Mutual Fund To Improve Your Finances

(Article as on date 11^th June 2020)

Every individual aspires to become financially stable, but very few have the knack for effective financial planning. Believe it or not but those who are good at financial planning are the ones who generally succeed at achieving their financial goals. That’s because when you have set realistic short term and long term financial goals, pursuing them becomes a lot easier. No one wants to remain stuck with the same amount in their savings account. If you too wish to see your money grow over a period of time, then you may have to start investing soon.

Mutual funds can be one of the ways for people to get some market linked capital appreciation. However, before investing in these funds investors are advised to understand their risk appetite. Knowing your risk appetite might help you in diversifying your investment portfolio the right way. There are some people who have zero tolerance towards risk and hence, they do not mind settling with conservative investment schemes that generally offer fixed interest rates. But these interest rates offered by such schemes are relatively low and may or may not help you in achieving your financial goals.

If individuals who do not want to settle with low interest rates and are keen on getting market linked capital appreciation then they might consider investing in mutual funds.

What exactly is a mutual fund?

What AMCs/fund houses do is that they collect money from investors sharing a common investment objective and invest this pool of funds across the Indian economy. The money is invested across multiple assets like equity debt, call money, corporate bonds, treasury bills, government securities, etc.

Securities and Exchange Board of India, the regulator of mutual funds in our country describe them to be, “a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in the offer document.

Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with the quantum of money invested by them. Investors of mutual funds are known as unitholders.”

Investing in mutual funds might help investors in meeting their short term and long term financial goals. However, they should bear in mind that since capital gains from mutual fund investments are market linked, returns from these investments are never guaranteed and sometimes their portfolio can even incur losses.

Having said that here are some ways mutual funds might help you with your finances:

You can save taxes and may earn some capital appreciation at the same time

Did you know that if you invest in a tax saving scheme like ELSS, you can bring down your tax liability and at the same time give yourself an opportunity to earn some long term capital gains? Equity Linked Saving Scheme or ELSS is a tax saver mutual fund that comes with a three year lock in period. Investors can invest up to Rs. 1.5 lakhs* per fiscal year in an ELSS scheme and bring down their gross taxable income. The three year lock-in gives your investments an opportunity to grow. So not only are you getting a tax benefit, but you are also getting an opportunity to earn some capital appreciation.

Mutual funds offer diversification

One good thing about mutual funds is that they usually have a diversified portfolio. This means that when you invest in mutual funds, you expose your finances to multiple asset classes. This may be a good thing as you get exposed to different investment opportunities by just investing in one fund. Also, it is less likely for all sectors to underperform at the same time in tandem. For example, if the equity markets crash, the debt assets might be able to even out the losses.

You can invest in mutual funds depending on your financial goals

Another good thing about mutual funds is that investors can invest in them depending on their risk appetite and investment horizon. For example, if you are looking for a mutual fund that might help you with long term goals like retirement planning then you may opt for solution oriented funds. On the other hand, if you are investing just to save taxes, then there is ELSS for you. Investors with a short-term investment horizon may opt for debt funds. This means that there are enough mutual fund schemes to cater to the needs of almost every individual. You can explore and invest in ELSS schemes easily using the ELSS app for a hassle-free experience.

These are some of the ways how mutual funds might be able to help you with your finances. However, if you feel that you need further assistance with financial planning then you are requested to seek the help of a financial advisor.

*As per the present tax laws, eligible investors (individual/HUF) are entitled to deduction from their gross income of the amount invested in Equity Linked Saving Scheme (ELSS) up to Rs.1.5 lakhs (along with other prescribed investments) under section 80C of the Income Tax Act, 1961. Tax savings of Rs. 46,800 mentioned above is calculated for the highest income tax slab.

Finance Act, 2020 has announced a new tax regime giving taxpayers an option to pay taxes at a concessional rate (new slab rates) from FY 2020-21 onwards. Any individual/ HUF opting to be taxed under the new tax regime from FY 2020-21 onwards will have to give up certain exemptions and deductions. Since, individuals/ HUF opting for the new tax regime are not eligible for Chapter VI-A deductions, the investment in ELSS Funds cannot be claimed as deduction from the total income.

Investors are advised to consult his/her own Tax Consultant with respect to the specific amount of tax and other implications arising out of his/her participation in ELSS

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully