With the passage of time, the investors are looking forward to investment tools that can promise comparatively better returns than the traditional investment instruments. Though many individuals are still not familiar with the investment tools such as mutual funds, liquid funds and tax-saving funds, they want to invest to get handsome returns.
What are mutual funds?
Mutual Funds are vehicles for investment comprising the working capital of different investors who share the same financial goal. In India, the mutual funds are modulated by the SEBI (Securities and Exchange Board of India). Nowadays, investing in mutual funds is regarded as the easiest way to increase your wealth. The investors make money by regular interest and capital gains. They can be categorised on the basis of certain characteristics such as investment objectives, asset class, structure, and risk. Scroll down to know more about mutual funds and its categories.
What are liquid funds?
Liquid funds are debt mutual funds with short term maturities that give a fixed return amount. These funds are predominantly invested in debt securities which comprises market instruments like commercial papers, treasury bills, certificates of deposits with a maturity period of 91 days. The best advantage of investing in a liquid fund is that it offers great returns. In other words, investing in liquid funds offers quick buying and selling of assets, which is then converted into cash.
What are tax saver funds?
On the other hand, The tax saver fund or Equity Linked Saving Scheme(ELSS) are open-ended mutual funds that help you save and provides the opportunity to grow money. These funds are primarily invested in stocks of different companies. The risks are relatively higher in ELSS funds as compared to other debt funds. However, if you are investing for the long term, the risks tend to smoothen, and it will provide you with average returns. The lock period of tax saver funds or ELSS funds is 3 years.
A comparative study of mutual funds, liquid funds and tax-saving funds on the basis of:
1. Risk
The level of risk in mutual funds depends upon whether the investment is made in stocks or bonds as stocks are generally riskier than bonds.
Investing in liquid funds associates low risk as it consists of short term market instruments. The maturity period of any invested security is not more than 91 days which protects the portfolio from changing interest rates.
Investing in ELSS or tax saver funds can be termed with high risks. Investors should invest in ELSS only if they have the risk appetite to invest in stocks or equity. Equity, as we know, is a risky asset class of mutual funds. However, it has the potential to offer superior returns if invested over a long period.
2. Amount for investment
Amount of money one can invest in mutual funds is from Rs. 20,000 to Rs. 50,000.
Investors can invest a minimum amount of Rs. 500 and a maximum amount of 10 lacs in a liquid Fund.
Investors can start investing in tax saver funds such as ELSS funds with a minimum amount of Rs. 500. There is no maximum limit for investment in a tax-saving fund. However, the tax deduction is only available up to Rs. 1.5 lakhs.
3. Tax
Different mutual funds are taxed in different manners. If the investment is sold within a year, the gain is considered as a short-term capital gain, which is taxed at the rate of 15%. If the investment is sold after one year, the gain is considered a long-term capital gain, which is taxed at a rate of 10%.
As the liquid fund is one of the categories of debt, it is eligible for taxation. If the investment is held for more than three years, then it will be taxed at the rate of 20% with indexation.
On the other hand, by investing in ELSS tax saver funds, you can avail tax benefits up to 1.5 lakhs. This is one of the prominent reasons to invest in this fund. Investors are allowed to save tax only with this scheme under section 80C.
4. Withdrawal
The investors can easily withdraw money from mutual funds. However, the only clause one needs to note is that it has to be an open-ended fund.
Liquid funds are alternate saving accounts. You can withdraw money from liquid fund anytime from the bank.
Investors can redeem the benefits from the investment in ELSS funds after a period of 3 years. But, if the investors are happy with the returns they are gaining, they can choose not to redeem.
Some tips for the first-timers who want to invest in mutual funds
- The investors need to fix an amount for investment as it will help to decide the amount that can be invested and the money that needs to be kept aside. Investment works best when done with a purpose.
- There are various categories of mutual funds. So, choosing the right one as a beginner might not be an easy task. However, experts advise that investing in debt funds or balanced funds would be better for first-time investors as it comes with minimal risks and provides high returns.
- Invest in more than one mutual funds as it will expand your portfolio. If one does not perform well, the other will make up the loss.
- Internet banking should be updated on your bank accounts as it is considered more secure than debit cards and cheques.
Mutual funds, liquid funds and tax-saving funds, all of them are a go-to option for people who are willing to take a step towards investment. Therefore, if you have a good amount of capital to invest in and you want to make profits from it, then you can choose mutual funds, liquid funds or tax saver funds and increase your wealth.
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