Investing in mutual funds is an excellent way to minimize your risk. The best part is that it’s easy to start. Moreover, there are tax savings benefits to help you save money.
Diversification helps lower risk
Investing in mutual funds is one of the best ways to create wealth and diversify your portfolio. However, it is also important to be aware of the risks involved. You can reduce your risk by spreading your investments across different markets, industries, and companies.
The market value of your investment instrument is affected by prevailing interest rates, currency market performance, investor preference, and other factors. Some investments perform better than their counterparts, while others do not. For example, bonds are less volatile than stocks. But they don’t offer as much return.
In general, a well-diversified portfolio of 25 to 30 stocks will yield the most cost-effective risk reduction. However, there is no rule that says a portfolio must have this many stocks.
Another way to diversify is by using a target-date fund. These funds are designed to shift your assets from high-risk stocks to lower-risk bonds as you approach retirement. They are more expensive than basic ETFs, but they may provide additional benefits.
If you are interested in long-term goals, you should choose a mix of equity and fixed income. Debt funds and ultra-short debt funds are also available for short-term investments.
The primary objective of diversification is to reduce the impact of volatility on your portfolio. In addition to buying investments in different sectors, countries, and industries, you can also buy them in different market caps.
Low initial investment
Investing in mutual funds is easy and requires a relatively small amount of involvement. However, it is important to know how to invest and select the right mutual fund scheme to fit your needs and risk profile.
When investing in mutual funds, the first step is to decide what your financial goals are. This will help you to define a budget and a risk profile. You can also use a systematic investment plan (SIP) to build your portfolio. This will allow you to invest a fixed amount on a regular basis, thereby lowering the overall cost of investing.
Once you have determined your financial goal, you can then decide on your risk profile and time horizon. It is important to choose a balanced fund. These are low-risk and offer good returns.
If you’re a beginner, you can invest directly in an asset management company (AMC) or through a broker. You can also invest in a money market mutual fund, which can be invested online. You can also invest in an equity fund through an AMC or a broker. You can also invest in an ELSS (Equity Linked Savings Scheme) to avail tax benefits under section 80C.
To invest in a mutual fund, you will need to complete KYC. This requires you to fill an application form, submit self-attested identity and address proofs, and take a photo. You can visit a KYC registration agency or you can complete the process online.
Tax-saving benefits
Investing in Mutual funds is one of the most tax-friendly options for Indian investors. They help you achieve your financial goals by offering good returns. Depending on your financial goal, you can invest in various types of mutual funds.
You can also invest in equity mutual funds and receive tax benefits. These funds invest a majority of their assets in equities. They offer a tax deduction of up to Rs.150,000 from your annual taxable income.
If you want to take advantage of the tax benefits, you need to understand the types of taxes that are levied on investments made with mutual funds. The holding period of your investments also determines the amount of tax you will pay on capital gains.
To avoid capital gains, you should choose a mutual fund that is diversified and offers tax exemptions. You should also consider the amount of risk involved. The longer you hold an equity mutual fund, the more likely it is to lose money. You can set off losses against gains to reduce the amount of tax you will have to pay.
You can invest in ELSS mutual funds and qualify for tax benefits under Section 80C of the income tax act. The lock-in period of this fund is the shortest of all other tax saving investment options. You can buy this fund from a variety of online platforms.
