Benefits of investing in mutual funds

While investing in mutual funds lots of questions arise in our minds. And one of the most common queries comes to our mind is that whether there are any benefits in investing in mutual funds. So, yes there are lots of benefits to investing in mutual funds.

Benefits of investing in mutual funds

Diversification

Investors enjoy the benefit of asset diversification when they invest in mutual funds. Diversified portfolios invest in a variety of instruments such as bonds, stocks, etc. Having a diversified portfolio increases the chance of earning higher returns while minimising risk.

Liquidity

One of the main advantages of mutual funds is liquidity, you can redeem any portion of your investments and the money gets credited to your bank account within 2-3 days.

No Lock-in

Unlike traditional investing instruments, mutual funds come with a zero lock-in period. This means you can redeem your investments in a time of extreme need.

Tax efficient

Equity mutual funds are taxed at 10% per annum if held for more than one year and debt mutual funds provide indexation benefits. A post-tax FD rate would be 4.9% whereas a debt mutual fund equivalent would be 6.5% p.a.

Best tax-saving option 

Mutual funds provide the best tax-saving options. ELSS (equity-linked saving scheme) Mutual funds have a tax exemption of Rs. 1.5 lakh a year under section 80C of the Income Tax Act.

Lower Cost

In a Mutual fund, funds are collected from many different investors, and then the same is used to purchase securities. Due to the size of the mutual fund, the negotiation is strong and the same is passed on to the investors.

Alternative to a Fixed Deposit

Over the last few years, a fixed deposit is not spoken about too much because a lot of alternatives have emerged.

Alternative to a Fixed Deposit

Liquid Funds

Liquid fund invests in treasury bills and money market instruments. If the investment horizon is less than one year, a liquid fund may be chosen.

Arbitrage Funds

Arbitrage funds are hybrid mutual fund schemes with risk-free risk rate rates by exploiting price differences of the same underlying assets in different capital market segments. An arbitrage fund attracts equity taxation, which makes it a viable alternative to a fixed deposit for any period.

Debt Mutual Funds

Debt mutual funds is a scheme that invests in deposits and other money market instruments. If the investment horizon is more than one year, a short-term debt fund with high-quality underlying investments may be chosen.

Conservative hybrid funds

A conservative hybrid combines state and central government bonds with high dividend-paying equities. It generates a decent return if the investment is held for more than 3 years.

The order of the above-mentioned funds also indicates the expected return from low to high expected return. A liquid fund is the lowest followed by an arbitrage fund, debt, and then a conservative hybrid.

How to select best Mutual Funds

Selecting the best mutual fund is not easy as there are various mutual funds. But to invest in any financial assets like stocks, bonds, mutual funds, etc., one has to dedicate their time to do a thorough research of all the options available to invest and then choose which asset or fund best set their goals, needs, and objectives.

How to select best Mutual Funds

Most investors rely on mutual fund rankings, stars, and ratings. However, this is one of the parameters to choose a Mutual Fund, depending solely on the rating can mislead because there are lots of other parameters to be considered before investing.

Here are a few points or criteria one should consider and follow before investing in Mutual Funds

Investment Objective

An investment objective is a set of goals that determines an investor's financial portfolio. The investment objective helps in generating income and growth over time.

Risk appetite

The term risk appetite refers to the maximum amount of loss that you, as an investor, are ready to take.

Time horizon of investment

This term refers to the time an investor would invest his/her money in mutual funds. If the time horizon is less than 3 years, you should prefer investing money in Debt Mutual Funds and if the time horizon is more than 3 years, you should invest money in balanced and Equity funds.

Comparison of the funds

For choosing the right fund, you must compare the like-to-like mutual funds. This comparison especially returns must be compared on a five-year basis for an equity fund and a yearly basis for a debt fund.

Fund manager’s Experience

Another important factor to be considered while selecting a mutual fund is the performance of its fund manager and how long he/she has been in this wheel. An investor should look at the fund manager’s experience and how he has managed current funds or funds managed in the past by him/her.

An investor can select the most suitable mutual fund scheme if they research thoroughly and work according to the above-mentioned criteria.