Mutual funds are one of the best investment options for anybody who doesn’t understand the financial market too well. Investing a mutual fund is basically like outsourcing investments to an expert.
Mutual funds have umpteen number of advantages over other types of investment options. Here are some of the most important benefits of mutual funds.
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The 10 Most Important Benefits of Mutual Funds:
1. Ease of Investing
For a new or an average investor it is quite difficult to be equipped with all the expertise for value investing initially.
Thus putting together diversified securities would not be an easy task due to the time and knowledge required for the analysis.
A mutual fund can enable the investors’ to start with just one mutual fund.
2. Diversified Investments
The most important standard of smart investing is diversification.
The pooled investments of mutual funds professionally managed are able to achieve this standard.
Diversification implies investing in a wide range of securities across the sectors to spread the risk. Instead of putting all the eggs in one basket, a mutual fund invests in a large number of stocks or bonds within one portfolio.
Diversification is very important because investing in just a couple of stocks may be risky.
For example, if there are only a few stocks in the portfolio and the prices go down over a short period, there will be a drastic decline in the value of a portfolio.
But if investments are done across a number of stocks and which are not or less correlated, the volatility of the prices would have less impact on the value of the portfolio.
3. Professional Management
Mutual funds are managed by professionals who after proper research and analyses of the bonds or stocks decide upon its inclusion in the portfolio.
The managers are qualified, trained and experienced thus are constantly watching and managing the fund.
Actively managed funds use their ability and resources trying to beat the market that is outperforming certain index such as Nifty 50.
4. Varied Types of Funds Available
Every investor has their own investment objectives.
The various categories of funds available suits almost all the investment needs.
Funds like equity funds, bond funds, sector funds, money market funds such as debt funds, balanced funds are few types of the fund in the market.
Depending on the investment horizon, a short term, medium term or long term mutual fund can be selected.
5. Tax Saving
Investing in a mutual fund could also help in tax saving.
ELSS (Equity Linked Savings Scheme) are tax saving mutual funds. \
With a lock-in period of 3 years, the benefits received from ELSS funds are a part of deduction under section 80C (maximum limit of Rs. 1.5 lakh).
Being an equity investment, ELSS funds deliver good returns in long run with the three-year lock-in investing discipline taken care.
6. Option to Invest Monthly
A lot of money is not needed to begin investing in mutual funds.
One can start investing with an amount as low as Rs. 500 per month.
SIP (Systematic Investment Plan) is a smart way of investing in a mutual fund with small amounts to invest.
With SIP, the amount is deducted from the bank account each period depending upon the time horizon. The mutual fund gives the option of investment through SIP or a lump sum (one-time).
7. Low Costs of Investment
The investors are charged commissions for each purchase and sale of securities depending upon the brokerage firm.
Mutual funds are significantly less expensive where the manager places all the necessary trade to maintain the portfolio but the investor may only be responsible for one low expense.
However, to ensure the benefits, investors must look for direct mutual funds with low expense ratios.
The mutual fund companies are under the purview of SEBI.
The details like the necessary disclosures, the investment amount and stock, the assets under management are made known.
The details about the fund manager and historical performance of the portfolio enable the investors to take their decisions accordingly.
The transparency of the transactions in the mutual fund ensures safety to the investors and a sense of reliability.
Liquidity implies the ability of the investments being converted into cash readily when required.
Investing in assets which are not so easily convertible may take a long to provide liquidity thus delaying the need.
With open-ended mutual funds, the units can be sold or purchased when desired at the current NAV.
Thus, money can easily be retrieved providing liquidity.
10. Automatic Reinvestment
Unlike FD where the money earned is returned to the investor, mutual funds reinvest the gains back into the fund.
There are options where the amount is not invested back. It is called dividend plan. It is not recommended.
Growth plan mutual funds are the ones that automatically reinvest the gains till you decide to take your money out of the mutual fund.
Disclaimer: the views expressed here are of the author and do not reflect those of Groww.