Content of the material
- What are Important Benefits of Mutual Funds?
- Reduced Taxes
- # 2 Investing Will Help You Build Wealth
- The Challenges Of Investing In Real Estate
- Starting Capital
- Next steps to consider
- Diversify To Lower Investment Risk
- Related Resources
- Buying An Investment Property: 3 Signs You’re Ready And What You Need To Know
- What Are Real Estate Investment Trusts (REITs) And Should I Invest In Them?
- Should You Invest In Affordable Housing? The Pros, The Cons And The Profitability
- Lower Capital Gains Tax Rate
- Having a savings account isn’t enough
- Portfolio diversification and risk management
- Learn the basic investing types
- The Bottom Line
What are Important Benefits of Mutual Funds?
One of the most prominent advantages of investing in mutual funds is diversification. It is the process of spreading a given investment over multiple assets classes. Diversification helps us create an assorted portfolio that segregates the headwinds experienced in various sectors. Money is invested in a mixture of assets according to one’s risk appetite.
For e.g., an equity-oriented mutual fund would generally comprise of 60-70% investments in equities, and the remaining 30-40% in debt securities.
As mentioned earlier, diversification helps us reduce the risk associated with different asset classes. This proves to be beneficial when an underlying component of a given mutual fund experiences market headwinds. With diversification, the risk associated with one asset class is countered by the others. This way, you don’t lose out on the entire value of your investment if a particular compenent of your portfolio goes through a turbulent period.
A lot of investors do not have the time or resources to conduct their research and purchase individual stocks. This is where professional management becomes quite useful. Several people invest in mutual funds for the professional expertise it provides to one’s investments. A fund manager continuously monitors investments and adjusts the portfolio accordingly to meet its objectives. This professional management is one of the most important advantage of a mutual fund.
The tax benefits associated with a particular kind of mutual fund is perhaps what draws most investors to this investment vehicle. To encourage investments in mutual funds, the Government of India offers several tax benefits.
For e.g., investments in Equity-Linked Saving Schemes (ELSS) qualify for tax deduction under Section 80C of the Income Tax Act. One can invest up to Rs1.5 lakh in this instrument to avail a tax saving of approximately Rs46,800 (assuming the highest slab of income tax i.e. @30% plus health & education cess 4% excluding surcharge as applicable) on their taxable income. The only caveat here is that the instrument comes with a lock-in period of 3 years, which means that you would not be able to access the invested funds during this period.
One can easily sell mutual funds to meet their financial needs. Upon liquidation, the money is deposited in your bank account in few days. Additionally, there are mutual funds that provide faster disbursal. They are called funds having instant redemption facuility , wherein the money is transferred to your bankon the same day.
All investors aim to achieve a higher RoI by investing in financial instruments such as mutual funds to beat inflation and increase their wealth of the long-term. Mutual funds have greater prospects of potentially providing highreturns over time as one can invest in a diverse range of sectors and industries.
All mutual funds are regulated by the capital markets watchdog Securities and Exchange Board of India (SEBI). This means that all mutual fund houses are required to follow the various mandates as laid down by SEBI. This, in turn, protects the interests of the investors. Moreover, SEBI makes it mandatory for all mutual funds to disclose their portfolios every month.
It is very easy to invest in mutual funds, i.e. you can do this either online or offline. You simply need to visit your Asset Management Company’s (AMC) website and submit the necessary documents to start on your investment journey. Moreover, you can also visit your AMC in person and sign the physical documents to get started. This ease of investment makes mutual funds are preferable avenue.
Another advantage of investing your money is that it gives you a chance to reduce your taxable income. Certain retirement accounts, such as a 401k and a traditional IRA allow you to deduct the amount you contribute from your income for the year. You do have to pay taxes on the amounts and their earnings in retirement. However, investing today can give you a bit of a break on taxes. The amount you contribute to other retirement accounts (like a Roth IRA) is taxed in the year you make the contribution. But, you don’t have to pay tax on that amount or any earnings when you withdraw it during retirement.
# 2 Investing Will Help You Build Wealth
I think this should go without saying, but I’m going to say it anyway: Investing is how you build wealth.
There are a hundred and one ways to invest and grow your money. If you’re serious about building wealth then you need to create an investing plan that suits you and your goals.
The wealthy invest, the broke do not.
The Challenges Of Investing In Real Estate
While investing in real estate brings the potential for a large payday, it also comes with some challenges and risks.
Real estate is not a liquid investment. Once you invest your money in a single-family home, apartment or commercial property, you’ll have to sell that property – or the portion of it that you own – to get your money. Other investments, such as stocks and bonds, are far more liquid. It’s easy to sell stocks to get access to your money.
You’ll also need more money to get started in real estate investing. Homes and commercial properties aren’t cheap. You might need to apply for mortgage loans to purchase these properties. Investing in mutual funds, CDs and stocks typically requires far less starting capital.
The profits usually don’t come quickly with real estate investments. Yes, you might charge rent to commercial or residential tenants. But often these payments only cover the cost of your mortgage payments or the other costs associated with maintaining an investment property. The big profits come when you sell the property for more than what you paid for it. To hit that goal, though, you usually must wait several years for your properties to increase in value.
Location is key when investing in real estate. Your property probably won’t increase in value if it isn’t located in a community where real estate prices are on the rise. This means you’ll have to do plenty of research to find the right investment property in the right location.
Next steps to consider
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How ETFs work
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Diversify To Lower Investment Risk
While investing in stocks is riskier compared to bonds, there are ways to reduce your investment risk, such as by diversifying. Diversification means investing in different types of assets, across different sectors so that you spread out your risk. If one type of stock or asset goes down in value but other types of investments go up or stay the same, your entire portfolio is not impacted in a big way.
Here are some ways you can diversify your stock investments:
- By investment type: A well-diversified portfolio will provide most of the benefits and fewer disadvantages than stock ownership alone. That means a mix of stocks, bonds, and commodities. Over time, it’s the best way to gain the highest return at the lowest risk.
- By company size: There are large-cap, mid-cap, and small-cap companies. The term “cap” stands for “capitalization.” It is the total stock price times the number of shares. It’s good to own different-sized companies because they perform differently in each phase of the business cycle. For example, large cap companies are considered more stable and less susceptible to share price volatility. On the other hand, small cap companies might be riskier and prone to share price volatility but offer greater growth potential.
- By location:Own companies located in the United States, Europe, Japan, and emerging markets. Diversification allows you to take advantage of growth without being vulnerable to any single geography.
- Through mutual funds and ETFs: Owning mutual funds or exchange-traded funds (ETFs) allows you to own hundreds of stocks selected by the fund manager. One easy way to diversify is through the use of index funds or index ETFs.
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Buying An Investment Property: 3 Signs You’re Ready And What You Need To Know Home Buying – 7-minute read Victoria Araj – March 31, 2022 Buying an investment property is an exciting new step if you’re financially ready. Here’s what you should know before you move forward with your investment. Read More
What Are Real Estate Investment Trusts (REITs) And Should I Invest In Them? Home Buying – 7-minute read Victoria Araj – February 19, 2022 Torn between investing in real estate or the stock market? REITs can bridge the gap. Learn about REITs and how they might improve your investment portfolio. Read More
Should You Invest In Affordable Housing? The Pros, The Cons And The Profitability Home Buying – 7-minute read Andrew Dehan – February 28, 2022 Demand for affordable housing is surging, supply is low and tax credits can sweeten the deal. Find out if affordable housing investment is right for you. Read More
Lower Capital Gains Tax Rate
An investor who sells a security within one calendar year of buying it gets any gains taxed as ordinary income. These are referred to as short-term capital gains. Depending on the individual’s adjusted gross income (AGI), this tax rate could be as high as 37%.
Any securities that are sold after being held for more than a year result in long-term capital gains. The gains are taxed at a maximum rate of just 20%. Investors in lower tax brackets may even qualify for a 0% long-term capital gains tax rate.
Having a savings account isn’t enough
Saving money is important, but it’s only part of the story. Smart savers start by building sufficient emergency savings within a savings account or through investment in a money market account. But after building three to six months of easy-to-access savings, investing in the financial markets offers many potential advantages.
Portfolio diversification and risk management
Investors may wish to quickly gain portfolio exposure to specific sectors, styles, industries, or countries but do not have expertise in those areas. Given the wide variety of sector, style, industry, and country categories available, ETF shares may be able to provide an investor easy exposure to a specific desired market segment.
ETFs are now traded on virtually every major asset class, commodity, and currency in the world. Moreover, innovative new ETF structures embody a particular investment or trading strategy. For example, through ETFs an investor can buy or sell stock market volatility or invest on a continuous basis in the highest yielding currencies in the world.
In certain situations, an investor may have significant risk in a particular sector but cannot diversify that risk because of restrictions or taxes. In that case, the person can short an industry-sector ETF or buy an ETF that shorts an industry for them.
For example, an investor may have a large number of restricted shares in the semiconductor industry. In that situation, the person may want to short shares of the Standard & Poor’s (S&P) SPDR Semiconductor (XSD). That would reduce one’s overall risk exposure to a downturn in that sector. XSD is an equal-weighted market cap index of semiconductor stocks listed on the New York Stock Exchange, American Stock Exchange, NASDAQ National Market, and NASDAQ Small Cap exchanges.
Learn the basic investing types
When it comes to investing, you have many options. Before deciding which investment vehicles are appropriate for you, it’ll help if you know what they are, how they work, and why they may be a good fit for your needs.
The Bottom Line
People who invest in stocks can benefit from many different trading strategies. Investors who have more experience and a higher amount of capital at their disposal may be able to ride the market waves and make money using short-term trading techniques. But that may not work for those who are just starting out or aren't able to tolerate too much risk. Holding stocks for the long-term can help you ride the highs and lows of the market, benefit from lower tax rates, and tend to be less costly.