Is It Beneficial To Invest In Mutual Funds
Published On Mar 08, 2022 10:00 AM By InsuranceDekho
Mutual fund is a financial instrument which pools the money of different people and invests them in different financial securities like stocks, bonds etc. Each investor in a mutual fund scheme owns units of the fund, which represents a portion of the holdings of the scheme. The securities are selected keeping in mind the investment objective of the scheme. Mutual funds are managed by asset management companies (AMCs). AMCs appoint fund managers to manage different mutual fund schemes and ensure that the scheme investment objectives are met. For fund management and other services provided by AMCs, a fee is charged to the investors.
Benefits Of Investing In Mutual Fund
Let us now discuss mutual fund tax benefits
1. Risk Diversification
One of the biggest advantages of mutual funds is risk diversification. Every stock is subject to three types of risk – company risk, sector risk and market risk. Company risk and sector risk are unsystematic risk, while market risk is known as systematic risk. Mutual funds help investors diversify unsystematic risks by investing in a diversified portfolio of stocks across different sectors. Hence mutual fund risk is much lower than individual stocks.
Smaller capital outlay: Investors will require a large capital outlay to build a diversified portfolio of stocks. On the other hand, since mutual funds work on the basis of pooling of money, mutual fund investors can have the beneficial ownership of a diversified portfolio of stocks with a much smaller capital outlay.
2. Investment Expertise
Mutual funds are managed by professional fund managers who have the desired qualification, expertise and experience in picking the right stocks or other instruments to get the best risk adjusted returns.
3. Economies Of Scale In Transaction Costs
Since mutual funds buy and sell securities in large volumes, transaction costs on a per unit basis are much lower than what retail investors may incur if they buy or sell shares through stock brokers.
4. Variety Of Products
Mutual funds offer investors a variety of products to suit their risk profiles and investment objectives. Apart from equity funds, there are hybrid funds, debt funds, liquid funds and tax savings schemes etc. to suit different investment requirements.
5. Variety Of Modes Of Investments
Mutual funds also offer investors flexibility in terms of modes of investment and withdrawal. Investors can opt for investment modes like lump sum (or one time), systematic investment plans (SIP), systematic transfer plans (STP) and systematic withdrawal plans (SWP). You can invest in the growth option of mutual funds if you want to take advantage of compounded returns over a long investment period or you can invest in a dividend option if you want income from your investment.
6. Disciplined Investing
Mutual funds encourage investors to invest over a long period of time, which is essential to wealth creation. Furthermore, systematic investment plans or SIPs encourage investors to invest in a disciplined manner to meet their various financial goals. Many investors fail to build a substantial investment corpus because they are not able to invest in a disciplined way. Mutual fund SIPs help investors to maintain a disciplined approach to investment.
Mutual funds are one of the most popular investment choices in the world. Advantages for investors include advanced portfolio management, dividend reinvestment, risk reduction, convenience, and fair pricing. Disadvantages include high fees, tax inefficiency, poor trade execution, and the potential for management abuses.
Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.