One of the best investment options for salaried individuals are mutual funds. A mutual fund is an investment vehicle which collects money from various investors and invests the collected corpus in equity, debt and money market instruments. It is managed by a professional fund manager along with a team of experts which helps investors to benefit from the professional management of funds. It also allows an investor access a diversified portfolio of stocks and/or bonds for an amount as low as Rs. 500.
An investment in a mutual fund scheme generally yields a return of 8%-12% subject to market conditions and involved risks.
You can invest in a mutual fund scheme in 2 ways – either in a lump sum or by way of a Systematic Investment Plan (SIP). It is always a good and financially sound idea for salaried people to invest in a mutual fund scheme via a SIP as it allows investment of a fixed sum in a mutual fund scheme at fixed intervals – either daily, monthly, quarterly or semi-annually. A SIP comes with the following advantages:
- Small investment amount: It is wise for salaried people to invest in a mutual fund scheme via a SIP as it allows investment of small amount at fixed intervals, thereby not making the contribution heavy on pocket. A SIP can be started with an amount as low as Rs. 500 which is to be paid at regular intervals. This also reduces the financial risk associated with a lump sum investment.
- Power of compounding: The power of compounding is magical. A SIP enables you to regularly increase your investment amount by a fixed amount and get the benefit of compounding. With a SIP you do not only earn returns on your investment but also on the earned returns.
- Less Risk: Another advantage of investing via a SIP is that it reduces the involved investment risk. Mutual funds invest in equities and debt, the prices of which fluctuate on a day-to-day basis. Thus, with the same amount of money invested at regular intervals, some days you buy fewer units of the mutual fund when markets are up and more when markets are not doing that well. Thus, a SIP enables you to lower the average cost of your investment and reduce the risk of your investment by spreading your purchase price over time. This feature of SIPs is called rupee-cost averaging.
- Automated Process: A SIP is a hassle-free way of investment. It allows you to opt for fully automatic contributions from your bank account. For this, you need to give a one-time mandate to your bank for making your SIP contributions and your money will get invested in the scheme automatically at the periodic interval selected by you. This not only saves you from the trouble of filling forms and cheques or logging on digital platforms every time you make your SIP contribution but also removes the risk of not making the due contributions in time.
Save Tax With Your Mutual Fund SIP
There are various types of mutual funds, however, for simplicity they can be classified into three categories namely equity, debt and hybrid funds on the basis of their asset allocation. A type of equity mutual fund scheme which allows salaried individuals to save their tax is an Equity Linked Savings Scheme (ELSS). As ELSS is an open-ended equity scheme which invests a minimum of 80% of its assets in equities and equity related instruments and qualifies for a tax deduction of up to Rs. 1,50,000 under section 80C of the Income Tax Act. An ELSS comes with a lock-in period of 3 years. You can read more about the taxation of mutual funds here.