Securing your future requires you to make informed investing decisions. These decisions need to be based on your financial goals. Additionally, you also need to consider your risk-return appetite.
While numerous options like fixed deposits, stocks, and more are available, mutual funds stand out. Mutual funds offer a unique blend of flexibility, affordability, and growth potential. This is one of many reasons to invest in mutual funds.
In this article, let us explore why one should invest in mutual funds in India.
Why Invest in Mutual Funds?
Many individuals wonder “why to invest in mutual funds?” The Indian mutual fund industry is expected to grow significantly in 2025. For instance, ICRA Analytics reports a 135% increase in net inflows and a 39% rise in net AUM over the past year.
This highlights investors’ increased interest due to the wide range of benefits that mutual fund investments offer, as listed below.
1. Professional Management
Mutual funds are managed by experts. They have years of experience and great fundamental understanding. They know the market and can make changes in the fund portfolio when needed. This allows investors to gain better profits without much interference.
2. Risk Diversification
This point brings us to the question, “Are mutual funds safe”. Well, it depends on how you invest. Mutual funds invest in a diverse range of assets which diversifies concentration risk. This means that if there is a fall in one underlying asset, it can be offset by another.
For instance, a large-cap fund invests in a wide range of stocks from different industries. This reduces the risk of investing in a single stock.
Like every investment, mutual funds have risks, but you can minimize them with diversification.
3. Option to Choose from a Variety of Funds
There are various types of mutual funds in the market. There are short, medium, and long-term options. Then, there are equity and debt-based choices.
With so many options, finding a mutual fund matching your goal is easy. In other words, there are some options for every investor when it comes to mutual funds.
4. Liquidity
Mutual funds offer liquidity, allowing you to easily redeem their units when needed. This convenience ensures you can access your funds quickly. Additionally, if you redeem units after the exit load period is over, there are no costs associated with redemption.
However, it’s important to note that not all mutual funds offer the same liquidity. For example, Equity-Linked Savings Schemes (ELSS), which offer tax benefits of Rs. 1.50 lakh under section 80C, come with a mandatory lock-in period of 3 years. Thus, if you wish liquidity, prefer selecting one with no lock-in period.
5. Low Cost
Mutual funds, especially those that are passively managed, generally have lower transaction costs and management fees than individual investments. Passively managed mutual funds track specific indices like the Nifty 50 or the Sensex, which means they don’t require fund managers to actively select stocks.
This reduces transaction costs and management fees as these funds simply mirror the composition of an index. This makes passively managed mutual funds an economical choice for investors and helps to enhance overall investment returns by reducing excessive fees.
6. Tax Benefits
Investing in certain mutual funds like the Equity Linked Savings Schemes (ELSS) can offer a tax advantage of up to Rs.1.50 lakh. These deductions are usually claimed under specific tax codes like Section 80C of the Income Tax Act. This can improve the overall return on investment for long-term investors.
7. Regulation and Transparency
Mutual funds are regulated by guidelines and regulations set by SEBI and are managed by Asset Management Companies (AMCs). This regulation ensures fair practices and detailed, regular disclosures about fund performances and holdings. All these give investors peace of mind and better control over their investments.
No doubt, investing in mutual funds has multiple advantages. However, have you ever wondered why mutual funds are better than stocks? Let us explore the same here now.
Benefits of Mutual Funds
Mutual funds present several advantages over direct stock investments, particularly for those new to the financial markets or seeking a more hands-off approach.
1. Diversification
When you invest in mutual funds, you invest in a pool of assets. On the other hand, stock investing involves one asset at a time. Hence, the chances of facing losses are less in mutual funds due to fluctuations.
2. Professional Management
Mutual funds are managed by seasoned investment professionals. Fund managers handle all aspects of asset selection and adjustments. This is invaluable for investors lacking the time or expertise to manage stocks directly.
3. Cost-Effectiveness
Mutual funds are often more cost-effective than buying stocks directly. Due to economies of scale, they allow investment in a diversified portfolio with lower transaction costs. Additionally, administrative fees are shared across the fund’s investors, reducing individual expenses.
4. Accessibility and Convenience
Investing in mutual funds is quite easy. You can access them anywhere and can redeem them anytime you need. This allows you to get the returns when needed. But with stocks, this might not be the case. If there is a fall, you will need to wait. Hence, mutual funds are simpler when compared to stocks.
Conclusion
When planning your financial future, understanding the role of mutual funds is essential. This investment option mixes diversification, professional management, and growth potential, making it integral to a well-rounded investment strategy.
However, before you commit to investing, a thorough and deep evaluation of mutual funds against your financial goals is important. This will ensure that your investment choices are well-informed and tailored to your long-term goals.
