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Benefits of Mutual Funds

  February 18,2020

Different Benefits of Mutual Funds

Mutual funds are on everyone's lips. Mutual funds have become a hot topic of discussion among friends and colleagues. You might be aware of what is mutual funds, however, are you aware of the various benefits that mutual funds have to offer?

In this article, we will dive deep into the various benefits of investing in mutual funds. However, if you are not aware of mutual funds or you are not quite sure, here’s a quick refresher.

A mutual fund is an investment option that pools money from different investors which are invested in different securities such as bonds and stocks as per the scheme objective. Mutual funds come in different shapes and sizes. Based on the asset class, mutual funds can be broadly classified into three categories: equity funds, debt funds and hybrid funds. Equity funds predominately invest in the stock market, debt funds in government bonds, commercial papers etc, and hybrid funds invest in both equity and debt market.

Here are some of the benefits of investing in mutual funds:

Experts manage Mutual funds

Expert fund managers manage mutual funds. Their job is to invest in securities as per the scheme’s objective and earn higher returns than the benchmark. Benchmark is the index against which the performance of the fund is measured.

With mutual funds, you don't have to take any investment calls as the fund manager decides what to buy and sell on your behalf. Moreover, a research team or analysts assist the fund manager make the right investment decision.

Helps in diversification:

A mutual fund scheme invests in different securities across different maturities and sectors. Diversification helps to manage risk. As the funds invest in several securities, the investment risk in the mutual fund significantly lower than investment in a few stocks.

Mutual funds invest in different asset classes:

Not all mutual funds invest in the stock market. There are different categories of mutual funds such as debt mutual funds that invest in debt market securities such as government bonds and commercial papers etc. These instruments are relatively less volatile than equities. Hybrid mutual funds invest in equities and debt instruments.

So, there are mutual funds for all types of investors as different funds have different risk tolerance level and time horizon.

Cost-effective:

Mutual funds are one of the cheapest investment options available to individual investors. The expense ratio is the cost charged by the fund houses from investors and is a percentage of the overall assets. The market regulator, Securities & Exchange Board of India (SEBI) fixes an upper limit on the expenses that can be charged by the fund houses. As investors pool their money in mutual funds, the cost is equally borne by the different individuals. As a result, mutual funds are one of the cost-effective investment options.

Secondly, investors can invest Rs.500 per month and get exposure to a diversified portfolio that is cheaper than directly investing in equities or bonds.

Different ways to invest in mutual funds:

Lumpsum investment or one-time investment or systematic investment plan(SIP) are the two ways to invest in mutual funds. Lumpsum investment and SIP have different benefits. As the name suggests, in lumpsum investment, investors make a single investment at a time and there are no recurring payments.

SIP is a great investment tool for salaried people as it helps them to invest a certain amount of money regularly. While investments can be made on a quarterly, monthly, weekly basis, monthly SIP is the most popular.

One can start investing with as little as Rs.100 per month. Investors can also step up their SIP amount every year. You can also make lumpsum investments in the fund which will help you to build a bigger corpus and reach your financial goals faster.

Mutual Fund industry is highly regulated:

As SEBI regulates the mutual fund industry, fund houses have to disclose certain data related to investments, returns, expense ratio etc related to regularly.

Fund houses also have to disclose the net asset value of funds regularly. Fund houses publish factsheet every month where different aspects of the fund such as the securities held by the fund, fund manager, the returns delivered by the fund are published.  

Tax benefits:

Investing in mutual funds can also help you to save tax. Investing in equity-linked savings schemes(ELSS), a category of equity mutual funds can help you to save tax by investing up to Rs.1.5 lakhs in a financial year. These ELSS funds not only help you to save tax but also help you to build wealth over the long term.

Conclusion: Mutual funds have different benefits and it is one of the best investment options for individual investors. To know more about mutual funds and to start investing in mutual funds, consult your financial advisor today. 

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