7 Reasons for You to Start Mutual Fund Investments Today!

A mutual fund is a financial avenue that pools the money of several people and invests it in various financial securities such as equities and bonds. Each investor in a mutual fund scheme holds fund units, which represent a percentage of the scheme's holdings. The securities are chosen with the scheme's investment objective in mind. Asset management companies (AMCs) oversee the management of mutual funds. AMCs hire fund managers to handle various mutual fund schemes and ensure that the investment objectives of the schemes are met. A fee is charged to investors for fund management and other services offered by AMCs. Let us now look at the benefits of mutual fund investment.

1. A Portfolio with Diversification:

Mutual funds typically invest in two types of assets: debt and equity. Some funds invest solely in debt, while others are just in equities; others are balanced or hybrid.

The main advantage of investing in a mutual fund is that you have exposure to a wide range of stocks or fixed-income securities. For example, if you invested Rs. 1,000 directly in stocks, you would most likely receive only one or two shares. If you invested in a mutual fund, you would receive a basket of many equities for the same money.

If a few stocks in a portfolio underperform, the others make up for it. Mutual funds ensure diversification in this way. If you are a beginner investor who doesn't want to spend time researching stocks, mutual funds are a good option.

1. There is an Opportunity for Everyone:

This could be one of the major advantages of mutual fund investments. There are presently over 2,000 active schemes, giving you plenty of options. You can choose funds that correspond to your risk tolerance, investing horizons, and personal financial objectives.

Debt funds have the lowest risk, followed by balanced or hybrid funds, which are moderately risky, and equity funds, which have a higher risk. However, the gain is proportional to the risk. The greater the risk, the higher the returns.

There are several options even within these broad categories. A large-cap equity fund, for example, will be less volatile and provide lower but predictable returns. Mid-cap or small-cap equity funds, on the other hand, can vary dramatically but have the potential to provide larger long-term returns. In terms of debt funds, a fund that invests in corporate paper will provide better returns than a gilt fund but will be riskier. But in the end, your risk tolerance and your purpose will decide which are the best mutual funds to invest in.

1. Take Advantage of High Liquidity:

If you invest in open-ended mutual funds (which are the majority of funds), you can buy and sell units at any time. Your entire redeemable or buyable value is determined by the fund's net asset value (NAV) on that particular day.

Closed-ended funds can also be liquid. Closed-ended funds, despite their predetermined duration, are listed on an exchange when the New Fund Offer (NFO) concludes. Once listed on a stock exchange, these funds can be freely bought and traded.

So, whether you buy open-ended or closed-ended funds, the liquidity is always high.

Take notice that some Mutual Funds, such as Tax Savings Funds (ELSS), have a three-year lock-in term.

1. Purchase with a Lump sum or set up a SIP:

Flexibility is one of the benefits of mutual funds. You can either make a one-time lump sum investment or invest in small amounts over time via a SIP (Systematic Investment Plan). If you have spare cash, a lump sum investment works nicely. We encourage investing via SIP because you can invest smaller sums (than lumpsum). Furthermore, due to the effect of rupee cost averaging, the cost of purchasing mutual fund units may be cheaper.

1. You Can Invest Small Sums:

A SIP can be started with as little as ₹500 per month. The advantage here is that you don't have to wait a long time to accumulate enough cash to invest. Therefore, you will be able to make the best use of available funds and maximize results.

1. Cost-effective:

Investing in mutual funds is quite cost-effective. When you buy stock directly, you must pay fees such as brokerage and the Securities Transaction Tax (STT). The more transactions you have, the higher your costs will be. Mutual funds have an advantage over individual investors in that they conduct bulk transactions and hence profit from economies of scale. They may, for example, be able to obtain lower brokerage rates, which benefits mutual fund investors. Because debt funds deal in big volumes, they may be able to negotiate higher interest rates from debt issuers.

1. Lower your tax liability:

Finally, one of the advantages of mutual funds is that you can save on income taxes. Under Section 80 (80C) of the Income Tax Act of 1961, you can lower your taxable income by up to Rs 1.5 lakh if you invest in an ELSS fund.

Conclusion

Over the previous two to three decades, mutual fund investments have gone a long way in India. Mutual funds are quickly becoming one of the most popular investment vehicles for regular investors. We explored the advantages of investing in mutual funds in this article. Mutual funds provide a diverse range of investment alternatives to meet a variety of financial goals and risk profiles. You can learn more about the potential returns of different mutual funds by using a mutual fund calculator online. If you want to learn more about the advantages of mutual funds in India, speak with your financial advisor.

Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.