Advantages of Mutual Funds

Now that you are aware of what are mutual funds, we will discuss some of the advantages of mutual funds.

Return on Investment

Historically, Mutual funds perform better than any other fixed income instrument like fixed deposits. You can expect anywhere between 12% to 18% return on our investment in equity mutual funds, if invested for a long period of time i.e. 10 years or more. There are some equity funds that have given consistent return of more than 20% over 10 years. With the declining interest rates, mutual funds is the best investment option i would suggest. Always remember, you invest to beat inflation.

Professional Management

You may neither have time nor skills to manage your investments on day to day basis. Investing requires skill. It requires to constantly monitor and study the changing dynamics of market. You need someone with these skills. If there is something wrong with your water pipeline at home, you don't go rush to fix it yourself. You call plumber for it, who are experts of this area. Similarly, mutual funds are managed by professionals, who constantly monitor performance of fund and take decisions in the interest of investors to meet fund's objective.
    

Diversification

"Don't put your all eggs in one basket." To reduce risk, you need to invest in different type of investment schemes. Mutual funds allows you to hold a diversified portfolio. A single mutual fund invests in somewhere 100-150 stocks. It is impossible that all the companies are not performing good. One may be performing below average, other may be average and some companies may be performing above average. Investing in shares of different companies. mutual funds provides this diversification and minimizes the risk and also gives you expected returns.

   

Tax Efficiency

Mutual funds are effectively more tax efficient than other instruments. Long term capital gain tax on equity mutual funds is zero i.e. you don't have to pay any tax on it. There are also tax savings mutual funds which provides you tax rebate under section 80C of IT act.

Read also: Mutual Fund taxation Rules
   

Liquidity

You can sell you mutual fund units at the ease of your home. Unlike property or gold, you don't need to search for a buyer to sell your mutual fund units. You can simply redeem units and you can get your money directly in your bank account with in one or two days. Liquid funds provide instant redemption and you can get your money credited with in 30 minutes. In case of real state property you need a seller and it may take days and even months before deal is materialized.

    

Flexibility & Transparency

There are variety of mutual funds to choose from. You can choose the mutual fund which meets your style of investing. You can choose mutual funds as per your risk appetite. You can start investing in mutual funds online if your KYC is done. You can compare mutual funds easily and select the fund to invest. Comparison can be done on the basis of returns over 1 year, 3 years, 5 years, 10 years and more. Mutual funds provide you with transparency. They clearly states how much they invest in different type of assets and stocks.