Advantages of investing in a Mutual Fund

Over the last 3 years, mutual funds have emerged as an important source of investments for the retail investors. The assets under management (AUM) of mutual funds overall has touched a high of Rs.21 trillion with equity AUM touching a high of Rs.7.1 trillion. While that is still very small by global standards, it shows growing conviction for mutual funds with respect to retail investors. There are some unique advantages that mutual funds proffer. Here are 10 key advantages which make it quite attractive to investors as an asset class

Some key advantages of investing in mutual funds

  1. First and foremost, it gives you a more professional method of participating in equity and debt markets. As an individual investor, you do not have the time and the wherewithal to track thousands of companies in the market, the news and the quarterly announcements. When you invest in a mutual fund, the fund manager does the job for you. With years of experience and a full-fledged team at his disposal, the fund manager is able to pick stocks and also monitor them on a continuous basis.
  2. The beauty of mutual funds is that it has a product for every need that an investor may have. If your focus is long term wealth creation then there are equity funds. If you are looking at alpha, then you have mid-cap funds. If you are just looking at beta then you have index funds to invest in. If you are looking at low risk products, then you have debt funds and if you are looking at liquidity then there are liquid funds and cash funds for you to invest in. Lastly, if you are looking at tax breaks, then ELSS could be the product for you. In a nutshell, mutual funds have something for everybody.
  3. Mutual funds offer diversification. The whole idea of investing in equities is about reducing your risk. That can be done by spreading your portfolio across more number of stocks. As an individual investor, your resources are limited and hence your capacity to diversify also becomes limited. Mutual funds can overcome that and reduce your risk.
  4. Mutual funds are versatile and therefore they fit in perfectly with your financial plan. In fact, most of your long term financial needs can be met through mutual funds. You can design specific mutual fund combinations for your goals like retirement, child’s education, home loan margin etc.
  5. Mutual Funds tend to generally outperform the index. Thus the fund manager is able to offer you that something extra as compared to the index. This happens through security selection in equities and in debt and that ensures that you earn above market returns.
  6. Mutual funds are tax efficient. For example, the dividends on equity and debt funds are tax-free in the hands of the investor. Long term gains on equity funds are tax free and short term gains are taxed at a concessional rate of 10%. In case you want an additional rebate under Section 80C of the Income Tax Act, you can opt for ELSS schemes. In fact, if you earn more than Rs.10 lakhs in dividends in equities, you have to pay an additional 10% tax. There are no such compulsions in case of equity funds.
  7. Mutual funds help you realize the power of compounding when it comes to long term wealth creation. When you opt for a growth scheme of a fund, your principal continues to earn returns and these returns are reinvested into your corpus. In a nutshell, the power of compounding works in your favor.
  8. Mutual funds are flexible to cover multiple asset classes. There are equity funds for a diversified approach to equities and then there are special sectoral and thematic funds. You also have different types of debt funds which range from the very short term to the very long term. Depending on your time frame, you can also choose between closed ended funds and open ended funds. Mutual funds structured as ETFs can also have other assets like real estate, gold and global equities as their underlying asset.
  9. Purchase and sale of mutual funds is very simple. You can either adopt the online channel or the offline channel to buy and sell mutual funds. Even an equity fund can be redeemed and funds credited on the T+2 day. Debt funds and liquid funds can be monetized faster. Hence, you need not worry about being stuck with an illiquid asset as in the case of real estate or precious metals. Mutual funds offer you simplicity and convenience.
  10. Mutual funds offer you a variety of scientific approaches to your money like the SIP, SWP and the STP where you can manage your returns, your risk, liquidity and tax implications quite effectively. Since SIPs can be done with as low an investment as Rs.500/month, you can actually align regular mutual fund investing with your routine cash flows.

In a nutshell, mutual funds have emerged as solid inter mediation products in the Indian market. They combine the four mantras of return enhancement, risk minimization, tax efficiency and liquidity adjustment into once single product. That is what makes mutual funds unique as an investment proposition.

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