Benefits of Mutual Fund

We had earlier written that almost all financial Investment 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 free to manage it.

Now there are certain advantages when we deal with Mutual Funds:

1. Professional investment management

Fund Managers handling your money are those people who have through knowledge and immense experience in the field of financial Market. There is always a team of people who look after investments. There are processes and  research based investment is done both in bond/ Debt and Equity market.  If you were to look at the average return based various Equity Funds and the return generated by overall market, you will find that Fund Managers have done their job well and they have given 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 invest in various stock and securities, it gives benefit of diversification to common investor. He/ She just to invest in the common pool and thru this pool, diversification can be done. For Individual investor. it is not possible to have diversification in 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 huge amount of money pooled by thousand of investor, their cost of handling comes down. Economies of Large scale pulls the cost of handling money to much low levels.

4. Convenience

Investing in Mutual Funds is like 123.

1.Choose a Scheme(Take the help of Advisor here)

2. Fill the form which would take less a minute.

3. Remit a cheque in favor of scheme.

Also after you have invested, the post investment activities like withdrawal, changes etc are much easy to operate.

5. Flexibility

Since the investment in Mutual Funds are denominated in terms of UNITS, there is 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 scheme as well. In fact, there is no flexible investment tool than Mutual Funds available for investors.

Also Read
KISS Strategy in Financial Products: Keep It Simple Stupid
Long Term and Short Term Investments

6. Liquidity

The investment done in Mutual Funds are always available for withdrawal expect in case of Tax Saving schemes and schemes that carries mandatory lock-in as its feature. the money can be withdrawn or redeemed just by singing a redemption from and , money gets credited to your bank in 1-3 working days.In fact, we keep guiding investor that unless you require tax savings, don’t get into any schemes which locks your money. The fact of the matter is that manufacturer of financial products like insurance etc. comes whith lock- in products more for their benefits or for 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 closure of each working day. The regulator SEBI, has also mandated various other clauses which makes mutual fund investment crystal clear. The charges levied are also clear which is the main concern for most of the investor.

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 per his objective. you have option in Debt, Equity , money market, Gold, ETF, International Market and what not   markets.

9. Tax Benefit

Tax benefits on Mutual Funds keep changing time to time. According to taxation on mutual fund in financial year 2010-2011 few of the tax benefits are:

  • No long term gain tax on sell of equity mutual fund(long term here means 1 year plus)
  • Tax free dividend
  • No dividend distribution tax in case of equity mutual fund
  • Benefit of indexation in case of debt mutual fund
  • Lower long term gain tax in comparison to any other interest bearing product

11 COMMENTS

    • 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. 🙂

  1. 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.

  2. 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.

    • 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.

  3. 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.

  4. 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

  5. @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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