10 Reasons Why Should You Invest In Mutual Funds

As an investor, you would like to get best returns on your investments. Conventional methods like bank FD, NSC, PF do not give much returns & come with a longer waiting period. There is another best option to get excellent returns is the stock market, but this comes with huge risk as you may not have the time to study the stock market to keep track of them regularly. You must need a plenty of time and knowledge to determine what to buy or when to sell the stocks. A lot of people take a chance and gamble, some get lucky, and most of them don’t. This is where mutual funds come in.

advantages of investing in mutual funds

10 Benefits of Investing in Mutual Funds

Mutual Fund (MF) is a mechanism of pooling resources from general public and investing collected funds in debt or equity instruments in accordance with the objectives as disclosed in the offer document.

Most of the people think that mutual fund means equity investment. This is not true. Mutual funds offer both 100% debt to 100% equity and also hybrid products with the combination of equity and debt. The past performance of the schemes is also available since the inception of the fund. The past performance may not sustain in future, but it tells the quality of the fund’s performance in different cycles of the market, which can help investors before taking any investment decision. Mutual Funds schemes are market-related and does not offer any guarantee of returns, which keeps away most of the investors from investing in mutual fund schemes. One has to understand how this schemes work & performs over a period of time and what are risks attached to this. Equity schemes always outperform the other asset class in the longer run and beat inflation with a big margin.

Risk Return Matrix Mutual Funds

Risk Return Matrix

Normal bank FD’s, Postal schemes or PF offers returns in the range of 7-9%, but in the mutual fund from above chart, we can get an average of 15-17% per year, which also comes without tax.

See –Steps by Step Guide to Choose Best Mutual Fund

Below are the advantages of investing in Mutual Funds:-

Regulations

All Mutual Fund firms are well regulated and come under the observation of SEBI (Securities Exchange Board of India). They are required to register with SEBI & are obliged to follow strict regulations designed to protect investors. All operations are also regularly observed by the SEBI. Also, MF distributors have to mandatory pass the exam for selling their products and is given the best training by all the AMCs with whom they are linked.

So it is viewed as one of the best safest class of investment in the equity market.

Professional Management

Professional management. Mutual fund firms have a very well qualified research team that continuously studies the performance and prospects of companies & also they have crucial market information. They assign a fund manager to each specific scheme, who invest your money in carefully researched funds by him & his team. Therefore, you do not have to thoroughly research your every investment, just choose a best MF firms & you have a mutual fund manager to handle it for you.

Diversification

As the saying, “don’t put all your eggs in one basket” truly relates to the concept of diversification. It is sporadic when all stocks decline at the same time and in the same proportion, in such times holding a variety of sectors/investments may help counterbalance the impact of poor performers, while taking advantage of the earning potential of the rest, and this is known as diversification.

Diversification lowers your risk of loss by spreading your money across various sectors & industries.

For example, if you buy stocks in the infrastructure sector and this sector is not performing well, at this time you must have stocks of other sector say energy sector which is performing well, this helps in balancing your portfolio.

Below mentioned is sector allocation & top holdings for UTI MNC diversified Mutual Fund. In such portfolios, you are very well diversified & safe.

Low Cost

Many investors do not have the huge money to buy lots of stocks. Investors can purchase mutual funds in a smaller denomination of Rs.5000 or minimum Rs. 500 with SIP (Systematic Investing Planning). Smaller denominations of mutual funds give mutual fund investors the capability to make periodical investments through monthly purchase plans while taking advantage of rupee-cost averaging. So, rather than waiting until you have enough money to buy high-cost investments, you can start instantly with mutual funds.

See –Top 5 Best Small Cap & Mid Cap Mutual Funds

Flexibility

You have another good advantage of mutual funds to get in and out easily. Generally, you can sell your mutual funds in a short period of time without there being much difference between the sales price and the most current market value. However, it is important to look out for any fees associated with selling, including exit load fees. Also, unlike stocks, which trade anytime throughout market hours, mutual funds transact only once per day after the fund’s Net Asset Value (NAV) is calculated.

Moreover, the process is standardized, making it quick and effective so that you can get your money in hand as soon as possible. The service available today is also one of the best in India, and you can access all your investment details online.

Systematic Investment Plan (SIP) –

This option in mutual fund schemes is always better for investing in equity in the long run. The investor gets rupee cost averaging, which lowers the average cost and investor gets the advantage of the power of compounding.

Rupee-cost averaging – Invest a specific rupee amount at regular intervals irrespective of the investment’s unit price. As a result, your money buys more Mutual Fund units when the price is low and less units when the price is high, which can imply a lower average cost per unit over the time. Rupee-cost averaging enables you to discipline yourself by investing every month or quarter rather than making intermittent investments.

Transparency

Every mutual fund’s performance is reviewed by various publications and rating agencies, making it easy for investors to compare the fund to another. As a MF investor, you will get regular updates of daily NAVs, portfolio holdings, and asset allocation, etc.

Tax Efficient

Mutual Fund Schemes are most tax efficient instruments available in India as mutual fund investment in all asset class for a period of more than one year is considered as long term for the tax purpose.

There are very good tax saving schemes known as Equity Linked Saving Scheme (ELSS), that invests 60-70% in equity related instruments that are notified to avail tax benefits. Investment in such ELSS MF’s would provide the tax benefit to investor’s u/s 80C, which is capped to a maximum of Rs 1.5 Lacs per year. Also, the returns are tax-free, which is not the case in other conventional investments such as bank tax saving FD, NSC.

Easy Information Availability

Mutual Fund schemes are easy to compare, as the object of the fund is well defined. One can easily get the details of risk involved in the scheme by reading Scheme Information Document (SID) or Key Information Memorandum (KIM).

Introduction of Direct Plans –

From the year 2012, direct plans are available in all categories in MF schemes, which eliminates the distributor and reduce the overall cost of around 0.25% to 0.70% p.a. This is automatically going to increase your return over a period of time. It is always prudent to invest in mutual fund schemes depending on asset allocation and time horizon. The only thing you must do is select the fund, which is at least three years old and a consistent performer and is in the top quartile in the category. The another thing you must check is that scheme should beat its benchmark index and performance should not fall below its benchmark index.

See –Top 5 Best ELSS Tax Saving Mutual Fund

Summary

As we know with any investment, there are certain risks involved in buying mutual funds. These investment options can experience market fluctuations and sometimes provide returns below overall market returns.

So it is always advisable to monitor and review the performance of the scheme at least once in a quarter so that you can take corrective actions, if fund selected by you starts none performing compared to its benchmark index. The advice of a financial planner can also add a lot of value to your investment.

3 Replies

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  1. Charan Sukhejat says:

    I have always thought that mutual funds are same as stock market (riskier) and may not guarantee you good returns. But looking at the advantages here , it feels like I should explore more about mutual funds.
    Thanks for sharing great post.

  2. Violet says:

    I could not refrain from commenting. Well written!

  3. Eden says:

    Thanks for the marvelous posting! I certainly enjoyed reading it, you will be a great author.I will remember to bookmark your blog and
    definitely will come back down the road. I want to encourage you to definitely continue your great writing, have a nice afternoon!

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