6 Lesser-Known Features of Mutual Funds

For almost any kind of investor, investing in mutual funds can be a smart decision. For instance- a diversified portfolio of high-performing mutual funds can allow even small-time novice investor to earn handsome returns with minimum effort. However, with thousands of options to choose from, selecting the proper mutual funds can be an overwhelming task.

Additionally, having a clear understanding of the product itself can be difficult sometimes. Fortunately, there are certain features that the best-performing funds share, thereby justifying the slogan, “Mutual Funds Sahi Hai”. These lesser-known features can be used as a way of filtering the massive list of all possible funds available for consideration. This would help simplify your task of fund selection, as well as increase your probability of making profits.

With this in mind, given below are six lesser-known features of mutual funds that you should know.

Feature# 1: Mutual Funds are Flexible

Mutual funds are flexible investments that can potentially provide you superior returns no matter how much you invest or how long you stay invested. For example, there are liquid funds, where you can park surplus funds for a period as short as a day and still get good returns. Additionally, in terms of investment amount, even an amount as small as Rs 500 can be invested in mutual fund scheme.

Feature #2: Mutual Funds Are Transparent Investments

All mutual funds are required to mandatorily publish a document on a monthly basis, which is known as the “Fact Sheet”. This sheet contains all key information like the expense ratio of the fund, which stocks/bonds the mutual fund is invested in, sector-wise allocation, and so on. Having access to all such details ensures enough transparency and helps you make an informed decision regarding your investment.

Feature #3: Investment in Mutual Funds is Easy

The earlier paper-based KYC and cumbersome investment system are now streamlined due to the new method of e-KYC based on Aadhaar. You can now make your investments through online investment accounts and net banking from the comfort of your home. This saves a lot of time(and also worries about filling out a bunch of forms), thus making the overall investment process easy.

Feature #4: Mutual Funds Have Multiple Investment Choices

Mutual funds offer you unique risk-reward relationship across the key categories of funds like- debt, equity, and hybrid funds. For example, as risk-tolerant investors seeking high returns, you can invest in equity funds having the potential of providing high ROI (such as small/medium cap funds). On the other hand, if you are a risk-averse investor, you can go for lower risk investments such as debt funds and potentially generate returns that are superior to savings accounts or fixed deposits.

Feature #5: Mutual Funds come with many withdrawal and reinvestment options

If you think that mutual fundsare all about investing a lump sum amount and then liquidating it (for generating profit), you are wrong. In fact, mutual funds give you the option to make regular small investments through a systematic investment plan (SIP). Moreover, you also get the option to make periodic withdrawals using the systematic withdrawal plan (SWP).

Additionally, you can make periodic transfers of your current investment to another mutual fund scheme through the systematic transfer plan (STP). All these options guarantee that your money is never idle and always invested towards your goal of wealth creation.

Feature #6: Mutual Fund Returns Can Be Tax-Free

Contrary to a popular misconception, not all mutual fund returns are taxable. It is common information nowadays that ELSS fundsprovide tax benefits under 80C of the IT Act, 1961. Returns and maturity benefits of ELSS funds are tax exempt.

Besides ELSS funds, equity-oriented hybrid schemes and equity funds can likewise provide tax-exempt returns. This is on account oflong-term capital gains,i.e. benefits from investments held for over a year, in case of equity funds are totally tax exempt. However, if profit arisesfrom debt funds, all benefits are taxable according to current tax collection rules.

Bottom Line: Get to Know the Mutual Fund Before You Invest in It

Taking a cue from the slogan- ‘Mutual Funds Sahi Hai’ and investing in a top-performing mutual fund is always a smart move. However, it is crucial that you fully understand why a given mutual fund is an appropriate place to invest.

Remember- ‘Selecting a mutual fund scheme based on your personal endeavours and guided by your investment goals, risk-tolerance level and your overall financial situation, will always benefit!