Why You Should Start Investing in Mutual Funds

16 September 2022
6 min read

In India, Mutual Funds have advanced significantly over the past two to three deAs a result. The most popular investment choice for retail investors right now is Mutual Funds. For most types of investment needs and risk profiles, Mutual Funds provide a broad range of investment solutions.

A Mutual Fund is a type of financial tool that collects money from numerous investors and invests it in a variety of financial instruments, such as stocks, bonds, and so forth, and Asset Management Companies are in charge of managing Mutual Funds.

We covered the advantages of investing in Mutual Funds in this article, so, read on for more information about Mutual Funds as we go over their advantages and the reasons you should invest in them in this blog.

Reasons Why You Should Invest in Mutual Funds

Now you might be wondering – Should I invest in Mutual Funds? Or if yes, why should I invest in Mutual Funds?

Well, the answer is simple. Investors choose Mutual Funds over directly managing their own portfolios for a variety of reasons. The main benefits of investing in Mutual Funds over individual stocks are listed hereby-

  1. Diversification of Portfolio

Any investment professional will tell you that diversification is one of the most crucial ways to lower the risk of your portfolio. To reduce potential losses, it is advantageous to diversify your holdings rather than invest in a single business, sector, or investment vehicle.

Investors can instantly diversify their holdings with Mutual Funds, which is a great option. Unlike buying individual stocks, investing in one or more Mutual Funds gives investors access to a wide range of investment options because each fund may hold dozens of different securities. Mutual Funds assist investors in hedging against unsystematic risks.

  1. A Fund for Every Type of Investor is Available

Mutual Funds primarily invest in the Debt and Equity asset classes. Some funds invest exclusively in Debt Fund, while others only in Equity Funds, and, the remaining in Balanced or Hybrid Funds.

Gaining access to a wide range of shares or fixed-income tools is the main advantage of investing in a Mutual Fund. The other securities in a portfolio make up for underperforming securities. Mutual Funds guarantee diversity in this way. You can choose Mutual Funds if you're a fresh investor who doesn't want to devote a great deal of time researching stocks to invest in.

  1. Advantages of High Liquidity

The second most liquid investment vehicle after bank deposits is open-ended mutual funds, which are also significantly more liquid than other types of investments like life insurance, infrastructure bonds, post office schemes, etc. In open-ended funds, investors have the benefit of redeeming their units.

One of the key advantages of mutual funds over other investment options, such as life insurance plans and government small savings programs, is their outstanding liquidity.

  1. Options for Lumpsum & SIP Investments

Mutual Funds also offer the option to invest the amount in one go or place a specified number at regular intervals. The first choice is referred to as a "Lumpsum" investment, and the second is referred to as a "Systematic Investment Plan," or SIP.

Under Systematic Investment Plans (SIPs), the investor invests a specific sum of money at regular intervals. This specific amount is directly deducted from the investor's bank account. It disregards the timing of the market.

On the other hand, Lumpsum Investments are options of investment that allow the investor to purchase the number of units they want in one go. This method is usually chosen to create extra wealth and liquidity. The Lumpsum method makes use of the timing of the market strategy.

  1. The Benefit of Transparency

Another benefit of Mutual Funds for investors is transparency. Investors are always updated on the current market value of their Mutual Fund units because Mutual Fund schemes make their Net Asset Values (NAVs) public at the end of each business day.

Mutual Funds release Monthly Fund Factsheets every month that includes information about the portfolio holdings for each and every Mutual Fund scheme. Investors are informed of the monthly investments made by the fund managers in these sheets.

  1. Tax Benefit

One of the biggest advantages of investing in mutual funds over many customary fixed-income investments is their tax advantages. Under Section 80C of the Income Tax Act of 1961, investing in an ELSS Fund entitles you to a reduction in your taxable income of up to Rs. 1.5 lakh.

Most traditional fixed-income investments have interest payments that are taxed at the investor's individual income tax rates. When compared to conventional fixed-income investments, mutual funds have significant tax advantages for investors in higher tax brackets.

  1. Competency of Cost

Mutual Fund investing is very cost-effective. Direct equity purchases require you to pay fees like brokerage and the Securities Transaction Tax (STT). Your costs will rise as the amount of transactions increases. Overlaying investors can benefit from Mutual Funds' ability to take advantage of economies of scale because they conduct transactions in bulk.

  1. Lower Transaction Cost

Another benefit of Mutual Funds is lower transaction costs as a result of economies of scale, and, since Mutual Funds buy and sell securities in large volumes, transaction costs per unit are much lower than those incurred by retail investors when they buy or sell shares through stock brokers.

  1. Smaller Upfront Investment

The next important feature of Mutual Funds is that you can begin investing in them with small amounts of money. To construct a diversified collection of stocks, investors will need to invest a significant amount of money. Mutual Funds, on the other hand, work on the basis of money pooling, so Mutual Fund investors can benefit from ownership interest of a diverse portfolio of stocks with a much relatively small investment.

  1. Professional Management & Expertise

Stock and bond investing require a great deal of knowledge and experience. You must be knowledgeable about financial markets, industry sectors, particular businesses, and research techniques.

The fact that Mutual Funds are managed by professionals who have the necessary training, knowledge, and experience to choose the best stocks or other financial instruments to obtain the best risk-adjusted returns is a major benefit of Mutual Funds. The AMCs' research team provides assistance to the fund managers.

Key Takeaways

  • Mutual Funds collect money from a number of investors and invest it in a variety of securities.
  • Every Mutual Fund has an objective that outlines its risk profile, investing goal, and overarching strategy.
  • Every Mutual Fund has a goal that describes the risk profile, investing objective, and overall investment strategy of the fund. A Mutual Fund investment is a decent way to steer clear of some of the difficult choices associated with stock investing.
  • Although management fees are still charged by Mutual Funds, the expense of trading is shared among all investors, which lowers the cost per person.

Conclusion

It is better to start investing sooner rather than later. Therefore, if you have money saved up and are looking for the best time to invest in the best kinds of Mutual Funds, understand that investing over time is always preferable to timing the market. Start making modest regular investments right away.

Disclaimer

The stocks mentioned in this article are not recommendations. Please conduct your own research and due diligence before investing. Investment in securities market are subject to market risks, read all the related documents carefully before investing. Please read the Risk Disclosure documents carefully before investing in Equity Shares, Derivatives, Mutual fund, and/or other instruments traded on the Stock Exchanges. As investments are subject to market risks and price fluctuation risk, there is no assurance or guarantee that the investment objectives shall be achieved. NBT do not guarantee any assured returns on any investments. Past performance of securities/instruments is not indicative of their future performance.
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