When it comes to investment decision most of the youngsters prefer and opt to invest the funds in mutual funds. For the first time investors, the concept of mutual funds may be confusing at times and hence they turn to the people around them be it family members or friends or colleagues to seek answers from them. It is better to have some basic knowledge about mutual funds before investing your money into it as this will help you to gain confidence in your investment decisions.
An investment advisor can also help you to reach your desired financial goal by maximizing your returns and minimizing the risk factor. Investing in mutual funds is one of the best forms of investment avenues in India.
The following are the seven advantages of investing in mutual funds in India.
1. Investment in Small Amounts
One can invest in small amounts through systematic investment plans (SIP) with as little as Rs 500 every month. The catch here is you need not have to wait for a long tenure until you accumulate more money to make an investment decision. With mutual funds, an investor can make optimum use of the available cash and thus maximize his/her returns.
2. Fund Option For All Types of Investors
Mutual funds are one of the significant tools of investment which currently provides over 2,000 active schemes. With mutual funds, investors can match their investment horizons, risk appetite and fulfil their desired financial goals accordingly.
If you are a risk-averse investor then you can go for less risky debt funds. For those who opt to take a moderate risk, they can pick balanced or hybrid funds. The one who is ready to take the risk can go with equity.
Please Note: The reward factor in case of mutual funds is directly proportional to risk. (Higher Risk = Higher Reward and vice versa).
For Example, A mid-cap or small-cap equity funds have a higher potential to fluctuate wildly but provides higher returns on holding for the long term. Similarly, large-cap equity funds will be less volatile and are likely to provide lower but yet stable returns. When it comes to debt funds, it will carry a higher risk but will provide higher returns.
3. Diversified Portfolio
A mutual fund generally invests in two main asset classes - namely equity and debt. The fundamental benefit of investing in a mutual fund is that an investor will get exposure to a variety of shares or fixed income instruments.
For instance: If you opt to invest Rs 2000 directly in stocks, you will probably get three or four shares of a company. But, if you park your funds in mutual funds, you will get a basket of several stocks for the same price.
Due to the nature of its diverse portfolio, if few securities underperform, then investment on other securities will compensate for your losses. Thus a diversified portfolio of a mutual fund will come in handy for those investors who do not prefer to spend too much of time researching on equities.
4. High Liquidity
Mutual funds are known to provide high liquidity factor which is one of the prime reasons for attracting a huge customer base towards it. If an investor opts to invest in open-end mutual funds, you will be free to purchase and sell the units any time as per your convenience.
The liquidity factor offered by mutual funds acts as a boon to investors in many ways. Say if a find or a group of funds which are consistently underperforming across the time intervals in such a scenario, you can use the liquidity option to redeem the said fund and go for a superior fund.
A time lag exists when an investor invests in a mutual fund and the date when your desired financial goal becomes due. Between these two data points, the market which is subject to volatility may change due to several factors, in such cases, the high liquidity offered by mutual funds helps investors to review the relevant funds after taking stock of the existing scenario.
An investor can come across a financial crisis, during which mutual funds can be used to save oneself from the distress situation. One can create a highly-liquid emergency fund known as the liquid fund for this reason. A liquid fund is a type of debt fund which provides higher returns than a regular savings bank account. It also offers flexibility to withdraw cash at any time.
5. Reduces Tax Liability
The investment made in equity-linked savings scheme (ELSS) provides twin benefits to investors - tax deduction and wealth accumulation. The investments made in ELSS are eligible for deductions under Section 80C of Income Tax Act 1961. An individual can claim for deduction of up to Rs 1,50,000 per annum. ELSS also offers highest returns amongst all the investments which are eligible for rebate under Section 80C.
It is quite cost-efficient to invest in mutual funds. Because if an investor is planning to purchase equity directly, they may have to incur costs like Securities Transaction Tax (STT) and brokerages. For a larger number of transactions, you will have to incur higher cost. But in case of mutual funds, all these costs will be negated as fund managers will do bulk transactions and hence an investor will be able to enjoy economies of scale.
7. Invest either through SIP or in Lumpsum amount
Investment in mutual funds provides flexibility. An investor can either opt to make a lumpsum investment or can put a small amount over a while through SIP (Systematic Investment Plan). As an investor, one can invest in mutual funds in two ways: one - time lump sum payment and Systematic Investment Plans (SIP). If you have idle cash then go for lumpsum investment and contrarily if you have lesser amount then opt for SIP.
For Example: If you have money say Rs 1,44,000, have a higher risk tolerance and have a substantial disposable amount of money in hand then opt for making a lump sum investment. The same Rs 1,44,000 can be invested in equal 12 monthly instalments over a year as an investment of Rs 12,000 can be made every month.
SIP is the most preferred form if you do not have a lump sum amount to invest. Off lately, SIPs periodic investment of even a minimum of Rs 500 has gained recognition making it popular across the investor community in India.
About the Author
Archana is a Content Writer at GoodReturns. She has been writing articles related to investment planning and personal finance for more than two years.