Mutual funds need no introduction. Their popularity has soared over the last few years, and data from the Association of Mutual Funds in India reveals a five-fold increase in the AUM of the Indian mutual fund industry in a span of ten years. Disciplined investing in mutual funds can help you address your short and long-term goals. Let’s understand their various aspects and analyze who should invest in them.
You don’t need a large amount to invest in mutual funds. Most fund houses allow you to invest as little as Rs. 500 to Rs. 1000 per month. This makes mutual funds convenient for all kinds of investors. Mutual funds give you the liberty to start small and gradually increase your investment with time. After completing the required KYC formalities, you can start a systematic investment plan (SIP) in your chosen mutual fund.
Diversification is an integral part of investments that makes your portfolio better shock absorbent. Mutual funds invest in different companies across sectors in a fixed proportion. This helps spread your investments across industries and entities. If you want to diversify through stocks, you need to invest in more than one stock. However, the case is different with mutual funds as they invest in a basket of stocks that provides easy diversification.
Mutual funds are highly liquid. You can easily convert them into cash when needed. Once you place a redemption request, you get your money credited into your account within 2-3 business days, subject to exit loads, if any. This makes mutual funds an ideal investment avenue to park an emergency corpus that you can access when required.
The mutual fund universe is vast and there is a fund for almost every kind of investor. Whether you have an aggressive or conservative outlook, you will find a fund that aligns with your goals, risk appetite, and investment horizon. Even within the broad categories - equity, debt and hybrid - there are many choices.
Mutual funds are cost-efficient. Direct equity investment entails brokerage and securities transaction tax (STT). Larger the number of transactions, higher the cost. However, as there are bulk transactions in mutual funds, they enjoy economies of scale. Expense ratios of direct mutual funds are lower than regular funds.
Experts manage mutual funds. With years of experience under their belt, fund managers take calls on stock picking, selling and managing your investments. You don’t need to monitor your investments as the fund manager takes care of them.
Investment in mutual funds can also help reduce your tax liability. Investment in equity-linked savings schemes (ELSS) qualify for tax benefit under section 80C of the Income Tax Act, 1961. Investment in ELSS gives you the twin benefits of tax saving and equity investment.
Systematic investment plan (SIP) in mutual funds imbibes a disciplined savings habit. Your money is invested in your chosen fund at a predetermined frequency. It brings discipline into your investments and benefit from the power of compounding in the long run.
Now you know the advantages and benefits of investing in mutual funds, let us see the people who should invest in mutual funds. You should invest in this financial instrument if:
Investing in stocks can be beneficial if you have the requisite knowledge. However, if you don't, mutual funds are a better alternative. As said, they invest in a range of stocks with a professional fund manager at its helm. The fund manager takes calls on stocks to be picked and dumped as per the fund's investment objective.
If you find it difficult to save or indulge in mindless spending, mutual funds can help. SIPs in mutual funds are a kind of forced savings.
Diversified portfolio in equities can help you negate volatility. As mutual funds invest in a range of stocks, they help you build a diversified equity portfolio cost-efficiently.
Under the old tax regime, you can claim tax exemption worth Rs. 1.5 lakhs under section 80C. If you want to maximize your benefits under this section, mutual funds can be a prudent investment option. If you want to exhaust the entire limit under this section, you can invest in ELSS to maximize its benefits.
When you invest in equities, time in the market is more important than timing the market. SIPs in mutual funds help you do that and maximize benefits from equity investments. They help you stay invested across market cycles and benefit from the power of compounding in the long run. For long-term goals like children’s education and retirement, it’s necessary to stay invested in equities for the long haul for real gains.
While mutual funds can help you be disciplined with your money and build a corpus for various life goals, choosing a fund that aligns with your goals and risk tolerance is vital. Also, check the fund’s expense ratio as a fund with a high ratio can eat into your returns. Analyze the fund’s long-term performance and consult a neutral and independent financial advisor in case of any doubt.
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