In terms of the balance between income and savings, mutual funds are the best investment option for salaried person. A mutual fund is an investment strategy that receives funds from various investors and invests in equities, debt and money market instruments with the funds collected.
Mutual funds are run by a skilled fund manager and an expert team that enables investors to benefit from professional fund management. It gives an investor access to a diversified stock and/or bond portfolio, which is worth Rs. 500.
Investments in mutual fund schemes typically generate 8% –12% returns subject to market conditions and related risks.
In a mutual fund scheme, you can invest in two ways – either through a lump sum or through a systematic investment plan (SIP). It is always a good and financially sound idea for salaried persons investing in mutual fund schemes through SIPs, as it enables them to invest a fixed amount of money in mutual funds schemes at fixed intervals – daily, monthly, quarterly or semi-annually. The following benefits come with SIP:
A small investment- It is prudent for salaried individuals to invest in mutual fund schemes through SIP as it allows small scale investment at fixed intervals; thus it does not make the contribution on the wallet huge. With an amount as low as Rs. 500, a SIP can be started to pay at regular intervals. It also reduces the financial risk of investing in a lump sum.
Compounding Power: Compounding power is magical. A SIP allows you to increase your investment amount by a fixed amount regularly and take advantage of compounding. Not only do you earn returns on your investment with SIP, but also on the returns received.
Low Risk- Another benefit of investing through SIP is that there is less investment risk. Mutual funds invest in equity and debt, with prices fluctuating daily. Therefore, with the same cash amount at regular intervals, you buy fewer units from mutual funds some days when prices are up and when markets are not doing well.
It shows that by distributing your purchase price over time, SIP allows you to reduce the average cost of your investment and reduce the risk of your investment. This SIPs function is called the rupee-cost averaging.
Automated process: SIP is a trouble-free investment method. It enables you to opt for fully automated contributions from your bank account. To do this, you need to mandate your bank to make your SIP contribution once, and your cash will be automatically invested in the plan at the interval you choose.
This not only saves you from the difficulty of filling and checking forms or logging into the digital system, whenever you make your SIP contribution, it also eliminates the danger of failing to make a reasonable contribution in time.
Save tax on your SIP mutual fund- There are different types of mutual funds, for clarity, based on their asset allocation, they can be classified into three categories:
- Debt and
- Hybrid funds.
An equity-linked saving scheme (ELSS) is a form of equity mutual fund scheme that enables salaried persons to save their tax.
Since ELSS is an open-ended investment scheme, which invests at least 80% of its assets in equity and equity-linked tools and is eligible for the tax deduction of up to Rs. 1,50,000 as per Section 80C of Income Tax Act. An ELSS comes with a lock-in period of three years.