Updated: May 25, 2020
For those Mutual fund is new word, at the beginning you consider mutual funds as one of the many investment options available to you. Similar to other investments, you invest your money to buy mutual funds. Your investment return is based on the fund performance.
You may not be able to understand few terms in the beginning but it is OK. As you will progress with the learning it will become clear to you.
Let’s first look into the 10 reasons why you should invest in mutual funds.
1.1. Expectation of higher returns to fulfill financial goal
The prime objective of investment in financial instruments are to receive higher returns. There are traditional instruments which are quite popular among the people but the main drawback is return. For example, fixed deposit is popular but if consider the inflation rate to calculate the net return then return is surprisingly very low.
Mutual funds provide a way to reach out to variety of market linked product. Most of the time mutual funds have delivered superior return as against traditional investment options. Equity funds which is one type of mutual funds have delivered more than 10% returns over the last 10 years.
1.2. Professionally managed by expert
Mutual fund schemes are managed by qualified and experienced fund managers. Fund managers are skilled professional when it comes to making investment decision. Their expertise to understand the market and making right decision are key to get the higher return. Fund managers performance are measured by the fund performance, this is another reason they are very much focused when it comes to investment decision. For the investor, it is like hiring of a professional service.
One of the main benefit of mutual fund is diversification benefits. As per the investment objective of the scheme, fund manager invests the investor’s money in buying a basket of securities. It means that investor money is not invested in single securities but in many securities hence diversify the risk.
Though investors are not part of the decision making process of securities selection but it does not mean that they will not know where their fund has been allocated. Mutual fund schemes portfolio are publicly available so investor can go to mutual fund Asset Management Company’s (AMC) website and can check the list of securities and their allocation.
1.5. Stock market investment without DEMAT account
DEMAT account is mandatory for buying stocks from stock market. There are open ended equity mutual fund schemes which can be bought directly from the AMC (Mutual fund Company). When buying mutual fund schemes from the AMC, there is no need of DEMAT account. Fees like transaction fees, brokerage account maintenance fees, STT etc. can be avoided.
Liquidity is another factor which plays an important role while making investment decisions. Liquidity refers to, how easily you can liquidate your investment to get your money back. For a moment think of land investment. If you want to get your money back, it is not so easy to sell the property and get the amount credited in your bank account. Most of the mutual fund schemes are liquid.
1.7. High value stocks in portfolio
Investor can buy mutual fund scheme with very low investment amount. It is not that the minimum investment is based on the securities in fund portfolio. There is no relation between the securities price in the portfolio with the investment amount. It means, high value securities can be bought using mutual fund route.
1.8. Tax benefits
Equity linked savings schemes popularly known as ELSS are mutual fund schemes which offers dual benefits. As investments grows, it offers good return to the investor, at the same time tax benefits under section 80C.
Even though mutual fund investment itself is subjected to market risk. It means that the return may vary but it is not that the mutual fund company can take your money and run away. Mutual fund are formed as a trust. In later video, when I will talk about the mutual fund setup then you will get to know that how investor interest are protected.
1.10. Set up systematic withdrawal plan
Another advantage of mutual fund investment is its systematic withdrawal plan feature. Under this feature, investor can set withdrawal amount in a systematic manner like withdrawal of a fixed amount every month. This feature is ideal for the retired person. Withdrawal frequency could be monthly, quarterly, half-yearly, yearly etc.