The 7 Main Benefits of Mutual Funds

Mutual funds are amongst the most popular investment options, due to the numerous benefits they offer investors. In this blog post, we discuss the 7 most important benefits that mutual funds provide investors.

Wide range of risk-return options

Mutual funds are of various different types (equity, debt, hybrid, international, gold), that offer a very wide range of risk-return options for investors. Investors have varied goals, with each goal having different appetites for risk and investment horizons. Mutual Funds allow investors to fund each goal with an investment that best reflects the risk appetite and investment horizon for that specific goal. 

Professional Management

Most investors lack the skills, time and experience required to identify the best securities to invest in. Hiring a financial expert to identify the best investments can be costly. By pooling together the funds of a large number of investors, mutual funds help investor gain access to highly seasoned investment experts (fund managers) at a relatively low cost. The fund manager is responsible for identifying and monitoring investments to ensure that they meet the requirements of the fund's investment mandate. 

Diversification

Diversification helps reduce the risk of investments, by spreading investments across a large number of different investments (whose values may not necessarily move together). Mutual funds help investors take advantage of diversification at 2 levels - (a) an individual mutual fund is typically well-diversified at the fund level itself (b) since investors can invest in a basket of mutual funds of different types, they can further increase the level of diversification at the overall portfolio level. 

Ease of Investing & Redemptions

It is very easy to invest in mutual funds (especially if you choose to do so online). The ease with which you can invest or redeem your mutual funds, are substantially superior to virtually all other investment options. 

Mutual funds also allow you to make investments & redemptions in very small sums (as low as Rs. 500), making it very easy for smaller investors to invest. 

Liquidity

The vast majority of mutual funds (with a very few exceptions), allow you to redeem your investments at any point in time. Money redeemed from mutual funds are deposited in your bank account within a few days (typically the next day for debt MFs, and on a T+2 basis for equity MFs). 

Additionally, mutual funds allow you to redeem only a fraction of your total investments, as compared to a number of other investment options which require a complete withdrawal (even if you only require a part of the total corpus). 

Benefit of SIPs, STPs, SWPs

SIPs (Systematic Investment Plans), STPs (Systematic Transfer Plans) & SWPs (Systematic Withdrawal Plans) make it very easy for investors to spread their investments, redemptions or transfer of investments in a systematic manner spread out over a period of time. This provides substantial benefits to help reduce the risk of volatile asset classes and meet the specific needs of an investor.

Tax Advantages

While most investors understand the tax benefits of ELSS funds (sec 80c tax benefits), they often fail to appreciate the substantial tax advantages of normal mutual funds. Equity mutual funds allow the fund manager to modify investments, without attracting equity capital gains tax.

Both equity & debt mutual funds lead to substantially lower tax incidence for investors, as compared to making direct investments in equities and debt securities.