Mutual fund is a financial instrument which pools the savings of a number of 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 unit holders and each investor in the scheme holds a pro-rata share of the portfolio, that is, entitled to profits as well as losses.
There are many benefits of investing in mutual funds but let us discuss some compelling ones.
1. 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 invest or wants to create a diversified stocks portfolio by directly investing in stocks through 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. In fact he can even invest with an even lower amount of Rs 500, in case of ELSS Funds.Mutual funds are managed by qualified and professional fund managers who are backed by a team of result analyst skilled to pick the right stocks and other instruments. Therefore, the mutual fund managers are able to generate best risk adjusted returns for the investors.
2. 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 is much lower than that of buying or selling stocks directly by an individual investor from the stock market.
3. 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 period of more than 1 year) for equity mutual funds are totally 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 period of more than 3 years) is taxed at 20% after applying 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 period of less than 3 years) in case of debt funds is taxed according to the tax slab of the investor.
If you invest in ELSS Funds, you can avail a tax benefit of upto Rs 150,000 in a financial year, under Section 80C of the Income Tax Act 1961. See the top performing ELSS Funds here
4. 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 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 T+3 basis (Here, T means the transaction day + 3 means, 3 transaction days). In case of liquid funds it is on 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.
5. 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.
In fact mutual funds have investment option from 1 day to your entire life time period.
See the various categories of funds and their performance from here
6. Mutual Funds are easy to invest
If you have a bank account, a colour 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 favour 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.
As we can see there are many benefits of investing in Mutual funds. Mutual Funds offer diversified investments, provides better tax efficient returns, saves taxes, easy to invest and historically has given the best returns compared to other investment asset classes and therefore it should be the integral part of your overall investment portfolio.