Top benefits of investing in mutual funds
Created on 20 Apr 2019
Wraps up in 4 Min
Read by 1.1k people
Updated on 29 Jan 2022
Not everyone can nail the stock markets. Not everyone can analyze companies and make investment decisions. And that’s where Mutual Funds come into the picture. If you are a beginner in the game of saving and investing, mutual funds might be the one for you.
Today’s article will help you understand the benefits that mutual funds provide. But before diving into it, let’s first understand what mutual funds are and how they work.
What are Mutual Funds?
A Mutual Fund is basically a fund that pools together resources from investors and puts it into several asset classes. And how does the investor benefit, you ask?
Let’s take, for instance, that you enter a store and you’re confused as to which chocolate you should buy. The one you really want does not fit your budget; the one that fits does not satisfy you completely. Can you buy small chunks of each of these available? Sounds stupid? Yes, it does, because you cannot do that.
But this can be easily done with stocks. If you really wish to invest in equity and debt securities but do not have a huge quantum of surplus funds, you can start small by investing in mutual funds.
So how do mutual funds work?
Asset management companies that provide mutual funds generally pool funds from many small investors. The fund managers create portfolios and segregate these funds based on your objectives, risk appetite, and other factors. The pooled in money is then invested into those portfolios and investors are given a share or a unit on which they’d earn returns.
Now let’s understand why mutual funds are one of the most preferred investment products
Mutual funds come with plenty of advantages which are:
1. Much easy to invest: As a beginner, it is quite challenging to analyse stocks for investment. In such situations, mutual funds come across as readymade solutions to stock investment with much less risk.
2. Diversified risk: In mutual funds, you invest in a pool of funds which spreads your risk. The benefit of this is that in case few stocks are underperforming, the returns are still made due to other stocks that are performing well.
3. Expert management: Mutual funds are supervised by professionals who invest in funds only after thorough research and analysis. Thus, it is much safer to invest in mutual funds as you act upon professional advice.
4. Multiple options: In a mutual fund, you have access to a variety of funds such as balanced funds, debt funds, bond funds, equity funds, and many others. So, as an investor, you have the freedom to choose from a variety of funds. The mutual fund investment can be short-term or long-term depending on your investment goals and preferences.
5. Save on income tax: Mutual funds like Equity Linked Savings Schemes are funds that save on tax. They have a lock-in period of 3 years which ensure the benefits of tax deduction under section 80 C.
6. Small investment value: To invest in mutual funds, you can begin with a small investment value of Rs. 500 per month. The systematic investment plan is another great way to invest in funds. You need to pay a small amount of money, which gets deducted from your account each month, to invest in mutual funds.
7. Dependable: The mutual fund companies are under the constant scrutiny of SEBI, Security and Exchange Board of India. As an investor, you have all the details of the fund manager and his past performance record to help you act accordingly. The mutual fund transactions are absolutely transparent and reliable.
8. Easy liquidity: Mutual funds provide easy liquidity at all times. These funds can be easily redeemed as desired. People usually trade in open-ended mutual funds where the funds can be bought and sold quickly.
9. Reinvestment: The mutual funds are automatically reinvested to give you a more significant corpus of revenues each time. Unlike, in FD where the money is returned with the added interest, here, the money earned is reinvested in funds.
These are the benefits that come along with mutual funds. Mutual funds serve as a great investment option for beginners as well as for those who don’t have time to study and analyse the stocks.
Disadvantages of mutual funds
1. Window dressing - As the funds are completely managed by the fund managers, there could be a possibility of window dressing and other practices like excessive replacement, unnecessary trading, etc.
2. Dilution of profits - If you are looking to earn high returns and do not mind some risk, mutual funds are not the one for you. Diversification in mutual funds reduces the risk, but this process also diluted the profits of an investor.
3. Lock-in period and exit load - Some kinds of mutual funds usually have a lock-in period of 3 years, during which the funds cannot be redeemed wholly or partially.
AMCs also charge fees while redeeming these funds, known as exit load, if funds are withdrawn during the lock-in period.
Mutual funds are one of the best innovative products in the investment arena. However, mutual funds are still an untapped area in India. A large chunk of the Indian population is skeptical about mutual funds and is reluctant to invest. Today we hopefully busted some of the myths you might have had about mutual funds. Like any other product, mutual funds have their pros and cons, which need to be weighed accordingly before deciding to invest.
So would you invest in mutual funds? Let us know!
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