There is a large variety of options available, right from fixed deposits, stocks, gold or real estate, insurance, public provident fund and mutual funds. Each product has its pros & cons and risks & rewards. However, if you are looking at an investment option that is professionally managed, diversified and offers a good risk-return trade off, mutual funds can be the right choice for you. Let us look at the advantages mutual funds offer that make them a wise investor’s choice.
Why investing in a Mutual Fund is a wise choice?
- Diversification
One of the biggest advantages mutual funds give you is that of immediate diversification. You may not have enough money to spread your investments in varied stocks and sectors, but by pooling money from thousands of similar investors, a mutual fund spreads your investment and hence, risk. It is highly unlikely that all the stocks will go down by the same proportion on any particular day. This ensures that you have not kept all your eggs in one basket and are safe from incurring huge losses from a single bad investment.
- Professional Management
Another big benefit of investing in mutual funds is the professional expertise it provides for your investments. Asset Management Companies (AMCs) provide qualified fund managers who, with the help of strong research teams and their own expertise, pick the best options to meet the fund’s objective. This saves you time and the stress of constantly monitoring your investments and wondering if you made the right buy or sell decision. With mutual funds, you do not have to worry about market swings.
- Affordability
You may want to buy shares of large companies or want to invest in big companies in a particular sector of choice. However, you may not have the money to make a big investment. Mutual funds trade in big volumes, giving their investors the advantage of lower trading costs. Anyone can start an investment in a mutual fund through a Systematic Investment Plan (SIP) with as little as Rs 500.
For example, say Pooja has just started her career and wishes to put aside atleast Rs 48,000 annually to go on an overseas vacation after three years. Instead of waiting to collect a lump sum of Rs 48,000 to kick start the investment, mutual funds allow Pooja to invest a small sum of Rs 4,000 every month, in the form of a SIP. This makes it affordable for Pooja and at the same time keeps her goal on track.
- Liquidity
You can easily move your money in and out of mutual fund investments. Investments in open-ended funds can be redeemed in part or as a whole any time to receive the current value of the units.
- Tax Benefits
There are various tax benefits available on your investments in mutual funds. For example, investments in Equity Linked Savings Schemes (ELSS) qualify for tax deductions under Section 80C of the Income Tax Act. There is no tax on capital gains on units of equity schemes held for more than 12 months.
Schemes other than equity-oriented schemes are treated in the debt category for tax purposes. Short term capital gain is applicable for redemption of debt mutual funds within 3 years. Long term capital gain (more than 3 years) from debt mutual funds is taxable after claiming the benefit of Indexation.
- Well Regulated
In India, all mutual funds are regulated by the Securities and Exchange Board of India (SEBI). All mutual funds are required to follow transparent processes, as laid down by SEBI, protecting the interest of investors. Further, SEBI makes it compulsory for all mutual funds to disclose their portfolios every month.
