You would be lying if you were to say that you haven’t heard the words “mutual funds” or “SIP” if you live in India. Thanks to the immense and successful marketing campaign by the industry, most Indians are well acquainted with mutual funds (at least the word). This is clearly reflected in the recent figures. As of 31st July this year, the Assets Under Management (AUM) of the Indian Mutual Fund Industry stood at 37.74 trillion and has witnessed a five-fold increase in a span of 10 years and around two-fold just in the last five years.

Mutual funds are pooled investment vehicles that pool money from several investors and invest the same in equities, bonds, government securities, and money market instruments. The collected funds are then invested by professional fund managers in stocks and bonds, etc., per the scheme’s investment objective. The investment returns and income thus generated from the fund are distributed proportionately after deducting expenses related to managing and operating the fund.

Mutual fund investing should be an essential part of your finances, whether you are an investing guru or have just learned to walk the intricacies of financial markets. So in this blog, we will discuss the top 7 advantages of mutual fund investing.

Professional Management: Mutual funds are managed by experienced and qualified fund managers that actively make decisions to buy, sell, rebalance, and monitor your investments. These professionals have a dedicated team, expertise, experience and resources that are beneficial for investors who lack the time, knowledge and resources to conduct their research and purchase securities.

Highly Regulated: Mutual Funds are regulated by the Securities and Exchange Board of India (SEBI), the capital markets regulator in India, under SEBI (Mutual Funds) Regulations, 1996. There are stringent rules and regulations in place that protect the investor, help them raise their grievances, and keep them well-informed. Additionally, SEBI has laid down rules that make the industry transparent and mitigate risks in fund management.

Affordability: Most shy away from investing and have a list of excuses to keep off starting for the longest period. One of the most popular is that they don’t ever seem to have the surplus they can begin with. And then, there is the cost and time related to buying stocks and bonds directly. This is where mutual funds come in. You can start small (as low as 100) and systematically with mutual funds.

Economical: Not so far up, we discussed how funds are pooled and invested in mutual funds. Investors in the pool also share expenses related to the fund, like administration and management. SEBI regulations have laid down limits on expense ratios for various types of schemes. The expense ratio represents the annual fund operating expenses of a scheme, expressed as a percentage of the fund’s daily net assets. One of the crucial advantages of mutual funds is their low cost. Having huge economies of scale, the funds also charge lower fees.

Diversification: Diversification is the cornerstone of investing. It is prudent not to have all your eggs in one basket; one stumble and no omelette for the day. With diversification, the risk associated with one security/asset is countered by the others as long as they are uncorrelated. As with the affordability aspect mentioned above, you can economically diversify your portfolio by buying units in a mutual fund across many securities and asset categories such as equity, debt and gold.

Liquidity: Mutual funds can be easily encashed by redeeming your units at any point to meet your needs. With the exception of certain schemes, you can give a redemption request in all open-ended mutual funds on a business day. Easy liquidity ensures you have access to your money when you need it. The amount is directly credited to your bank within 1-4 days, depending upon the type of scheme. Units of close-ended schemes, ELSS funds, and certain solution-oriented schemes have lock-ins attached.

Tax Benefits: Mutual funds also offer tax benefits. ELSS funds are a type of mutual fund that provide tax benefits for investment amounts under Section 80C of the Income Tax Act, 1961, up to 1.5 lakhs in a financial year. Besides this, investments in equity funds held for the long term are also tax-efficient for investors.

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- Nischay Avichal