We had earlier written that almost all financial Investments available today are in the from of Mutual Funds. Mutual Funds, as we described are basically on OUTSOURCING AGENCY where we give them our money to manage as they are more specialized and they charge a fee to manage it.
Check – Long Term and Short Term Investments
Now there are certain benefits of mutual fund in India:
1. Professional Management
Fund Managers handling your money are those people who have a thorough knowledge and immense experience in the field of the Financial Market. There is always a team of people who look after investments. There are processes and research-based investment is done both in the bond/ Debt and Equity market. If you were to look at the average return based on various Equity Funds and the return generated by the overall market, you will find that Fund Managers have done their job well and they have given a better return that the overall market in long run.
2. Diversification
Diversification is needed for the safety and stability of your investment portfolio. Since Mutual Fund is pool money and through this pool, a manager invests in various stock and securities, it gives the benefit of diversification to the common investor. He/ She just to invest in the common pool and thru this pool, diversification can be done. For Individual investors. it is not possible to have diversification in a real sense as the amount of investment is often too small to buy different securities.
3. Low Cost
Going by train is going to be always cheaper than going by your own vehicle. The same rule applies to Mutual Funds as well. Since they deal with a huge amount of money pooled by thousand of investors, their cost of handling comes down. Economies of Large scale pull the cost of handling money too much low levels.
Check- What are structured products
4. Systematic or one-time investment
When it comes to mutual fund investment, there are a variety of options to choose from depending on your budget and convenience. For example, if you have less money, starting a monthly or quarterly SIP in an equity fund may be a more suitable option. However, if you have a larger sum of money to invest, a one-time lumpsum investment in a debt fund may be more appropriate.
5. Flexibility
Since the investment in Mutual Funds is denominated in terms of UNITS, there is a lot of flexibility that you carry. You think of any permutation and combination of adjustment that you require, it can be done. For example, you can invest in parts, you can withdraw in parts, you can switch in parts to other schemes as well. In fact, there is no flexible investment tool other than Mutual Funds available for investors.
Must Read- 7 types of Indian investors which one are you
6. Liquidity
The investment done in Mutual Funds are always available for withdrawal except in the case of Tax Saving schemes and schemes that carry mandatory lock-in as its feature. the money can be withdrawn or redeemed just by singing a redemption and, money gets credited to your bank in 1-3 working days. In fact, we keep guiding investors that unless you require tax savings, don’t get into any schemes which lock your money. The fact of the matter is that manufacturers of financial products like insurance etc. come with lock-in products more for their benefits or for the benefits of agents.
7. Transparency
Transparency is the key benefit of investing in Mutual Funds. You as an investor would know where your money is invested, what is the value of their investment on the closure of each working day. The regulator SEBI has also mandated various other clauses which make mutual fund investment crystal clear. The charges levied are also clear which is the main concern for most of the investors.
8. Variety
There are plenty of options available for an investor to choose from. Depending on his time horizon, his needs, his return expectation, he can choose as per his objective. you have options in Debt, Equity, money market, Gold, ETF, International Market, and what not markets.
9. Tax Benefit
Tax benefits on Mutual Funds keep changing from time to time. According to taxation on mutual funds in the financial year, 2021-2022 few of the tax benefits are:
- No long term gain tax on the sale of equity mutual fund (if your gains are below 1 lakh)
- The benefit of indexation in the case of debt mutual fund
- Lower long term gain tax in comparison to any other interest-bearing product
a very common article, nothing is notable in it.
Ya Ajay we agree with you but we wrote it for 2 reasons:
1st that every Indian is not aware of mutual fund & its benefits(less than 2-3% Indians invest in Mutual Fund & even they don’t understand it properly)
2nd till date we have wrote more than 80 articles but still there are very few article on Mutual Fund in our blog.
Thanks for sharing your views. 🙂
good article … agree with all the points.. however..
1. Low Cost
Not really. They have an expense ratio of 2.25% or so. Not cheap at all.
Even the index funds that don’t hire any fund manager charge 1%. No justification at all. Mutual funds in western countries cost much lower.
2. Professional investment management
This got me chuckling. This may be true for mutual funds in general. But look at how the Indian mutual fund companies have behaved over the last 10 years. SEBI/AMFI keep coming up with rules to protect the common investors.
But the fund companies keep coming up with tricks to ensure that the good intentions of SEBI/AMFI are thwarted. Agents and large instituitional investors have to kept happy even at the cost of common investors (the people who should be the real targets of mutual funds). For instance, when SEBI capped the marketing expense of funds, the companies started coming with NFOs one after another because NFOs were not subject to the cap. And in sync with this, the agents churned investors’ money from existing funds to NFOs. The agents are companies are like two wolves, looking out for each other.. and sc***ing the commong investor (donkeys).
Then the practice of giving units at the previous day’s NAV to large institutional investors at the expense of existing investors. Announcing dividends out loud on bill boards, knowing very well that common investors can’t differentiate between mutual fund dividend and a company stock dividend. Harping on NAV of 10/-, making it sound to gullible investors that NAV of 10 is cheap. I can cite many such unethical practices. So the claim of “Professional investment management” is very hollow in the indian context.
Hi Sumant,
Cost depend on volumes & competition – so there is long way to go. I agree that Index funds in India are damn expensive – some of them charge 1.5%. Even ETF are super expensive but with time cost will come down.
Regarding Professional Management – every Indian Business is trying to use loopholes including Mutual Funds. With time this gaps will be bridged. I think we can give them benefit of doubt & can invest in few selected AMCs.
Hi Hemant
As for as I am concerned, it is the best investment vehicle for people like me who want to benefit from equity but have no knowledge about the working of stock market.Moreover, I don’t need a Demat account for investment through this route.
What is the time period of investment to gain a substantial amount of money through MF’s?
Hi Amit,
If you are looking to benefit from equity MFs, you should look for a time horizon of 5-10 years. But at the end of the day it depends on your financial goals.
i have alreadey investment in LIC which is monthly primum 3000/- and Housing EMI 11203/-.we both me and wife income around 40k per month .but not assurity long work of my wife.my income was 20000/-
kindly suggest invsetment how can i manage.
Hi Folks,
I want to thank you for this site. It has been an immense eye-opener and a wealth of knowledge.
My question: I had been speaking with a Financial consultant who has put a business case for ULIP as compared to a SIP in MF. His argument is as follows:
MF have an expense ratio of around 2-2.5% and if you are looking for a retirement fund with a tenure of 15 years, it is much better for go for a ULIP as the costs are much less compared to a MF(around 1.5% for ULIPS as per the new IRDA laws). He has even extrapolated the data for 15 years with fixed return of 15% in both the cases that the costs of ULIP would be less by 7-8 lakhs.
Can you please let me know if his hypothesis is correct with numbers if possible?
Thanks,
Pinaki
@Pinaki
if he says cost of a ULIP is lower than that of a mutual fund, I have a beach-front property to sell in Mongolia!
To steer of confusion, ask him for actual IRR, taking a nominal return of 12%. This gap between nominal return and IRR is the true cost.
1.5% is just the fund management fee. There are myriad other costs associated with ULIPs. If you do the math, it will work to be more than 1.5%.
Moreover ULIP costs are front loaded vs the uniform cost in a mutual fund. Which means, the lock-in period is much longer in ULIPs.
Thank you Sumant for your response. Let me put some numbers and assumptions together:
1. Horizon is 20 years and return is fixed a 15%
2. ULIP charges consists of Premium Allocation Charges, Policy Allocation Charges, Fund Management Charges and Mortality Charges
3. MF consists of Fund Management Charges and Aset Management Charges.
4. Investment is 1 lakh/annum for a period of 10 yers
The calculation shows that the total net charges for ULIP is 595407 and MF is 905642 at the end of 20 years.
I can send a detailed calculation sheet if you can send me a email id. I just want some clarity in terms of the best investment when you are looking for a retirement fund which is something like 20 yrs away.
Regards,
Pinaki
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