<p>Each AMC operates a number of schemes suited to different types of investment needs.</p>
Mutual funds are an easy way for investors to gain benefits of investing without having to do much research or analysis themselves. Mutual funds combine the savings of a large number of investors and manage it as a single pool of money. Instead of investors worrying about which stock, bond or commodity to invest in, professional fund managers do the job.
Simply put, a mutual fund is a financial intermediary, set up with an objective to professionally manage the money pooled from investors at large. By pooling money together in a mutual fund, investors can enjoy economies of scale. Mutual funds are set up as trusts and they appoint asset management companies (AMCs) to manage funds. Each AMC operates a number of schemes suited to different types of investment needs.
For individual investors who do not have much time to study and research investments themselves, mutual funds are one of the best options for reaping the benefits of different types of investments with minimum effort and at low cost. In most funds, it is possible to start investing with as little as Rs.500. Also, unlike many other investments, mutual fund investments are highly liquid, which means an investment can generally be withdrawn without much delay. When an investor wants to withdraw money from a mutual fund, it is generally possible to do so at short notice and receive the redemption proceeds within a few business days.
Tax-saving funds are also called equity-linked savings schemes or ELSS funds. They are diversified equity funds (invest into quality large-cap and also selectively into few high quality matured mid-cap stocks) eligible for tax exemptions under Section 80C of the Income Tax Act, 1961. Under this section, you can avail of tax exemption on investment of up to Rs.1.5 lakh in a financial year in a set of prescribed investments, one of which is ELSS. Since these are equity funds, it is desirable to invest in them for the long term (at least with a more than five-year investment horizon). This long-term imperative is enforced to some extent as these funds have a three-year lock-in period as per current tax laws. A longer holding period helps to considerably lower the sharp variation in returns (volatility) typically associated with equity funds. The tax-break also acts as a natural boost to returns.
A beginner’s first mutual fund should be useful, simple to understand and easy to execute. Tax-saving funds (ELSS) is generally a good option to start investing in.