Investments in mutual funds have increased drastically in recent years. The gained popularity harpoons from the fact that these diversified portfolio investment vehicles has delivered consistent returns.
But with so much of investment options hitting the Indian financial markets, why should we even opt for Mutual Funds? When there are safe heavens like Bank’s deposit, is it required to take extra risk for extra returns? Or rather what are the benefits of Mutual Funds?
Let’s now focus on the question of the hour
Why mutual fund? The mutual fund advantage
- Ticket Size:
Generally, all financial investments require a considerable amount of money. But for Mutual Funds, this limitation is just eliminated by options of Systematic Investment Plans (SIPs). A part of our daily earnings can be parked through this SIP to earn a profit. A mutual fund in turn pools these investments from various investors like us to build a large corpus for investment.
- Options and types to suit our style:
Equities market are high-risk high gain, we often hesitate to invest in equities due to volatile swings. Hence, sometimes we may prefer bonds, infrastructure projects, etc. Mutual funds are of various types they do have combinations, various asset classes. The funds can be purely made up of an asset class or can be a hybrid of many. Even over the underlying asset classes mutual funds still have variation regarding structure (open-ended, close-ended or interval), risks (low, high, moderate), sector-specific (large, mid, small-cap), and many more. Thus, there are a plethora of options for investors to choose mutual fund for their investment type.
- Expert Management:
With our own investments in the financial market, we need to manage our portfolio actively or hire a portfolio manager to monitor movement, re-balance and get the required return. But in a mutual fund, all these active monitoring and management of asset classes are done by specifically appointed managers.
- Tax Benefits
One of the biggest advantages of a mutual fund is that there are various tax benefits available on investments in mutual funds. For example, investments in Equity Linked Savings Schemes (ELSS) qualify for tax deductions under Section 80C of the Income Tax Act. There is no tax on capital gains on units of equity schemes held for more than 12 months. Thus, these schemes aid in minimizing tax expenses.
As a fact, we can claim up to Rs. 150,000/- deduction from our gross taxable income. ELSS investments fall into the category of 80C, even though the investment in the ELSS scheme has been through a lump sum or Systematic Investment Plan (SIP).
An interesting fact about PPF is that investment proceeds of PPF are tax-free, but the interest paid is taxed as per the income tax rate of the investor. Capital gains of up to Rs 1 Lakh in ELSS mutual funds would be tax-exempt. However, capital gains in excess of Rs 1 Lakh will be taxed at 10%.
This taxation in the ELSS scheme is applicable only at the time of redemption and not during the term of investments.
ELSS SIPs offer a lot of flexibility. Unlike PPF or life insurance plans, there are no penalties or policy suspensions, in the event of missed payments in ELSS SIPs.
- Retirement Fund
Mutual funds enable us to have equity exposure but help to reduce the risk through diversification of the portfolio. In the long run, mutual funds offer excellent returns and help build a corpus for our post-retirement needs.
The real power of compounding will aid in meeting our financial goals as a typical retirement plan is for 10 years. With even 9% of moderate return, we can expect the money to become almost 4x of our initial investment.
- Regulated by SEBI
All mutual funds are regulated by the Securities and Exchange Board of India (SEBI). Hence, transparency of the process and interest of the investors are pressed by the regulator. Further, SEBI makes it mandatory for all mutual funds to disclose their portfolios every month.