Benefits of Investing in Mutual Funds
Created on 11 Nov 2020
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Updated on 17 Aug 2022
All of life's problems seem simple and finding solutions to them get only easier when one knows what they are doing or have a rough idea about what has to be done. Some can seek help by reaching out to their family or friends, or some can be their individualistic self; but whichever route one takes, the theme of knowing what one is doing remains consistent.
In the same way, investing in mutual funds while knowing its advantages and the benefits, mutual fund schemes offer, might avoid risks by helping investors to select the funds according to their financial goals.
Mutual fund schemes offer a variety of options to their investors according to their ability to fulfil their financial goals. Knowing the benefits of mutual funds might encourage small investors to invest in mutual funds.
Benefits of Mutual Funds Investment
There are various benefits to investing in mutual funds. Let's take you through them and understand how they benefit the investors. Here are some major benefits.
In mutual funds, the fund manager diversifies the investor's portfolio by investing in different funds like equity, securities, bonds, money market, etc. Diversification helps investors to reduce their portfolio's risks of the investment by investing in different funds.
If the value of one investment is declining, and the other ones are rising, then the loss of one portfolio will be adjusted by a rise in other investments' value.
Any investment requires a lot of research on the markets before putting in the money. Having no prior knowledge of the industry can lead investors to select the wrong funds to invest in.
To avoid these situations, mutual fund companies hire professionals who have experience in the market and do a lot of research before investing in any funds. Investors invest in mutual funds, and the AMC (Asset Management Company) takes care of the rest to offer good returns to their investors. And that makes mutual funds more attractive.
Easy to invest
Before the internet era, investors used to go to different AMCs and purchase funds of the company on their own or through a broker. All this process was time taking, required a lot of research, and investors had to pay a lot of expense ratio.
But today, anyone who wishes to invest in mutual funds can invest online through different applications in which all the mutual funds are available in a single place, and investors do not need to go to different AMCs to purchase their funds. All the information and performance of the funds can be accessed online.
Flexibility of Investments
Mutual funds offer the flexibility of investments to all types of investors who wish to start their investments with a small amount of money. Investors do not require a lot of cash to invest in mutual funds.
They can start their monthly investments through SIP (Systematic Investment Plan) in which they can start their minimum investments from Rs 500 to any maximum amount they wish to invest.
Investors can invest in mutual funds according to their income, financial goals, and risk tolerance.
Easy to Purchase
Mutual funds can be purchased online and offline from anywhere in the world. An AMC offers its funds through their online websites, broker firms, agents, banks, or online applications.
Investors can easily track their fund's performance through online applications.
Transparency on the Investments
To avoid scams and maintain transparency between the investors and AMC house, SEBI (Stock Exchange Board of India) introduced labels for the mutual funds. This means all the mutual funds will be labeled according to their risks and returns.
Following are the colour codes to categorize mutual funds:
Blue - Indicates the mutual fund has a lower level of risk.
Yellow - Indicates that the mutual fund has a medium level of risk.
Brown - Indicates a higher level of risk.
These labels help investors to avoid risks, and they can also access the credential details of the fund manager to keep the process safe and transparent.
Lower Expense Ratio
The fund manager keeps a small amount of money from the investor's profit as the charge to maintain and keep the records of their portfolio, and to pay the fee to the professional who invests their money in the market to get a higher profit.
The amount the AMC charges is 0.5-2%.
A mutual fund offers tax savings options to its investors. Investments of up to 1.5 Lac done in ELSS Mutual Funds are eligible for tax deduction under section 80C of the Income Tax Act.
Flexible Lock-In Period
Mutual funds offer a flexible lock-in period to its investors for 1 year, 3 years, 5 years, and so on, depending on the investor's financial goals.
However, it is advisable for investors to stay invested for a longer period to gain higher profits. In a short period, the market can fluctuate and might not be able to offer the expected returns to its investors. Hence, staying invested for a longer period can avoid these short term market fluctuations.
Flexible Withdrawal Process
Mutual funds offer some policies through which investors can invest and withdraw at any point of time as per their preferences. On the other hand, there are many other policies for investors who wish to stay invested for a longer period through which investors can withdraw their funds after the maturity period.
The Bottom Line
Investing in good schemes offers higher returns and helps in avoiding possible risks. Investors should invest according to their financial goals and risk tolerance.
Mutual fund schemes are attractive to investors as they offer a diversification that leads to lower risk. Mutual funds also offer professional management to manage the investor's portfolio and offer the flexibility of investments in which anyone can start their investments an amount as low as Rs. 500. Mutual funds offer schemes through which investors can save their tax up to 1.5 lac.
There are many other benefits of investing in mutual fund schemes, knowing which might help investors to invest in the right schemes according to their goals and risk tolerance.
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