Advantages of mutual funds

Smart investment

If you were to invest all your money in one industry and that industry failed, you’d lose a lot of money, but with mutual funds, such risks are mitigated by spreading the investments over various avenues, like stocks and bonds, to ensure that even if one generates losses the rest can control the amount you lose.

Choice of risk

Stay with talking about risk, mutual funds also offer a choice of low, medium and high risk funds. These are meant to satiate your appetite for risks. A high risk fund offers the highest returns but the losses will also be high where as a medium risk fun tends to balance risk with return a little better where as low risk funds carry the least risk of losses and, consequently, the least returns of the three too.

Options on liquidity

When you invest in a mutual fund you have a choice, invest in a regualr fund or in a tax saver fund. The difference in the two, in terms of liquidity, is that with a regular mutuual fund you can start withdrawing from the fund a few months after the investment begins whereas with tax saver funds, there is usually a lock in period before which you cannot withdraw anything. This allows investors to plan their finances better.

Tax benefits

Mutual funds offer the option to invest in them and claim income tax benefits under section 80C of the IT Act. This means that the money invested in mutual funds is exempt from income tax and helps bring the taxable income down.

More choice

With all the mutual fund investors can chose between high, medium and low risk funds. They can also chose funds based on their need for return. This means that they can either chose a fund where earnings may come over a short period or one where they come over a longer period to ensure that the returns can be encashed just in time for a planned expense.

Invest in instalments or lump sums

Lets say you are young and don’t have a large sum of money that you can invest in mutual funds. In such a case you can go in for a systematic investment plan or an SIP. An SIP is nothing but investing in the the mutual funds in EMIs. This allows you to be able to invest in the mutual fund without putting too much pressure on your finances. On the other hand, if you have a large sum of money that needs investing, you can put that too in a mutual fund in one lump sum.

No big investment required

With a mutual fund, especially the SIP, you can invest as little as Rs. 500 a month if you want. There is no need for investors to put in lakhs or tens of thousands to start a mutual fund.

Well regulated

The regulatory authority that oversees mutual funds is SEBI (Securities and Exchange Board of India), whcih has laid down strict guidelines that mutual fund providers need to follow. This ensures that there is no unfair treatment of investors and tries to ensure that the investment works in favour of both the investor and the mutual fund provider.

Low cost of asset management

This is a particularly interesting feature of mutual funds. Since they acquire the money from a whole bunch of investors, the cost of the services provided, or the asset management, is relatively low when compared to.

Professional management

This is one of the main features of any mutual fund. It is not possible for every single investor to be well acquainted with the markets and know how and when to invest in it. This would ideally put an investor at a disadvantage but with mutual funds this disadvantage is negated by the fact that the people who actually manage the funds are all experts in the industry and are backed by entire teams dedicated to market research. This means that investors can be assured that qualified people are taking all the important calls on where their money is being invested.

Taking advantage of a growing economy

Since mutual funds are linked to the stock market, all the investors in a mutual fund get the chance to take advantage of growth in the economy. Something that would not have been very easy if they were to try investing in stocks and bonds on their own without any help.

Some would say that compared to the traditional favoured means of investment in India, fixed deposits, are a safer option but the fact remains that the advantages that mutual funds offer, far outweigh the disadvantages of the investment. They also tend to offer better returns when compared to many other investments, while offering moderate risk to the investment itself.