MUTUAL FUNDS

Advantages of Mutual Funds

Mutual Funds are a powerful investment tool since they have inherent advantages that are absent in both Individual/ Retail Investing and in other Asset Classes.

For one, the expertise of a fund manager and his team is available to make decisions on your behalf.

Second, a unit of money, say Rs.10,000/- invested directly on the market will buy you one or a maximum of two scrips in small quantities. In Mutual Funds, the same amount of money is actually spread proportionately over the entire portfolio of the scheme. This ensures that your risk is spread and hence minimized.

Third, investing directly on the market requires you to monitor the market and time the purchase and sale of investments. In case of Mutual Funds, the fund house is constantly scanning the market and times it for you to ensure better leverage of buy and sell opportunities.

Fourth, transactions costs are reduced since the funds invest in large amounts and hence the sheer amount of transaction value brings down the cost of transacting to your benefit.

Fifth, Mutual Funds (excluding Tax Savings Equity Linked Savings Scheme - ELSS) are liquid unlike Property, Gold, and certain Fixed Income Instruments.

Sixth, Mutual Fund operations are transparent. Date about the schemes holding and value are published daily on the AMFI website and on the website of the fund.

Seventh, Mutual Funds are flexible in the sense that investments as low as Rs. 500/- can be made. Secondly, one can invest either in lump sums (suitable for businessmen and professionals) as and when investible surplus is available or one can invest regularly and in a planned manner (suitable for salaried individuals) through a SIP mode.

Eighth, Mutual Funds are a great wealth management tool. Based on the nature of your financial goal e.g. children’s higher education, children’s marriage, your retirement, etc can be planned through a Systematic Investment Plan (SIP). We have given an example of each of these in the pages ahead.

Ninth, Mutual Funds are an effective tax planning tool. Investments in ELSS qualify for tax deduction. Income from Equity Funds do not attract tax after a holding period of a year. Further, dividends declared by Equity Funds are tax free. Moreover, even Debt Funds held for more than 3 years are qualified as long term assets and attract the benefit of indexation coupled with 20% tax.

Mutual Funds can broadly be classified into three categories. We present an at-a-glance comparative analysis of these fund types for your benefit.