Chapter 2: Advantages of Mutual Funds

Avinash was keen to talk to someone about mutual funds. Being an advertising executive and having worked on many creative campaigns, he was quite impressed looking at an awareness campaign about mutual funds. For years he kept thinking about the risk associated with mutual fund investing and had a lot of misconceptions. Most of those were clarified by the campaign. Yet, he was not sure how to get started.

Avinash is not alone. A lot of you may have wondered about benefits of investing through mutual funds. Mutual funds are an excellent choice for investors. Let’s find out why!

Advantages of Mutual Funds

1. Professional fund managers:

Professional fund managers manage all mutual fund schemes. These managers have specialised financial knowledge and skillsets, which enables them to manage your funds expertly.

Would you trust your health to just any quack doctor? Of course not! Then why trust an unqualified person with your finances? By investing in a mutual fund, you ensure that only an expert handles your hard-earned money.

2. Low minimum investment:

Don’t have a large sum to spare? No problem! You can invest as little as Rs 100 per month through some mutual fund schemes. In the case of lump-sum investments, some funds require a minimum investment of just Rs 500.

3. Portfolio diversification:

The total investment in a mutual fund is allocated across different asset classes and the securities within them. That spreads out the risk and ensures diversification. Mutual funds ensure that whatever you invest—even a small sum of Rs 500—will have a diversified portfolio.

Here’s an example: Suppose the price of stocks in a mutual fund portfolio are falling. If the portfolio includes bonds and commodities, those assets could cushion the blow and safeguard the overall investment.

4. High liquidity :

Investment products like public provident funds and ULIPs lock away your cash for specified periods. Fortunately, most mutual funds don’t have any lock-in period. You can withdraw funds at any time based on your need.

Here’s a tip: If you want easy access to your capital with low risk, try investing in liquid funds. A liquid fund is a type of debt mutual fund that invests in very short-term money market instruments. With a liquid fund investment, you can get your money back on T+1 days or the next day.

Did you know?

SEBI has capped the expenses of mutual funds. The expense must be in proportion to the Assets Under Management (AUM) slab. The higher the AUM, the lower the costs. A mutual fund can charge only up to 2.5% of the yearly AUM as expenses.

5. Low fund management expenses:

Given the unique structure of mutual funds, the cost of managing the fund is distributed among all unitholders. That makes investing through mutual funds more affordable.

6. Easy purchase and redemption:

Mutual fund schemes are sold through various channels. Most banks, broking houses, wealth management companies and fintech companies offer online and offline transaction facilities. Many apps facilitate mutual fund transactions, as well.

All this makes investing in mutual funds very convenient. Compare schemes, start an investment, redeem units—you can do everything from the comfort of your home.

7. Transparency and easy tracking:

SEBI has implemented strict guidelines on disclosures by mutual fund companies. That’s why all mutual funds offer full transparency about their portfolio, expenses, Net Asset Value (NAV), and other details.

Did you know?

  • Mutual funds declare their NAV daily. So, you can easily track your investment’s market value and performance. 
  • Want to view all holdings of a mutual fund scheme? Check its latest factsheet. It is updated every month.

8. Variety of schemes:

Indian investors can choose from more than 1,800 mutual fund schemes with different investment objectives. There is a mutual fund scheme to suit the needs of every individual.

Here’s a tip: Factor in your risk appetite, financial goal, and time horizon before selecting a scheme to invest.

9. Relatively lower risk:

All mutual funds offer diversification benefits. That’s why mutual fund investment is less risky than investing directly in shares. Plus, mutual funds are managed by experts who are in a position to take timely action as per the market conditions to safeguard the interest of investors.

Mutual fund investments are subject to some risk. But thanks to the fund manager, you are spared of the headache of managing your portfolio. No matter how markets move, the fund manager takes care of it.

10. Regulated by SEBI:

SEBI regulates mutual funds. From time to time, SEBI implements norms to protect the interests of investors. And complying with the SEBI norms is mandatory for all mutual funds.

The stringent regulatory environment enables investors to feel confident about their mutual fund investments.

11. Tax-saving benefits:

Some mutual fund schemes offer tax benefits under Section 80C of the Income Tax Act. Equity-Linked Savings Schemes (ELSS), for example, are also known as tax-saver funds. They come with good returns as well as tax benefits under Section 80C.

12. Flexibility to switch :

You can freely switch from one scheme to another scheme of the same mutual fund house. Maybe the equity market is overheated, and you want to keep your money safe. You could move your investment from an equity scheme to a debt fund offered by the same AMC.

Here’s a tip: Don’t want to switch all your mutual fund units at one go? Use the Systematic Transfer Plan (STP) to move from one scheme to another gradually.

13. Multiple investment options:

Choose whether to invest a lump sum or instalments via a Systematic Investment Plan (SIP). With a SIP, you can choose the investment frequency as per your cash flow cycle and even a preferred date for investing each month. 

Did you know?

Most mutual fund distributors offer SIP investors the flexibility to stop or pause their investment if they face a shortage of funds during the investment period.

The bottom line is this: With mutual funds, you get to invest in a way that works for YOU!

Summary

  • Mutual Funds are managed by professional fund managers with specialised financial knowledge and skillsets.
  • You can invest an amount as low as Rs 100 depending on the scheme.
  • Mutual funds allow you to diversify into many different stocks easily and in a cost-effective manner.
  • It is easy to buy and redeem units in mutual funds.
  • You can choose from a wide variety of mutual funds to invest.
  • Mutual funds offer a highly transparent and cost-effective option to invest your money.
  • As its policymaker, SEBI regulates the mutual fund industry and lays guidelines to safeguard your interest as an investor.
  • ELSS is a tax-saving mutual fund scheme which help you save tax under Section 80C.
  • Use SIP or lump sum investment mode to begin your mutual fund journey today.

We studied why mutual funds are popular thanks to the many advantages they offer from portfolio management, convenience, cost effective pricing and many more. In the next chapter, we see how Mutual funds are more extensively regulated than other pooled investment options.

Disclaimer:

ICICI Securities Ltd.( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No : 022 - 2288 2460, 022 - 2288 2470. AMFI Regn. No.: ARN-0845. We are distributors for Mutual funds. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon.