Mutual funds are one of the most popular and convenient ways of investing in the stock market. They offer a range of benefits that make them suitable for different types of investors and financial goals. In this article, we will explore some of the reasons why you should invest in mutual funds and how they can help you achieve your financial objectives.
What is Mutual Fund?
Mutual funds are investment vehicles that pool money from numerous investors to create a diversified portfolio of stocks, bonds, or other securities, managed by professional fund managers. Investors buy units or shares, representing their proportional ownership in the fund. The primary aim is to achieve collective investment goals, such as capital appreciation, income generation, or a combination of both. Mutual funds offer a practical and accessible way for individuals to invest in a diversified portfolio without directly managing securities. They cater to investors with varying risk appetites, providing options ranging from low-risk debt funds to higher-risk equity funds. With professional management, liquidity, and regulatory oversight, mutual funds serve as a popular and effective tool for wealth creation and financial planning.
Reasons why you should invest in mutual funds
- Diversification of portfolio: Mutual funds allow you to invest in a diverse set of securities that are selected and managed by professional fund managers. This reduces the risk of investing in a single stock or sector and helps you achieve a balanced portfolio that can withstand market fluctuations.
- A fund for every type of investor: Mutual funds offer a variety of schemes that cater to different risk appetites, investment horizons, and financial goals. Whether you are a conservative, moderate, or aggressive investor, you can find a fund that matches your profile and preferences.
- Advantages of high liquidity: Mutual funds are easy to buy and sell. You can redeem your units of an open-ended mutual fund schemes at any time and get your money back within a few days. This gives you the flexibility to access your money when you need it and also take advantage of market opportunities.
- Options for lumpsum and SIP investments: Mutual funds allow you to invest either in a lumpsum or in a systematic investment plan (SIP). A lumpsum investment is a one-time investment that can help you benefit from the power of compounding over a long period. A SIP is a regular investment that can help you average out the cost of purchase and reduce the impact of market volatility.
- The benefit of transparency: Mutual funds are regulated by the Securities and Exchange Board of India (SEBI), which ensures that they follow strict guidelines and disclose all the relevant information to the investors. You can easily track the performance, portfolio, expenses, and risks of your mutual fund schemes through their factsheets, annual reports, and websites.
- Tax benefit: Mutual funds also offer tax benefits to the investors. Some mutual fund schemes, such as equity-linked savings schemes (ELSS), are eligible for tax deduction under Section 80C of the Income Tax Act. The returns from mutual funds are also taxed at a lower rate than other forms of income, since the lock-in period of these funds is 3 years.
- Competency of cost: Mutual funds are cost-effective as they allow you to invest in a diversified portfolio of securities with a low amount of money. You also save on the brokerage, commission, and transaction costs that you would incur if you invest directly in the stock market. The only cost that you pay for mutual funds is the expense ratio, which is a percentage of the fund’s assets that is charged for managing the fund.
- Lower transaction cost: Mutual funds also reduce the transaction cost for the investors as they buy and sell securities in bulk. This enables them to get better prices and lower the impact cost, which is the difference between the actual price and the desired price of a trade. The lower the impact cost, the higher the returns for the investors.
- Smaller upfront investment: Mutual funds allow you to start investing with a small amount of money. You can invest as low as Rs. 100 in a mutual fund scheme through a SIP. This makes mutual funds accessible and affordable for everyone, especially for beginners and small investors.
- Professional management and expertise: Mutual funds are managed by qualified and experienced fund managers who have the knowledge and skills to analyse the market trends, select the best securities, and optimise the portfolio performance. They also have access to advanced tools and research that help them make informed and timely decisions. By investing in mutual funds, you can benefit from the expertise and guidance of the fund managers.
- Long-term returns: Mutual funds have the potential to generate higher returns than other forms of investments in the long run. This is because mutual funds invest in the growth and development of various sectors and industries that contribute to the economy. They also benefit from the power of compounding, which means that the returns are reinvested to generate more returns over time.
- Easy access: Mutual funds are easy to access and invest in. You can buy and sell mutual fund units through online platforms, mobile apps, or offline channels. You can also monitor and manage your mutual fund portfolio through these platforms. You can also get regular updates and reports on your mutual fund schemes through email, SMS, or online statements.