MF as An Avenue for Equity Investment

Many investors believe equity is one of the best asset class to create wealth for the long term. Instead of buying stocks, which are difficult for them to track, they are investing in this asset class using mutual funds. 

1. How do mutual funds score over direct investments in stocks? 

It is becoming increasingly difficult for individuals to track companies on their own as they do not have time and resources at their disposal for the same. Mutual funds are managed by professional fund managers, who track, evaluate and research companies on a regular basis. sectors and companies on a regular basis. A fund manager’s decision to invest in a particular share is backed by strong research by the team. Many individuals fall prey to stock tips, or market sentiments and go overboard on individual stocks without understanding risk. A fund manager evaluates risk before buying a stock and there are guidelines in place. Guidelines are in place on how much a fund manager can invest in each stock and each sector, which helps in the long term. 

2. How much money would one need to start investing in mutual funds? 

Mutual funds allow you to start equity investments with very small amounts. You can start with as little as Rs 500, and indirectly hold a portfolio of stocks. You can choose to contribute one time lump-sum or have the flexibility to do SIPs on a monthly basis. As compared to stocks, you do not need a demat account to hold mutual fund units. Many bluechip stocks themselves quote at a high price, and to even buy a single stock you would have to invest more than what you do in mutual funds. 

3. What tax does an investor have to pay in a mutual fund? 

When an investor buys and sells shares before completing one year, he has to pay short term capital gains. However, in a mutual fund, the fund manager may keep transacting in shares at varying points of time. From financial year starting April 1, if investor remains invested for more than one year in an equity oriented fund, he will have to pay long term capital gains tax of 10 per cent on all his gains. 

4. How liquid are mutual funds? 

Many individual stocks are illiquid. Also if there is a large seller, the price could go down sharply. Similarly, on a good announcement the stock may be on upper circuit. Mutual fund investors do not face such liquidity issues. An open-ended fund can be bought / sold at that day’s NAV by simply approaching the fund house or its registrar or a distributor and doing the necessary transaction.