Mutual funds have been getting increasingly popular and the industry has grown at an exponential pace. The reason is quite obvious as there are innumerable schemes to cater to the needs of different kinds of investors. There are schemes for those who want to accumulate a corpus, seek tax benefits or want better alternatives for bank interest rates on deposits. Even with some associated risks, different kinds of mutual funds can match the investment goals of people with both high and low-risk appetites. Also, the millennials are more interested in creating a diverse portfolio of investments and have a higher risk tolerance than it was a generation ago. They are spoilt for choices and while all kinds of investments have their advantages and disadvantages, the benefits of mutual funds make it a lucrative investment option.
Benefits of Mutual Funds
While seasoned investors may know the benefits of mutual funds, it is important for novices to understand them. Here are multiple reasons why should you invest in mutual funds:
1. Diverse Portfolio
The first and foremost advantage of a mutual fund is the diversification of investments. The corpus collected from various investors is invested in equities, debt, gold, overseas securities, and various asset classes. It is invested across different sectors, industries, and companies of various capital sizes. A diverse portfolio helps to attract gains from a mixture of asset classes as well as results in risk reduction. Single asset class investment, like that of stocks, is highly volatile because you may lose the value of an entire investment if there is market turbulence. But in mutual funds, each asset class is segregated from the market volatility. Hence, not all assets, or not even all stocks can rise or fall in tandem.
2. Good Returns
Mutual funds offer good returns on investment and have the potential to build capital over time while beating inflation. As it invests in a mixture of assets, sectors, and industries, it has a higher exposure to the investment fund and a balanced risk-return ratio. Also, with SIPs (Systematic Investment Plans), you can invest small amounts periodically for a few years instead of a lump sum. You purchase fewer units when the unit price of the fund is high, and more when the price is down. This is called the benefit of Rupee Cost Averaging, where the average cost of units is reduced and therefore, has a higher return on investment (RoI).
3. Professional Management
This is one of the best and biggest benefits of the mutual fund schemes that have fund managers to manage and monitor professionally. Most investors lack the time, inclination, and even the skill set to research and analyze multiple stocks and asset classes. So, you need not outsource an expert for yourself to have a diverse investment portfolio but invest in mutual fund plans. The AMCs have qualified managers and assist teams that decide how to allocate funds to different securities and when to do so. They buy and sell various money market instruments and make timely entries and exits to earn interest for the funds and the investors.
4. Low Investment Cost
Mutual Funds are a diversified portfolio of investment with a pool of money collected from numerous customers. As an investor, you become a unitholder representing your share in the mutual fund. You will need a large capital outlay to buy several stocks, other assets, or to have such a diversity in investments. But with mutual funds, you can become a beneficial owner of diverse investment portfolios with smaller amounts. It is because mutual funds trade securities in large volumes and the transaction costs get lesser. When you buy or sell units in bulk, per unit transaction costs are cheaper than what retail investors would incur through stockbrokers. This is called economies of scale in transaction costs and makes mutual funds cost-effective.
However, do check the expense ratio of the mutual fund scheme when you plan to invest. Expense Ratio is an annual fee that the fund houses or Asset Management Companies (AMCs) charge for the management of a mutual fund.
5. Flexible Payments for Investment
You have the liberty to make flexible payments for investment in mutual funds through varying amounts and modes of payments. There is no limit to the amount you can invest in a mutual fund scheme and can opt out of various modes of payments. You can make one-time lump sum payments, or go for Systematic Investment Plans (SIPs), Systematic Transfer Plans (STPs), and Systematic Withdrawal Plans (SWPs). SIPs allow you to make small contributions through monthly or quarterly payments. You can also increase or decrease the SIP amount.
6. Tax Benefits
In case you are looking for an investment that offers both high returns and tax benefits, you can choose the Equity Linked Saving Scheme (ELSS). It is a mutual fund plan that is tax-exempt up to Rs. 1.5 Lakh under Section 80C of the Income Tax Act, 1961. It comes with a lock-in period of 3 years that is lower than any of its alternatives, like fixed deposits and PPF, and offers better returns than them.
Mutual Funds, except those that come with a lock-in period like ELSS, can be redeemed anytime. You can easily withdraw the money and sell the units which makes it highly liquid. There is a quick disbursal of money and you receive it in your bank account within a few days. However, there could be an Exit Load, which is the pre-exit penalty when you redeem before the maturity period.
8. Attracts Large Scale of Investors
As mutual funds invest in a mixture of assets and have many types, they offer a variety of schemes to suit the large scale of investors. There are equity funds for risk-tolerant investors and debt funds for those who want fixed returns with low risks. You can choose ELSS for tax benefits, liquid funds as an alternative to FD to have better returns in the short term. If you want to opt for safer investment in equity funds, then you can go for large-cap funds as the major corpus amount is invested in stocks of bluechip companies. Bluechip or large-capitalization companies are the top 100 companies with the biggest capital structure listed by SEBI. If you have a higher risk appetite then you can go for mid-cap or small-cap funds. They invest in medium-sized or small company stocks that carry higher risks but can give very high returns in the long term. You can have an assorted portfolio to match your investment goals and risk-bearing capacity.
9. Easy Investment
Mutual funds, as mentioned earlier are low-cost and high returns giving investments. Especially with SIPs, it becomes affordable for many people where they can start their investment with an amount as low as Rs. 500. Apart from its fair pricing, you can invest in mutual funds through different platforms. You can invest via AMCs (online or offline), brokerage firms, agents, banks, registrars, and various mutual fund investment sites and apps. You need no Demat account but just provide the essential information and documents.
10. Transparent & Regulated
Mutual Funds are a highly transparent investment because it is regulated by the norms of the Securities and Exchange Board of India (SEBI). Also, the Association of Mutual Funds in India (AMFI) is a self-regulatory body formed by fund houses and AMCs (Asset Management Companies). The AMFI is a regulator under the purview of SEBI that seeks to develop the mutual fund industry on ethical and professional standards.
SEBI is a watchdog that lays various mandates that the AMCs must follow. It directs them to provide proper disclosures about all their mutual fund (MF) schemes and their investment portfolios. You can verify the credentials of the fund managers, Assets Under Management (AUMs) by fund houses, and risk levels of each MF scheme. The disclosures must have standard information of specific investments with the percentage of corpus amount allocated in each asset and sector.
Wrapping it up:
Mutual funds’ benefits are getting more noticeable and hence it has sparked a bit of talk. One must know the pros and cons of any investment to make a wise decision. Mutual funds are professionally managed, give high returns, and are low-cost investments. It has a diverse asset allocation and various types of mutual fund schemes are available for all kinds of investors. Whether you are a seasoned investor or a first-timer, risk-tolerant or risk-hesitant, you can choose the right fund for yourself among a plethora of schemes.