Before investing in mutual funds in India investors should understand if mutual funds suit their requirement or not. Therefore, investors must know that there are many an advantages and few disadvantages of investing in mutual funds in India. But before we discuss that, let us know what are mutual funds in India and what are different types of mutual funds in India
Advantages of mutual funds in India
Diversification of risk
Mutual funds help investors by providing a wide array of options to diversify their risks. The investment can be made in a in a portfolio of stocks across different sectors, bonds, money market instruments and Government Securities etc. depending upon the objective of the scheme. A diversified portfolio reduces risks associated with individual stocks or specific sectors and the investors are not subjected to volatility of stock markets for asset creation.
To invest specifically in Funds related to equity markets, investors can buy units of a diversified equity mutual fund scheme with an amount as small as Rs 5,000/. The minimum amount of investment required for MF is Rs 500 per month, in case of ELSS Funds.Mutual funds are managed by professional fund managers who have domain knowledge and experience. Hence, they are equipped to pick stocks and instruments which will allow the investors maximum returns and minimal risk.
Low cost investments
Since mutual funds buy and sell shares and securities in large volumes,it reduces the transaction cost than that of buying or selling stocks directly by an individual investor from the stock market. Mutual Fund transactions are carried out through investor’s bank account and do not mandatorily require a DEMAT account as in case of trading in stock markets.
Mutual Funds are tax efficient
One of the biggest advantages of investing in mutual funds is that they are more tax efficient than most other investment products. Long term capital gains (holding period of more than 1 year) for equity mutual funds are totally tax free. Dividends declared by equity mutual funds are also tax free. Short term (holding period of less than 1 year) capital gains in case of equity funds are only 15% on the profits made.
For debt mutual funds, long term capital gains (holding period of more than 3 years) is taxed at 20% after allowing the indexation benefit. Once indexation is factored in, the long term capital gains tax on debt funds is reduced considerably, especially for investors in the higher tax bracket.
Short term capital gains (holding period of less than 3 years) in case of debt mutual funds is taxed according to the tax slab of the investor.
You can compare how debt funds are better than fixed deposits using the debt funds versus FD research tool
If you invest in ELSS Funds, you can avail a tax benefit of uptoRs 150,000 in a financial year under Section 80C of the Income Tax Act 1961.Check which are the top performing ELSS Mutual Funds in India
Read what are mutual fund income tax exemption
Open ended mutual funds are more liquid than many other investment products. Investors in open ended mutual fund schemes can redeem their units fully or partially at any point in time and get the redemption amount credited in their bank account generally within transaction + three working days. In case of liquid mutual funds,the amount can be redeemed within transaction + 1 day. Some mutual fund liquid schemes have the option of instant redemption by using online portals or AMC mobile apps.
Wide range of schemes to choose from
Mutual funds offer investors a variety of schemes to suit their respective risk profiles, investment objectives and life goals they wish to achieve. Apart from equity mutual funds, which offer investors options ranging from medium to long term investments, the products also vary depending on the risk taking ability of the investor. There are many other fund categories among the debt fund options like, income funds, short term debt funds, balanced funds,arbitrage funds, monthly income plans (MIPs), child plans, retirement plans and liquid funds to suit different investment requirements of an investor.
Read what the different types of mutual funds in India are
Mutual Funds are easy to invest
The process of investment in Mutual Funds can be carried out in these steps:
- As an investor you need to have a bank account, a colour photograph, address proof (either driving license, Aadhar Card, Voter ID Card) and a PAN card and you are ready to invest in a mutual fund. These are required to make a mutual fund KYC. Read what are KYC for mutual fund
- You have to locate a mutual fund advisor in your city or an Asset Management Company in whose scheme you want to invest and fill up the mutual fund KYC form.
- Once the KYC formalities are done, you need to fill in and sign the application form of the scheme you want to invest in and provide a cheque drawn in favour of the scheme name.
- Mutual funds also offer investors flexibility in terms of modes of investment and withdrawal -You can opt for lump sum (one time) investment, where you can invest any sum at one time and Systematic investment plans (SIP) is another option wherein you can invest in small fixed sums every month on a fixed date.
- Apart from lump sum and SIP, Systematic Transfer Plans or STP, helps transfer a fixed amount on a fixed frequency or the appreciation from one scheme to the other schemes within the same AMC. See the STP research calculator to understand how STP works
Systematic Withdrawal Plans (SWP) is another option wherein one can withdraw a fixed amount at a fixed date from his / her investments.
As we can see there are many advantages of Investments in Mutual Funds, but there are a few disadvantages as well.
Disadvantages of mutual funds in India
No control on fund management – Investors does not have any say or control on the money invested by them in mutual funds as the investment decisions are taken by the fund manager. In mutual fund investors has to repose faith in the fund manager
Risky investments – Mutual funds invests in equity markets and based on changing market conditions the value of investments fluctuates in a mutual fund investment. Therefore, there could be periods when your investment value could become lesser than that of your original investment amount.
Returns are not guaranteed – Unlike fixed deposits, returns in mutual funds are not guaranteed as they are market linked. Therefore, the returns in mutual funds are market linked.