If you are someone looking for a financial product where you can invest your savings without having to devote a lot of time and energy, mutual funds are your answer. Mutual funds are a passive way to invest in the capital market, which could be equity, commonly known as stocks; or debt, known as bonds. A mutual fund invests in a basket of securities, which could be equity, debt or a combination of both. When you buy a mutual fund, you are essentially buying a part of this combined basket. This strategy of investing is appealing to many investors, including retail investors. According to the Association of Mutual Funds in India, the assets under management, or the money invested in mutual funds of the Indian mutual fund industry has grown from Rs 7.22 trillion on 31st July, 2009 to Rs 24.54 trillion as on 31st July, 2019.
What are the benefits that investors are seeing there and hence investing more? Let us take a look at some key benefits that mutual fund investments bring to you:
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The best part about having your money invested in mutual funds is that you can move your investment in and out in a hassle-free manner. Liquidity of any asset is the ease with which you can convert the asset into cash to be used for any other purpose. Investments in mutual funds can be redeemed seamlessly directly into your bank account in a few clicks. Your money can land in your account almost instantly or at best in a couple of days depending on whether you invested in a debt mutual fund or an equity one.
When you invest a large chunk of your money in a single stock, your investment could face a major setback if the stock faces a difficult time. However, when you invest in a mutual fund, you are actually investing in multiple stocks. So even if one of the stocks in your mutual fund scheme basket witnesses trouble, it is highly unlikely that all the stocks in the basket will be affected at the same time. This diversification of your investments through a mutual fund is a classic example of how not keeping all eggs in the same basket can prove beneficial.
Investor friendly tax treatment
Putting your hard-earned money in mutual funds paves way for several tax benefits on your investments. For example, the dividends that investors receive from mutual funds are completely tax-free. Then there are tax benefits associated with a special category of mutual funds called the Equity Linked Savings Schemes or ELSS. Investments made in these schemes qualify for deductions under Section 80C of the Income Tax Act. There are also indexation benefits on long term capital gains from debt fund investments which could result in significant savings for an investor.
Investing using small amounts
Having a diversified investment portfolio of stocks independently needs a lot of money. However, this can be avoided by retail investors with limited resources. As a mutual fund invests in a variety of stocks and you as an investor buy units of the mutual funds, you end up buying a small share-holding in all of these stocks, via the mutual fund. Having investment exposure to all these stocks independently would turn out to be an expensive affair for you. Instead, a mutual fund investment allows you to benefit from a wide range of stocks even if you have limited resources. Some mutual funds allow you to make an investment of as low as Rs 500 through an SIP.
Professional Investment expertise
While many of us are broadly aware about the major happenings in the financial markets, all investors needn’t necessarily be people having detailed knowledge about the markets. Similarly, you might not have enough time out of your routine to keep a track of changing market trends. Having said that, investing in the stock market requires specific skills and expertise. This expertise is something that results in making efficient trading decisions that lead to financial gains. Many retail investors incur huge losses while trading due to the absence of these skills and expertise. Mutual funds, on the other hand, are managed by professional fund managers who have the required expertise to choose the correct stocks and can make an informed decision on when to buy or sell those stocks. This professional expertise is something that eventually leads to financial gains for the investors.
These are just some of the many benefits that a mutual fund has. Moreover, mutual funds in India are regulated by the Securities and Exchange Board of India (SEBI), which ensures the highest level of transparency in all its transactions. While you know of these benefits now, it is always a good practice to consult your financial advisor in order to ensure that you are investing in the right funds that suit your particular requirements.