Mutual Funds: Tool for Wealth Creation -

What are mutual funds?

Mutual funds are a financial instrument which pools the money of different investor and invest them in stocks, bonds, etc. Each investor in a mutual fund scheme owns units of the fund, which represents the holding portion of the share.

The securities are selected to keep in mind the investor investment objective. Mostly Mutual funds are managed by Asset Management Companies (AMCs).

AMCs appoint fund managers to manage different mutual fund schemes and ensure that the schemes should meet the investment objectives.

Risk Diversification

The biggest advantage of investing in mutual funds is risk diversification. Every stock has three types of risk: company risk, sector risk, and market risk. Company risk and sector risk are unsystematic risks, while the market risk is known as systematic risk. The stock price of a company may fall if the company’s financial performance is poor, sometimes if the company performs well, the stock price may still fall, if the market falls. Mutual funds help investors diversify unsystematic risks by investing in a diversified portfolio of stocks in various sectors. Although mutual fund risk is much lower than individual stocks.

In mutual funds, investors can also invest in other resources like bonds, cash commodities like gold, and other precious metals. This is called diversification and it allows you to reduce the risk of investing in one particular stock and sector. This also gives you a broader platform for various stocks and sectors.

Diversification means if one stock or sector doesn’t perform well, the other can compensate with higher returns to avoid the loss for investors. Make ensure that you have not kept all your eggs in one basket and are safe from sustaining huge losses from a single bad investment. In mutual funds, Investors are not required a large capital to build a diversified portfolio of stocks. Investors can buy units of a diversified equity fund with an investment as low as Rs 1,000 only (or even lower for some schemes).

Professional Management

Investing in the stock market needs a lot of experience and expertise. Understanding the risk-return trade-offs in stock market investments is the most important part of equity investing. Some untrained investors have lost their money because of share trading. Mutual funds are managed by expert fund managers who have expertise and experience in picking the right stocks to get the best risk-free returns. 

A mutual fund is recommended because it doesn’t require the investors to do the research and asset allocation. A fund manager takes care of it and makes decisions on what to do with your investment. the fund manager decides whether to invest in equities or debt. the fund manager also decides on whether to hold them or not and if hold then for how long.

Your fund manager’s reputation in fund management should be an essential qualification for you to choose a mutual fund for this reason. Another big benefit of investing in mutual funds is the professional expertise that provides you with your investments. Asset Management Companies (AMCs) provide qualified fund managers who, with the help of strong research teams and their expertise, pick the best options to meet the fund’s objective. This saves your time and the stress of looking into your investments and if you made the right to buy or sell decision. With mutual funds, you do not have to worry about market fluctuations

Transaction Costs and Fair Pricing

mutual funds are bought and sold on a large scale, transaction costs on a per-unit basis are much lower than what investors pay if they buy or sell shares through stockbrokers. Mutual funds are easy to understand and easy to buy. 

You can buy shares of large companies or wish to invest in big companies in a particular sector of choice. But you do not have the money to make a big investment. Mutual funds trade in big amounts, giving their investors the advantage of lower trading costs. Anyone can start an investment in a mutual fund through a Systematic Investment Plan (SIP) Investors can buy units of a diversified equity fund with an investment as low as Rs 1,000 only (or even lower for some schemes).

If someone has just started their career and wishes to save at least Rs 96,000 annually to get the house or something expensive after three years. Instead of waiting to collect a lump sum of Rs. 96,000 to kick start the investment, mutual funds allow anyone to invest a small sum of Rs 8,000 monthly, in the form of a SIP.

Liquidity

You can easily get your money back from mutual fund investments. Investments without locking period funds can be redeemed in part or as a whole any time to receive the latest value of the units. Mutual funds consider liquid investments. If you need tax saving than you have to opt for three years of the lock-in period. Mutual funds are well integrated with the banking system, that means if you need money it will directly transfer in your account.

If you opt for open ended shares it is easier to buy and sell mutual fund schemes. You can sell your units at any point (when the market is high). Do keep an eye on rules or penalties on exit load or pre-exit load. It should be considered that mutual fund transactions happen only once a day.

Tax Benefits

mutual funds are also providing tax benefits available on your investments. investments in Equity Linked Savings Schemes (ELSS) are for tax deductions under Section 80C of the Income Tax Act. There is no tax on capital gains on equity schemes held for more than one year.

Schemes other than equity-based schemes are treated in the debt category for tax purposes. Short term capital gain is applicable for the redemption of debt mutual funds within 3 years. Long term capital gain (more than 3 years) from debt mutual funds is taxable after claiming the benefit of Indexation.

You can invest up to Rs 1.5 lakh in tax saving mutual funds. which is covered under Section 80C of the Income Tax Act, 1961. Though a 10% tax on Long-Term Capital Gains (LTCG) is applicable for returns above Rs.1 lakh after one year, they have consistently delivered higher returns than other tax-saving instruments like FD in recent years.

Well Regulated Quick & Automated Process

In India, all mutual funds are regulated by the Securities and Exchange Board of India (SEBI). All mutual funds are required to follow transparent processes, as laid down by SEBI, protecting the interest of investors. Further, SEBI makes it compulsory for all mutual funds to disclose their portfolios every month.

You can start with one mutual fund and slowly you can invest in many. These days it is easier to study and pick funds most suitable for you. Tracking mutual funds will not be difficult without extra effort. With the help of a fund manager, you can decide when, where, and how to invest. You can choose an automated system from your account to avoid any problem.

Variety of products and Modes

Mutual funds offer investors many products to suit their risk and investment goals.  Other than equity funds, there are many hybrid funds, income funds, and liquid funds to suit different investment requirements.

Mutual funds also offer investors elasticity in terms of modes of investment and withdrawal. Investors have a different investment option like a lump sum or one-time, systematic investment plans, systematic withdrawal plans, switching from one scheme to another scheme.

You can invest in growth options (equity fund) if you want to take advantage of the compound return of long investment plans. You can invest in dividend option if you want regular income from your investment. No other investment products offer such a wide range of investment modes. Mutual Funds offer multiple scheme options depending upon your financial goal, risk, and time limit.

Disciplined Investing

Share prices are highly unstable and can tempt the investor to buy or sell in short time periods due to fear or greed. Normally trading often leads the investor to suffer losses. Mutual funds encourage investors to invest over a long-time period, which is essential to create wealth.

systematic investment plans encourage investors to invest in a well-organized manner to meet their long-term financial aims. Many investors fail to build a substantial investment amount because they are not able to invest in an ordered way. Savings if not invested frequently gets spent on a lavish lifestyle.

Systematic investment plans (SIPs) in mutual funds help investors to maintain a self-controlled style for savings and investment. Sips also help investors take sentiments out of the investment process. Investors get very eager in bull market conditions but get anxious in bear markets.

It is a well-known fact that investments made in bear markets help investors get high returns in the long term. Investing through SIPs in a systematic way, investors can stay disciplined, which is essential to achieving their financial aims.

Transparency

Investors can stay tuned on information relating to the markets and schemes by logging on the website or calling on customer care. They can view factsheets, statements, and annual reports.

Mutual funds in India are regulated and monitored by the Securities and Exchange Board of India (SEBI). The body protects the interests of investors. This helps mutual funds to be a safer method of investment. Mutual funds are required to provide investors with standard information about their investments. They should also provide a statement of investments with the scheme and the quantity of security invested by investors.

Dilution

While diversification averages your risks of loss, it can also dilute your profits. So you should not invest in more than seven to nine mutual funds at a time.

As the benefits and potential of mutual funds can undoubtedly dominate the disadvantages if you make informed choices. investors will not have the time, to get knowledge, research, and analyse different mutual funds.

Above all are the benefits of investing in mutual funds, but all the mutual funds are related to market risk. Please read all documents before investing.