7 Advantages of Investing in Mutual Funds

When it comes to generating savings and making investments, there are plenty of schemes out there for you to choose from including mutual funds, fixed deposits, stocks, and bonds, etc. Among these, mutual fund investments have emerged as one of the most popular routes in recent times. These schemes are often classified on the basis of their potential risk and this usually corresponds to the expected rate of return. Low-risk schemes offer lower but relatively consistent returns while high-risk investments have the potential of providing higher returns to the investor.

Thus, on the one hand, you have equity stock investments that represent high risk- potentially high return investments, while on the other hand you have fixed deposits that represent low risk-low return investments. Fortunately, modern day investors have the choice of investing in mutual funds of various types, which provide a unique balance of potentially high returns, while being considerably less risky than stock investments in the long term.

Mutual funds have gained substantial popularity in the past few years, buoyed by their consistent performance at least partially due to the liquidity-driven rally in equity markets not just in India but also globally. Thus whether you are a novice or an experienced investor, you can start investing in mutual funds today and watch your wealth grow steadily if you are in for the long haul. In fact, as per historical records, equity mutual funds have provided average annual returns of around 15% in the medium to long term.

Here are the top 7 advantages of investing in mutual funds to help you decide in favour of investing in these schemes.

1. Superior Diversification – If you invest directly in equity stocks, you can manage to be invested in a limited number of companies till you run out of investment capital. When you put your money in mutual funds, you immediately gain access to a much wider range of stocks that provide much greater diversification than an individual investor’s portfolio. Thus your mutual fund account potentially grants you access to hundreds of stocks without the need to select and purchase them individually. This higher degree of diversification reduces exposure to a particular sector and thereby reduces the overall volatility of the investor’s portfolio.
2. Professional Management and Oversight – It can be tough to run your business or do justice to your day job while monitoring the performance of your stocks unless of course you are closely associated with the financial markets. In case, active portfolio management is not your forte or you are a stock market novice, take the safer route and make your equity investments through an equity mutual fund. Mutual funds are professionally managed by fund managers who have years of relevant financial market experience and they are supported by a team of subject matter experts who help pick investments and strategies that help maximize profits for the scheme’s investors.
3. Flexible Investments – It is not essential to invest huge sums of money in mutual funds. It is possible to start with a single investment of as low as Rs. 500 and then increase your investments at a later date. However, if you want to capitalize on the performance of the mutual fund in the long term, you may consider making larger investments. You also have the option of choosing between 2 different investment styles – lump sum and SIP investments. In the case of a lump sum, you pool your capital and invest in the form of a large single investment at an opportune moment. A SIP is a smaller investment made at regular intervals, usually a month, over a period of time in a mutual fund of your choice. The SIP route is ideal for investors seeking a disciplined approach to making mutual fund investments.
4. Tax Benefits – Investments in a type of equity mutual funds – the Equity Linked Savings Scheme (ELSS) qualify for tax deduction benefits of up to Rs. 1.5 lakhs under Section 80C of Income Tax Act 1961. Moreover, if you invest in equity mutual funds, you can get tax-free returns in the form of zero long term capital gains when you hold your units for a year or more from their date of allotment. Short-term capital gains on equity funds are, however, taxable at the rate of 15% of the total gains from the investment. In the case of debt funds, you are liable to pay both short term and long term capital gains whether you take indexation benefit or not.
5. Higher Liquidity – One of the biggest reasons why mutual funds remain a hot favourite amongst all kinds of investors is that an investor can get in and out of the market with relative ease. This is especially true in the case of debt funds many of which have zero entry and exit loads and can be redeemed easily as and when you need them. Moreover, a few fund houses also have unique schemes that allow benefits such as instant redemption and debit card withdrawal of your mutual fund investment in case of emergencies. This is a contrast to popular fixed rate alternatives such as fixed deposits that have high premature withdrawal charges.
6. Low Transaction Charges – When investors buy multiple securities to diversify their investments they are liable to pay separate securities transaction charges for each transaction. This can add up to a substantial amount and impact the investor’s returns negatively in the long term. In comparison, when you buy mutual funds, the investor gets the same or greater level of diversification without having to pay multiple securities transaction charges. In the case of mutual fund fees such as securities transaction charges as well as all fund management charges are represented by the fund’s expense ratio, which is much lower than the cumulative individual securities transaction charges that an individual is liable to pay.
7. Transparency of Investments – Some novice investors shy away from mutual fund investments because they are ignorant of the fact that mutual funds are strictly regulated and highly transparent. Mutual funds are subject to numerous regulatory requirements that are designed to make sure that they operate in the best interest of the investors. The fund houses or Asset Management Companies (AMCs) are regulated and closely monitored by watchdogs such as the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI). As per current mandate, fund houses are required to publish data regarding all of their funds as well as distribute their fund information freely for the benefit of various user groups including existing and prospective investors, analysts, etc. This feature is not available as of now with any other investment route ranging from PPF and EPF to ULIPs and NPS.