For millennia, fixed income instruments like bank FDs have been the favored means of investment for Indians. Better returns don’t seem as tempting as knowing “my money is safe in the bank.” Is this assurance sufficient to encourage investors to keep their money with banks at a time when post-tax FD returns barely outperform inflation? An MF is a financial instrument that pools the money of numerous people and invests it in a variety of financial securities, such as stocks, bonds, and other investments. Each investor in a mutual fund scheme has units, which represent a percentage of the scheme’s assets.
For many years, Indians have preferred to invest in fixed-income products such as bank FDs. Better profits seem less attractive than knowing that “my money is safe in the bank.” Is this self-assurance enough to persuade investors to put their money in the banks at a time when post-tax FD rates barely beat inflation?
Mutual funds are a kind of investment vehicle that is often managed by an asset management firm and allows investors to invest their money in a variety of assets such as bonds, equities, and other securities. The Securities and Exchange Board of India regulates mutual funds. Mutual funds are a good option for those who want to invest a specific amount but aren’t sure where to start. A potential investor might also seek professional advice to ensure that his or her money is well spent.
The securities are chosen with the investing goal of the scheme in mind. Mutual funds are managed by asset management organizations (AMCs). Fund managers are hired by asset management companies to oversee the management of various mutual fund schemes and guarantee that the schemes’ investment objectives are met. AMCs charge investors a fee for fund management and other services they provide.
While a fixed deposit offers a guaranteed income, the returns are much lower than a comparable mutual fund investment. When you invest in an FD, banks lend money to businesses in the form of a loan. When you invest in equity mutual funds, the asset management company (AMC) purchases equities with the money you’ve saved in the stock market. Regardless of the manner of investment, the funds will eventually be invested in businesses, putting your money at risk.
INVESTING IN MUTUAL FUNDS HAS ITS ADVANTAGES
Risk Diversification: One of the most important benefits of mutual funds is risk diversification. Each stock is susceptible to three types of risk: company risk, sector risk, and market risk. Company and industry risk is referred to as unsystematic risk, whereas market risk is referred to as systematic risk. Mutual funds assist investors in spreading unsystematic risks by investing in a diverse array of companies from various industries. As a result, mutual fund risk is far lower than individual stock risk.
Transaction cost economies of scale: Because mutual funds buy and sell large volumes of assets, transaction costs per unit are much lower than what normal investors would pay if they purchased or sold shares through a stockbroker.
Mutual funds are managed by professional fund managers who have the appropriate qualifications, expertise, and experience to select the best stocks or other securities in order to obtain the best risk-adjusted returns.
Mutual funds offer a diverse choice of products to suit investors’ risk profiles and investment goals. Apart from equity funds, there are also hybrid funds, debt funds, liquid funds, and tax-saving programs to fulfill a variety of investment demands.
Investing with discipline: Mutual funds encourage long-term investing, which is crucial for wealth accumulation. In addition, systematic investment plans, or SIPs, encourage investors to make continuous investments in order to meet their various financial goals. Many people are unable to build a substantial investment portfolio because they are unable to invest in a disciplined manner.
SIPs in mutual funds help investors maintain a disciplined approach to investing. SIPs also help investors remove emotions from their investment decisions, as many investors get delighted during bull markets but terrified during bear markets. It is a well-known fact that investments made during times of market weakness assist investors in gaining high long-term returns. One of the most appealing aspects of mutual fund investing is that it allows investors to maintain discipline by automating their investments through SIPs.
Bank fixed deposits (FDs) are unquestionably safe because you will almost certainly receive your money back. However, did you know that bank FDs may have a negative influence on your savings over time?
Fixed-income investments (FDs) offer lower-than-inflation returns.
From 2012 to 2014, India’s average inflation rate was 9.76 percent. Most FDs pay an interest rate of around 8.5 percent before taxes and around 7% after taxes. This means that every year you put money into an FD, you are losing money.
FDs are taxable, which further reduces your net income.
When compared to equities mutual funds, long-term returns are taxed at 10% for holding periods of more than one year on earnings exceeding Rs 1 lakh. FD interest is taxable in your current tax bracket. The more your income, the lower your FD return will be.