A mutual fund is an investment vehicle that combines the capital of several participants to buy assets. Mutual funds (MFs) are a good choice for investors who want to increase their wealth and reach their financial objectives. These funds allow investors to diversify their holdings and take advantage of expert fund management.
As a result, mutual funds have witnessed rapid growth in India over the last two to three decades. Investors choose these funds for varied reasons, many of which have been covered below.
Why Invest in a Mutual Fund- Compelling Reasons
Here’s why a mutual fund investment can be a great option for your portfolio.
- Diversification
Diversification is among the biggest benefits of investing in mutual funds. They let investors allocate their funds among a variety of instruments, including bonds, stocks, and other asset types.
Diversification reduces an investor’s portfolio’s overall risk and ensures that investments aren’t too reliant on any one security or asset type.
- Professional Fund Management
Professional fund management is an additional benefit of investing in MFs. These funds are successfully managed by seasoned fund managers who know how to find the best investment possibilities while simultaneously lowering risks.
Fund managers study market trends and choose securities with the highest prospective returns, utilizing various tools and strategies.
- Flexibility of Choice
Mutual funds also give you the option to invest the entire amount at once or in predetermined monthly installments. The latter system is known as SIPs (systematic investment plans), where you can invest a specific amount on a regular basis. Lump sum investments, on the other hand, enable you to purchase as many units as you want right away.
- Transparency
Transparency is another advantage of mutual funds for investors. Since mutual fund schemes release their ‘Net Asset Values’ (NAVs) to the public at the end of each business day, investors are always informed about the current market values of their units.
AMCs (asset management companies) also provide monthly fund factsheets with detailed insights on portfolio holdings for all their schemes. These give you the information that you need to track the performance of your mutual fund investments.
- Long-Term Returns
The possibility of long-term gains is the primary justification for investing in mutual funds (MFs). Although returns on investments are not guaranteed, mutual funds (MFs) have historically and statistically produced greater returns than many other investment alternatives, including savings accounts and fixed deposits (FDs).
Compounding increases the value of mutual funds (MFs) over time, allowing investors to significantly increase their wealth. However, to earn handsome long-term returns, it is recommended that the portfolio be managed wisely, re-allocated according to market movements, and adopted a long-term approach.
- Tax Benefits
The tax benefits of mutual funds outweigh those of many traditional fixed-income investments by a wide margin. You may deduct up to Rs. 1.5 lakh from your taxable income by investing in an ELSS fund under Section 80C of the Income Tax Act. In comparison, interest payments on the majority of conventional fixed-income assets are subject to the investor’s individual income tax rates. For investors with higher tax rates, mutual funds provide considerable tax advantages over traditional fixed-income investments.
Considering these benefits, mutual funds (MFs) can be said to be value-additions to any portfolio. However, make sure that you consult a financial professional or expert before investing and understand the risks attached to these investments.
