Investing in mutual funds is very simple.
Investing in mutual funds could surely be one of the best things which can happen to your portfolio. But many times investors do not invest in these due to a lot of misconceptions and wrong notions. The purpose of this article is to simply understand what mutual funds are and then discuss the advantages of investing in mutual funds.
What is a mutual fund?
A mutual fund is a mechanism, which brings a group of people together to invest their money in shares, bonds, money market instruments and other securities with a predefined objective.
What are the advantages of investing in mutual funds?
- Diversification: The biggest advantage of mutual fund investing is the diversification of risk it offers by investing in a number of stocks, which offsets the risk of loss in one company by the gains it may generate on other stocks. Small investors cannot spread their investment across equity shares of different companies because of the high price of these shares and suffers that risk.
- Liquidity: You can easily withdraw your investment amount by simply submitting the signed account statement and the proceeds would be credited directly to your bank account within 4 to 5 working days.
- Professional management: Mutual funds are managed by qualified professionals. Investors often do not possess the required professional analytical approach and expertise to manage their own portfolio apart from the lack of time which needs to be devoted in managing the funds.
- Simplicity: Investing in mutual funds is very simple and you can start with as low as Rs.5,000 lumpsum or even Rs.100 per month via SIPs by simply filling up an application form and the amount would be deducted directly from your bank account.
- Governance: Mutual Funds are regulated and governed by the highly regarded organisation SEBI, which ensures utmost transparency.
- Monitoring: You can regularly monitor the performance of your mutual funds and that too online with the detailed reports and statements provided by these companies.
- Tax benefits: Returns of equity mutual funds are tax free if one sells it after holding it for more than a year and in case you sale your fund within a year, then tax would be charged at a special rate of 15 per cent only.
- Variety: You can invest in a variety of funds like blue-chip stocks, sectoral funds, bonds, money market funds or even balanced funds so as to achieve long-term capital appreciation.
- Inflation adjusted returns: You can easily beat the ever rising inflation and get better returns than your investments in fixed deposits or other fixed instruments which do not keep pace with the inflation. It has the potential to generate higher returns over a longer period and returns on an average ranges from 12 to 20 per cent based on the history of stock market investments.
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