Why All Mutual Funds May Not Suit You?

Why All Mutual Funds May Not Suit You?

Mutual Funds
Last Updated: 2021-04-23T19:29:35+05:30

When it comes to investments, there is no “one fit for all” investment option. Everyone has different investment goals and risk profiles. Hence, even if an investment suits your friend’s profile, it is not necessary that it suits you as well.

Similarly, there are different types of mutual funds and each one of these caters to different requirements of investors. You need to understand your financial goals, risk profile, and the time period for which you want to stay invested before making any decisions. It is always better to invest in line with your financial goals so that you do not end up choosing a wrong fund.

Hence, it is important to know why all mutual fund investments may not suit you. We have elaborated on the reasons below.

Every mutual fund has a different risk profile

You should remember that mutual fund investments are not risk free. Rather, each mutual fund scheme entails different risk. Equity-oriented mutual fund schemes are more suitable for investors with a high risk appetite, but for a conservative investor, it is always good to choose debt-oriented funds or balanced funds as they are less volatile.

However, it is not necessary that all debt mutual funds carry low risk. For instance, if you are thinking about investing in dynamic bond funds, believing that your capital would be intact like fixed deposits, then this is not true. Dynamic bond funds are a category that always react to interest rate movements or rate changes and can be subject to short-term falls.

Hence, you should choose a fund after completely understanding about the associated risk and matching it with your risk appetite.

Every mutual fund has different asset allocation

Choosing a fund that has the optimal asset allocation is another key factor to keep in mind. There are many underlying assets such as debt, equity, gold, and real estate, etc., in which money is invested through mutual funds. Therefore, you need to choose a fund that falls in line with your investment strategy and balances the risk and returns of the portfolio.

Every mutual fund scheme has a different investment strategy

Every fund has a different investment strategy, i.e. some aggressive funds take risks and invest in industries like infrastructure, FMCG, and pharma, etc., while some invest only in the international market. Hence, you should understand the investment strategy of the fund where you are looking to park your savings.

Every fund has different time frame for generating profits

You cannot invest in equity funds and expect a huge amount of profit in a year’s time. Generally, equity funds require at least five-seven years to avoid capital losses and get inflation-adjusted returns. Hence, you need to keep this in mind before taking any decisions.

Every fund does not provide a regular income

You cannot invest in equity funds with an aim of generating regular income. The dividends on equity funds are paid from profits. Therefore, in case of a prolonged period of loss, you will end up without any income. Also, it might be possible that your capital is eroded in case of continuous losses.

So, if you are looking at a regular income from your investments then you should choose a debt-oriented fund with a systematic withdrawal option to generate such cash flows as per your requirement.

Investing for tax benefits                               

There are different tax implications on different types of mutual funds. Short-term capital gains (STCG) on equity mutual funds sold within a year are taxed at a flat rate of 15%, whereas long-term capital gains (LTCG) on equity mutual funds sold after one year are tax-free up to Rs1lakh, after which they are taxed at 10%.

However, STCG on debt mutual funds sold within 36 months is calculated as per the current tax slab, whereas LTCG on debt mutual funds is taxed at 20% with indexation benefits. Also, investment in equity-oriented mutual funds is available for deduction under Section 80C of the Income Tax Act in the year of investment and no such deduction is available on other mutual funds schemes.

Hence, if you are investing in mutual funds with an aim to save taxes, then you should be aware about these tax implications.

Bottom line

No one wants to see their hard-earned money wash away. Hence, if you are looking to make investments in mutual funds, then take some time to research about the various funds and choose one that matches your investment profile.

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