Mutual funds often are one of the misunderstood avenues due to their market linked nature, which makes it complex to understand. However, they are simple in their philosophy and offer you a wide range of benefits like diversification, economies of scale, professional money management, liquidity, and transparency, to name a few. In simpler terms, a mutual fund is a pool of investments that consist of distinct securities like equities, money market, debt instruments, etc. This avenue solves the issue of novice investors who find investing their money challenging due to inadequate market knowledge. Investments in mutual funds are managed by professional fund managers at a nominal fee. Such designated managers track, analyze, and transact different securities on behalf of you. It is one of the major benefits for those who cannot find much time to do proper research. Read on to know more about the crucial reasons for the growth of mutual funds in India.
Diversification
Diversification is a prominent benefit of investing in mutual funds. This is a process of disseminating your investment over various asset classes. Diversification assists you to build a mixed portfolio that separates the headwinds faced in different sectors. Funds are invested in a mix of assets as per your risk tolerance level. For instance, equity linked mutual funds will usually consist of 60 – 70 percent investments in equities, and the rest 30 – 40 percent is in debt securities.
As previously mentioned, diversification assists you to lower the risk linked with distinct asset classes. It proves to be advantageous when the underlying component of a specific fund experiences market downturns. With diversification, the associated risk with one asset category is countered by others. In this way, you do not lose on the whole investment value if a specific component in your portfolio witnesses a turbulent period.
Tax benefits
Tax benefits linked with a specific type of mutual fund are what attract many investors towards it. To encourage mutual fund investments, the Indian government provides tax benefits. For instance, investments in ELSS (Equity Linked Savings Scheme) allow tax deduction as per Section 80 C. You can invest an amount of up to Rs 1.50 lakh in this avenue to avail tax saving of nearly Rs 46,800 (in case of highest income tax slab of 30 percent) on your taxable income. The only caveat is that ELSS comes with a lock-in of three years, which means you cannot access the invested money during this tenure.
High liquidity
You can sell off your mutual funds at any time to mitigate your financial requirements. On liquidation, money is deposited into your account in a few days. Moreover, there are even mutual funds that offer faster fund disbursal. It is called an instant redemption facility where the fund is transferred on the same day of placing the redemption request.
Higher investment return
Whenever you invest, your major aim often is to attain a higher return on investments and mutual funds can certainly help. Equity schemes, a category under mutual funds have the potential to generate inflation beating returns, and outperform fixed income asset classes by a wide margin over the long term.
Option to invest smaller investible amount through SIP in mutual funds
If you lack the skill to time investments, you can choose the SIP route for investing in mutual funds. Opting for the SIP route helps to ensure regular investment, average your investments during market corrections and inculcate financial discipline. With the ticket size of most SIPs starting from Rs 1,000 (Rs 500 in case of equity linked savings scheme), through smaller monthly investments also you can derive the benefit of investing in mutual funds.
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