Recommended reading: Introduction to mutual funds
The benefits of investing in mutual funds are:
- Professional management of the investments: Each Mutual fund appoints an experienced and professional funds manager and several research analyst, who research before investing, thus adding value to the common investor. These professional constantly keep track of the market changes and news, predict the impact they will have on the investments and take quick decision regarding the adjustments to be made in the portfolio.
- Low costs of Investments: Due to the large amount of funds manages, very low costs accrue per investor. Mutual fund achieves economics of scales in research, transactions and investments. It lowers the cost of brokerage, custodial and other charges.
- Diversification : A common investor has limited money, which he can invest only in a few securities and faces a great risk. If their values go down, the investor loses all his money. Since Mutual Funds have huge amounts of funds to invest, the Fund manager invests in the securities of many industries and sectors; ( called diversifying the risk ). This diversification reduces the risk involved because all the sectors and industries will never go down at the same time. Investors get this diversification by investing a small amount in Mutual Funds.
- Convenient record keeping and administration: Mutual funds take care of all record keeping including paperwork. It also deals with the problem of bad deliveries, broker’s commission etc.
- Various types of Schemes: Mutual Funds offer various types of schemes such as regular income plan, growth plan, equity funds, debt Funds, and balanced Funds. So an investors can select a plan according to his needs.
- Flexibility: Mutual funds offers various schemes, giving the investor the option to shift from one scheme to another at various times depending on his needs, the risk he is willing to take, and the type of return the wants.
- Scope for good return: Mutual fund invest in various industries and sectors, therefore the portfolio gets diversified, resulting in mutual funds generating equitable return.
- Enables investing in high value stocks: The individual investors have less money to invest and cannot invest in high value stocks such as Infosys. With Rs 12000 an investors can purchase only 2 shares of infosis, which is like putting all his eggs in one basket. Mutual funds have huge amount of funds and can invest in these high value stocks. The benefits from this high value stock can pass on to all the investors.
- Easy liquidity: Mutual fund provides easy liquidity. In the case of open-ended scheme units can be purchased/sold at NAV from/to the mutual fund on any day. In the case of closed-ended funds units are traded on the stock exchange at the market prices, or the investors can repurchase the units from the mutual fund at the prevailing NAV related prices.
- Tax benefits: There are certain schemes that offer tax benefits o the customers. So the investor also tax benefits from mutual fund.
- Provides transparency: Mutual funds keep the customers informed about the competition of all the investments in various asset classes from time to time. During the launch of the mutual fund the offer document provides information on the objective of the funds, cost to be incurred, entry/exist load to be charged to the investor, risk associated with the funds, & detail about the fund mariners, sponsors, members of trust etc.
- Regulated by SEBI: Just like equities, mutual funds are also regulated by the SEBI. This is to safeguard the interests of investor.