What are benefits of investing in mutual funds in India?

Before you read on what are the benefits of investing in mutual funds in India, you must know what are what are mutual funds in India, what is an Asset Management Company (AMC) and how it works and what are the different types of mutual funds in India

While there are many benefits of investing in mutual funds, let us discuss some compelling ones.

1. Mutual fund help in 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 scheme objective. A diversified portfolio reduces risks associated with individual stocks or specific sectors and therefore, ideal for investors looking to invest for long term for wealth creation needs.

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/. However, the minimum amount of investment required in case of investing in ELSS Funds is Rs 500. What are ELSS Mutual Funds?

Mutual funds are managed by fund managers who have domain knowledge and experience. Hence, they are equipped to pick stocks and instruments which will allow the investors maximum returns with minimal risk.

2. Mutual funds are low cost investment

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 thus do not require any special accounts like DEMAT account as is the case in case of trading in shares.

3. Mutual Funds are tax efficient

The other benefit of investing in mutual funds is that they are more tax efficient than most other investment products. Long term capital gains in case of equity or equity oriented mutual funds (holding period of more than 1 year)were totally tax free till January 2018. However, Budget 2018 has introduced long term capital gains tax (LTCG), which is payable at 10% if the total gain in a year is above Rs 100,000.Short term (holding period of less than 1 year) capital gains in case of equity mutual funds are only 15% on the profits made.

For debt funds, long term capital gains (holding period of more than 3 years) is taxed at 20% after applying 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 funds is taxed according to the IT slab of the investor.

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. See which are the top performing ELSS Funds

4. High liquidity

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 the bank account registered with the AMC/ folio generally within 4 days (transaction + 3 days). However, in case of liquid funds,the amount can be redeemed within 24 hours (transaction + 1 day). Some mutual fund liquid schemes have the option of instant redemption by using online AMC portals, or RT agent websites or mobile app of the respective AMC.

5. 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 appetite of the investor. There are many other fund categories among the Debt fund options like, income funds, short term debt funds, monthly income plans (MIPs) and liquid funds to suit different investment requirements of an investor.

Read what are the different types of debt mutual funds in India

6. Mutual Funds are easy to invest

The process of investment in Mutual Funds can be carried out in the following steps:

  1. 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, you are ready to invest in a mutual fund. Read how to make a mutual funds KYC
  1. 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.
  1. 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 different investment modes like lump sum (one-time investment), where you can invest any sum at one time and keep it invested for a long period of time. Systematic investment plans (SIP) is another option for investors who wish to invest small sums every month. Systematic Transfer Plans or STPshelps transfer a fixed amount on a fixed frequency or the appreciation of one scheme to the other schemes within the same AMC, switching from one scheme to another or Systematic Withdrawal Plans (SWP) wherein one can withdraw a fixed amount at a fixed interval from his or her investments. Investments in Mutual Funds offers an investor many options and allows flexibility of changing, switching schemes or even partial withdrawal etc.

While the above are some of the key benefits of investing in mutual funds in India, there are some disadvantages as well, which you must read – What are advantages and disadvantages of mutual funds in India.