Investments are coveted by wise persons. People who indulge in investing, lead there life in a happy and stress free way. It is usually suggested that people should start saving as soon as they start earning. Investing is the next step of saving. Someone truly said that ‘’saving means future earnings’’. The simplest form of investment is depositing the funds in the bank and earning a fixed amount of interest. It is said to be the most orthodox way for investing as it requires minimal risk and gives a fixed return (usually most of the banks offer an interest of 4% annually).
Investments
are more specifically initiated after analyzing the risk and return of a
particular investment. The traditional investment options that are generated by
big corporations are stocks (common and preferred) and bonds. Both bonds and
stocks involve giving money to the organization collected from the investor. The
difference is by investing in stocks, investor gets ownership in the
organization but investing in bonds means that investor is lending his/her
money to the organization. There is more risk involved in equity rather than
bonds. But more risk also helps to earn more return.
There
are other investment options that are available except these traditional
sources. One such not so popular option of investment type is Alternative
investments. This includes commodities, real estate, hedge funds,
infrastructure, private equity and some other (stamps, antiques etc.). There
are few advantages and disadvantages that need to be considered before
investing in these types of investments. Advantages are:
·
There are many varieties for investments in which an investor
can invest their funds.
·
The orthodox way to deposit funds in bank provides a fixed
return to investors.
·
Deduction is also receivable by the investor under income tax
by investing in shares (common stock).
Some
of the drawback of the above types of
investments are:
·
Investor cannot diversify his/her funds by himself/herself.
Expert opinion is required.
·
Expert opinion might become costly for retail investors.
·
Some of the investments are meant for the qualified or
Institutional investors and not for retail investors. Some of them are Hedge
funds and Private equity.
·
Some of the investments require a large amount of investments
and is not in league for common man since the very start. Example: Real estate,
Antiques, Jewelry etc.
·
Not every investment saves tax.
Investor
requires something more captivating.
Mutual
fund is becoming the new choice of investment for small investor. The first big
problem relating to the traditional and non-traditional type from investor
point of view is- it is difficult for
the investor to diversify the investments. In mutual funds, a pool of funds is
created by gathering funds from small
investors who are looking for diversification of their investments. Then this
small amount collected turns out to be a big amount and then the amount
collected is invested according to the experts appointed by a particular
company. Mutual funds invest the pooled amount in different forms of
investments which results in diversification and ultimately leads to lower the
risk. Like all other forms of investments mutual funds is also exposed to the market
risk and it doesn’t guarantee a fixed return. Return is affected by market ups
and down but by diversification it helps in reducing risk. Mutual funds make
investments affordable for small investors.
The second issue related to the investment forms is the tax. Not all forms of investments offer tax saving but Mutual Funds does. There are some Best tax saving mutual funds, Best tax saving funds in the market. There is a particular mutual fund scheme known as Equity Linked Saving Scheme (ELSS) that helps in saving taxes of the investor. Under ELSS the money collected from the investor are invested in equity and securities that are related to equity. ELSS can be applied by investors through Systematic Investment Plan (SIP). SIP is a type of mutual funds other than open end mutual fund and close end mutual funds. Investor can claim deduction under the Income tax Act for investing funds in ELSS scheme. The deduction is applicable under section 80C and maximum amount of deduction is Rs.1, 50,000 – Rs.1,52,000 according to the IT Act. ELSS scheme is considered to be one of the best ways to save tax. Many companies are initiating their own Mutual fund schemes to offer the best deal to the investor. If an investor falls in the slab of 30% tax then he/she might save up to Rs.40,000 -Rs.45,000 by way of tax deduction. In return the MF company will charge a nominal fees on an annual basis that is much less than the fees charged by the professionals to the individual investor. The mean return in ELSS from last 3 years has been 14%-16%. Equity mutual fund gives redemption to investor if the holding period of his/her investment is more than 1 year. There is some other tax saving investments as well like National Saving Certificate, Public Provident Fund, National Pension Scheme etc. but they offer a return lower than Mutual Funds. This makes Mutual funds more attractive.
Mutual
funds have some advantages and few limitations as well. Some of the advantages
of the mutual funds are:
·
Helps retail investors to diversify.
·
MF provides attractive return.
·
Mutual fund helps in saving tax.
·
The investment amount starts with Rs.500 which retail
investors can afford easily.
·
The fees charged by MF are much lower than the fees charged
by professionals to individual investors.
Some
disadvantages of MF are:
·
Even after the diversification, the market risk cannot be
eliminated.
·
The other forms of tax saving funds like PPF, NPS etc. are
government securities that offer lower return but they also involve lower risk.
Government securities are named as default free or risk free securities so
investors get attracted towards them.
Despite
all these disadvantages, there is no doubt that Mutual Funds is one of the best
offering in the capital markets for investors till date. Mutual funds are becoming
the new epitome of investment industry.