Compared to most other products, such as fixed deposits or debt instruments; investing in stock market offers an opportunity to earn higher returns. However, knowing what shares to buy and when to sell these is difficult for most investors. Furthermore, such investments are risky due to the volatility of the equity markets.These limitations may be overcome when you invest in mutual funds (MFs).
In simple terms, a mutual fund comprises contributions made by several investors. A professional fund manager decides where to invest this corpus using his skills and knowledge.
You will hold mutual fund units proportionately depending on your capital investment. The returns earned on the instruments included in the mutual fund portfolio are distributed among the different investors.
Here are eight benefits of investing in MFs.
One fundamental principle for sound financial investing is to ensure you do not invest all your capital in a single instrument. Diversification of investments is beneficial in reducing the risk as your portfolio comprises different financial products spread across various sectors in order to prevent loss. A mutual fund scheme invests in different products, such as equities and fixed income instruments, thereby lowering your risk.
Experienced fund managers analyze several factors to decide on where to invest the money. They are further assisted by qualified teams who constantly conduct extensive research about companies and analyze their performance. Based on the objective of the fund and the research, fund managers make investment decisions. This provides you with an opportunity of earning higher returns.
You may not be able to buy shares of large companies because these are high priced. On the other hand, you may invest as low as INR 500 in a Systematic Investment Plan (SIP) of a mutual fund scheme.
Open-ended mutual funds allow you to exit your investment without any limitations. This means you enjoy higher liquidity when compared to other products like bonds or deposits. Redeeming mutual fund units is a simple and quick procedure, which ensures you do not face any delays in receiving your money.
Mutual fund investments that are held for one year or more qualify for long-term capital gain benefits. The profits earned are taxed according to the rules guiding such gains and are also eligible for indexation that helps lower your tax liability. In addition, if you invest in an equity-linked savings scheme (ELSS), you are eligible for tax deductions under section 80C of the Income Tax (IT) Act, 1961.
Several rating agencies and industry publications track and record the performances of various mutual fund schemes. Furthermore, you will receive a periodic update on the Net Asset Value (NAV) to make informed decisions. In addition, you receive details about the fund manager’s strategy and holdings.
Rupee cost averaging
This allows you to invest a specific amount at periodic intervals. This means when the NAV is lower, you are able to purchase more units and vice versa. As a result, the average purchase price reduces. Rupee cost averaging encourages disciplined investment instead of making hasty and random decisions.
All mutual fund houses are registered with the Securities and Exchange Board of India (SEBI). Furthermore, they must follow and adhere to strict regulatory guidelines and rules that are provided for investor protection. The SEBI regularly monitors the various mutual funds, which ensures your investments are safe.
A large number of fund houses offer different schemes for you to invest. You may choose from equity or debt funds, large-cap, mid-cap or small-cap funds, and balanced funds as per your personal needs and investment goals. Furthermore, you may switch between different funds according to the changes of your financial objectives. Such versatility makes mutual funds attractive and a popular investment product.
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