Mutual funds have been gaining wide acceptance over the last two-three decades. It is the right investment choice currently for retail investors. Mutual funds offer an extensive selection of investment options for both risk profiles and investment needs.
A mutual fund is a financial tool that gathers investment from several investors and puts it in various financial instruments like bonds, stocks, etc. Mutual funds are managed by Asset Management Companies.
Many new investors think of the question: why should I invest in mutual funds? There are many reasons why investors choose mutual funds over other investment options. Let’s discuss some of them.
● Diversification Of Portfolio
Diversification allows you to reduce the risks associated with your investment portfolio. Diversifying your assets will help you to minimize losses rather than focus on a single asset, company, or vehicle. Mutual funds allow investors to diversify their assets instantly, and therefore, it is a good option. As each mutual fund holds various securities, it gives access to different investment options. It helps investors in protecting their investments from unpredictable risks.
● Investors Get To Choose Funds According To Their Preference
Mutual funds consider Equity and Debt asset classes as the primary option. Some funds completely focus on Debt funds and others target Equity funds. The rest will be investing in Hybrid or Balanced funds. The most important advantage of mutual funds is getting access to different fixed-income tools or shares. A portfolio’s other securities complement the risk of those securities that are underperforming. This way, mutual funds offer diversity. It is an ideal choice for fresh investors who are not interested in researching stocks.
● High Liquidity
Open-ended mutual funds are considered to be the second investment option with high liquidity after bank investments. They are more liquid than post office schemes, infrastructure bonds, life insurance, etc. Investors can redeem their units in open-ended mutual funds. Liquidity is considered to be a major advantage of mutual funds when compared to other saving programs or insurance plans.
Transparency is a major benefit of mutual funds for investors. Mutual fund schemes publish their NAVs or Net Asset Values at the end of every business day. Thus, investors will be updated about their Mutual fund units’ current value. Every month mutual funds release their monthly fund factsheets which include data regarding the portfolio holdings of each mutual fund scheme.
● Tax Benefit
Along with fixed-income investments, mutual funds also give tax benefits. Countries like India offer a reduction in tax up to 1.5 lakhs. Most conventional fixed-income investments will have interest payments and they are taxed at the independent income tax rates of the investor. Mutual investments offer more tax advantages than traditional fixed-income investments.
● Low Transaction Costs
Low transaction cost is another benefit of mutual funds due to the scaling of economies. Mutual funds purchase and sell large volumes of securities, lowering the transaction costs compared to those collected by retail investors who buy and sell stocks via stock brokers. This is also a reason why many investors choose mutual funds.