When it comes to investing in India, the first and most significant problem that all young generation investors encounter is excess possibilities. Bonds, fixed deposits, platinum, shares, foreign currencies, and a mix of these all have their own set of advantages and disadvantages. Moreover, investors must examine their investing time horizon, tolerance for risk, and expected returns in order to attain their objectives.
This article clarifies why the younger generation should invest in mutual funds.
What are mutual funds, and how do they work?
To describe mutual funds for beginners in simple words – An asset management business manages mutual funds, which are professionally managed investment programmes or funds. These funds allow consumers to participate in a diverse range of assets that knowledgeable and experienced fund managers oversee.
Mutual funds aggregate money from investors to buy stock, bonds, and other financial instruments.
Mutual funds provide a number of advantages to members, whether they are looking for financial gains or simplicity.
- Save taxes
- Alternative to Fixed Deposits which is Better
Disadvantages of Fixed Deposits –
- Lock-in interest is completely taxable* and there is a penalty if you remove your money too soon.
- Risk of declining interest rates
All of these drawbacks do not apply to debt mutual funds, which are considered to be safer!
In more ways than one, you’ll be better off investing in debt mutual funds than fixed deposits if you’re risk-averse.
You can invest in several sorts of mutual funds according to your requirements.
If you want to build an emergency fund, liquid funds are an excellent place to start.
The invested money in liquid funds is indeed very flexible (it may be withdrawn from your savings account inside 24hrs!), as the name implies. However, the rate of interest on liquid funds is double that of ordinary savings accounts (3.5 percent versus 7 percent)
- Systematic withdrawal plan
It is a systematic technique of withdrawing money from a mutual fund investment. For example, if a person has invested Rs. 2.4 lakh in such a plan, they might put up a 12-month systematic withdrawal plan of Rs. 20,000. It aids in the generation of a consistent income, making it particularly beneficial to retirees. This plan allows you to make periodic withdrawals of a variable or set amount from a mutual fund scheme.
The number of withdrawals can be set to a month to month, bi-monthly, yearly, or semi-annually, depending on the needs of the individual. This is a straightforward investing choice since cash flows could well be modified. In this approach, one could generate a consistent income while yet being involved in the plan.
- Investing and monitoring are made simple.
An investor might begin with a simple monthly investment of Rs 500 or a lump sum payment. There are digital platforms that allow them to invest from the comfort of their own home. Mutual funds offer a variety of investment options and enable a variety of investment quantities by switching funds. It simplifies the process of gaining access to portfolio information, account statements and making systematic investments through SIP.
Did you know that investing in mutual funds can help you save a significant amount of money in taxes each year? What is the exact figure? Up to Rs. 46,350.
Under Section 80C of the Income Tax Act, you can deduct up to Rs. 1,50,000 from your yearly income by investing in various instruments, one of which is the ELSS mutual fund category (Equity Linked Saving Scheme)
The most well-known of these instruments is the –
Fixed Deposits for 5 Years
ELSS has regularly yielded the most significant returns with the lowest lock-in among these and others that haven’t really been addressed. As a result, not only do you save taxes, but your investment also increases quicker than it would in a savings account or a PPF.
So, if you haven’t already begun your financial strategy, do that now. Begin small, keep things easy, and learn as you go. Remember that building wealth is a long-term process with no quick fixes. And the most significant benefit you have as a young person earning is – time!