In India, traditionally investor want to invest their hard earned money in Secured options like Fixed Deposits, Recurring Deposits or Bonds etc. where they can earn a fixed amount of return on their investment rather than investing in Unsecured options like Shares and Mutual Funds where they can earn much higher return in comparison with return earned in secured options. Secured options are usually having low potential risk and low return. On the other hand unsecured options having high potential risk and high return.
With this unique feature of unsecured investment options, new investor are often faced with 2 options as far as investing in equity is concerned. But fortunately, modern day investors have the choice of investing in mutual funds which provide a unique balance of high return with less risky as compare with direct investment in shares.
For new investors, benefits of investing in mutual funds are always have upper hand while investing in Shares. In this article we discuss 7 major benefits of Investment in Mutual Funds in India.
This is one of the important feature of mutual funds. Mutual Funds diversify the risk of investment. In shares where you can invest only in limited companies but in mutual funds you have much higher range of stocks which keep your risk much lower than invest in shares. If you want to create your equity portfolio by investing directly in shares for this you have much higher amount of capital. On the other hand for mutual fund investment in diversified equity fund with an investment of as low as Rs 1000/- in SIP option.
Mutual Funds are professionally run by an Expert. As a common man we unable to understand the future market indications. But if you invest in mutual fund, which are professionally managed by fund managers who have years of relevant financial market experience and they are supported by a team of subject matter experts who help pick investments and strategies that help maximize profits for the scheme’s investors.
Mutual funds are more tax efficient than most other investment products. Long term capital gains (holding period of more than 1 year) for equity mutual funds are tax exempt. Further dividends of equity funds are also tax free. For debt funds long term capital gain (holding period of more than 3 years) is taxed at 20% with indexation. Once indexation (due to inflation) is factored in the long term, capital gains tax is reduced considerably, especially for investors in the higher tax bracket.
Economics of Scale:-
Mutual funds with their large investment pool provide unparalleled economies of scales to retail investors, which means mutual funds with huge assets under management can spread all expenses over a large number of assets and hence can afford to spend significant funds in research, hire the best talent to manage money.
One of the biggest reasons why mutual funds remain a hot favourite amongst all kinds of investors is that an investor can get in and out of the market with relative ease. This is especially true in the case of debt funds many of which have zero entry and exit loads and can be redeemed easily as and when you need them. Moreover, a few fund houses also have unique schemes that allow benefits such as instant redemption and debit card withdrawal of your mutual fund investment in case of emergencies. This is a contrast to popular fixed rate alternatives such as fixed deposits that have high premature withdrawal charges.
Variety of Modes of Investments:-
Mutual funds also offer investors flexibility in terms of modes of investment and withdrawal. Investors can opt for different investment modes like lump sum (or one time), systematic investment plans (SIPs), systematic transfer plans (from other mutual fund schemes) or switching from one scheme to another.
Low Transection Charges:-
When investors buy multiple securities to diversify their investments they are liable to pay separate securities transaction charges for each transaction. This can add up to a substantial amount and impact the investor’s returns negatively in the long term. In comparison, when you buy mutual funds, the investor gets the same or greater level of diversification without having to pay multiple securities transaction charges. In the case of mutual fund fees such as securities transaction charges as well as all fund management charges are represented by the fund’s expense ratio, which is much lower than the cumulative individual securities transaction charges that an individual is liable to pay.
In this blog we have discussed the key benefits of investing in mutual funds versus directly in shares. While investing directly in shares definitely has its own advantages, the benefits of investing in mutual funds outweigh that of investing directly in shares, especially for new investors. If you have expertise in picking stocks at the right valuation, you can invest directly in shares. However, if you lack the expertise then investing in mutual fund is definitely a much better option.
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