7 Reasons To Never Ignore Mutual Fund Investment

Published: Thursday, May 12, 2016, 11:48 [IST]

We are increasingly seeing a lot of adverts in different sections of the media on mutual funds. Some are confused, while others are not able to understand what it is all about. However, all you need to do is just apply and stay put in some equity mutual fund schemes.

Research has shown that mutual funds have generated better returns over 5, 10 and 20 year periods than bank deposits. So, why ignore mutual funds at all? Is it because it is more complicated than bank deposits? It does not take time to understand and you should not ignore higher returns.

You can invest small sums initially, which can be as small as Rs 500 each month. Once you understand, you can invest larger sums and increase exposure.

The process of investing particular amount regularly in a mutual fund (small amounts of Rs 500, Rs 1000 and so on) is called a Systematic Investment Plan (SIP). There are different mutual fund schemes available in the market, one can choose based on the time and risk.

Here are 7 reasons why you should consider investing in mutual funds:

1) Diversification

As it is said, "Don't put all your eggs in one basket". This is applicable to mutual fund schemes as well. Investing in only one product such as equity or bond can be risky.

The right combination can give you better returns with considerable risk. As debt can give you safe returns with low risk and equity high risk and high returns. So, mutual funds help you to diversify.

2) Professional Management

When you pick a mutual fund scheme, it is the fund manager who will invest the money in segments after doing thorough research.

What this means is that your money is handled by professionals who will keep monitoring the fund to maximize your returns.

3) Tax benefits

Investments held by investors for a period of 12 or more will be taxed according to the tax slabs. Investing in Equity Linked Savings Schemes (ELSS) is eligible for tax deduction under Sec 80C of the Income Tax Act.

ULIPs are also a method of investing in mutual funds, that also offer you insurance. They give you tax benefits under Sec 80C and the income earned is tax free.

4) Low transaction cost

As mutual funds buy and sell in large volumes, there will be low transaction cost which is easily affordable for small investor also. If you buy and sell stocks as an individual, there will be a brokerage charge and fees involved to buy and sell.

5) Liquidity

Mutual funds are considered as liquid instruments which can be bought and sold easily unlike real estate. With open-ended funds, one can sell the funds at the net asset value. Check the latest NAV of mutual funds. The amount will be credited to the bank account.

6) Transparency

Mutual funds can be tracked easily by Net Asset value (NAV) and can be compared to its peers. There are many companies which review the funds and rating agencies will rate the funds based on the performance.

So, you can choose from Crisil ratings of funds, as well as other portals that offer ratings.