Why Invest in Mutual Funds?
Mutual funds are easy to understand
Investing directly into stocks is not that simple. It is not as easy as “buy low and sell high”. It is imperative to understand the financials behind a stock price and predict the bumps that the script may face in the future. Mutual funds execute the hard job of interpreting financial numbers and events. They have a professional team for financial interpenetration.
The only task that a retail investor has to do is to select the correct mutual fund. The hard analysis part comprising the share price, its fundamentals and technical analysis are done by the fund houses.
Benefits Of Mutual Benefits
1) Risk diversification in Mutual Funds Investment
Retail investors can only invest in two to three stocks in a particular segment, at a time. This leads to extreme capital erosion if these stocks fall.
If somebody has bet on the financial sector via two particular NBFCs or banks, there is every chance that those companies might default’. In that case, the whole capital spent on those two shares will vanish.
On the other hand, mutual funds have the financial power to invest in a multitude of quality stocks from a single sector. In such a scenario, return from majority of stocks compensate the crash of one or two defaulting held shares in that segment.
This leads to one of the many benefits of mutual funds:capital; market risk diversification via mutual funds.
2) Tax benefits of mutual funds
ELSS are tax saving mutual funds. These are currently one of the best tax-saving instruments. The tax benefits of mutual funds in the ELSS category occur in two ways.
The invested amount gets a tax rebate under 80C in the year of investment. The matured amount after three years is taxable at a meagre ten per cent over gains of one lakh rupees. The tax benefits of mutual funds are the best because no other tax saving instrument gives such high returns within such a short period of time.
Most of the tax-saving instruments like FDs, NSC have longer maturity time frame ranging between five to ten years.
However, none of these tax-saving instruments like FD, NSC, Pension Funds can compare with the returns from ELSS (if invested at a proper time and price) which can range from 10 to 15 % in favourable times.
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3) Smaller Capital Outlay
Quality shares are often highly-priced, which deter common traders. Shares like MRF have zoomed over fifty thousand rupees for each stock.
High-quality NBFC stocks like HDFC trade above rupees two thousand apiece. If a trader wants to buy multiple shares of such companies, his capital outlay will run into several lakhs.
Whereas, when one invests in mutual funds who have these shares in their holdings, he needs a few thousand rupees only.
He will get fractional benefits corresponding to his investment as per the movement of these shares. Thus he will benefit from these high priced stock’s movements by investing a smaller capital outlay in same sector mutual funds.
4) Variety of Products in Mutual Funds for Investment
Today, investors are deluged with a variety of investment options. However, it is not easy for a layman to understand the risk behind every NCDs, commercial papers and bonds.
These are debt paper, whose handling is best left to the experts. In this case, the mutual fund houses have a team of debt experts who are constantly engaged in such debt paper evaluation.
RBI has a liberal remittance scheme under which 250000 dollars can be invested abroad. However, this process is troublesome from legal angle and is beyond the means of average Indian. However, mutual funds have given us an indirect way of investing in US equities.
There are several Indian funds from reputed fund houses that invest in Nasdaq stocks or in a fund of funds (FOF) who directly invest in US securities.
When an average Indian investor wants to invest in stocks like Google, Amazon, Facebook, Caterpillar, Apple, Alphabet, etc. then putting money into an Indian mutual fund plan based on US bourse would be the best option. It is much simpler than offshore remittance.
China and India consume a large part of gold for jewellery and social security purposes. Storing physical gold is difficult. Mutual funds or gold funds.
These gold funds allow buying and selling of very small denomination paper gold units. Each of these units is backed by physical gold of the same quantity. Its storage is handled by the mutual funds. Gold funds or gold ETFs have a ready market for selling.
The above examples show the importance and importance of mutual investment diversification.
Must Read: Risk of Mutual Funds Investment in India
5) Disciplined investing
Trading is an exciting activity, which by nature is impulsive. Short term and intraday traders get an adrenaline rush when stocks move as they envisaged.
However, their dejection knows no bounds when stocks move in the opposite direction of their trade. Though impulsive trades sometimes result in a profit, such decisions mostly lead to meet loss. However, mutual funds follow a strictly disciplined approach in their investments.
They have strict rules for buying a stock and similar logic behind selling it. Mutual funds apply predefined stop losses to most of the holdings. This preemptive step results in massive capital protection in case a stock suddenly goes down by 40 to 50% due to any irregularities.
On the other hand, common investors mostly buy and sell scripts on impulse or when they feel that the stock price has become too low or when they see large retail participation in the stock.
Most of the retail participants suffer massive erosion of their capital, rather than avoiding it by placing a stop loss and accepting a fractional loss.
Such disciplined investing by mutual funds versus random trading by common retail traders, lead to mutual funds posting stable results every year versus the net loss suffered by retail traders most of the time.
6) Ready buy and sell
Liquidity is one of the main benefits of mutual funds. Liquid instruments are those which can be easily bought and liquidated on demand. Mutual funds can be bought easily and sold whenever necessary unless mandated something else by the fund house itself or by SEBI.
Mutual funds cap the liquidity or redemption only when there is an unforeseen circumstance. It can be default of the instruments in which these funds themselves have invested, which normally is free and far between.
In short, the units of mutual funds are sold readily at current NAV by applying to the fund house. Hence they are termed as fully liquid. In case of overnight or liquid funds, the money is credited into the account the very next day.
7) Mutual Funds are easy to track
Mutual funds are transparent. Their NAV, (current and historical), rating, expense ratio, holdings, etc. are available in all financial portals.
The interested investor can track the performance history of the fund vis a vas the same index performance. These data help the investors take an informed decision regarding investment in a particular mutual fund.
Conclusion
In our country, most of the investors are involved in other earning activities. They have precious little time to devote to the stock fundamentals and technicals. Neither do they possess such specialized knowledge?
However, most of the common investors have the financial capability to invest a few thousand to a few lakhs in the stocks. However, lack of proper investing may turn these lakhs and thousands into a few hundred. To avoid such drastic capital erosion, mutual funds are the best way for passive investing.
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