We all have or will get a million opportunities to earn. But more than making money, it is important to make a plan to invest the money. Investment is important because one needs their wealth to grow and increase their financial growth. Why just stick to your monthly salaries if you can get more? Why compromise on your future goals? Why not live a life you have always dreamt of living. Yeah! Investments can make that possible.
Talking about investments, let us see what the different investment options are. Some of the common ways in which one can invest are:
- Bank products
- Investment funds (mutual funds, closed-end funds, exchange-traded funds)
Each investment depends on the returns you are expecting as well as the risk you are willing to take. Let us first discuss few of the most common ways of investing.
- Fixed Deposit (FD): Fixed deposit investment is a type of investment that allows the borrower to earn money based on the interest rate charged on the amount deposited by him. The investor deposits a certain amount as per his wish and gets returns based on the interest rate and the tenor of the investment. Some of the characteristics of Fixed Deposits are:
- Guarantees Returns: When you invest in FD, the financial company (banks and NBFCs) assures a return based on the amount you deposit and the fixed interest rate offered.
- Less risk: In the case of fixed deposits, the risk associated is comparatively lower than other investments as this type of investment has fixed interest rates.
- Safe and secure: Investing in fixed deposits proves to be a safe option as it is closely monitored by government agencies.
- Mutual Funds: A Mutual Fund investment is an investment scheme in which different groups of people come together and invest money in bonds, stocks, securities etc. Such a type of investment involves a large pool of money which is managed by Fund Manager. Here are a few characteristics of Mutual Funds:
- Risk Diversification: Through Mutual Fund investment, your money gets invested into a variety of investments. As you are investing into different schemes, you will have an assurance regarding the risk associated which will reduce the fear of investing everything in just one type of investment.
- Low cost: Mutual funds do not offer any barrier on the amount to invest.
- Flexibility: Mutual fund investment offers a unique feature of switching from one fund to another. Let us try to understand this feature.
Switching between Investment Funds: Switching of mutual funds is a process of transferring whole or a part of the investment from one mutual fund scheme to another. This option makes a switch from dividend plan to growth plan as well as from one fund scheme to another possible. However, there are certain things associated with switching between investment funds. These are:
- How to switch Mutual Funds: One can make a switch between different mutual funds by one time request, Systematic transfer plan (STP) and Triggered switches. Each type of option is associated with different procedures and features.
- Tax repercussions: The Tax repercussions on switching between mutual funds depend on whether you are switching from equity to debt funds or debt to equity funds. Redemption from one fund follows a new purchase of another and hence attracts taxes. However, this also depends on the duration before the switch.
- Exit and Entry loads: In case one decides to switch between investment funds, it is important to consider entry and exit loads. The charges vary from one type of mutual fund to another.
While it is possible to switch between investment funds, one should think properly before making any decision. Be it mutual funds, fixed deposits or any other type; all investments carry some risk. Hence, it is very important to understand the criticalities associated with investments or any decision related to them.