Benefits of investing in Mutual Funds

 

One of the leading questions that every individual faces in their lives is that where should they invest their money to secure their old age. In these uncertain times we have a lot of options to invest. These options come in the form of property, stocks, fixed deposits, bonds and money market securities. However, these options primarily tend to confuse us because they all have their own set of challenges and benefits. However, instead of the above mentioned options, I would blindly invest in mutual funds/

So what do mutual funds offer that others’ don’t to achieve our investment objectives?

 

Mutual funds offer a varied selection of products such as money market funds, fixed income funds, equity funds, balanced funds etc. All these products are designed as per the risk taking capacity of the customer. These funds allow investors to park their money over a diversified selection of securities managed by a professional fund manager.

Some of the benefits that can be derived from investing in mutual funds are as follows:

 

1.  Diversification

One rule of investing, for both large and small investors, is asset diversification. Diversification involves the mixing of investments within a portfolio and is used to manage risk. We have probably heard this adage “Don’t put all your eggs in one basket”. Eggs denote your investment in stocks and basket means a common pool of your fund. In short, it’s risky to invest all your money with one stock. Mutual funds minimizes you risk by spreading your investments over a diversified range of assets. Whether you are investing Rs. 500/- or Rs. 50000/-, the distribution of your investment amongst all assets will be equal.

 

 

2. Lower Cost

Many investors don’t have enough money to start with to buy lots of securities. Two to three thousand rupees is not enough to purchase stocks, especially after deducting commissions. However, one can buy a mutual fund for as low as Rs. 500/-. Smaller denominations of mutual funds empower the investor to make periodic investments monthly while taking advantage of rupee cost averaging. So, rather than having to wait until you have enough money to buy higher-cost investments, you can get in right away with mutual funds. The benefit of scale in brokerage and fees also translates to lower costs for investors.

 

 

3. Liquidity

Mutual funds offer the ability to liquidate your investment ANYTIME with relative ease. This is possible mostly in the case of open ended funds. However, it is important to watch out for any fees associated with selling which are generally miniscule.

 

 

 

4. Tax advantages

Saving tax becomes an important factor while deriving returns from your investments. You can fo do in mutual funds by invest in equity linked savings scheme (ELSS). You will be eligible for income-tax deductions through investments in such schemes.

 

5. Safety

Mutual funds are regulated by the Securities and Exchange Board of India (SEBI) in order to protect the interests of investors. You can be assured that your investments are managed in a disciplined and regulated manner and are in safe hands.

 

 

6. Expert Managers

Many investors do not have sufficient knowledge or time to handle their own investments. This is where mutual funds come in. The investment in these funds is managed by experienced professionals called fund managers. These fund managers assess the performance and prospects of numerous financial instruments and take decisions accordingly.

 

 

7. Higher Rate of Returns

Mutual funds are the only available instrument that can beat the scourge of inflation comprehensively. The current rate of inflation is 8%. Typically, if are invested in mutual funds over a period of 25 years you will derive returns @ 14%—15% p.a. So if you have invested Rs. 100,000/- now, you will be receiving Rs. 32,00,000/- after 25  years. I don’t think there is any other tax free instrument available in the market that will offer you the same kind of return.

 

 

Every form of investment involves risk. However, with investments in mutual funds, your risk is considerably reduced. It is always better to take the help of a financial advisor whose only specialty is mutual funds.  With skilful management and exposure you will realize that as of today mutual funds are the best available option for long term investment.

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