Disclaimer: Originally published in August 2018. It is being republished since it still remains an interesting topic till today.
Do you believe that mutual funds are just a scam? Do you feel that investing your money in a mutual fund is equivalent to losing it for sure?
If you are the one who feels that mutual funds are just a sham and nothing else, then this article will present a different vision to you! (and this is not a paid article)
Contrary to popular belief, the mutual fund industry is absolutely genuine provided that an investor invests in a mutual fund after thoroughly analysing its pros-cons, expected rate of return, and most importantly, the validity and reliability of the concerned fund manager.
Here are some key points that will help you dispel this clichéd notion about mutual funds being fraud:
Mutual funds generally offer an opportunity for investors to organise and accumulate their wealth through professional management of their funds.
Investing in securities/stock markets usually requires a person to open and maintain multiple accounts and relationships like that of broking account, D-mat account, etc.
On the other hand, investing through mutual funds can simplify the whole procedure of investing and holding securities in one go. You just need to maintain a streak with your local fund manager/agent.
Affordable Portfolio Diversification:
An investor needs to ensure that all eggs are not in the same basket so that taking into account the risk constraints, the investor is less likely to lose all his/her money on all the investments at the same time.
Investing in the small denominations of a scheme provides investors with the exposure to a range of securities held in the investment portfolio of the scheme in proportion to what they are already holding in the current scheme.
Thus, even a small investment of Rs. 500 in a mutual fund scheme can give investors proportionate ownership in a diversified investment portfolio.
Economies of Scale (High Benefits in Low Costs):
Mutual funds give flexibility to the investors to organise their investments according to their own convenience.
Direct investments may require a much higher investment amount than what many investors may be able to invest together as a bunch. For example, investment in gold and real estate requires a large outlay.
A mutual fund offers the same benefits at a much lower investment value since it pools small investments by multiple investors to create a large fund.
Thus, investing through a mutual fund offers an economic advantage to an investor as compared to direct investment (considering cost saving).
Tax deferral & its benefits:
Specific schemes of mutual funds, such as Equity Linked Savings Scheme (ELSS) give investors the benefit of deduction of the amount subscribed (up to Rs. 1,50,000 in a financial year), from their income that is liable to tax.
This reduces their taxable income, and therefore the tax liability.
Mutual funds offer options, whereby the investor can let the money grow in a particular scheme for several years.
By selecting such options, it becomes possible for the investor to defer the tax liability.
This aids investors to legally build their wealth faster than would have been the case if they were to pay entire tax on the income each year.
Investment & Regulatory comfort:
After making an investment with a mutual fund, it becomes much easier & comfortable for the investor to make further inquiries & purchases with very little documentation.
The Securities and Exchange Board of India (SEBI) has also mandated various stringent checks & balances in the structure of mutual funds and their activities.
Usually, mutual fund investors benefit from such protective & regulatory laws as well.
Mutual funds also provide a lot of facilities that help an investor to invest and withdraw amounts consistently through a Systematic Investment & Withdrawal Plan.
Investors can also move their money among different kinds of schemes through a Systematic Transfer Plan (STP).
Such kind of well-structured approaches promote investment discipline, which is useful in long-term wealth creation & protection.
SWPs allow the investor to structure a regular cash flow from the investment account.
There is no doubt about the fact that investment is a risky venture, irrespective of the avenue undertaken, but the mutual fund industry is also growing rapidly in India.
If invested wisely, mutual funds can produce a high rate of returns. All you need to do is think and analyse wisely before selecting a particular fund manager to invest with.
Till then, that’s all from our side, folks! Think you can add more to the article? Let us know in the comments section!
Image Credits: Google Images
Sources: RuleoneInvesting, Investopedia, Economics Times + more