Mutual funds (MFs) are one of the most well-known financial instruments in the market. Apart from inculcating savings discipline, they also offer handsome returns over the long term. No matter whether you are a novice or experienced investor, adding MFs to your portfolio is one of the smartest financial moves you can make.
In this guide, we tell you all you need to know about mutual fund schemes and the most compellin gadvantages of mutual funds.
In simple terms, a mutual fund is an investment vehicle that comprises a pool of capital collected from multiple investors. This corpus is then invested in diverse financial securities – stocks, money market instruments, bonds, debts, and other assets – based on the MF’s mandate.
Mutual funds are professionally managed by Asset Management Companies (AMCs). An AMC designates fund managers who oversee that the fund’s investment goals are met. They allocate assets under management (AUM) to different securities for generating a steady income and/or capital gains for the participant investors.
As an investor, you own a specified number of units of the whole fund. You share its losses or gains proportionally with other holders. Therefore, income generated from the investments is divided among all the investors according to their holding percentage.
Another important thing to know is that the market performance of the constituent securities determines the gains you earn on an MF. Besides, market condition plays a central role in influencing a purchased security’s value.
Additional Read: Tips to invest in mutual funds
There is a world of advantages that mutual funds offer. Ease of investment, versatility, transparency, liquidity, and diversification are only a few. In this section, we take you through the top advantages of mutual funds that make them an excellent choice for investors of all ages and risk appetites.
One of the biggest advantages of a mutual fund is a seasoned professional – the fund manager – is picking the best securities for you and making investments in them. Say, you are a beginner in the world of stock markets. Neither do you have the time or the requisite knowledge to conduct extensive research on available stocks and pick the best. But, you want to build a portfolio with high-growth stocks. Instead of attempting to identify stocks with the most potential yourself, you can invest in a small-cap equity fund. Here, the fund manager will do the research on your (and other investors’) behalf and invest the AUM in high-growth companies.
The same holds true for evaluating, researching, selling, and buying bonds, debentures and other asset classes covered by MFs. Fund managers hold the required experience, expertise, and qualification to select the right securities for generating ideal returns.
The expert management may also include a team of analysts that assist in the task. They track the market, monitor investments and regularly tweak the portfolio to fulfil the fund’s objectives.
Perhaps the most important advantage of MFs, which is important for many investors, is the liquidity they offer. A mutual fund is an uncomplicated financial instrument offering decent liquidity. In fact, it is simple to join or exit a scheme. You can redeem the unit holdings whenever you want to meet your financial needs. Moreover, most funds are well-linked to the banking system. So, you can have money deposited directly to your bank account upon liquidation.
There are even some funds that offer an instant redemption facility that transfers money on the same day of the transaction. However, do look out for some factors like pre-exit penalty and exit load in a fund. You might incur some charges if you exit the scheme before the lock-in period.
One of top advantages of mutual funds is the incredible diversity in objectives and asset classes. You will find plenty of products to choose from, depending on your risk profile, income, time horizon, goals, etc.
Broadly, you will find four kinds of MFs in the market - equity funds, balanced or hybrid funds, fixed-income funds, and money market funds. Further, there are multiple subcategories of schemes designed to meet different financial goals. You can invest in the best-balanced advantage funds, index funds, growth funds, speciality funds, value funds, international funds, sector funds, emerging market funds, and more!
In a mutual fund, your investment is spread across a wide range of securities. For instance, in a mid-cap fund, the fund manager will invest in stocks of companies belonging to different sectors. This means that even in the event of market volatilities, your risk will be spread across different industries. If utility stocks, for example, are taking a hit, other stocks will offer a cushion and hold the net value of the fund up.
Instead of putting all eggs in one basket, MF schemes are designed to distribute risk while capturing widespread market gains. This is known as diversification, which reduces your risk and provides a broader portfolio exposure. Because the value of asset classes will not rise or fall simultaneously, diversification safeguards the overall performance of your portfolio.
Statutory government bodies monitor and regulate MFs in India for protecting the interests of investors. The Association of Mutual Funds in India (AMFI) and the Securities and Exchange Board of India (SEBI) lay down strict regulations to be followed by all mutual fund houses.
SEBI, being the primary regulator of the market, ensures that investor interests are safeguarded. To simplify and introduce more transparency in fund schemes, in 2017, SEBI mandated all fund houses to categorise their schemes into 5 broad categories, further divided into 36 sub-categories –
You can validate a fund house’s credentials from SEBI easily. You can access standard information about investments, including a scheme’s quantity of investment in each security, and the likes. SEBI also has a grievance redressal mechanism in place for investors. In fact, the regulatory body frequently notifies circulars for compliance by fund houses and to make information easily available to all investors.
The government of India also offers mutual fund tax benefits to promote investments in such schemes. For instance, you can invest in an Equity-Linked Savings Scheme (ELSS) to enjoy tax-saving advantages. ELSS tax benefits allow you to become eligible for tax deduction up to Rs. 1.5 lakhs per year under Section 80C of the Income Tax (IT) Act, 1961. Effectively, this brings your taxable income down.
Mutual funds (MFs) are one of the most well-known financial instruments in the market. Apart from inculcating savings discipline, they also offer handsome returns over the long term. No matter whether you are a novice or an experienced investor, adding MFs to your portfolio is one of the smartest financial moves you can make.
In this guide, we tell you all you need to know about mutual fund schemes and the most compelling advantages of mutual funds.
Systematic Investment Plans (SIPs) offer several advantages that make them an attractive option for investors looking to build wealth over time. By committing to a fixed amount of investment at regular intervals, investors can develop a habit of saving and benefit from the power of compounding. This also helps in averaging out the cost of investment through rupee cost averaging.
Additionally, SIPs are highly flexible. Investors can start with a small amount and gradually increase their investment as their financial situation improves. This makes SIPs accessible to a wide range of investors, including those who may not have enough funds to make a large lumpsum investment. Moreover, since SIPs are managed by professional fund managers, investors don't have to worry about constantly tracking their portfolios or predicting market movements.
SIPs are also excellent for diversification as they invest across different asset classes and sectors, reducing overall investment risk.
Systematic Transfer Plans (STPs) are ideal for investors seeking a more strategic approach to managing their investments. STPs help them manage risk by gradually transferring funds from one mutual fund scheme to another. This is particularly useful for investors who want to move from a debt fund to an equity fund or vice versa, ensuring a smoother transition and minimizing the impact of market volatility.
By systematically transferring funds, investors can maintain their desired asset allocation without the need for frequent manual adjustments. This helps keep the investment portfolio aligned with their risk tolerance and financial goals.
Systematic Withdrawal Plans (SWPs) offer a variety of advantages for investors. Investors can set up a plan to withdraw a fixed amount of money at regular intervals, earning regular income. This makes SWPs particularly beneficial for retirees or those who need a steady cash flow to cover living expenses.
SWPs also provide investors with the flexibility to choose the frequency and amount of withdrawals based on their financial needs and goals. This makes it easier to manage financial planning and cashflows effectively. Moreover, by withdrawing funds systematically, investors can avoid the risk of liquidating their investments at a market low and preserve the investment's value over time.
If you're looking for consistent cash flow to meet your regular expenses, IDCW options can be an excellent investment. Through IDCW options, you receive income distributions at regular intervals, such as monthly, quarterly, or annually. The remaining capital continues to be invested in the market, allowing for potential appreciation over time.
Additionally, with IDCW options, you can choose the frequency of income distribution that aligns with your financial needs and goals. This helps you align your investments with your cash flow requirements, enhancing financial planning.
MFs are versatile and flexible enough to be useful to all kinds of investors. Moreover, it’s simple to invest in mutual funds due to their accessibility. Start with a lump-sum or systematic investment plan (SIP) directly or through a financial advisor. With online applications, you can join a scheme from anywhere in the world with just your mobile phone.
Additional Read: How to Invest in Mutual Funds
Simplify your investment journey by downloading Tata Capital’s Moneyfy app. Explore a wide range of funds, compare different schemes, and keep a watch on the market conveniently. Choose schemes that align with your objectives and risk appetite. Start reaping the long-term benefits of mutual fund investments with Moneyfy today!
One of the primary advantages of mutual funds is diversification. By pooling money from many investors, mutual funds invest in a wide variety of securities, spreading the risk. This means that even if some investments perform poorly, others may perform well, balancing out potential losses and reducing the overall risk to the investor.
Mutual funds are investment instruments that pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. Key advantages of mutual funds include diversification, professional management, liquidity, and convenience. However, they also have drawbacks like associated fees and expenses, market risk, and potential for lower returns.
Yes, mutual funds can be highly beneficial, especially for investors who do not have the time or expertise to manage their investments actively. However, it's essential to consider the associated fees and market risks before investing.
Investing in mutual funds offers several benefits:
- Professional management by experienced fund managers
- Diversification across a variety of assets
- Regulated by the Securities and Exchange Board of India (SEBI), ensuring investor protection
- Different types of funds for different risk appetites and financial goals
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08 November 2024
10 mins read
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