Invest in Mutual Fund to Help Start Your Own Business

Published On: 19-Dec-2021

Starting your own business may call for some initial seed capital apart from your time and focus on the venture. When one plans to start a business, it is always helpful to have some accumulated savings.

Here are five significant reasons why mutual funds are a better investment option to help start your business:

Wide Range of Investment Options

Mutual funds provide a wide range of investment options to the investors, wherein they can choose from a large spectrum of mutual fund schemes best suiting their risk appetite and financial goals. One can choose from equity schemes, debt schemes, hybrid schemes, or even passive mutual fund schemes.

Equity mutual funds may be more suitable for long-term financial goals. Equities may be volatile over the short term but carry the potential of wealth creation over the long term. Similarly, debt schemes may be considered more suitable for short-term goals and emergency fund creation due to the relative stability of debt as an asset class.

Flexible Investment Horizon

Even while one may have invested in a particular mutual fund scheme with a specific investment horizon, the investments are generally not locked-in, except for ELSS (Equity Linked Savings Schemes) or Solution-Oriented schemes. As such, one carries the flexibility to redeem and liquidate the mutual fund investments when the need arises.

This flexibility can also incentivise the entrepreneurs to partially invest their surplus funds into mutual funds to invest into the business at an opportune time. The company may not need funds immediately, but the need may arise anytime.

Investment Options to Facilitate Regular Investing

When it comes to mutual fund investing, one can use SIP (Systematic Investment Plan) to make regular investments. Under SIP, the investment amount is deducted from the bank account at periodic intervals and invested in a specified mutual fund scheme automatically.

Further, one can also use STP (Systematic Transfer Plan) to switch investments from one mutual fund scheme to another. Such inter-scheme transfers also happen automatically without any human intervention after one-time registration. While SIP can help the investors accumulate savings over time, STP can align the investors’ risk profile with that of the investment portfolio.

Tapping Market Opportunities to understand different businesses

An entrepreneur tends to have very sharp business acumen, understanding different businesses well. While it may not be possible for them to invest in each such business segment, one can use mutual funds to create an investment into that specific business segment through sectoral/ thematic funds. Sectoral/ thematic funds are such funds that predominantly invest in equities and equity-related securities of companies operating in a particular sector/ theme.

Tax Efficiency

There are special tax rates and exemptions for long-term capital gains, whether equity or debt schemes. The minimum period of investments specified for the classification of gains as long-term capital gains are 12 months for equity schemes and 36 months for debt schemes. As against the maximum marginal tax rate of 30% for retail investors, the tax rate for long-term capital gains on equity schemes is 10% (plus applicable surcharge and cess) without indexation.

For debt schemes, the tax rate is 20% with indexation benefit. Further, the investors can also benefit from Rs. 1 lakh exemption per year for long-term capital gains from equity shares and equity funds in aggregate. It is said, “a penny saved is a penny earned.” As such, any tax savings can enhance the investment corpus for the business as well.

Note: The tax provisions, as mentioned in the article, are for illustrative purposes only and are updated as per the Union Budget 2021 passed by the Parliament. The tax rates for capital gains will be as per the tax laws applicable on the date of redemption/ sale and not on the date of investment.