Mutual funds are collections of investments made up of various securities, including money market instruments, debt instruments, and stocks. These assets come together to form a mutual fund; every combination is known as a portfolio. Investing in mutual funds provides you, for a little charge, with a competent fund manager. This designated fund manager tracks, evaluates, and trades various securities on your behalf. This can be a massive benefit for people who need more time to conduct research.
Let us examine some of the main advantages of mutual funds that make them an excellent option for investors, in case you are new to the world of investing in mutual funds.
- Professional Management: Investors may need more time, expertise, or resources to carry out due diligence and buy specific stocks or bonds. Professional money managers who work full-time and possess the necessary skills, resources, and knowledge to acquire, sell, and oversee investments are in charge of managing mutual funds. A fund manager closely monitors investments and rebalances the portfolio as needed to meet the plan’s objectives. The competent fund managers’ portfolio management is one of the biggest advantages of investing in mutual funds.
- Risk Diversification: Investing in mutual funds allows you to quickly spread the risk of your investments among a variety of securities and asset classes, including gold, debt, and equity. This works well in situations where there are market headwinds for the underlying security of a particular mutual fund scheme. When there is diversity, the risks of each asset class balance each other out. If the value of one item in the portfolio drops, the other assets may not be impacted and may even increase in value. Put another way, even if one section of your portfolio has significant volatility, you will still get the total value of your investment. Consequently, one of the main benefits of investing in mutual funds is risk diversification.
- Affordability & Convenience (Invest Small Amounts): Buying every single individual security held by a single mutual fund outright may be more expensive for a lot of investors. In contrast, most mutual funds have lower minimum beginning investment requirements. One of the easiest and most straightforward ways to invest is with a SIP mutual fund or SIP investment. An investment can be started or stopped at any time with little paperwork required.
- Liquidity: You have simple access to your money since you can redeem (liquidate) units of open-ended mutual fund schemes to suit your demands on any business day (when the stock markets and banks are open). Redeemable amounts are credited to your bank account within a day to four days, depending on the type of plan. Closed-ended mutual fund schemes only permit redemptions at the time of maturity. In a similar vein, ELSS units are locked in and cannot be liquidated for three years.
- Low Cost: One major advantage of mutual funds is their affordability. Because mutual fund schemes benefit from substantial economies of scale, their expense ratios are low. The annual fund running expenses of a scheme are represented by the expense ratio, which is expressed as a percentage of the fund’s daily net assets.
- Well-Controlled: Under the SEBI (Mutual Funds) Regulations, 1996, the Securities and Exchange Board of India (SEBI), the capital markets regulator, regulates mutual funds. In order to safeguard investors, maintain transparency, and provide a suitable framework for mitigating risk, SEBI has established strict rules and regulations that adhere to fair valuation principles.
- Tax Benefits: Under section 80C of the Income Tax Act, 1961, investments made up to ₹1,50,000 in ELSS are eligible for tax benefits. Longer-term investments in mutual funds are tax-efficient.
The most significant benefit of mutual fund investing is its low cost. Individuals who are unable to allocate a substantial percentage of their income to mutual funds may begin investing with as little as Rs. 500 at prearranged intervals. This is referred to as a SIP or systematic investment plan. Conversely, you can even put a lump sum in a mutual fund if you have a sizable amount of money to invest. 5paisa provides commission-free direct mutual fund investments. Investing in direct mutual funds might also help you reduce the fee ratio.