Mutual Funds are often misunderstood as a complex investment vehicle. However, in reality, they are pretty simple in their investment philosophy and offer investors a host of benefits such as diversification, professional money management, economies of scale, transparency, and liquidity, to mention a few. In simple words, mutual funds are a pool of investments comprising different securities such as equities, debt instruments, and money market instruments, etc. These holdings form a mutual fund and each individual combination is also referred to as a portfolio. It is quite challenging for most investors to manage their own money and the task of studying and analyzing various companies simply adds on to their challenges. Mutual fund investments offer you with a professional fund manager at a nominal fee. This designated fund manager analyzes, tracks, and transacts various securities on your behalf. This can be a major advantage for those who cannot find the time to do their research.

If you are new to the world of mutual fund investing, let us look at some of the key benefits of mutual funds that make them an ideal choice for investors.

What are Important Benefits of Mutual Funds?

1. Diversification

One of the most prominent advantages of investing in mutual funds is diversification. It is the process of spreading a given investment over multiple assets classes. Diversification helps us create an assorted portfolio that segregates the headwinds experienced in various sectors. Money is invested in a mixture of assets according to one’s risk appetite.

For e.g., an equity-oriented mutual fund would generally comprise of 60-70% investments in equities, and the remaining 30-40% in debt  securities.

As mentioned earlier, diversification helps us reduce the risk associated with different asset classes. This proves to be beneficial when an underlying component of a given mutual fund experiences market headwinds. With diversification, the risk associated with one asset class is countered by the others. This way, you don’t lose out on the entire value of your investment if a particular compenent of your portfolio goes through a turbulent period.

2. Professional Management

A lot of investors do not have the time or resources to conduct their research and purchase individual stocks. This is where professional management becomes quite useful. Several people invest in mutual funds for the professional expertise it provides to one’s investments. A fund manager continuously monitors investments and adjusts the portfolio accordingly to meet its objectives. This professional management is one of the most important advantage of a mutual fund.

3. Tax Benefits^#

The tax benefits associated with a particular kind of mutual fund is perhaps what draws most investors to this investment vehicle. To encourage investments in mutual funds, the Government of India offers several tax benefits.

For e.g., investments in Equity-Linked Saving Schemes (ELSS) qualify for tax deduction under Section 80C of the Income Tax Act. One can invest up to Rs1.5 lakh in this instrument to avail a tax saving of approximately Rs46,800 (assuming the highest slab of income tax i.e. @30% plus health & education cess 4% excluding surcharge as applicable) on their taxable income. The only caveat here is that the instrument comes with a lock-in period of 3 years, which means that you would not be able to access the invested funds during this period.

4. Highly Liquid

One can easily sell mutual funds to meet their financial needs. Upon liquidation, the money is deposited in your bank account in few  days. Additionally, there are mutual funds that provide faster disbursal. They are called funds having instant redemption facuility , wherein the money is transferred to your bankon the same day.

5. Higher Return on Investment (RoI)

All investors aim to achieve a higher RoI by investing in financial instruments such as mutual funds to beat inflation and increase their wealth of the long-term. Mutual funds have greater prospects of potentially providing highreturns over time as one can invest in a diverse range of sectors and industries.

6. Well-regulated

All mutual funds are regulated by the capital markets watchdog Securities and Exchange Board of India (SEBI). This means that all mutual fund houses are required to follow the various mandates as laid down by SEBI. This, in turn, protects the interests of the investors. Moreover, SEBI makes it mandatory for all mutual funds to disclose their portfolios every month.

7. Easy Investment

It is very easy to invest in mutual funds, i.e. you can do this either online or offline. You simply need to visit your Asset Management Company’s (AMC) website and submit the necessary documents to start on your investment journey. Moreover, you can also visit your AMC in person and sign the physical documents to get started. This ease of investment makes mutual funds are preferable avenue.

SIP and Lumpsum

Most importantly, investing in mutual funds is very affordable. For those who cannot earmark a significant portion of their earnings towards mutual funds, they can start investing with amounts as low as Rs500 at predefined intervals. This is known as a Systematic Investment Plan or SIP. On the contrary, if you have a significant chunk of money to invest, you can even make a lumpsum investment in a mutual fund. Many investors are confused which is better between to above two investment methods. Here is an article on  SIP vs Lumpsum which will help you understand which is a better of the two.

Mutual funds aid you in realizing your life’s superior goals quite easily. In this video, we go through the different benefits of mutual funds that investors can capitalize on to grow their corpus and meet their financial goals.

# The information given here is neither a complete disclosure of every material fact of Income-tax Act 1961 nor does it constitute tax or legal advice. Investors are requested to review the prospectus carefully and obtain expert professional advice with regard to specific legal, tax and financial implications of the investment/participation in the scheme