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Any Investment plan has its own advantages, be it for a short term or long term. Investors are usually keen on investing in Mutual Funds because of the risk management. However, needless to say, these investments also come with some disadvantages. This article explain about the advantages & benefits of mutual funds.
What is Mutual Fund?
A Mutual Fund scheme is a type of financial instrument which is made by a pool of money collected from many investors. The AMCs invest in securities like company shares, bonds, stocks, debts, and other assets by mutual fund companies. The AMCs manage these open-ended investments. Mutual fund companies allocate the fund in different securities. This helps its investors to grow their wealth through their investments
The capital gain on a Mutual Fund scheme depends on the performance of the securities it decides to buy. The market condition is also a factor that determines the value of the particular security purchased.
The income or gain generated from these investments is then distributed among the investors. The distribution is done post deduction of certain expenses, by calculating the Net Asset Value of the scheme.
Mutual Funds can be a higher risk investment but the returns are generally greater than in any other investment plan.
Mutual Funds have both advantages and disadvantages. The advantages of investing include professional management, low risk, diversification, liquidity, economies of scale. The disadvantages of investing include the high fee, poor trade execution, tax inefficiency., etc.
Advantages and Benefits of Investing in Mutual Funds in India
The following are explain about the advantages of mutual funds.
Liquidity
The most important benefit of investing in a Mutual Fund is that the investor can redeem the units at any point in time. Unlike Fixed Deposits, Mutual Funds have flexible withdrawal but factors like the pre-exit penalty and exit load should be taken into consideration.
Diversification
The value of an investment may not rise or fall in tandem. When the value of one investment is on the rise the value of another may be in decline. As a result, the portfolio’s overall performance has a lesser chance of being volatile.
Diversification reduces the risk involved in building a portfolio thereby further reducing the risk for an investor. As Mutual Funds consist of many securities, investor’s interests are safeguarded if there is a downfall in other securities so purchased.
Expert Management
A novice investor may not have much knowledge or information on how and where to invest. The experts manage and operate mutual funds. The experts pool in money from investors and allocates this money in different securities thereby helping the investors incur a profit.
The expert keeps a watch on timely exit and entry and takes care of all the challenges. One only needs to invest and be least assured that rest will be taken care of by the experts who excel in this field. This is one of the most important advantages of mutual funds
Flexibility to invest in Smaller Amounts
Among other benefits of Mutual Funds the most important benefit is its flexible nature. Investors need not put in a huge amount of money to invest in a Mutual Fund. Investment can be as per the cash flow position.
If You draw a monthly salary then you can go for a Systematic Investment Plan (SIP). Through SIP a fixed amount is invested either monthly or quarterly as per your budget and convenience.
Accessibility – Mutual Funds are Easy to Buy
Mutual Funds are easily accessible and you can start investing and buy mutual funds from anywhere in the world. An Asset Management Companies (AMC) offers the funds and distributes through channels like :
- Brokerage Firms
- Registrars like Karvy and CAMS
- AMC’S Themselves
- Online Mutual Fund Investment Platforms
- Agents and Banks
This factor makes mutual funds universally available and easily accessible. More so, you do not require a Demat Account to invest in Mutual Funds. Mutual funds are easy to buy, track performance and one-click investment with Scripbox.
Learn: how to invest in mutual funds.
Schemes for Every Financial Goals
The best part of the Mutual Fund is the minimum amount of investment can be Rs. 500. And the maximum can go up to whatever an investor wishes to invest.
The only point one should consider before investing in the Mutual Funds is their income, expenses, risk-taking ability, and investment goals. Therefore, every individual from all walks of life is free to invest in a Mutual Fund irrespective of their income.
Safety and Transparency
With the introduction of SEBI guidelines, all products of a Mutual Fund have been labeled. This means that all Mutual Fund schemes will have a color-coding. This helps an investor to ascertain the risk level of his investment, thus making the entire process of investment transparent and safe.
This color-coding uses 3 colors indicating different levels of risk-
- Blue indicates low risk
- Yellow indicates medium risk, and
- Brown indicates a high risk.
Investors are also free to verify the credentials of the fund manager, his qualifications, years of experience, and AUM, solvency details of the fund house.
Lower cost
In a Mutual Fund, funds are collected from many investors, and then the same is used to purchase securities. These funds are however invested in assets which therefore helps one save on transaction and other costs as compared to a single transaction. The savings are passed on to the investors as lower costs of investing in Mutual Funds.
Besides, the Asset Management Services fee cost is lowered and the same is divided between all the investors of the fund.
Best Tax Saving Option
Mutual Funds provide the best tax saving options. ELSS Mutual Funds have a tax exemption of Rs. 1.5 lakh a year under section 80C of the Income Tax Act. You can use Scripbox’s income tax calculator to ensure tax plan requirement
All other Mutual Funds in India are taxed based on the type of investment and the tenure of investment.
ELSS Tax Saving Mutual Funds has the potential to deliver higher returns than other tax-saving instruments like PPF, NPS, and Tax Saving FDs.
Lowest Lock-in Period
Tax Saving Mutual Funds have the lowest lock-in periods of only 3 years. This is lower as compared to a maximum of 5 years for other tax saving options like FD, ULIPs, and PPF.
On top of that one has the option to stay invested even after the completion of the lock-in period.
Lower Tax on the Gains
With Equity linked saving scheme you can save tax up to Rs. 1.5 Lakh a year under section 80C of Income Tax (IT) Act. All other types of Mutual Funds are taxable depending on the type of fund and tenure.
Before making an investment one should keep in mind the various advantages Mutual Fund provides. Thorough knowledge of the benefits of Mutual Funds would lead to better gains in the future.
Although there are a lot of advantages of investing in Mutual Funds, there are certain disadvantages as well
We will now learn about the disadvantages of Mutual Funds.
Explore Loan Against Mutual Funds
Disadvantages of Investing in Mutual Funds
Cost to Manage the Mutual Fund scheme
As mentioned above, Market Analysts or Fund Managers manage and operate the mutual funds. These Fund Managers work for the fund houses that manage huge investments every day. This requires a lot of efficiencies, expertise, and experience in the subject matter.
Dilution
Due to dilution, it is not recommended to invest in too many Mutual Funds at the same time. Diversification, although saves an investor from major losses, also restricts one from making a higher profit.
Lock-in Periods
Equity-linked Saving Scheme (ELSS) have a longer lock-in period of 3 years. This debars an investor from withdrawing the investment before the lock-in period is over. However, withdrawing these funds before the lock-in period could lead to huge penalties.
A portion of the fund is kept in cash to safeguard investor’s interest . This is done to compensate the investor in case he desires to withdraw the fund before maturity. This part of the cash fund does not earn any interest.
In spite of it having certain disadvantages, Mutual Funds in India are considered one of the best investment plans. The advantages and long term benefits one incurs when investing in a Mutual Fund makes it a win-win situation for all. The professional expertise makes it easier even for a novice to investing without having any idea about it.
Here at Scripbox our expert market professionals analyze and research the different Mutual Funds available. With proper market research, we bring to you the best investment plans which would allow our investors to gain profits.
Conclusion
Investing in a good plan not only derives a good profit but also secures one’s life. Money invested now will lead to a safer tomorrow. Hence, one should plan an investment according to one’s needs and risk-taking capacity.
With advantages of mutual funds like expert management, cost-efficiency, hassle-free process, tax-efficiency this makes for a better investment scheme.
In this article, we have explained the advantages of mutual funds and benefits along with the disadvantages.
We advise investors to estimate the investment returns and maturity before investing. This will ensure your investment plans match your financial goals. You can use Scripbox’s SIP calculator and income tax calculator to estimate your returns and tax plan requirements.
Frequently Asked Questions
Mutual funds are diversified investment options that offer good growth in the long term. The investments are managed by professional fund managers, and thus, you don’t have to worry about tracking and managing your investments. Different types of mutual funds are suitable for every type of investor. Mutual funds offer high liquidity, flexibility, convenience, expert fund management and tax saving benefits. Thus, they are a good choice for long term wealth creation.
One can invest in mutual funds through SIP or lumpsum investment. At the same time, SIP refers to periodic investments of a fixed amount on a predetermined date every month, whereas lumpsum refers to a one-time investment. Most of the mutual funds demand a minimum lump sum investment of Rs. 1000 to 10,000. However, investors can start a SIP of Rs.500 every month. There are some AMCs that accept SIP investment as low as Rs.100 every month. Therefore, investors can choose to invest Rs.1000 or even lower based on their financial capability and future financial goals.
One can cash out their mutual fund holdings as long as it is an open-ended fund. Both equity fund and debt fund are quickly withdrawn after the investment is made. For instance, an investor can withdraw their mutual fund investment the next day post-investment. However, one should always keep in mind the exit load. i.e. the penalty fee that the mutual fund charges for early withdrawals.
Both equity and debt mutual funds have different periods for exit load. Usually, equity schemes charge an exit load of 1% if the fund is withdrawn within a year.
Furthermore, it takes T+1 days for the funds to receive the investor’s bank account in debt funds withdrawals. For equity funds, it takes T+3 days for funds to credit investors’ bank account. Therefore, liquidity is one of the most significant advantages of mutual funds.
The profit and loss in a mutual fund depend on the financial market’s performance and the underlying security performance. Hence, there is no guarantee that you will not lose money in mutual funds. However, it is always advisable to understand how mutual funds work before investing in them. Mutual funds are professionally managed by fund managers who invest in a wide variety of stocks, bonds and commodities. It is not that all mutual funds will fail to perform. Therefore, the profit and loss of a mutual fund depend on various factors such as market volatility, economic growth, stock performance, etc.
When you are losing money in mutual funds, this does not mean that you should start redeeming your funds. One should think twice when you see the markets are performing poorly. Moreover, investment in mutual funds is made for longer horizons. Investors can also choose the SIP route for leveraging the rupee cost averaging benefit. i.e. adding more units when markets are falling.
Mutual Fund vs FD. The answer depends on your investment goal and preferences. Due to exposure to the equities mutual funds are relatively riskier than fixed deposits. Fixed deposits offer guaranteed returns at the end of the tenure. This is not the case with a mutual fund. The return is completely dependent on the market ups and downs. However, mutual funds have the potential to provide inflation-beating returns in the long-term. If you are an investor who understands the risk associated with equities and has an objective of capital appreciation then mutual funds are a better option. Moreover, if you only want to park your surplus for a shorter period than you may opt for debt funds.
Debt funds have the potential to provide returns higher than FDs. Debt funds carry a risk ranging between low to moderate risk. Hence, you must consider this factor before investing. Even if you compare a tax-saving FD and ELSS then as well risk and long-term are the factors you must always consider. Both FD and ELSS provide tax saving benefits under section 80C. But due to equity exposure ELSS is riskier. But ELSS provides inflation beating returns in the long-term. Hence, before investing always set your investment goal, understanding of risk, and tenure. This way you will be able to take a well-informed investment decision.
No, mutual funds are not free. The income or capital gain earned is taxable. Long term capital gain or short term capital gain is applicable depending on the holding period of the mutual fund investment. The tax rate is different for different types of mutual funds and different types of capital gains. However, an investment made in ELSS is tax exempt. This means that if you invest in an equity linked savings scheme then you can claim a tax benefit of up to rs 1.5 lakhs under section 80C of the Income Tax Act, 1961.
As per SEBI categorization, there is no such fund categorized as Blue Chip Fund. The mutual fund houses use the blue chip as a synonym for large cap fund. Many AMCs use the term ‘Blue Chip’ in the name of the large-cap funds and mid-cap funds. For example- SBI Bluechip Fund, ICICI Prudential Bluechip Fund, Principal Emerging Bluechip Fund, Mirae Asset Emerging Bluechip Fund, etc. However, the term blue chip in the name of the fund does not necessarily mean that these large-cap funds or mid-cap funds invest in bluechip companies.
Blue chip companies are large companies with higher growth potential, higher stability, and offer stable and regular growth. The companies such as Reliance, TATA, Infosys are considered as Blue Chip companies. Blue chip funds are basically large cap funds which invest more than 80% of its corpus in large cap companies. Most large cap companies are Blue Chip companies. The large cap fund is an equity oriented mutual fund and hence invests more than 65% of its corpus in securities of large cap companies.
No, mutual fund charges are not charged monthly. There are many different types of mutual fund fees depending on the type of transaction. Such mutual fund expenses are exit load, entry load, and expense ratio. The exit load is the charge on the redemption of mutual funds. Exit load is charged as a percentage of the NAV on the date of redemption. This percentage differs from one AMC to another. The exit load is charged either as a flat percentage on withdrawal or as a period of holding percentage on the number of units withdrawn.
For example No exit load if up to 10% of Units allotted are redeemed or switched out within 1 year from the date of allotment. For example- if redeemed or switched out in excess of 10% of units allotted within one year from the date of allotment an exit load of 1%. Expense ratio is the fee charged by the asset management companies against the annual management of the mutual fund scheme. The TER total expense ratio formula is used to calculate the annual fee percentage.
TER = Total expense incurred / Fund’s net assets. Expense ratio is higher for actively managed funds in comparison to the passively managed funds. Entry load is the charge which is charged at the time of purchase of a mutual fund scheme. This expense. The purpose of this expense is to cover the various expenses such as distribution, advertisement, promotion, etc. The SEBI abolished the entry load in the year 2019. Hence, it is not charged by any AMC now.
Mutual funds are market-linked instruments and, thus, do not guarantee returns. Therefore while investing in them, you should consider the following: performance of the fund over the years, compare the fund’s performance with the benchmark and category, mutual fund house track record, fund manager’s experience and expertise, expense ratio, taxation, investment objective, lock-in period, AUM, etc.
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