How Much to Invest in Mutual Fund?
Understand how much to share in mutual fund
A mutual fund is one large pot of money pooled from various investors. The asset management company uses it to purchase financial instruments like bonds, stocks, currency, among other assets. A professional fund manager manages that pot of money. These shares mean the investor is a co-owner of the assets being traded by the fund manager. They are invested in optimizing returns over a more extended period. So if an inexperienced investor is not confident to directly invest in a stock, the mutual fund can be a good beginning for them.
Why invest in mutual funds?
Ideally, investment in mutual funds should depend on the investors’ short, mid, and long-term financial goals, and assets can be tailored accordingly. Critical advantages of mutual funds are:
- Diversified investment portfolio: Since a mutual fund is a pool of several investments in securities, it helps the investor cost-effectively diversify their portfolio.
- Tax-efficiency: Under the popular 80C section of the Income Tax Act of 1961, a tax-paying investor can claim up to 1.5 lakh in deductions, and mutual funds are a great way to reduce your taxable income.
- Minimal investment: A mutual fund does not require large amounts from a single investor as it pools together smaller amounts from several investors to build a big pot of money. A Systematic Investment Plan (SIP) can help regular investments in small quantities as low as Rs. 500.
- Expert management: An investor in a mutual fund need not track market fluctuations to adjust their positions, as these are taken care of by the professional fund manager who will optimize the investors’ returns.
- High liquidity: Mutual funds can be easily converted into ready cash in a matter of few days.
Additional read: 7 reasons to invest in mutual funds
How much to invest in mutual funds?
Now that your financial goals are clear and you know why a mutual fund is a good investment vehicle, let’s assess how much you should invest for maximum benefits:
- A mutual fund’s price: Since a mutual fund is a pool of many securities, to calculate its price, you need to figure the Net Value Asset (NAV) - the total value of a mutual fund’s securities after deducting its liabilities. Investors trade mutual funds at NAVs.
- Exact NAV: This is hard to determine as the assets in the mutual funds undergo market fluctuations constantly. So NAVs are valued once daily, which is the price for the investors to trade their mutual funds.
- Your Mutual Fund Price: Since this is calculated at the next NAV, it may be lower or higher than yesterday’s closing NAV which probably determined your decision to trade the mutual fund.
- Getting the exact price you want: For this, you need to trade on a secondary market, like a stock exchange, as here you can pre-decide a price of a security that best suits you. Mutual funds do not guarantee the worth of the asset the moment you decide to buy or sell it but reveals that worth only at the next day’s NAV.
- Goals and risk tolerance: These are crucial to determining how much to invest and which mutual funds to invest in. If your goal is to avoid risk at all costs, investing small in high-ranking government or corporate bonds is safer. On the other hand, if your goal is to churn significant returns, investing big in high-risk stocks or bonds is a way to go. High risk means high chances for losses, but the most professional expert manages these mutual funds in trading risky securities.
- Capital gains or dividends? : You can further systemize your financial goals to figure how much to invest in mutual funds. If your goal is to grow your wealth, growth stocks - a company’s stock that is expected to sustain guaranteed cash flow in future indicated by its revenues and earnings – are a great way to go. On the other hand, if you are looking for immediate income, dividend-bearing stocks are an avenue to generate annual or even quarterly income.
- Income tax efficiency: To assess how much to invest in mutual funds, investors should know if their income is lifting their income tax threshold. If so, growth stocks are a better alternative than dividend-bearing stocks.
While mutual funds offer a haven for inexperienced investors than exchange-traded stocks, some cautionary preparation is advisable. To determine how much to invest and reap benefits, an investor should be wary of investments exceeding their returns.
ICICI Securities Ltd.( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No : 022 - 2288 2460, 022 - 2288 2470. AMFI Regn. No.: ARN-0845. We are distributors for Mutual funds. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. Please note, Mutual Fund related services are not Exchange traded products and I-Sec is just acting as distributor to solicit these products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein mentioned are solely for informational and educational purpose.