If you think about the internet as real estate, it really becomes clear how you’ll be able to earn money online. Investing in mutual funds is one easy and less stressful way to make money. Essentially, a mutual fund is a pool of money invested by a group of people- individuals or companies.
How Do Mutual Funds Work?
Shared by thousands of investors, a mutual fund is managed collectively to earn the highest possible returns. Typically, a mutual fund company invests the money of a group of people and prepares an investment portfolio on their behalf. A portfolio manager is then assigned to each of the funds and is responsible for investing money in stocks, bonds, and other such financial securities.
You can also invest in mutual funds yourself, without taking the help of a mutual fund company. You can buy mutual funds from the fund house through AMCs or online websites. Simply visit the fund’s web page or call them to request information and an application.
Types of Mutual Funds
1. Debt Funds
Debt Funds are invested in fixed income assets such as government bonds and company debentures. The major advantage of these funds is that they provide fixed returns and are thus considered a safe investment avenue.
2. Equity Funds
Equity Funds are invested in equity stocks or shares of companies. These funds are characterized by high-risk and may offer high returns in the long run.
3. Balanced Funds
Also known as hybrid funds, balanced funds feature a combination of equities and fixed income securities such as debentures. The aim of these funds is to strike a perfect balance between risk and return.
How To Invest In Mutual Funds?
- Analyze Your Risk Appetite
The best thing about mutual funds is that they allow you to begin investing with an amount as low as Rs.100. But as they say- ‘Mutual Fund Investments are subject to market risks. Please read all scheme related documents carefully.’
Though high risk is associated with high returns, uncertainties may pop-up any time and affect the market. Therefore, it is advisable that you consider all the risks of this venture before making an investment decision.
| Type of Risk | Type of Mutual Fund | Associated Risk |
| Market Risk | All | Decrease in value of investment due to changes in market conditions |
| Liquidity Risk | All | Lack of market to sell funds |
| Interest Rate Risk | Debt | Change in interest rate |
| Country Risk | All | Decline in the value of foreign investment due to political instability |
As a knowledgeable investor, you must spread your funding across various assets and securities, to reduce the overall risk. However, selection of the kinds of funds must be highly based on your risk appetite, investment duration, and financial goals.
- Plan Your Investment Period
You will need to decide whether you wish to go for a short-term investment or a long-term investment. If you wish to invest your funds for less than 5 years, it will be advisable that you opt for Debt Mutual Funds. However, if you have an investment horizon for at least five to seven years, you can invest in equity mutual funds.
| Type | Short-term Investment | Long-term Investment |
| Equity Mutual Funds | Less than 12 months | 12 months & more |
| Debt Mutual Funds | Less than 36 months | 36 months & more |
| Balanced Mutual Funds | Less than 12 months | 12 months & more |
- Mutual Fund Taxation
When you redeem or sell a mutual fund unit, you are required to pay tax on the profit or capital gain that you have made. The applicable tax rates for different types of mutual funds are given below-
Capital Gain Taxation
| Type | Short-term Capital Gain Tax | Long-term Capital Gain Tax |
| Equity Mutual Funds | 15% | 10% without indexation |
| Debt Mutual Funds | As per income tax slab | 20% without indexation |
| Balanced Mutual Funds | 15% | 10% without indexation |
*indexation- a method of adjusting tax payments by employing a price index that adjusts for inflation
- Review Your Investments
You must keep a regular check on the investments that you make to evaluate the performance of the funds. Performance analysis will enable you to track the changes in the market conditions and determine the factors that affect your investments.
What Is The Average Mutual Fund Return Rate?
The income in mutual funds is earned in the form of a dividend on stocks and interest on debentures or bonds. If you own a stock fund (equity or preference shares), you will earn through a fixed or variable dividend income. In case of debentures or bonds, however, you will receive a fixed interest amount on your investment. Alternatively, if the fund specializes in real estate investment, you might make money from rents, property appreciation, or profits from business operations.
The profit that you gain through mutual funds depends entirely on the type of fund and the amount invested. The trick of this business lies in making investments for longer periods to receive the complete advantage. You may not earn huge profits instantly, but the investment may prove healthy in the long-run.
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