A mutual fund is a financial instrument that pools the savings of several investors and may invest them in different financial securities like stocks, bonds, debentures, money market instruments and Government Securities, etc. or a combination of all of these. These securities are managed by a professional fund manager on behalf of the unitholders and each investor in the scheme holds a pro-rata share of the portfolio, that is, entitled to profits as well as losses.
Why Invest in Mutual Funds?
There are many benefits of investing in mutual funds but let us discuss some compelling ones.
- Mutual Funds help in diversification of risk
Mutual funds help investors diversify their risks by investing in a portfolio of stocks across different sectors, bonds, money market instruments, and Government Securities, etc. depending upon the objective of the scheme. A diversified portfolio reduces risks associated with individual stocks or specific sectors. If an investment or wants to create a diversified stock portfolio by directly investing in stocks through the stock exchange, he or she would require a large amount of investment. On the other hand, the same investor can buy units of a diversified equity mutual fund scheme with an amount as small as Rs 5,000/- only. He can even invest with an even lower amount of Rs 500, in the case of ELSS Funds. Mutual funds are managed by qualified and professional fund managers who are backed by a team of result analysts skilled to pick the right stocks and other instruments. Therefore, mutual fund managers can generate the best risk-adjusted returns for investors. - Mutual Funds are low-cost investments
Since mutual funds buy and sell shares and securities in large volumes, transaction costs on a per-unit basis are much lower than that of buying or selling stocks directly by an individual investor from the stock market. - Mutual Funds are tax-efficient
The other benefit of investing in mutual funds is that they are more tax-efficient than most other investment products. Long term capital gains (holding more than 1 year) for equity mutual funds are tax-free. Further, dividends of equity funds are also tax-free. Short term (holding period of less than 1 year) capital gains in case of equity funds are only 15% on the profits made.
For debt funds, long term capital gains (holding more than 3 years) is taxed at 20% after applying for the indexation benefit. Once indexation is factored in, the long term capital gains tax on debt funds is reduced considerably, especially for investors in the higher tax bracket. You can compare how debt funds are better than traditional investments. Short-term capital gains (holding less than 3 years) in case of debt funds are taxed according to the tax slab of the investor.
If you invest in ELSS Funds, you can avail of a tax benefit of up to Rs 150,000 in a financial year, under Section 80C of the Income Tax Act 1961. - High Liquidity
Open-ended mutual funds are more liquid than many other investment products like shares, debentures, fixed deposits, post office schemes, and PPF, and a variety of traditional deposit products. Investors in open-ended mutual fund schemes can redeem their units fully or partially at any point in time and get the redemption amount credited in their bank account generally on a T+3 basis (Here, T means the transaction day + 3 means, 3 transaction days). In the case of liquid funds, it is on a T+1 day basis. Some mutual fund liquid schemes have even started crediting redemption amounts instantly if you are making the redemption request online or through their mobile apps. - Wide range of schemes to choose from
Mutual funds offer investors a variety of schemes to suit their respective risk profiles and investment objectives. Apart from equity mutual funds, there are many other fund categories like income funds, short-term debt funds, balanced funds, arbitrage funds, monthly income plans (MIPs), child plans, retirement plans, and liquid funds to suit different investment requirements of an investor.
Mutual funds have investment options from 1 day to your entire life period. - Mutual Funds are easy to invest
If you have a bank account, a color photograph, address proof (either driving license, Aadhar Card, Voter ID Card), and a PAN card, you are ready to invest in a mutual fund. All you have to do is to contact a mutual fund advisor in your city or the mutual fund company (AMC) in whose scheme you want to invest and fill up the mutual fund KYC form. Once the KYC formalities are done, you need to fill in and sign the application form of the scheme you want to invest in and provide a cheque drawn in favor of the scheme name.
Mutual funds also offer investors flexibility in terms of modes of investment and withdrawal. You can opt for different investment modes like lump sum (one time), systematic investment plans (SIP), systematic transfer plans, or STP (it helps transfer a fixed amount on a fixed frequency or the appreciation from one scheme to the other schemes within the same AMC), switching from one scheme to another or Systematic Withdrawal Plans (SWP) wherein one can withdraw a fixed amount at a fixed interval from his investments.
People Often Ask
- Can we get tax benefit on mutual fund?
Yes, one can get tax benefits as per the Section 80C of the income tax act 1961, under which if a person invests in ELSS, then they are eligible for tax exemption. - Which mutual fund is best?
Some of the best mutual funds in India are -
- How safe are mutual funds?
Mutual funds are very safe investments but they are always subject to market risk, one should read all the market-related information carefully before investing in one. - What is the rate of return on mutual funds?
On average mutual funds have a return rate of 14% based on the study of market trend of the past 15 years.
Conclusion
As we can see there are many benefits of investing in Mutual funds. Mutual Funds offer diversified investments, provide better tax-efficient returns, save taxes, easy to invest, and historically have given the best returns compared to other investment asset classes and therefore it should be an integral part of your overall investment portfolio.