Benefits of Mutual Funds

Wondering why mutual funds are a big buzz among investors? Diversification, affordable, liquidity, and professional management – mutual funds come with multiple benefits. Most new investors kickstart their investment journey with mutual funds. Understand why mutual funds should find a place in your investment portfolio.

Mutual funds have been the heartthrob for Indian investors. Most investors kickstart their investment journey with mutual funds. Mutual funds pool money from multiple investors and invest in a class of assets as per the scheme of the fund. 

One of the pertinent questions that new investors ask is – Why invest in mutual funds? And we ask, why not? Let’s see the benefits of mutual funds to understand their importance.

 

Mutual Fund Benefits

 

 

Following are the benefits of investing in mutual funds that make it a preferred choice of investments for the investors:

 

  • Diversification:

    Mutual funds are one of the best diversification tools of investment. The funds invested in mutual funds are further invested in the asset class as per the scheme. This diversifies the portfolio, significantly reducing risks.

 

  • Professional Management:

    Mutual funds are professionally managed by expert fund managers. This is primarily beneficial to novice investors and those who want to invest but cannot do their research and analysis before investing.

 

  • Affordability:

    Minimum investment in mutual funds starts at as low as Rs. 500. Thus, it does not matter whether you are a student, housewife, or working adult. Mutual funds are affordable for most people.

 

  • Liquidity:

    Most mutual fund schemes are open-ended, which means you can liquidate your investments anytime.

 

  • Tax Benefits:

    Investments in mutual funds are allowed as a deduction under section 80C of the Income Tax Act, 1961. The amount of deduction is limited up to Rs. 1,50,000 for each financial year. Thus, mutual funds can help you substantially with tax savings if you fall in the highest tax slab.

 

  • Well Regulated:

    Mutual funds are required to get registered under the SEBI. The SEBI acts as a watchdog for investors. Any irregularity by the mutual fund companies can result in consequent actions by the SEBI.

 

  • Multiple Options:

    There are mutual fund schemes for everyone. Whether you are risk-averse or have a good risk appetite, you want to invest in index, gold, small-cap, large-cap, or best debt mutual funds, mutual funds provide a variety of schemes for investors.

 

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While we saw the advantages of mutual funds, what’s enticing is the fact that investment in mutual funds can be done in the following two ways:

 

  • Lumpsum Investment:

    The investor can invest a lump-sum amount in any of the lumpsum investment plans in a mutual fund at once.

 

  • Systematic Investment Plan:

    Popularly known as SIP, an investor can opt to invest a specified amount each month over a while.

 

Let’s understand the advantages of both these investing methods!

 

Advantages of Mutual Fund Lumpsum Investment

 

Following are the advantages of mutual fund lumpsum investments:

 

  • Park excess funds at once:

    In case you have excess funds that you wish to invest in mutual funds at once, you can go for a lump-sum investment in mutual funds.

 

  • Significant tax benefits:

    If it’s the end of the year and you still haven’t planned your taxes, making a lump-sum investment in any of the tax saving mutual fund schemes can help you save taxes.

 

  • Bear Markets:

    Bear markets are the best opportunity to invest. If the markets are down, you can make lump-sum investments to get more units allotted at a cheaper price. Once the markets rise, the profits will be significant.

 

Advantages of Mutual Fund SIPs

 

Following are the benefits of mutual fund SIPs:

 

  • Disciplined Investing:

    SIP investment in mutual funds inculcates the habit of investing among the investors. This creates a disciplined approach toward investing.

 

  • Rupee Cost Averaging:

    Investing over a period averages the cost of your investment. When markets are down, you can get more units allotted at cheaper prices. When the markets are high, though the number of new units allotted will be less, however, the net asset value of each unit will be high, boosting your overall portfolio value. This is known as rupee cost averaging.

 

  • SIP Insured:

    Investment in SIPs provides you with two options. Regular SIP is the normal SIP that serves the investment purpose of the investors. The second option is SIP insured, whereby the investor receives the benefit of investment and insurance. The sum assured is usually 80 to 120 times the SIP value. Suppose, you invest Rs. 10,000 each month as SIP Insured. In this case, if the company provides insurance benefit @ 100 times the SIP amount, then the sum insured will be Rs 10,00,000 (Rs. 10,000 * 100 times).

 

Closing Note

Mutual funds have found their place in most investors’ portfolios. The benefits they carry make them a preferred investment avenue for investors. While some use mutual funds as a tool to minimize risk, others use them to earn market-linked returns without amplifying their risk. So, have you started investing in mutual funds?

 

Interested in how we think about the markets?

Read more: Zen And The Art Of Investing

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