Take a look at 5 key advantages of investing in mutual funds.
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Mutual fund investment: Investing in the stock market, while potentially lucrative, carries significant risk for those lacking the necessary time, expertise, or resources to choose and manage individual stocks. This is where the role of mutual funds becomes critical.
A mutual fund aggregates capital from numerous small investors, investing collectively in a range of equity and debt instruments. Investors receive units corresponding to their investment, with the fund levying a management fee. The mutual fund's performance, whether profitable or not, is proportionally shared among its investors.
Here are five key advantages of investing in mutual funds:
1. Expert Management: Mutual funds are managed by seasoned, professional managers, offering expertise and dedicated resources for effective investment management. This is particularly beneficial for investors who lack the time or knowledge to invest directly in individual stocks.
2. Diversification: Mutual funds offer a straightforward approach to diversify investments across various asset classes like stocks, bonds, and precious metals. This diversification can mitigate risks, especially when a specific asset in a mutual fund's portfolio faces market challenges. Diversification ensures that even if one investment loses value, others within the portfolio may remain stable or even appreciate.
3. Liquidity: Open-ended mutual funds provide the flexibility to redeem units readily, offering convenient access to funds. However, units in closed-end funds are typically redeemable only upon maturity. Similarly, investments in Equity-Linked Savings Schemes (ELSS) are subject to a three-year lock-in period before they can be liquidated. Upon redemption, the redemption amount is credited in investor's bank account within one day to 3-4 days, depending upon the type of scheme. For examples, in respect of Liquid Funds and Overnight Funds, the redemption amount is paid out the next business day.
4. Cost-Effectiveness: Owing to large-scale operations, mutual funds generally boast a low expense ratio. This ratio indicates the annual operating expenses of a fund, covering administrative, management, and marketing costs.
5. Tax Incentives: Investments in ELSS up to Rs 1,50,000 are eligible for tax deductions under Section 80C of the Income Tax Act, 1961. Moreover, mutual funds held over the long term offer tax efficiency.
In addition to these advantages, mutual funds also offer affordability and convenience when it comes to investing. Purchasing individual securities directly can turn out to be costlier than going with a mutual fund that funnels your money in a particular shares basket. Managing all this on one's own– which would involve multiple transactions, tracking payments, etc– can also be inconvenient. By contrast, the minimum initial investments for most mutual funds are more affordable and their management is easier, too.
Investors should also note that mutual Funds are regulated by the capital markets regulator, Securities and Exchange Board of India (SEBI) under SEBI (Mutual Funds) Regulations, 1996. SEBI has laid down stringent rules and regulations keeping investor protection, transparency with appropriate risk mitigation framework and fair valuation principles.
(Disclaimer: The above article is meant for informational purposes only, and should not be considered as any investment advice. Times Network suggests its readers/audience to consult their financial advisors before making any money related decisions.)