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Planning to invest with your first salary? Here's why you should invest in Mutual Funds

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Planning to invest with your first salary? Here's why you should invest in Mutual Funds

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Investing your first salary is major coming of age moment. It’s like getting your driver's license or voting for the first time. It makes you feel all grown-up, responsible, adult-like and all that.

It was June 2019 when I got my first salary, and I still remember splurging on every delicacy on the streets, with my balance going to almost zero in two days. But hey! I also bought gifts for my parents, so don’t make me feel guilty for being selfish before.

Later on, I came across investing in mutual funds that most of my colleagues were doing, and I decided to join the bandwagon. 

What are mutual funds in the first place? And why invest my first salary in them?

Imagine this. When making a large pizza, you take several ingredients like the dough, sauces, vegetables, cheese, etc., and heat them in the oven. Then, when you take a slice of it, you hold small amounts of each ingredient. Mutual Funds work in a similar fashion. All the money pooled together by various investors into one large amount is invested into various securities, and each of the investors has a small ownership stake in the securities.And trust me, this is one of those scenarios where joining the crowd is one of the best decisions.

Here’s why:

There are all types of mutual funds for every investor.

Continuing the pizza analogy, each person has their taste and liking, and hence, there are a variety of pizzas available to cater accordingly. Similarly, every investor has a different kind of goal to achieve when they invest; hence, there are various mutual funds to help. They’re given below.

Based on asset class

  • Equity funds
  • Large-cap
  • Mid-cap
  • Small-cap
  • Debt funds/fixed income funds
  • Balanced/hybrid funds
  • Equity oriented
  • Debt-oriented
  • Arbitrage
  • Solution-oriented

Based on the investment objective

  • Growth funds
  • Liquid funds
  • Tax-savings funds
  • Income funds
  • Thematic/sectoral funds

Based on structure

  • Open-ended funds
  • Close-ended funds
  • Interval funds

Based on management style

  • Active funds
  • Passive funds

It’s an easy and hassle-free way to invest

With traditional methods getting outdated, investing in mutual funds has become paperless and takes minimal time. In this regard, Fi Money absolutely nails it! All you need to do is:

  • Download the Fi app and create an account
  • Enter all your required details
  • Get your e-KYC done, which takes around 5 minutes
  • Select the fund you wish to invest

Investing in mutual funds on Fi Money takes it to a whole new level. Most apps have something called SIPs or Systematic Investment Plans. On Fi Money, you have the option to automate your investing based on conditions chosen by you. You can, for example, invest in a mutual fund each time you shop online or order food online. These are called FIT Rules. 

How good are mutual funds to invest in?

So I’ve already spoken about how convenient they are to invest in. Well, I’d like to point out some more amazing benefits of this friendly neighbourhood instrument:

  • Ease of withdrawal - a great feature of mutual funds is that you can redeem your units at any point of time. Unlike fixed deposits, you have flexible withdrawal options but do keep in mind the exit load and pre-exit penalty before withdrawing.
  • Diversification - since mutual funds consist of various securities clubbed together, the risk factor reduces in case of a securities downfall. If the performance of one asset falls, then the performance of the other may rise or not be affected, protecting your overall portfolio from falling.
  • Professional management - experts who have industry experience and knowledge are the ones who invest on your behalf. They are known as fund managers. They keep a close tab on the entry and exit and other challenges.
  • You can start small - mutual funds are a flexible instrument to invest in. With a Systematic Investment Plan (SIP) option, you can start investing with an amount as small as ₹500.
  • Safe and transparent - with SEBI making the guidelines stringent, investors like you and I remain protected. Rules say that companies have to colour code the schemes indicating the risk factor of each scheme, with blue being low risk, yellow being medium risk and brown being high risk.

Debunking mutual funds myths

The table below should get rid of all the myths you probably have heard about investing in mutual funds

How are mutual funds taxed?

Okay, so when you invest in mutual funds, you expect to get returns, right? These returns can be in two forms. Dividends and capital gains. Dividends are distributed by the company's surplus profits, and capital gain is realised when you sell the fund at a price higher than your purchase price. And as per the rules, all gains are taxable in India. Let’s see how

Taxation of dividends

As per the amendment of the union budget 2020, dividends offered from mutual fund schemes are taxed in a classical manner. That means, the dividend received is added to the taxable income and taxed as per your tax slab.

Taxation of capital gains

In this case, the tax is determined based on the time period held and the type of mutual fund. The fund types are broadly equity, debt and hybrid. The table below summarises how they are taxed:

So there you have it. Although this is just the tip of the iceberg in investing and mutual funds, for any novice investor like you and me, this will go a long way in keeping our financial literacy updated. 

All of this gets me thinking again: What if? Instead of splurging, I could have probably bought better-quality gifts if I put part of my first salary in a mutual fund and taken it out today. 

FAQs

How should a beginner invest in mutual funds?

There are a number of ways you can invest in mutual funds as a beginner. If you’ve just started earning a salary, then the ideal investment for you could be an ELSS fund or a tax-saver fund. These funds offer relatively good returns, and also save you tax up to ₹1,50,000 a year as per the old tax regime. Other than that, you can also consider investing in index funds - these are mutual funds that invest in an index like the Nifty. They cost very little to invest in, and give you reasonable returns over a long period of time.

Can I invest in mutual funds by myself?

Yes, you can. All mutual funds have the option of investing directly. On Fi Money, you can choose from 100s of mutual funds to invest in. All the fund details are available in an easy to understand manner. What’s more - you can automate your investing by setting up FIT 

Are mutual funds a good investment now?

Mutual Funds are always a good investment for a number of reasons. The main reason being that mutual funds give you good returns, while also diversifying your investment across a number of stocks of varying growth rates and risk levels. Investing directly in the stock market requires you to research the companies you’re investing in, but mutual funds on the other hand, are managed by professionals who ensure you get the best value for your money. Mutual funds also invest in a number of different asset classes apart from stocks, such as bonds, gold and so on.

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