Mutual Fund is continuously becoming an investment vehicle of choice for most investors in India. This is a good sign as Mutual Funds offer numerous advantages which score over those offered by the other investment options available to Indian citizens. The advantages of Mutual Funds are many and I have attempted to summarize all of those in the twelve points given below.
Diversification
Diversification is the basis of risk management in investing. Diversifying your investments into various types of instruments and inside each instrument is very important to manage the risk you take when you invest. Most mutual funds ensure the diversification of their own investment portfolios. For example, hybrid MFs diversify their portfolio into equity and debt, equity mutual funds diversify by investing into stocks from various industries and debt mutual funds invest in bonds of different durations. The chances of all industries failing to perform at the same time are slim and this fact helps to manage the risk. On the other hand, if the portfolio is not diversified, it depends heavily on the performance of a single industry. If that industry does not perform well, it can lead to severe capital depreciation for the investor.
Professional Management
Not everybody has the expertise and time to manage their investments. The task of studying companies, analyzing financial data, studying the market outlook and observing the macroeconomic factors can easily overwhelm an investor and thus is best left to experts. Investing is not everybody’s cup of tea and getting it wrong can jeopardize one’s financial success. A multitude of factors needs to be factored in before making an investment decision, and once the investment is made these factors need to be constantly monitored.
Mutual funds are managed by professional experts. This fact gives good comfort to investors that their money is in competent hands. Generally, the fund managers have several years of experience and are experts in their field. This is their full-time job and so they can be trusted to manage one’s money well. If you choose your mutual funds well, reviewing it often becomes unnecessary and thus a lot of your time and effort can be saved.
Simplicity
Investing in Mutual Funds is relatively simpler than investing in stocks and bonds directly. The number of stocks and bonds can overwhelm an investor if he/she chooses to analyze all the data and information by himself/herself.
Mutual funds relieve investors of this burden by taking full responsibility for doing all the research. The only job left for the investor is to analyze the performance of the fund once in a while and compare it to other similar funds. This is relatively a much easier task and involves very few factors.
Liquidity
Most MFs are liquid in nature and come with zero or minimum lock-in periods. In other words, they can generally be bought and sold at investor’s will and they can redeem their investments in times of utmost need. This puts MF investors at an advantage when compared to somebody who has invested in a relatively illiquid asset like real estate. You can normally sell most Mutual Funds whenever you want and convert it to cash. This may or may not involve some costs depending on the fund, but it is still an advantage to be able to sell your assets at will.
Costs
The costs involved in MF investments are minimal. MFs charges can range typically from between 0.2% to 3% depending on the fund house and the type of fund. If we compare this to other investment options like a portfolio management service, for example, we are typically charged 2% to 3% of the total investment per year plus a share from the profits. This makes Mutual funds one of the best investment options considering from the perspective of costs involved.
Variety
Mutual Funds are of different types which allow investors to invest in funds that suit their needs and goals. For example, you can invest in –
- ELSS funds if you are looking to save taxes,
- Ultra-short-term funds if you are looking to park your excess cash to get better returns without taking any risks,
- Balanced funds if you are looking to diversify your investments in equity and debt, and
- Large-cap, mid-cap or small-cap funds if you want to create wealth depending on your risk appetite.
- Thematic or sector-based funds if you are confident of the future performance of a particular industry.
You Can Start with a Small Amount
Unlike other investments like real estate or stocks, mutual funds allow you to start with a very small amount. One can start with mutual funds with as low as ₹ 500 or ₹ 1000 depending on the funds one is looking to invest in. Some funds even allow you to start with just ₹ 100. This makes MFs a very suitable investment option for small retail investors to park cash or create wealth.
Automated Investment
Continuing from the last point, Systematic Investment Plans (SIPs) allow investors to invest suitable amounts regularly. So even small investors can invest small amounts, say ₹ 500 every month and save for their goals. The money gets debited automatically from their bank accounts at dates chosen by the investor, which facilitates hassle-free investments.
Disciplined Investment
Since the money is debited automatically under SIP mode, investing help in building a disciplined approach towards investing. There is no choice and thinking involved, which is a positive way of investing. Otherwise, most investors would choose to keep money in their savings account and thus deny themselves the huge benefits of investing their savings.
Regulated, safe and transparent
All mutual fund companies come under the purview of SEBI (Securities and Exchange Board of India) and they are required to make necessary disclosures periodically. Fund houses are required to disclose their portfolios, the objective of the fund, expense ratio, historical performance of the fund, fund manager’s qualifications, NAVs of the funds etc. in public domain at fixed time intervals. This ensures full transparency in funds’ operations and the safety of investors’ money. SEBI regulations safeguard the investors’ interest and attempt to benefit both the fund houses and the investors in the best possible manner.
Beat inflation
Mutual fund serves as an ideal investment option for investors to safeguard themselves against inflation. They can park their savings in MFs for a long-term inflation-adjusted growth and ensure that the buying power of your money does not plummet over the years.
Higher Return Potential
Mutual funds are known to generate higher returns compared to similar investment instruments. For example, debt mutual funds tend to deliver better returns than fixed deposits. Equity mutual funds too have generally delivered better risk-adjusted returns than direct equity for most investors.
The advantages of Mutual Funds are many when compared to those of other investment options. I really hope that this article would encourage you to consider investing a part of your savings in Mutual Funds.
Happy Investing!
(This article is contributed by CA Vikram Narsaria, SEBI Registered Investment Adviser and founder of stock advisory portal PaisaPub.in)
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