Mutual funds, with their numerous benefits, are fast becoming the first and best choice for investments for beginners and professionals alike.
If you’re just starting out on investments and need a reminder about why to opt for mutual funds, take a look here:
Tax saving benefit of mutual funds
More often than not, the first thought that crosses an investor’s mind is if the chosen investment tool will fetch a tax benefit. One must do appropriate amount of research to make sure that the investment type opted for offers the benefit. It must be done in the planning stages to avoid suffering losses in the tax planning period. ELSS – Equity Linked Savings Scheme – is the ideal tax-saving instrument. It can be used to harness the potential of investing in the equity market.
ELSS is a diversified equities fund that comes with a lock-in period of 3 years. It offers a tax deduction up to 1.5 lakhs under the Section 80C of the Income Tax Act, 1961. Dividends declared under this scheme are also tax-free. The profits obtained from the sale of ELSS units are treated as long-term capital gains. If the fund is sold before the completion of a year, one has to pay short-term capital gains tax of 15% on the returns under Section 111A of the Income Tax Act.
ELSS is the best option for wealth creation over a long term. With its time horizon of 3 years, it has also gained popularity among investors. SIP is one of the best ways to invest in an ELSS. It takes care of the volatility of the stock market by rupee cost averaging, and takes advantage of compounding. Its lock-in period of 3 years allows one to take full advantage of the growth through equities.
For one to invest in mutual funds, one need not have extensive knowledge of finance and economics of stock markets. One has to just invest a sum of money in the mutual fund and it automatically takes care of the trading and risk management. Mutual funds invest your money in stocks, bonds and other assets. These securities collectively make up the portfolio of the fund.
Affordability and frugality
Most mutual funds have low minimum investment requirements. This amount can be even lower if the investor plans to invest via a systematic investment plan instead of a lump sum. Thus it caters to a variety of investors.
The transactional costs and annual brokerage fees are low for mutual funds, as compared to a typical stock portfolio.
It offers professional management
The advantage of investing in a mutual fund is that the investor doesn’t have to do the analyzing, buying and selling of stocks and bonds. It is professionally managed by a team of analysts that do the buying and selling while balancing out the risk factor.
Mutual funds are bought by various kinds of investors for different purposes. An individual would buy it to start saving for retirement. A big company may invest in it as a portfolio for a major client, while others choose to invest to gain short or long term goals.