Why should one invest in Mutual Funds
Tax Planning

Why should one invest in Mutual Funds

Investing in Mutual Funds is a seamless and straightforward process, allowing investors to monitor the market and make investments according to their preferences. Additionally, the ability to switch between mutual fund schemes and rebalance portfolios ensures returns align with expectations.

Low Initial Investment

With Mutual Funds, investors can build a diversified portfolio starting with as little as Rs 500 per month through SIP (Systematic Investment Plan). This method offers the flexibility of investing either as a lump sum or through SIP, which, compared to lump sum investments, can lower the overall investment cost and leverage the power of compounding benefits.

Tax Benefits

Tax-saving mutual funds, such as Equity Linked Savings Scheme (ELSS), offer investors deductions under Section 80C of the Income Tax Act, up to Rs 1.5 lakh per financial year. ELSS has gained popularity due to its higher returns and the shortest lock-in period of three years among all Section 80C options.

Professional Management

Mutual fund investments are overseen by professional fund managers supported by research teams. These managers formulate investment strategies and select suitable securities based on the fund's objectives.

Considerations for First-Time Investors

Establish Investment Goals

Defining financial goals, budget, and time horizon is crucial for effective investment decisions. This helps determine the amount available for investing and aligns investments with risk profiles, ensuring purpose-driven investment strategies.

Choose Appropriate Fund Types

While various mutual fund types exist, experts often recommend balanced or debt funds for first-time investors due to their lower risk and consistent returns.

Selecting the Right Mutual Fund

With numerous mutual fund schemes available, thorough analysis is necessary to choose the most suitable investment. Factors such as fund manager credentials, expense ratios, portfolio components, and assets under management should not be overlooked.


Diversifying investments across multiple mutual funds can mitigate risks and yield balanced returns. A diversified portfolio helps spread risks, ensuring that underperforming funds are compensated by others, maintaining overall portfolio value.

Preference for SIPs

Systematic Investment Plans (SIPs) are advisable for first-time equity investors. SIPs mitigate the risk of investing at market peaks by spreading investments over time and across market levels. Additionally, rupee cost averaging associated with SIPs helps average investment costs and potentially enhances long-term returns.

Maintain Updated KYC Documents

Completing the Know Your Customer (KYC) process is mandatory for mutual fund investments. KYC compliance requires a PAN card and valid address proof.

Utilize Net Banking

Activating internet banking facilitates seamless and secure mutual fund investments, providing a straightforward process for investors.

Seek Professional Advice

Navigating the mutual fund investment process can be complex. Consulting a financial advisor or mutual fund expert can provide valuable guidance in selecting appropriate investment options.

Benefits of Mutual Fund Investments

While mutual funds entail risks, they offer significant advantages. Adhering to prudent investment principles can mitigate risks and create opportunities for long-term wealth accumulation. Key benefits include:

Regulatory Oversight: Mutual funds are regulated by SEBI, ensuring transparency, risk mitigation, and investor protection.

Flexibility: Mutual funds offer flexibility in investment amounts and frequency. SIPs allow regular investments based on budget and convenience.

Accessibility: Mutual funds are easily accessible through various channels, including online platforms, brokerage firms, and agents.

Tax Benefits: Tax-saving mutual funds provide deductions under Section 80C, with ELSS offering a shorter lock-in period compared to other options.

Redemption Flexibility: Mutual fund schemes offer easy redemption, allowing investors to meet financial needs promptly.

Open-Ended Schemes: Open-ended mutual funds offer flexibility, allowing subscription and withdrawal on any business day.
Investing in Mutual Funds

Investing in mutual funds is a straightforward process. Follow these steps to initiate your investment journey:

Create an investment account.
Provide necessary details and complete e-KYC.
Select the right mutual fund and invest.
Frequently Asked Questions

How Much to Invest: Experts recommend investing approximately 20% of monthly salary in mutual funds. Online platforms facilitate easy selection and investment.

Self-Directed Investment: Mutual funds can be bought directly through online platforms or intermediaries.

Types of Mutual Funds: Equity, debt, and money market funds are the primary categories, each with various sub-categories.

SIP Returns: SIP returns can be calculated using the Future Value formula based on investment amount, rate of return, and investment period.

Color Codes: SEBI-mandated color codes indicate the risk level of mutual funds, with brown denoting high risk and blue indicating low risk.

Avoidable Mistakes: Common mistakes include neglecting financial goals, ignoring risk profiles, and having a short-term approach.

Online Investment: Direct investment through mutual fund houses or online platforms simplifies the investment process.

Demat Account Requirement: A Demat account is not mandatory for mutual fund investment, which can be done directly through the fund house or online platforms.

International Investment: International mutual funds are accessible through Indian mutual funds or fund of funds schemes, offering exposure to foreign markets.

ELSS Investment: ELSS investments can be made online, similar to other mutual funds.

Investment Amount: SIPs allow investments as low as Rs 500 per installment, promoting accessibility for all investors.

Investing Without a Broker: Direct investment in mutual funds is possible offline or through online platforms without a broker's assistance.

Investment Through Demat Account: Mutual fund investment through a Demat account offers convenience but may incur higher charges compared to other methods.

Why should one invest in Mutual Funds
Maniraj Anantham 16 May, 2024
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