Young investors are constantly searching to explore and invest in new avenues to get both growth and security for their investments. Investing in mutual funds is said to be trusted to attain diverse financial goals but is also associated with market risk. As we enter 2024, this article will shed light on the various advantages of mutual funds and who should invest in them.
A brief introduction to Mutual Funds:
Mutual funds are a popular investment choice as they allow investors to pool their capital in an investment that diversifies their portfolio and is managed by professionals. Through mutual funds, investments are made into stocks, bonds, and other assets. These investments are created at the discretion of the asset management company by experienced professionals who seek to achieve high capital gains for the investor’s fund. Investors are charged various fees for the services that mutual funds provide.
From the potential of a diversified portfolio with substantial returns to having expert management, let’s understand the distinct benefits of investing in mutual funds in the modern investing of 2024.
Advantages of Mutual Funds:
1. Diversification and Risk Reduction:
Mutual funds pool money from many investors to invest in a diversified portfolio of about 50-200 different securities, including stocks, bonds, gold or other securities. This diversification helps spread risk because if one investment performs poorly, it may be offset by others performing well, thus protecting investors' money from market volatility.
In other words, you don’t lose out on the entire face value of your investment if a particular component or an asset of your portfolio goes through a turbulent period since it is counterparted with the one performing well. Thus, risk diversification is one of the most prominent advantages of investing in mutual funds.
2. Professional Management
One of the prominent advantages of mutual funds is that expert professionals with years of industry experience manage them. These years of experience help the fund manager ensure that investment decisions are made soundly and for the benefit of the investor investing in the fund. They can make accurate market predictions to a certain extent, ultimately leading to low risk and high return.
A portfolio's balance is regularly adjusted by a fund manager to achieve the scheme's goals, ensuring that young investors can benefit from industry experts' knowledge and experience. This service incurs a modest fee; however, it allows novice investors with limited time or skills in managing their investment portfolios access to professional guidance which makes for an affordable opportunity.
3. Liquidity
Investing in open-ended mutual funds comes with a significant benefit of high liquidity. An investor can purchase or sell their investment at the fund's net asset value (NAV) on any business day, enabling quick access to cash when needed. After redemption, the amount is credited within three to four business days based on mutual fund types; however, ELSS carries a 3-year lock-in period.
Please note that close-ended mutual funds can only be redeemed at the time of maturity. However, selling mutual funds is not advisable because mutual funds yield results on the principle of compounding. To earn more in the long run, you should keep the investment secured, but this benefit of liquidity does come in handy in unforeseen circumstances and can help you get through them.
4. Affordability and Accessibility
Investors with limited funds can choose to diversify their portfolio by investing in Mutual Funds. Through compounding, these funds provide a satisfactory return over the long term. Investing in individual securities may prove more expensive for most investors; hence holding mutual fund units that encompass preferred securities offers a plausible alternative. The broad and diverse nature of mutual fund portfolios also presents access to high-value investment opportunities. Starting an investment journey requires monthly contributions as minimal as Rs 100-500 only!
Monthly SIPs aid in maintaining consistency when saving and investing. Due to the discretion of each asset management company, mutual funds possess distinct objectives, strategies and assets; thus investors should select a scheme that aligns with their investment goals while minimizing risk.
5. Tax Benefits
Mutual funds are tax-efficient. Long-term capital gains from mutual funds generally have a lower tax rate than short-term ones. Some mutual funds are structured to be tax-efficient by using strategies like tax-loss harvesting. Also, by investing in ELSS (Equity Linked Savings Scheme) mutual funds, you are eligible to save income tax up to Rs. 1 lakh 50 thousand (under section 80c of the Income Tax Act), but these funds have a lock-in period of three years.
6. Dividend Reinvestment
As the dividend and other incomes earned through the fund are announced, the interest amount can be used to buy more securities. You can reinvest the amount by purchasing additional shares in the mutual fund. Many funds offer automatic reinvestment, allowing for potential compounding of returns over time.
7. Regulatory Oversight
Mutual Funds are a safe investment choice as government agencies regulate them. In India, the capital markets regulator, the Securities and Exchange Board of India (SEBI) regulates them under SEBI (Mutual Funds) Regulations, 1996. SEBI has laid down stringent rules and regulations to oversee fund operations keeping investor protection, transparency with appropriate risk mitigation framework and fair valuation principles. Similarly, mutual funds are monitored by the Securities and Exchange Commission (SEC) in the United States. Also, the value of stocks, the fund's historical performance, fund managers' qualifications, and track records are known. The fund's NAV (net asset value) is updated daily, providing investors with transparency and visibility into the fund's investments and how they are performing.
Conclusion
Mutual funds provide a hassle-free investment option for investors to expand their portfolios without the need to purchase individual securities. With an initial investment as low as Rs. 100, or through monthly SIPs, one can begin investing in mutual funds and benefit from expert guidance with regards to maximizing returns. Moreover, these investments are liquid and offer tax advantages while also giving investors the choice of reinvesting dividends and interest payments for compounding growth. Regulated by SEBI in India - ensuring safety and transparency - investing in mutual funds is prudent financial decision-making at its best!