Benefits of Investing in Mutual Funds : Know The Advantages

Nov 10th 2023
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Benefits of Investing in Mutual Funds : Complete Guide

Benefits of Investing in Mutual Funds, A mutual fund is a type of financial vehicle that invests the combined capital of several investors in a variety of assets, including stocks, bonds, and other financial goods. Units of the fund, or a fraction of the scheme's holdings, are owned by each investor in a mutual fund scheme. The scheme's investment goal is taken into consideration while choosing the securities. Asset management firms (AMCs) oversee the management of mutual funds. Fund managers are appointed by AMCs to oversee various mutual fund schemes and guarantee that the investing goals of the plan are fulfilled. Investors pay a fee for fund management and other services supplied by AMCs. Now let's talk about mutual funds' benefits.

Major Benefits of Investing in Mutual Funds:

  1. Diversification

Risk diversification is one of mutual funds' main advantages. There are three forms of risk that may affect any stock: market, sector, and business risk. Market risk is referred to as systematic risk, whereas company and industry risk are considered unsystematic risks. Mutual funds, which invest in a diverse portfolio of equities from several industries, assist investors in mitigating unsystematic risk. Mutual funds are solely exposed to systematic or market risk, whereas individual equities are liable to both systematic and unsystematic hazards.

      2. Investment Expertise

Bond and stock investing need a great deal of knowledge and experience. You must possess research skills, understanding of specific firms, industrial sectors, and financial markets. One significant benefit of mutual funds is that they are professionally managed by fund managers with the necessary training, experience, and knowledge to select the finest stocks or other instruments for the highest risk-adjusted returns. The research staff of the AMCs provides assistance to the fund managers.

      3. Multiple Options

Investors can choose from a range of products offered by mutual funds to meet their risk tolerance and financial goals. In addition to equity funds, many investment requirements can be met by hybrid funds, debt funds, liquid funds, tax savings plans, etc. Investing in mutual funds offers the advantage of allowing you to choose the right product for your requirements and risk tolerance.

      4. Different Modes of Investment

One benefit of mutual funds over other investing alternatives is their flexibility with regard to withdrawal and investment possibilities. Investment options available to investors include one-time lump sum payments, systematic withdrawal plans (SWP), systematic transfer plans (STP), and systematic investment plans (SIP).

      5. Start With Meagre Funds

The fact that you may begin investing in mutual funds with very little sums is another benefit of mutual funds. To create a diverse stock portfolio, investors will need to invest a significant amount of money. However, because mutual funds operate by pooling assets, investors in them can benefit from beneficial ownership of a diverse stock portfolio with far less initial investment. A diversified equities mutual fund unit can be purchased by investors for as little as Rs 500, or even less for ELSS schemes.

Read More: Best Mutual Funds To Invest in 2023

      6. Disciplined Investing

Long-term investing is encouraged by mutual funds, which is crucial for building wealth. Systematic investment plans, or SIPs, for mutual funds, also have the benefit of encouraging participants to maintain the discipline to achieve their diverse financial objectives. Due to their inability to invest in a disciplined manner, many investors are unable to accumulate a sizeable investment corpus. SIPs for mutual funds assist investors in sticking to a disciplined investing schedule. SIPs also assist investors in removing emotion from the investment process, as in bull markets, investors frequently become quite excited, while in bad markets, they become anxious.

     7. Easy liquidity

Long-term investing is encouraged by mutual funds, which is crucial for building wealth. Systematic investment plans, or SIPs, for mutual funds, also have the benefit of encouraging participants to maintain the discipline to achieve their diverse financial objectives. Due to their inability to invest in a disciplined manner, many investors are unable to accumulate a sizeable investment corpus. SIPs for mutual funds assist investors in sticking to a disciplined investing schedule. SIPs also assist investors in removing emotion from the investment process, as in bull markets, investors frequently become quite excited, while in bad markets, they become anxious. It is well known that investments made during downturn markets contribute to long-term high returns for investors.

     8. Transparency

For ordinary and high net worth investors, mutual funds can offer transparency. Investors know the market value of their mutual fund units on a daily basis since mutual fund schemes reveal their Net Asset Values (NAVs) at the end of each business day. Mutual funds release Monthly Fund Factsheets each month that include information on all of their schemes' portfolio holdings—that is, the securities in the portfolio together with their respective weights. The information that the fund managers have invested in on a monthly basis is available to investors. Monthly fund factsheets include essential information such as risk ratios, returns relative to the scheme benchmark, and portfolio holdings.

Read More: What Is Large Cap Mutual Fund?

     9. Tax Savings

One of the main advantages of investing in mutual funds over many traditional fixed income options is the tax savings. Short-term capital gains in equities funds are subject to 15% tax, whereas long-term capital gains are free from taxation up to Rs 1 lakh in a given fiscal year, after which they are subject to 10% tax. Short-term capital gains in non-equity funds are taxed at your income tax rate, while long-term capital gains (held for more than 36 months) are taxed at 20% after indexation advantages are taken into account. The majority of conventional fixed income investments tax interest income in accordance with the investors' income tax rates.

     10. Suited for Different Investment Goals

Investing in mutual funds allows you to achieve a variety of financial goals, including income and capital gain. Debt mutual funds can provide you with income, but equity mutual funds can assist you in building wealth through capital appreciation. Mutual funds that are hybrids might assist you in building wealth as well as capital appreciation.

FAQs

What Does a Load Structure Mean?

The amount an investor must pay to subscribe for units or to redeem units from the plan is known as the load. The AMC uses this money to cover additional selling and marketing costs in addition to paying the distributor's commission. The load quantities are not fixed and might fluctuate over time.

What Do You Mean By a Systematic Withdrawal Plan?

SWP is a feature that allows unit holders to periodically withdraw funds from the Scheme with only one order. Investors in an SWP may redeem a set amount or quantity of units—minimum 50 units and multiples thereof—at predetermined periods.

What Does Buy Price/Buy NAV Mean?

The cost at which an investor purchases a scheme unit is known as the purchase price or purchase NAV. Customers receive units based on the amount invested as of the investment date split by NAV. 

The Conclusion

In India, mutual funds have advanced significantly throughout the past two to three decades. Among the most well-liked investing alternatives available to regular investors these days are mutual funds. We covered the advantages of mutual fund investment in this post. For a wide range of financial needs and risk tolerances, mutual funds provide a diverse range of investment options. To learn more about the advantages of mutual funds in India, get in touch with your financial advisor.

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