification makes our investment less risky.
- Professional management- The mutual fund industry has lots of professional managers and qualified management teams who have extensive research on the market.
- The mutual fund industry- Mutual fund industry is regulated by Securities and exchange board of India who keeps ensuring transparency of the mutual fund industry.
Are mutual funds risky?
Except for Bank FDs and Government sovereign securities, most of the investments are risky. However, Risk can provide you a good return. Though you have to be patient with your mutual funds’ investments because it takes time to deliver good results. Mutual funds are risky. But the good news is that all mutual fund schemes do not carry the same risk when it comes to returns on investment.
Power of compounding
Compounding refers to compound interest in your returns.In mutual funds, you can reinvest your earnings and receive additional units. By doing such thing, you can earn a return on your returns and your principal. So when your principal is added to your reinvested earnings, your investment will increase at an increased rate. But compounding is a long-term strategy. Thus by staying invested for a long-term period, your capital will earn more money for you.
However, you can get the compounding benefit only under a growth plan. Under the growth plan, your notional return is also reinvested and it generates high sum at the time of sale. In case of dividend plan, since you get continuous incomes in the form of dividends, compounding doesn’t work unless you reinvest your dividend income. Thus to take the best advantage of compounding, start saving and invest wisely as early as possible.
Short-term investing in mutual funds can be a good option if you are a new investor in the market because these funds provide good experience in terms of reasonable return, risk and liquidity. With lack of experience and volatility of the market, one should go for short-term investment funds. Moreover, these funds provide a reasonable return and better than bank deposits like FDs, savings account. And there is no effect on the post-tax return as both instruments are taxed at same slab rate of the investors.
Long-term investments not only huge returns due to the power of compounding but there are tax benefits as well. Moreover, these long-term investment funds give options to investors to invest small amount at regular intervals like per month. This has a potential to deliver healthy returns in the long run. The rate of returns is fluctuating in mutual funds with market volatility for short-term investments. However long-term investments are comparatively less volatile and provide better returns.
You can earn returns on mutual fund investments under two Schemes namely-Growth plan or Dividend plan. In growth plan, you will receive only the mass amount in the form of capital gains at the time of selling of your investments. However, in case of dividend plan, you will receive dividends on a continuous basis like monthly, quarterly etc.
Taxation for mutual fund schemes
Debt-oriented Mutual fund scheme- Investors have to pay tax at their applicable slab rate if the holding period of their debt schemes is less than 36 months. The gain is a short-term capital gain. However in case the case of long-term capital gains, the investors have to pay tax@ 20% with indexation. Moreover, mutual fund houses have to pay dividend distribution tax at 29.12% ( 25%+12% surcharge+4% health cess).
Equity-oriented mutual fund scheme- From FY 2018-2019, the investors have to pay tax at 10% on equity scheme over and above Rs 1 lakhs.
Moreover, mutual fund houses now have to pay dividend distribution tax also at 10% on dividend declared under equity schemes.This will surely impact the returns of the investors as the company pays DDT out of their declared profit.
Investment schemes of mutual funds
- Open-ended scheme- These schemes do not have a maturity period. Investors can easily buy and sell units at declared Net Asset Value (NAV) on a daily basis.
- Close-ended scheme- Investors can subscribe to this scheme at the time of public issue. Thereafter they can buy or sell the units on stock exchanges where the units are listed.
- Equity-oriented Mutual Funds- This scheme provides capital appreciation over the medium or long-term. one should look for longer periods, typically 5 years and above.
- Fixed Income-oriented Mutual Funds- The aim of this scheme is to provide regular icome over the period
- Balanced fund- Investors can expect moderate growth under this scheme.They generally invest in 40%-60% in equity and debt instruments.
- Index funds- These funds invest in the particular index such as BSE index or NIFTY index.
Mutual fund investments can serve every kind of investor. A new investor with short-term goals and an experienced long-term investor both have various options available under any scheme. Mutual funds investments are risky. However, the power of compounding combined with the taste of diversification can give you good enough returns and certainly beyond your expectations.
Want to know more about mutual funds? Explore our website.Trust the expertise of your advisor, know your goals and invest!