Benefits of Mutual Fund

In the era of smartphones and tablets, if a person or friend comes up to you and inquires where can they buy a Walkman from; the immediate reaction would be a rather baffled look. The same reason would apply with our investments. Today, not only do we have more avenues for investment but also the methods of investing in them have increased. Today, let us understand why a mutual fund is a preferred investment vehicle for most investors and we will talk about the Benefits of Mutual Fund.

Benefits of Mutual Fund

• Professional management.

In the fast-moving world of today, investors seldom get time to view and completely understand the capital market, let alone the concepts of bond and money markets. Which is where a mutual fund helps, as these funds are managed by professionals who have access, not only to the past history or companies but also have better resources to handle the funds that are put together by the coming together of a large number of investors. This allows investors to focus on their other needs as they can be rest assured that their funds are well managed.

Contrary to popular belief, mutual fund investments are rather liquid in nature as compared to other investments like PPF or FD’s. Each open-ended fund has a specific exit load (usually 1% for redemptions made within a year) if an investor chooses to exit a fund, but the duration to receive the proceeds is mostly within 3-4 working days. It is only in close ended funds wherein withdrawals or redemptions aren’t permitted, but even in those types of funds the number of days the fund remains closed would be specified in the Offer document, which should be thoroughly reviewed before considering an investment.

• Economies of scale.

This term seems rather complex but is actually not so. The simpler meaning is ‘benefit of bulk purchase’. For those not familiar with the benefit of bulk buying, it simply means an increase in the number of items that can be bought with the increase of purchasing power. Eg., a single investor may be able to purchase shares of say 5-10 companies in his portfolio and that too a lesser quantity of each share, but in a mutual fund there are lakhs of investors investing various amounts into the same fund with a common purpose, thereby enabling the fund manager of the mutual fund to purchase shares of say more than 10 different companies and that too in much bigger quantities.

• Comparatively higher return.

As compared to its peers, mutual funds have a proven track record of comparatively higher returns. Investors need to understand which type of funds should be compared with which investments, as mutual funds have broadly 4 types of classifications when it comes to asset categories, i.e. equity , debt , hybrid ( balanced funds) and cash & cash equivalents(liquid funds). So an ideal comparison would be a F.D. with either an equity or equity based (more equity proportion) balanced fund and savings accounts with liquid funds. In the long run equity mutual funds can also be paired with real estate investments.

• Tax savers

Mutual funds also have a category called ELSS or Equity Linked Savings Scheme, whereby investors gain a tax advantage by investing in this category and claim the investment amount as a deduction from their taxable income under the section 80/C of the Income Tax Act. These funds however come with a lock-in period of a minimum 3 years and redemption per investment will be available after the completion of those 3 years. The investor also has the option of remaining invested in the same fund and making additional investments into the fund. The lock in period will by default apply to the new investments made.

• Diversification

Assuming an investor does have the ability to make bulk purchases in shares by themselves, these purchases may not be as spread out as compared to a mutual fund. Each fund has a portfolio of approx. 30 companies or more. Moreover these companies belong to different sectors such as pharma, banking, aviation etc., thereby providing an investor a diversified portfolio.

People who invest in shares do not see this as an advantage. However in a scenario where a specific share or an entire sector has underperformed, the said individual investor will be exposed to the underperformance of his/her investment much more than an individual investor in a mutual fund, simply because the mutual fund has exposure to other shares and sectors also, other than the ones that have underperformed.

Thus we find that most investors, be it homemakers (housewives), working women, earning students or even retired people, in recent times have opted for mutual funds as compared to other avenues of investment such as F.D’s etc., simply because time and tide wait for no man and this is the time for investing in mutual funds , in order to get higher Returns and minimize the risk associated with directly investing in shares.

About the Author :

Rufino Dsouza is a Certified Financial Planner who specialises in  the following Services :

• Client wise portfolio management.
• Investment seminars. 
• Investment solutions and goal planning.
• Tax planning, and effective investment tools for the same.

His Contact details are as below :