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8 Benefits of Investing in Mutual Funds

Though we are not a staunch supporters of investment in a mutual fund as equity investment always beat returns from mutual funds hands down over a longer period of investment. Notwithstanding that still mutual funds have certain advantages as listed below:

  • Mutual funds offer a route to investing in asset classes such as equity, debt, gold and real estate. As holders of the mutual fund units, investors are the beneficial owners implying that any returns or losses generated from the investment is to the account of the investor.
  • In a mutual fund, the investment activities such as evaluating and selecting securities, creating and managing the portfolio, and reviewing and rebalancing the portfolio based on the performance of the portfolio as a whole and the securities included in it, is done by professional fund managers for a fee. They bring experience, information and investment skills that individual investors may not all have.
  • Some securities may not be available for investment by retail investors. There are bonds and equity shares that are placed to institutional investors only. Mutual funds provide access to investors to such securities through their portfolio.
  • Mutual funds offer tax arbitrage to investors. Mutual funds are exempt from paying taxes on income and returns earned. They are thus able to earn income without paying any taxes on them and pass it on to the mutual fund investors as dividend which is exempt from tax according to prevalent tax laws in the hands of the investors.
  • Mutual funds give the flexibility to an investor to organize their investments according to their convenience. Direct investments may require a much higher investment amount than what many investors may be able to invest. For example, investment in gold and real estate require a large outlay. Similarly, an effectively diversified equity portfolio may require a large outlay. Mutual funds offer the same benefits at a much lower investment value since it pools small investments by multiple investors to create a large fund. Similarly, the dividend and growth options of mutual funds allow investors to structure the returns from the fund in the way that suits their requirements.
  • Investing in the securities markets will require the investor to open and manage multiple accounts and relationships such as broking account, demat account and others. Mutual fund investment simplifies the process of investing and holding securities.
  • Costs of investing in mutual funds are higher because the funds are managed by external agencies that need to be paid a fee for their services apart from the transaction costs thatthe investors have to bear. Direct investments may have lower costs since only the transactions costs have to be borne by the investor.
  • Mutual funds may provide an easier and more efficient way of investing in different asset classes and securities.
Thus one has to analyse the risk profile and then only consider investment in mutual funds as it has entry load, exit load and a number of other charges associated with it.

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