Do you have savings that you want to invest, but are confused about which is the right investment option?

You may have heard about various investment options such as fixed deposits (FD), mutual funds, recurring deposits, RBI bonds, direct equity, investment in gold and more. But choosing between them depends upon important factors such as –

1. The time you have to track investments.

2. The amount of money that you can invest as an individual investor.

3. Your knowledge of investment options and ability to keep up with changing market trends.

Use this guide to understand and choose investment options that are not only safe but also gives you a good return on your investment.

How are Mutual Funds Better than Traditional Investment OptionsWhat are Mutual Fund investments?

Traditionally, mutual funds are formed when a company pools money from multiple investors in securities like short-term debt, stocks, and bonds.

Mutual funds in India were initiated in 1964 with Unit Trust of India (UTI) with the United Scheme 1964 being the first scheme. Non-UTI public sector funds came in 1987 and private sector funds were launched in 1993.

Since then, investment in Mutual Funds has gathered pace due to the following key reasons –

a. No need to choose and track stock performance yourself –Sometimes, your decades-old investment in a stock may not be productive anymore. But do you have the time to keep track of it? Mutual funds are managed by a fund manager who has expertise in picking stocks, tracking them, making sector and asset allocation, and booking profits.

b. Tax-free trading gains – When you buy individual stocks and sell them, you may have to pay capital gains tax. Such is not the case in Mutual Funds.

c. Lower cost of investing – Fund houses pay a significantly lower fee as brokerage than what you might pay as an individual. As an individual, you may end up paying 0.5-1% as brokerage. You also don’t need a demat account to invest in Mutual Funds.

d. Diversified portfolio – Your investment will be well diversified in about 25-30 stocks. But an individual may not have so many funds or mental capacity to create such a portfolio. Mutual funds, on the other hand, provide instant diversification.

e. Tax efficiency – Some mutual fund investments are tax-free or help save more taxes, as compared to other traditional investments.

Also Read more: What are the Benefits of Investing in Mutual Funds?

Mutual Funds vs. Fixed Deposits

Fixed deposits are the safest form of investment that guarantees a certain return. You can invest and never look back till its maturity date. Mutual funds too, provide different levels of safety to an investor –

a. Various levels of risk are available in mutual fund investment depending upon whether you choose equity or debt funds, or a combination. This information would be clearly conveyed to you by your fund manager. While equity funds tend to be more volatile and can give significantly higher returns, debt funds are more stable.

b. You can start investing in mutual funds with a minimum amount of Rs. 500 which will be managed by fund managers. In fixed deposits, you have to invest a minimum of Rs. 1,000 for 15 days.

c. If you withdraw money from a mutual fund, only the exit load is charged depending upon when you withdraw. In fixed deposits, you pay a penalty on interest on premature withdrawal.

 Mutual Funds vs. Gold Investments

Traditionally, investing in gold has been one of the most preferred options in India. Investors believe that gold can not only act as an investment, but also as a commodity that can be used when auspicious occasions such as marriages and festivals happen in the family. While this is true, we also encourage looking at mutual funds due to the following advantages-

a. There is a very high risk of loss in storing physical gold. However, there is no risk in having gold ETFs. ETFs are open-ended mutual fund schemes that invest in gold bullion of 99.5% purity.

b. While you can start investing in mutual funds with a minimum of Rs. 500, investment amount in gold depends on the rate of gold on the day on which you are trading.

c. There may not be any negotiating capacity while liquidating gold.

d. People often liquidate gold as a last resort when they don’t have other investments to bank on. There are no withdrawal charges applied.

Mutual Funds vs. ULIPs

Mutual Finds and ULIPs contest for the same pie of market where they target retail investors and invest in market-linked plans. In the large-cap and mid-cap categories, there isn’t much to choose between the two. There are lower expense ratios in debt mutual funds, which range from 0.28% to 1.48% whereas, ULIP debt fund options attract fund management charges of 0.65% to 1.5%.

Comparing mutual funds and ULIPs purely on the basis of monetary returns may not be appropriate. The fee of ULIPs includes mortality charges, management fee, and administrative charges. You may consider ULIPs only if the primary need is for insurance coverage.

Mutual Funds vs. LIC investments

LIC offers insurance policies whose primary purpose is to provide you and your family coverage in case of any illness or death. The purpose of mutual funds is to meet your financial planning objectives. If you buy insurance policies with savings or investment element in them, you may end up with very small insurance cover. This defeats the whole purpose of purchasing an insurance policy.

Mutual Funds vs. Equity

While mutual funds handle your money through an expert fund manager, equity involves investing in shares directly. Unless you are an expert in share market investing or intend to become one, it does not make sense to invest directly in equity shares. While mutual funds can give you decent returns over a longer period of time, equity shares give you very high or low returns over a short duration. You need to constantly monitor the market influencing factors such as increase/ decrease in turnover of the company you have invested in, change in company management, the launch of new products, change in governments, natural disasters, foreign policy changes, elections, etc.

Mutual funds are better covered because the investment is diversified over a range of stocks.

Experience and Knowledge Matter in Mutual Fund Investments

While investing in mutual funds, you need both experience and insight to help decide which mutual funds are performing well, and which ones will perform well in the future. This helps build a portfolio based on market-influencing factors that really matter.

To understand how mutual funds operate, discuss your options with experienced consultants. It makes more sense to invest in mutual funds if you are a safe investor who does not have a lot of time to learn all the tricks of volatile equity markets. However, you can also take interactive online courses on mutual funds to help make wiser decisions in long-term investments.

Disclaimer: While this article explores the benefits of Mutual Funds, other investment options may also be useful depending upon your financial situations and other related factors. We encourage you to look at all options before making your investment plan.

Author Bio: Niyati Jetly is business development manager and evangelist at Centre for Investment Education and Learning

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June 2021