What is Mutual fund?
Mutual funds are ideal for investors who want to invest in various kinds of schemes with different investment objectives but do not have sufficient time and expertise to pick winning stocks. Mutual funds give you the advantage of professional management, lower transaction costs, and diversification, liquidity and tax benefits
Key Benefits of investing in Mutual Funds:
1. A Diversified Portfolio:
Mutual funds invest in two main asset classes — debt and equity. Some funds are pure debt, and some invest in just equity; others are balanced or hybrid.
The primary benefit of investing in a mutual fund is that you get exposure to a variety of shares or fixed income instruments. For instance, if you wanted to invest Rs. 1,000 directly in stocks, you would probably get only a share or two. If, on the other hand, you invested through a mutual fund, you would get a basket of several stocks for the same amount.
If a few securities in a portfolio don’t perform, the others compensate. In this way, mutual funds ensure diversification. If you are a lay investor who doesn’t want to spend a lot of time researching stocks, go for mutual funds.
2. There’s a Fund for Everyone:
This could be one of the significant benefits of mutual funds. There are over 2,000 currently active schemes — a lot to choose from. You can find funds that match your risk appetite, investment horizons, and personal financial goals.
Debt funds are the least risky, balanced or hybrid funds are moderately risky, and equity funds involve the highest risk. However, the reward is directly proportional to risk, Higher the risk, higher the returns.
Even within these broad categories, there are many choices. For example, a large-cap equity fund will be less volatile and offer lower but stable returns. Mid-cap or small-cap equity funds, on the other hand, can fluctuate wildly but have the potential to give higher returns in the longer term. And when it comes to debt funds, a fund that invests in corporate paper will offer higher returns than a gilt fund but will carry higher risk.
3. Benefit from High Liquidity:
If you invest in open-ended mutual funds (which most funds are), you can buy and sell your units at any time. Your total redeemable or buyable value is based on the fund’s net asset value (NAV) for that day.
Close-ended funds too can be liquid. Even though they’re for a fixed duration, close-ended funds are listed on an exchange after the New Fund Offer (NFO) closes. Once these funds are listed on a stock exchange, they are freely bought and sold.
So, whether you buy open-ended or close-ended funds, there’s always a high level of liquidity.
Do note that some Mutual Funds like Tax Savings Funds (ELSS) come with a lock-in period of 3 years
4. Invest in a Lump sum or through a SIP:
One of the advantages of mutual funds is flexibility. You can either make a lump sum investment or put in small amounts over some time through a SIP (Systematic Investment Plan). Lumpsum investment works well if you have idle cash. We recommend investing through SIP because you can invest relatively lesser amounts (than lumpsum). Also, because of rupee cost averaging, the cost of acquiring mutual fund units can be lower. We’ve spoken at length about SIP basics in our earlier article.
5. You can Invest in Small Amounts:
You can begin a SIP with as little as ₹500 a month. The advantage here is that you don’t have to wait for a while until you accumulate enough cash to make investments. Therefore, you will be able to make optimum use of available cash and maximise returns.
Investing through mutual funds is quite cost-efficient. When you buy equity directly, you have to pay costs like brokerage and Securities Transaction Tax (STT). The larger the number of transactions, the higher your costs will be. Mutual funds have the benefit overlay investors in that they do bulk transactions and are hence able to enjoy economies of scale. They may, for example, be able to get lower brokerage rates, which benefits investors in mutual funds. A debt fund may be able to negotiate higher interest rates from debt issuers since they deal in large quantities.
7. Reduce your Tax Liability:
Finally, one of the benefits of mutual funds is you can save income tax. If you invest in an ELSS fund, you can reduce your taxable income by as much as Rs 1.5 lakh under Section 80C of the Income Tax Act – 1961.