There are many benefits that an investor can get by investing in Mutual Funds. Flexibility, Diversification, and Expert Management of money are the few benefits that make mutual funds an ideal investment option.
Let’s dive into the details of the benefits that Mutual Funds provides:
1. Investments are managed by professionals (Fund Managers):
The investments pooled by the Asset Management Companies (AMCs) or Fund Houses are professionally managed by the Fund managers. The fund managers are Finance Professionals who have a magnificent track record of operating investment portfolios. Moreover, fund managers have the finest team of analysts and experienced persons who select the best-performing stocks and assets that have the potential to produce exceptional returns for investors in the long run.
2. No Lock-up Period:
Most of the Mutual Funds that exist in the market come with a No Lock-up Period. In investments, there is a period that exists when the investors cannot take their investments back, which is called a Lock-up Period. Some investments exist in the market that allows immature withdrawals to the investors within the lock-up period in exchange for a penalty. Maximum mutual funds are open-ended, and they come with fluctuating exit loads on redemption. Only the tax saver mutual funds, also known as ELSS (Equity Linked Savings Scheme), come with a lock-up period.
3. Low in price:
Many small investors wish to invest in mutual funds, so for them, mutual funds come at a very affordable price cost with a high rate of returns. Mutual fund houses or Asset management companies (AMCs) impose a small number of fees referred to as expense ratios on investors to manage their investments. It commonly lies between 0.5% to 1.5% of the total amount invested.
E.g., if you have invested Rs. 50,000, in Mutual funds, then 1.2% of expanse charges will be imposed over the amount of Rs. 50,000 which you have invested.
Which means, 1.2% of 50,000= 600
All the different countries in the world have their Security exchange board/council, which controls the whole share market or the stock market. The one which India has, its name is SECURITY EXCHANGE BOARD OF INDIA or SEBI.
SEBI regulates both the share markets BSE and NSE, while Mutual Fund houses are managed by SEBI, mutual fund companies have mutually formed the AMFI. In India, SEBI has mandated the expense ratio to be under 2.5%. As a result, all mutual fund houses and wealth management firms must adhere to the enforced restrictions.
4. SIP (Systematic Investment Plan):
The most significant advantage of investing in mutual funds is that you can invest a small amount on a regular basis through a SIP (Systematic Investment Plan). You can pay your SIP monthly, quarterly, or bi-annually as per your wish or as per your comfort. Also, you can decide the amount of your SIP you want to pay. Although, it cannot be less than the minimum investment/investable amount set for the scheme.
E.g., suppose you want to start investing in your monthly SIP with Rs.500, but the minimum investable amount of that particular mutual fund’s house is Rs.1000. Then, you have to raise your monthly SIP amount from Rs.500 to Rs.1000 to start your monthly SIP.
You can start or break off a SIP as and when you need. Investing via SIPs reduces the requirement to organize for a lump sum to get started with your mutual fund investment. With a SIP, you can stagger your investments over time, giving you the benefit of rupee cost averaging in the long run.
5. Switch fund option:
If you ever wish to move your investment to a different fund of the same fund house in the future, then the fund house will provide you the option to switch your investment from your existing fund to another fund as per your wish and your comfort. If you are a good investor, then you must know when to enter and exit from a particular fund. In case you see another fund having the possibility to outperform the market or your investment objective changes and is in line with that of the new fund, then you can initiate the switch option.
E.g., suppose “A” is the fund in which you are currently investing, and, getting a return of 6%. After some time, you forecast that Fund A will not generate good returns in the future, so you wish to switch from fund “A” to fund “B” because fund “B” is performing well, and, will give much higher returns in the future. So, in this case, the fund house will provide you the option to switch from fund “A” to fund “B”.
6. Goal-based funds:
Every individual on this planet has some financial goals, and they want to achieve them. For the accomplishment of that particular financial goal, people invest their hard-earned money into mutual funds with the view of meeting their goals. Mutual funds arrange fund plans that help investors meet all their financial goals, be it short-term or long-term. There are more than 5,500+ mutual fund schemes in India, and you can choose any scheme of your choice which, according to your analysis will provide you the desired returns, and can help you in achieving, your financial goals. Therefore, you have to assess your profile and risk-taking abilities carefully so that you can select the most applicable fund plan.
Far from stocks, mutual funds invest across sectors and market cap covering shares of many companies, thereby providing you with the advantage of diversification. Also, this minimizes the concentration risk to a great proportion.
If one asset class fails to perform up to the expectations, then the other asset classes would cover up for the losses. Hence, investors aren’t required to worry about market volatility as the diversified portfolio would provide some support.
E.g., suppose mutual funds are invested in A, B, and C three different companies.
However, “B” company fails to perform as per the expectation, but “A” and “C” companies are performing beyond expectations. Thus, diversified portfolios are providing some support to the investors.
Mutual funds are popular these days as they provide investors with the required stability that most other investment options lack. The sequence of investing through a SIP and no Lock-In period has made mutual funds an even more desirable investment option.
It means when it comes to accumulating an emergency fund, people can consider mutual funds as their first option. Mutual funds are so flexible that you can make an entry or exit at any time, which may not even exist in other investment options. As a result, most middle-aged people prefer mutual funds over some other form of investment instrument.
Since most mutual funds come with no lock-in period, it provides you as an investor with a high degree of liquidity. It makes it simpler for the investor to back off on their mutual fund investment at the time of a financial crisis.
You can send a redemption request in just a few clicks, and it will be approved quickly. On placing the reclamation/redemption request, the fund house or the asset management company would credit your money to your bank account in just 3-7 business days.
E.g., let’s say something unforeseen happened, and you don’t have the financial resources to deal with the situation. In this case, you can request for the redemption of your money from the fund house, and the fund house would credit your money to your account in just 3-7 days.
10. Seamless process:
Investing in mutual funds is a relatively simple procedure. All fund unit purchases and sales are made at the mutual fund scheme’s common Net Asset Value (NAV).
As the fund manager and his/her team of experts and analysts are tasked with choosing shares and assets, investors only need to invest, and the rest would be taken care of by the fund manager.
E.g., suppose you have bought 20 fund units of a mutual fund plan at Rs.10 each according to the NAV of that fund unit. But when you went out to sell those fund units, the NAV of that fund unit was Rs.12 each, so this means you are in profit of Rs.2 on each fund unit.
The Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI) regulate all mutual fund houses and mutual fund plans. Besides that, the Association of Mutual Funds in India (AMFI), a self-regulatory body formed by all fund houses in the country, also governs fund plans. Thus, investors need not worry about the safety of their mutual fund investments as they are safe.
12. Ease of tracking:
One of the most significant benefits of mutual fund investing is the ease with which you can monitor your investments. Fund houses or asset management companies better understand that it is hard for investors to take some time out of their busy schedules to constantly keep tracking their finances, and hence, they provide regular statements of their investments through their mobile applications. It makes it a lot smoother for them to track their investments and make decisions accordingly. If you invest in mutual funds through a third party, then you can also track your investments on their portal.
E.g., PRUDENT WEALTH (A wealth management firm) provides all the financial data of the investment to the investors through the app or website.
ELSS or Equity-Linked Savings Scheme is an equity-oriented mutual fund that grants tax deductions of up to Rs 1,50,000 a year under the Section 80C provision. By making full utilization of the Section 80C limit, you can save up to Rs 46,800 every year in taxes.
ELSS is the most famous tax-saving investment option under Section 80C of the Income Tax Act, 1961.
It has a three-year lock-in period, making it the shortest of all tax-saving investments. Investing in ELSS grants you the dual advantage of tax reductions and wealth accumulation over time.
14. Rupee cost averaging:
On investing in mutual funds through a SIP, you receive the benefit of rupee cost averaging over time. When the markets fall, you buy more units while you purchase fewer units when the markets are growing. Thus, over time, your cost of purchase of fund units is averaged out. It is called rupee cost averaging. Investing in mutual funds via a SIP is beneficial during both market ups and downs, and there is no need to time the markets.
15. No time markets:
When you are investing in mutual funds through a SIP, there is no need to time markets. It is because the rupee cost averaging phenomenon protects that your cost of purchase of fund units is on the lower side. However, you have to continue investing via a SIP for a long period. Hence, you can invest in mutual funds whenever you feel like it.
There is no ‘right time’ as such for investing in mutual funds. The best time is now! INVEST NOW via SIP.
Who should invest in Mutual Funds?
Everyone who has a fixed financial goal, be it short-term or long-term, should recognize investing in mutual funds. Investing in mutual funds is a brilliant way to accomplish your goals faster. There are a variety of mutual fund plans that suit all personas. Investors are required to assess their risk profile, investment horizon, and goals before getting started with their mutual fund investment.
For example, if you are risk-averse and intend to purchase a car within the next five years, you may consider investing in gilt funds. If you are ready to take some risk and are planning to get a house in a period of fifteen to twenty years, then you may consider investing in equity funds. If your investment horizon is less than two years and you are looking to earn higher returns than a regular savings bank account, then you may acknowledge parking your surplus funds in a liquid fund.
Read Next: What is Wealth Management?
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