A mutual fund is the best option for a layperson to invest in a diversified portfolio. You can easily invest in any asset class like equities, bonds, T-Bills, CPs, CDs or money market instruments using this instrument.
With so many schemes available, mutual funds have the potential to fulfill almost every investment objective closely related to your life goals, whether it is planning for a house, a car, retirement, any emergency or tax savings.
When it comes to tax savings, ELSS (a tax saving mutual fund) is the best option because of its potential to generate higher returns and the lower lock-in period.
The smartest and easiest way to invest in a mutual fund is through an online investment platform. You just need to:
- Sign up to create an investment account
- Select financial goals, be it tax saving or other life goals
- Pick up the mutual fund scheme to invest
- Give necessary additional information for the investment
- Bank transfer the money directly to the fund house
The investment process is automated without any fees or hidden charges.
But, you should not pick mutual funds based on advice that doesn’t come from a reliable source or just for showing tax investment certificate. We strongly advise you to carefully analyze the associated merits and demerits of the mutual fund.
Only then you will be able to know about the suitability of mutual funds as an investment instrument and foster healthy investment practices.
This article helps you understand the advantages and disadvantages of mutual fund investment, which you will face while picking up mutual funds for regular investment or for saving taxes.
11 Advantages of Mutual Funds
Let’s discuss the mutual fund benefits which you can enjoy by investing in mutual funds.
1. Liquidity to Enter and Exit Anytime
Liquidity helps you get money from your investments as and when you require. It is relatively easier to buy and sell a mutual fund scheme as compared to other investments like real estate, PPF, and NPS.
The only barrier is in the case of close-ended mutual funds, like ELSS which have a lock-in period of 3 years. But post-lock-in period you can sell your units without exit load at any point of time to fund your needs.
2. Diversification for Spreading Risk
The diversification offered by mutual fund investments it helps you manage risk by investing in more than one asset class like equities, debts and money market instruments based on your financial goals.
3. Expert Fund Management
Mutual funds save your time and help you manage the challenges of asset selection, fund allocation, monitoring, and management.
Investing in Mutual funds doesn’t require you to be an expert, as this saves your time and energy that goes in e-market research or to keep watch on timely entry or exit decisions. Your fund manager takes care of all the challenges.
You simply need to invest and be assured that the rest will be taken care of.
4. Flexibility to Invest in Smaller Amounts
Mutual funds have inbuilt flexibility to help you invest as per your cash flow position. The investment does not require you to make all the purchases upfront. But you can definitely do a lump sum purchase if you have money.
If you are receiving a monthly salary then you can go for a systematic investment plan (SIP) where you invest a fixed amount monthly or quarterly. You are flexible to plan as per your budget and convenience.
SIP can be as low as Rs. 500 per month and unlike lump sum investments this gives you the benefit of rupee cost averaging.
You can also check out the difference between SIP and mutual fund
5. Accessibility - Mutual Funds Are Easy to Buy
Mutual funds are offered by asset management companies (AMCs) and distributed through channels like;
- Brokerage firms
- AMCs themselves
- Registrars like Karvy and CAMS
- Online mutual fund investment platforms
- Agents and banks
This makes mutual fund universally available and easily accessible. Plus, you do not need to have a Demat account for investing in mutual funds.
6. Schemes for Every Financial Goals
You can find schemes suitable for anyone, from a high net worth investor to salaried individuals, matching the individuals’ income, expenses, risk-taking ability, and investment goals.
7. Safety & Transparency
Unlike Bitcoin, corporate bonds, money market instruments, and shares, all information about mutual fund is easily available online.
AMCs are strictly regulated through statutory government bodies like SEBI and AMFI, which ensures safe and healthy investment practices.
You can easily verify the credentials of the fund manager, his qualifications, years of experience and AUM, solvency details of fund houses.
8. Lesser Cost When the Fund Invests Collectively
Fund houses invest in assets collectively, hence save on transaction and other costs as compared to a single transaction. The savings are passed on to investors as lower costs of investing in mutual funds.
Plus, the asset management services fees also comes at a lower cost as it gets divided between all the investors of the fund.
Advantages of Tax Saving Mutual Funds
ELSS mutual funds also provide tax benefits to the investor. Mutual fund tax-saving benefits include
9. Best Tax Savings Option
Mutual funds help in better tax planning along with the higher returns from investments. You can get a deduction of up to Rs. 1.5 Lakhs under section 80C.
ELSS tax saving mutual funds have the potential to deliver higher returns as compared to other tax-saving instruments like PPF, NPS and tax-saving FD.
10. Lowest Lock-in Period
Tax-saving mutual funds have the lowest lock-in period of only 3 years as compared to a minimum of 5 years for other tax-saving options like FD, ULIPs, and PPF.
Plus, you have the facility to stay invested even after the completion of the lock-in period.
11. Lower Tax on the Gains
From the taxation on gains perspective, ELSS is neither totally tax-exempt like PPF nor fully taxed as in the case of returns from FD or NSC.
Gains from ELSS funds accrue after a period of three years; hence it is treated as long-term in nature. Gains from ELSS are taxed at the rate of 10% for gains over Rs. 1 Lakhs, which is lower than the 15% tax rate charged in the case of short term capital gains.
You should keep the advantages, highlighted above, in mind while investing in a mutual fund.
There are certain disadvantages of mutual funds like the risk of over-diversification and transaction charges. However, some online investment platforms can help you invest wisely depending on your financial goals.