Why Invest in Mutual Funds – Know its Benefits

byYashi DasLast Updated: February 13, 2023
Why Should You Invest in Mutual Funds

Mutual funds have gained huge popularity in recent times and the industry is growing at an exponential pace. One of the main reasons behind this is that it offers different types of schemes to cater to the requirement of the investors. Whether one wants to accumulate a corpus in the long-term, seek tax benefits, or want a better alternative for bank interest rates on deposits. Mutual funds offer an opportunity to the investors to invest in the market as per their risk appetite. Along with the benefit of wealth creation, there are various other benefits offered by mutual funds. Let’s read further to know in detail the benefits of mutual fund investment.

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 you should 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 mutual fund schemes that they have fund managers to manage and monitor professionally. Generally, 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 investments with a pool of money collected from numerous customers. As an investor, you become a unitholder representing your share in the mutual fund. If you buy several stocks, other assets, or plan to have such a diversity in investments, you will need a large capital outlay. 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 therefore, makes mutual funds cost-effective.

However, do check the expense ratio of the mutual fund scheme when you plan to invest. The 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 payment. 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.

7. Liquidity

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 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, and liquid funds as an alternative to FD to have better returns in the short term. If you want to opt for a safer investment in equity funds, then you can go for large-cap funds. This is because the fund managers invest a major corpus amount in stocks of bluechip companies.

Bluechip or large-capitalization companies are the top 100 companies with the biggest capital structure listed by SEBI (Securities & Exchange Board of India). 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 the SEBI kays down the norms and regulates them. Also, the fund houses and AMCs (Asset Management Companies) have formed an Association of Mutual Funds in India (AMFI) which is a self-regulatory body. 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 out 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.

How to know which mutual funds are best?
There are various mutual funds in different categories (as per the category norms by SEBI) that are outperforming the benchmark or give equivalent returns. Plan your investment goal, know the fund’s risk level to suit yours, and then choose the category and consequentially, the mutual fund.
Should I invest in more than one mutual fund?
Yes, you should definitely invest in more than one mutual fund. Try to pick up schemes from different categories/types of mutual funds to have a diverse investment. Different schemes can help achieve different achievement goals.
Are mutual funds good for short-term investment?
Equity mutual funds are usually suggested for the long-term like 5 years or more. But, if you wish to secure a short-term investment, then you can go for debt funds like Liquid Funds or Ultra-Short Funds. They provide better returns than bank deposits.
What are the charges in a mutual fund?
There are some applicable charges in a mutual fund like Expense Ratio, Exit Load, and in some cases, Entry Load. The expense ratio is the service cost for the management of the fund. Exit load is charged when you exit the fund or redeem it before the maturity period. Some funds charge entry load as managerial costs but this is usually eliminated under the expense ratio.

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