Sunday, 10 June 2018

Why One should invest in mutual funds?

Reason 1:
They are investments instruments which are capable of giving high returns . An average mutual fund scheme returns easily beats inflation in longer run and a good scheme can give far superior returns.

Reason 2:
Our Mutual Fund industry is one of the best regulated industry in the world. They are governed by the strict guidelines layed down by SEBI(Securities & Exchange Board of India).

Reason 3:
Investments decision of a Mutual Fund is taken by their AMCs and Fund Managers. They are experts who make investments decisions after doing intensive research and analysis of a company & industry. (Individuals generally don't have time and resources to do research hence best option is to let MF manage your investments)

Reason 4:
This industry is highly liquid. Even more liquid than stock markets. Payments are generally made through cheques or in some cases they are directly credited to your bank accounts , If your bank is allowing RTGS & electronic clearing and mutual fund AMC is providing such facility.

Reason 5:
Investments are diversified into many companies & sectors. Which make our investments safer and consistent growth prospects. Diversifying is usually not done by small investors , for such a actions one requires lots of funds.

Reason 6 :
Tax treatments- Governments encourage investments in capital markets and has given many tax sops. Under i) 80(c) investments done up to one lakh in specific mutual funds schemes which is called ELSS(Equity Linked Saving Schemes.) are exempt from tax. ii) Any units held for more than one year if redeemed is treated under long term capital gain tax which is taxable at 10% . If one plans to redeem before one year then he has to pay tax of only 15% on the profits.

Reason 7:
Mutual Funds are much cheaper compared to direct exposure to capital market since one does not need demat account ,annual charge to maintain account, charges imposed on demat holdings, stamp duty on transaction are not levied .

Now, let's assume that this group of individuals is a novice in investing and so the group turns over the pooled funds to an expert to make their money work for them. This is what a professional Asset Management Company does for mutual funds. The AMC invests the investors' money on their behalf into various assets towards a common investment objective.

Hence, technically speaking, a mutual fund is an investment vehicle which pools investors' money and invests the same for and on behalf of investors, into stocks, bonds, money market instruments and other assets. The money is received by the AMC with a promise that it will be invested in a particular manner by a professional manager (commonly known as fund managers). The fund managers are expected to honor this promise. The SEBI and the Board of Trustees ensure that this actually happens.

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