The starting point for investing through mutual funds is a decision to look at investment options beyond cash and bank deposits. The three financial investment options available to you in increasing order of expected returns are:
- Fixed Income (or Debt)
- Equities (or stocks)
Please note our use of the word “through” in the title. Mutual funds are an easier way to invest in Debt or Stocks. When you invest “in” an Equity Mutual fund, you’re actually investing in stocks “through” the mutual fund route. Similarly with Debt funds.
For a discussion on why you should invest in stocks, please see the blog post: Long term performance of Investment Options.
Investing through mutual funds is better than investing directly for a number of reasons and one or more may apply to you:
#1: You want Professional Management
Investing involves a lot of decisions, which require a deep understanding of the investment options. For example: investing in stocks requires you to have the ability to understand economic trends and company financials. With mutual funds, you can invest in stocks without knowing all that and rely on professional managers instead. You trust other professionals (Pilots, Chefs, Doctors) every day to get things done for you. It makes sense to do that for your money as well.
#2: You spend less effort & expense
Investing also involves a lot of work. Once again taking the example of stocks, you need a trading account with a broker, a demat account etc. You will then need to research stocks and monitor what you have invested in. These cost money and time. You also need to deal with multiple parties and keep records.
#3: You can invest small amounts
Mutual funds allow you to invest small amounts because you are a fractional investor in a large asset. This works specially well for large ticket investments like real estate. The minimum investment for a property could be in lakhs but with a real estate mutual fund, you could invest a few thousand rupees, which could gain from investing in a large project of hundreds of crores.
#4: You can diversify even with small portfolios
Since mutual funds invest in portfolios of assets, you get the benefit of diversification. [Diversification is a method of reducing risk by investing in more than one option. Your risk is reduced because if one option doesn’t do well, the others will make up for it). Mostly, for small investors, this is not possible to do. For example: 1000 Rs invested in a mutual fund will get distributed across 50-100 stocks whereas with Rs 1000 you will not be able to buy a single share of Infosys!
#5: You can invest very easily
Investing through mutual funds is easy and convenient. You can invest online through many intermediaries such as Scripbox, as well as directly with the mutual fund companies.
#6: You have easy access to your money
You can withdraw your money from a mutual fund at any time and will usually get the money into your back account within 3-4 days.
#7: Tax efficiency
Investing through mutual funds leads to better tax efficiency in certain cases. For example: Investing in Gold ETFs is more tax efficient than investing in Gold directly.
#8: Safety of your investments
Mutual funds invest in assets that they are required to disclose periodically. These are also audited. The failure of a mutual fund company does not affect the investments of unit holders as legally they always belong to the investors and are only held in trust.
#9: Regulatory oversight
Since typical mutual fund investors are small investors, the regulator SEBI has imposed strict rules and guidelines for Mutual Fund companies that protect investors. SEBI is actively working on steps that benefit investors.
IMPORTANT: Safety and security, which we refer to above, relate to protection from fraud. Since mutual funds invest in market securities, there is no guarantee of return or protection of capital. This applies to Debt funds as well as to Equity funds.