If you are looking to invest in stocks but are overwhelmed by complexities of the stock market or do not have time to study the market or do not understand which stocks to invest in nor have enough resources to figure out the same. Mutual funds are for you.
Mutual funds provide opportunities to retail and institutional investors to participate in equity markets,with the help of professional fund managers who manage these funds on behalf of investors.
Mutual funds no doubt have been able to democratize equity and debt markets and have made them accessible to a larger section of the investor community, In the coming section,I will summarize key advantages mutual funds offer to investors.
Professional Management at a fraction of cost
Mutual funds pool together a large amount of funds and hence can have the large asset base to spread their costs .This lets them hire professional managers and researchers to manage your money at a fraction of the cost it will cost individuals on their own. As an individual investor,it will be impossible for anyone to put together such formidable resources.
Everyone can have diversified portfolio
For retail investors who have small money to invest , getting a diverse portfolio while investing in equities is a challenge as they cannot invest in too many stocks to get an optimal diverse portfolio, Mutual funds solve this problem.Individual investors can invest as less as Rs 500 and still get units in a diversified portfolio of securities,let’s say if you invest Rs 1000 in ICICI Prudential Value Discovery Fund (G) you will have a diverse portfolio of stocks a sample of which is shown below.
So Mutual funds provides ultimate diversification for investors even with low or very low investments
You Can defer your taxes
How Deferment of taxes help you ( have assumed 30 % Tax rate)
Investment Year 0 Year 1 Year 2 Year 3( withdrawl) Return Mutual fund 100000 110000 121000 123170 23.17 %for 3 years Fixed deposit 100000 107000 114490 122505 22.5 % for 3 years
Economies 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 .
Asset class to match your risk profile
Mutual funds invest in equity assets as well as debt assets and also in a combination of two, so depending on your risk profile and appetite you can choose a mutual fund which optimizes the risk and gives you right returns. From capital preservation to growing wealth mutual fund schemes are available for all financial requirements and within growth,you can choose to invest in aggressive portfolios with higher growth potential like mid cap or small cap or relatively safer assets like large cap funds.
Systematic investments and withdrawals
Another good investment principle that mutual funds have pioneered is Systematic investments and withdrawals, some of you who have invested in equity markets will understand the concept of timing the market, retail investors do not know when to enter or exit from the market.Mutual funds provide systematic investment planning options where you can periodically invest in mutual funds and hence no need to worry about timing the market. Similarly, mutual funds also provide systematic withdrawal options.
Liquidity at no or very less cost
Mutual funds provide unparalleled liquidity to its investors. In most of the funds,you can take money out at any time or few funds provide periodic time frames when you can take money out, with SEBI clamping down on exit loads cost of withdrawal has also reduced significantly.
ELSS ( Equity linked saving schemes) also provide tax deductions for investments made in these funds, they come with a lock-in period of 3 years but they provide ways to invest your money in equities and helps them grow so you get tax benefits as well as growth.
Convenience of Investments
Mutual funds provide a convenient way to invest you can invest online as well as offline .You can get all your updates online, sell online, buy online change your funds online. Your accounts are linked to your mutual fund folios and hence money can be moved easily back to your accounts.
Well Regulated Industry so you are in safe hands
Mutual funds are closely regulated by SEBI and the regulator takes cares of investor interests before anyone else. SEBI has been proactively providing guidelines to ensure transparency and ensuring good investment practices are followed by all funds.
You want to know more about mutual funds read my post All you want to know about Mutual funds in India