A common man does not have any expertise to invest in Stock Markets. Mutual Funds (MF) give an opportunity to an individual to invest in stock markets and reap the benefit of higher returns. MF collects the funds from individuals called investors or shareholders. After pooling the amount received from various investors, which is called CORPUS is invested in stock markets. Mainly the amount is invested in Shares which is called Equities and Debentures also called as Debt instruments of reputed companies having high rating good track records. MF are managed by professionals who are qualified and having experience in the field of investments.
The following are the benefits of investing in MF:
- EASY ON POCKET:
One can start investing in an MF with a small amount. You can invest in a MF either on a monthly basis or in a lump sum. If you want to invest on a monthly basis, you will have to invest through Systematic Investment Plan(SIP). It is just like a Recurring Deposits schemes of Banks. You may start a SIP with as little as Rs 500 pm. You may choose the period of SIP as per your convenience. You may also invest a lump sum amount in MF with just Rs 1000.
- CAPITAL APPRECIATION:
The amount one can invest in MF is called Principal amount or Assets. There is a scope of growth in Assets which is called Capital appreciation. The growth in your investment is added to the capital. It occurs due to an increase in the price of shares and Bonds in which the amount was invested. Capital Appreciation is also known as Capital Gain and it is subject the Income Tax provisions when it is sold or realized.
Investment in MF is fully transparent as MF regularly sends the information periodically to their investors through email or by way of letters. A detail contains the present value of the investment, the composition of the investment as to how much is invested in Equities and in Bonds etc. Even the names of the companies with the amount invested in each company are also furnished. Information about the Fund Manager is also furnished. Expenses incurred in managing the funds are also disclosed.
- GOAL ORIENTED FUNDS:
MF investments help the investors in achieving their financial goals. One may have either Short Term or Long Term Goals. Short Term goals are like certain expenditures, purchasing a Car or other amenities.Whereas Long Term goal includes Building a House, Higher Education or Marriage. The tenure of investment is selected based on the short term or long term requirement. Normally for short term, 5 years period is ideal whereas for the long term it is 10-15 years.
- TAX PLANNING OPTIONS:
Investment in MF enables an investor to do efficient tax planning. MF returns are subject to short term and long term capital gain tax. Tax liability arises only at the time of withdrawal of investment. Hence one can plan the timing of withdrawal as per his tax planning and can minimize the tax liability.
- TAX-FREE RETURNS:
There is a popular scheme in MF called “Equity Linked Tax Saving Scheme (ELSS).The investment up to Rs 1.50 lacs in ELSS is eligible for deduction under Section 80C of Income Tax. There is a lock-in period of 3 years in ELSS. The appreciation in investment qualifies for long-term capital gain tax (LTCG).LTCG up to Rs 1.00 lacs is nil and beyond Rs 1.00 lacs it is 10%.
- PERSONALLY MANAGED:
In MF one gets the opportunity to manage his fund personally. You may change the ratio of investment in equity and bonds, switchover to other schemes of same MF offering better returns, modify the tenure of your investment. MF funds make available the details of their schemes on their Websites. One can monitor and manage their investment online hassle free.
- EASY TO LIQUIDATE:
MF offers easy liquidity. Fund value various schemes called Net Asset Value (NAV) is declared on a daily basis indicating present value of the fund. One can any time withdraw their investment as per their requirement. There is a partial withdrawal facility also as per the need. The amount is credited to the account on T+1 basis i.e. transaction day plus 1 day. You can plan the timing of the withdrawal based on the movement of Net Asset Value(NAV) of the fund.
- LIFE CYCLE PLANNING:
MF allows the investors to do the life cycle planning. Lifecycle Planning requires a Long-Term Planning. In Lifecycle there are various stages i .e. Family, Higher Education of children, Marriage of children, Medical treatment etc. MF helps you in building necessary corpus as per your need.
- ASSET ALLOCATION:
The amount collected from the investors/shareholders are pooled and invested in equities and bonds. They are called Assets. The ratio of investment in equities and bonds varies depending upon the aim of the fund. In an equity fund, the amount is 100% invested in equities and in a Debt Fund, the amount is 100% invested in Bonds. Balanced fund amount can be invested both in equity and bonds in various ratios as per the funds’ objectives.
- TAX EFFICIENT:
MF investments offer tax efficient investment. One can maximize tax benefits. In Dividend option, the dividend received is not added to the investor’s income as it is paid after paying dividend distribution tax(DDT) by MF. In Case of Equity funds, there is no DDT. In case of Capital Appreciation tax implication is different for Equity and Debt funds. Short Term Capital Gain is added to the income of the investor whereas long-term capital gains are taxed @20% in Debt Fund and @10% beyond Rs 1.00 lacs in case of Equity Fund. It is Nil up to Rs 1.00 Lacs.
- EXPERT AND RESEARCH BENEFITS:
MF are managed by a separate company called Asset Management Company(AMC).They manage and invest the funds pooled from various investors as per the financial objectives of the particular schemes. To achieve this it requires daily monitoring and analysis of the investments. For each scheme, there is a separate fund manager who does this job. He only decides where to invest and when to invest the fund. The return on investment depends upon the investment acumen of the fund manager. Besides, every AMC have got a panel of experts and research wing that regularly monitor/study the markets and trends and advises fund manager.
- CAN INVEST MINIMUM RS 500.:
MF offers the flexibility of investment. One can start a SIP by investing as low as Rs 500 pm.A small step taken today may give you a big leap in future. In long term it will lead to a big corpus as a benefit of compounding will be accrued.
- CHOICE OF VARIOUS SCHEMES:
MF offers varieties of schemes to the investors basing on their financial requirements.Some of the popular schemes are as under:
- Equity-linked Tax Savings Scheme(ELSS)
- Equity Fund
- Debt Fund
- Hybrid Fund
- Sectoral Fund- Pharma Fund, Energy Fund, Infrastructure Fund
- Blue chip Funds
- Large Cap, Mid Cap, and Small Cap Fund
Most of the above schemes are open-ended. But some close-ended schemes are also floated from time to time.
- VERY NOMINAL EXPENSE RATIO:
MF incurs a cost in running and managing a Scheme/portfolio in the form of Maintenance cost, Transaction cost, Advisory Services cost, Research cost etc. The expense ratio is calculated on the Net asset of the fund. SEBI has stipulated slab wise expense ratio basing on the AUM(Assets under management).Higher the AUM lower the Expense ratio and other way. The expense ratio normally ranges between 0.5 to 1.0 and rarely goes up to 2.5%.The expense ratio varies for different types of fund.
- PROFESSIONAL MANAGEMENT:
MF is managed by a separate company called Asset Management Company (AMC).These companies are managed professionally. The Management consists of the professionals from various fields like Business Analyst, Chartered Accountants, Economists, Stock market experts etc. These entire professional bring their expertise in managing the fund as per the financial objectives of the fund. Each fund is managed by a professional fund manager responsible for the performance of the fund.
- QUICK PERSONALIZED SERVICE:
MF fund offers quick and personalized service to the investors through their offices in various cities. They also have agents who offer various services to the investors. They also help investor in choosing the right fund as per their requirement.
Apart all the MFs have online facilities for various types of services. An investor can perform various functions including the redemption of investment.
- PORTFOLIO DIVERSIFICATION:
MF have diversified portfolio in their investments. They maintain a balanced sectoral portfolio in order to maximize the return. The investment is based on strong research and market conditions. The impact of the market forces is minimum on the NAV of the scheme. Equity funds mainly invest in Blue-chip companies, Large-cap companies etc Whereas Debt fund invests in High rated Debentures, Government Securities etc.
- DISCIPLINED INVESTMENT:
MF investments are considered as Disciplined investments. The funds are managed by a qualified fund manager having proven track record. He is assisted by a battery of professionals who advise on various aspects of investments. Further investments are also subject to various statutory compliance. SEBI also monitor the working of MF closely. All these measures mitigate the risk involved in investment and protecting the interest of the investors.
- AFFORDABLE LOW AMOUNT:
As the amount of investment in any MF is as low as Rs 500, which enables a person having small means also to invest in MF and reap the benefit of higher returns.
- MINIMUM PAPERWORK:
For investment in MF, documents required are minimal. An investor has to submit KYC (know your customers) documents. KYC documents mainly required for identification and address proof purpose. Aadhar Card and PAN Card serve the purpose. Further, there is a facility for registering KYC documents to the central e-KYC registry. Once it is registered, then you don’t need to submit KYC documents every time at the time of investment.
- DIVERSIFIED RISK:
MF investments are subject to market risk. To mitigate this risk, MF spread their risk by investing in diversified sectors. They religiously follow the adage that “all eggs are not to be kept in one basket”. Having diversified portfolio also help in reaping the benefits of booming sectors. This reduces the risk of capital loss also.
- NO HIDDEN CHARGES:
There is an umbrella organization of Mutual Funds called Association of Mutual Funds of India (AMFI). The functioning of MFs are subject to the directions and instructions of AMFI. Expenses charged by them are subject to SEBI & AMFI guidelines. Expenses are disclosed in the performance of each fund which is published regularly on the website of the MF.
- ABLE TO BEAT INFLATION:
The return on investment is compared to the rate of inflation. A good investment must give the return more than the rate of inflation. Though MF investments are subject to market risk, but past performance of various schemes indicate the return more than the rate of inflation. Inflation is considered as barometer of the performance of MF.
- EASY TO UNDERSTAND:
MF schemes are very simple and easy to understand. A person of normal prudence can easily understand scheme guidelines. Most of the schemes are having either Growth option or Dividend option. Undergrowth option income is reinvested whereas in the dividend option income is distributed by declaring the dividends. In growth option investor gets the benefit of compounding. One can choose the option as per his requirement.
MF offers flexibility both in investment and redemption. We may invest through monthly SIP or by lump sum investment as per our convenience. While withdrawing also we have the option to withdraw in a lump sum or we can part withdraw also. There is a facility of Systematic Withdrawal Plan (SWP) or systematic Transfer Plan (STP) which enables withdrawals regularly. This is just opposite to SIP.
- EASY TO BUY AND SELL:
MF schemes are easy to buy and sell. It can be bought or sold directly on prevailing NAV from MF itself. Some schemes are listed on Stock exchanges like NSE & BSE also. Such schemes could be bought and sold through stock exchanges also. This offers a easy liquidity to investment. MF also offers purchase and redemption facility online.
- BROAD MARKET EXPOSURE:
MF has broad market exposure in order to maximize the return. They diversify their portfolio in such a manner that the risk is mitigated and underperformance of one sector does not affect the overall performance of the fund. Normally MF will have exposure in Pharma, Infrastructure, Energy, Oil & Gas, Telecom, Large cap, and mid cap industries.
- WELL REGULATED:
MF is primarily regulated by SEBI. They are subject to various compliances stipulated by SEBI. Besides this MF have a self-regulated body called Association of Mutual Funds of India(AMFI) which ensures the ethical and healthy functioning of MF, thereby protecting the interest of both MF and investors.
- HUGE RETURN POTENTIAL:
Mutual funds have huge return potential. Past performance indicates the same. Some of the schemes have offered tremendous growth in the investments. The reason for such huge return is that Mutual funds are professionally managed and are subject to various statutory compliances. This propels them to perform to the optimum level.
- MARKET CYCLE PLANNING:
Money markets behave in a cyclical manner. Long and short forces determine the price in the financial market. This has got bearing on the performance of the MF. Therefore MF plan in advance to face this market cycle. Different sectors have different cycles, hence MF invest their funds in a different sector in such a manner so that their performance is not adversely affected.
- LESS RISKY THAN DIRECT STOCK MARKET:
Investment in the Stock market requires a certain amount of knowledge of shares and Bonds. A common man lacks the skill hence is prone to lose the money in the stock market. MF offers an opportunity to invest in the stock market and reap the benefit. MF offers professional and expert services to investors. MF also offers an easy and simple way of investing in the stock market.
- INVESTING IN VARIETY OF INSTRUMENT:
MF invests in a variety of instruments like Equities, Bonds, and Government Securities etc. Equities offer high growth and return, but there is no certainty. Bonds and Government Securities offer fixed return as per the coupon rate. MF invests in a mix of these instruments in order to maximize the return. The ratio of investment depends upon the scheme objectives.
- PARTICIPATE IN THE ECONOMY GROWTH:
MF plays an important role in the economic growth of the nation. They float the sectoral funds like Infrastructure, Pharma, Energy, Telecom, Power etc for focused investment. Thereby making available the funds to these specific sectors. Also to reap the benefit of buoyancy of these sectors. MF also plays the role of catalyst in the stock market. A stable and steady market is an indicator of a healthy economy.
- CAPABLE OF CREATING HUGE WEALTH:
MF investments have the potential of creating huge wealth. MF has proved to exceed average market return over the years. The compounding effect increases the value of investment exponentially in long term. The benefit of compounding could be obtained by opting to reinvesting the income earned.
- ALLOW AUTOMATIC REINVESTMENT:
In MF schemes there is an option to reinvest the income. Once this option is chosen, income is automatically reinvested. This amount is added to the principal amount invested thereby increasing corpus. Over the years invested corpus grows fast due to the compounding effect.
- SUITS TO EVERY CLASS OF PEOPLE:
MF investments do not differentiate between classes of people.People from all walks of life, whether rich or poor can invest in MF. MF investment could be started with a small sum of Rs 500 pm through SIP. A lump sum amount can also be invested. An amount can be invested from few days to few years as per the outlook of the investor and his financial needs.
- NO WORRIES OF KEEPING IT SAFE:
In MF investment investors get Units in proportion to the amount of investment. A folio is allotted and a certificate of a holding of units is issued to the investor. Since it is only a certificate does not require safekeeping unlike shares, Gold, and Bullions. One can check his holdings online also. The holding of units can also be maintained in Dmat form with authorized depositories.
- CAN INVEST FOR MINIMUM TWO DAYS ALSO:
MF investments offer a great amount of Liquidity. In Liquid funds, the amount can be invested for a minimum period of two days also. The return on Liquid funds has been more than the return in savings bank accounts. Redemption of units is also fast and simple. The amount is credited in a bank account in T+1 day.
- DEVELOPS HABIT OF DISCIPLINED:
The investment in MF is through Bank account only, whether it SIP or lump sum investment. In SIP amount is debited to the account every month through ECS on a predetermined date. Hence required balance has to be maintained in a bank account in order to clear the ECS. This inculcates the habit of thrift and financial discipline among the investors.
- MF PERFORMANCE IS TRACKED AND CAN BE RECORDED:
MF declares Net Asset Value (NAV) of all its schemes on a daily basis in print and electronic media. It is posted on their website also. Hence the performance of schemes can be tracked and monitored and a decision can be taken for a switch over to other scheme or redemption of units. This has brought more transparency and accountability in working of the MF.
- DIFFERENT TYPES AND CATEGORY TO CHOOSE:
MF offers different types and categories of schemes to choose to investors according to their financial needs. It offers both long-term and short-term schemes. It also offers sector funds. Both open-ended and close-ended schemes are available. One can invest any time in any fund. MF also offers an investment opportunity for a very short period even for two days and offer easy liquidity.
- WORKS UNDER THE MARKET REGULATORS:
MF is subject to statutory compliances. They are primarily working under market regulator SEBI.SEBI closely monitor the working of MF and ensure that no malpractice is done and interests of the investors are protected. SEBI also imposes penalties and fine for violation of their guidelines. This forces the MF to work in an ethical and transparent manner. MF investments are also subject to various Income Tax provisions on Short-term and Long-term Capital Gain Taxes.
- WORK UNDER GOVERNMENT GUIDELINES:
MF is primarily working under SEBI. They are subject to various statutory compliances. MF are also subject to various Income Tax provisions like quoting of PAN No for transactions, subject to payment of dividends and Long-term and short-term capital gain tax. They are also subject to various securities laws.
Over the years MF have emerged as most popular and smart ways for investors to build wealth over the long term. If planned properly and in advance, handsome gains can be expected by proper allocation of assets. Funds should be chosen according to one’s risk appetite. Hence profiling of risk appetite of investor is to be done to arrive at financial risk tolerance level. This will also help in defining investing goals and objectives. The best part of investing in MF is Liquidity and higher returns. One need not invest in individual stocks.
However one should not forget that MF investments are subject to market risks and returns are not guaranteed. But the historical performance of various funds shows great returns in long term.