Mutual fund investments give investors access to professional management for their funds. Professional management has many advantages like a clear investment objective, investment based research and prudent investment processes etc
Affordable Portfolio Diversification
Diversification helps reduce the risk of a portfolio and hence gives better risk adjusted returns. With even small investments say - of Rs 500, gives investors ownership of a portion of a diversified investment portfolio.
Economies of Scale
Investor’s together results in large sums of money which in turn gets investors access to professional managers to manage their funds which individual investors cannot do. Along with the higher transaction volume mutual fund investors get to negotiate better terms with brokers, bankers and other service providers. This is a distinct economic advantage to an investor in terms of cost saving.
Investments like real estate, venture capital, PPF where the investor cannot easily sell his investment in the market or get immediate access to funds as per their needs, are technically called illiquid investments and may result in losses for the investor.
Depending on the type of mutual fund, they can be liquidated, either at any time, or during specific intervals, or at times only on the closure of the scheme.
Mutual fund investors can let their investment grow in a scheme for several years and with this, they can defer their tax liability. This helps investors to legally build wealth faster than would have been the case, if you were to pay tax on the income each year.
Tax saving mutual funds (ELSS) give the benefit of deduction of the amount subscribed (up to Rs. 150,000), from the income that is liable to tax.
Dividend received from mutual fund schemes is tax-free in the hands of investors. However, dividends from certain categories of schemes are subject to dividend distribution tax, which is paid by the scheme before the dividend is distributed to the investors.
Long term capital gains is 10% and short term capital gain is 15% and gives mutual funds a definite advantage over other asset classes like real estate, debt etc.
Investment in mutual funds can be made very easily and additional purchases need minimal paperwork. In today’s world mutual fund investments can be made completely online.
Mutual funds are regulated by Securities & Exchange Board of India (SEBI). SEBI has mandated strict checks and balances in the structure of mutual funds and their activities.
Systematic Approach to Investments
Mutual funds let investor invest regularly with a Systematic Investment Plan (SIP); or withdraw regularly with a Systematic Withdrawal Plan (SWP); or move money between two schemes with a Systematic Transfer Plan (STP). These approaches promote investment discipline and are extremely useful in long-term wealth creation and protection.