Benefits Of Mutual Funds
12 June, 2024
Synopsis
Mutual funds are a convenient investment option, pooling money from multiple investors to create diversified portfolios managed by professional fund managers.
Advantages of mutual funds include diversification, professional management, rupee cost averaging, tax benefits and low investment requirements.
When identifying the right mutual funds, investors should consider factors such as track record, portfolio diversification, costs, fund manager expertise, and alignment with financial objectives.
Mutual funds are like ride-sharing apps. They pool your money with others (passengers) to invest in a "taxi" (company) managed by a professional driver (fund manager). You benefit from their expertise and share the cost and benefits.
Just like there are benefits to hailing a shared cab, there are several benefits to investing in mutual funds. Here's a quick look at the various benefits of investing in mutual funds.
What are the Benefits of Mutual Funds?
Mutual funds offer a variety of benefits for investors, including:
Diversification
Diversification is a strategy used by mutual funds to reduce investment risk. Instead of putting all your money in a single company or asset class, mutual funds offer the opportunity to invest across companies, sectors and assets classes. This ensures your investment is not concentrated in one place and exposed to high risk.
With a small investment amount, you can gain exposure and reap the benefits of a highly diversified portfolio of equity, debt and other assets through mutual funds. Diversification tackles and reduces the impact of market volatility on your overall investments.
Compounding Benefits
The power of compounding allows your investment corpus to grow exponentially over a long period. With mutual funds, your returns and dividends get reinvested automatically to harness the compounding effect.
Even small SIP investments in equity funds can add up to a large sum due to compounding over 10-20 years. This enables your wealth to grow at an inflation-beating pace.
Managed by professionals
Choosing the right stocks, allocating assets properly and timing entries and exits require experience and expertise. Mutual fund managers and their team of analysts spend time researching markets and companies to make prudent investment decisions.
As an individual investor, you may not have the skill, time or resources to match up to their knowledge. By investing through mutual funds, your money is managed by qualified professionals, ensuring your hard-earned money grows efficiently.
Low Costs
One of the biggest costs of investing directly is brokerage and transaction charges. For retail investors, these charges apply to every purchase and sale, which can eat into the returns.
With mutual funds, you can start an SIP online instantly. Mutual funds are an excellent option for individuals seeking to invest without investing much money upfront. Mutual fund houses levy a small annual maintenance fee, called the expense ratio, to provide investors with professional management services.
Even small-scale investors can participate in mutual funds and gain access to diversified investments by starting with as little as ₹100. For instance, even if the price of a single share of a company's stock exceeds ₹10,000, mutual fund investors can still own a portion of it.
Rupee Cost Averaging
Investing through SIPs gives the benefit of rupee cost averaging, where the same amount is invested every time to buy more units when the market falls and fewer units when the market rises.
This discipline of investing a fixed amount periodically helps you take advantage of market volatility over the long run.
Liquidity
Open-ended mutual funds offer relatively high liquidity compared to some other investment options. It's important to note that redemption processing typically takes a few business days, and the price you receive depends on the Net Asset Value (NAV) at that time. This means you might not get back the exact amount you invested, especially in volatile market conditions.
However, compared to fixed deposits or bonds with lock-in periods and potential penalties for early withdrawal, mutual funds offer more flexibility for accessing your invested capital.
The flexibility to redeem your investment whenever you want without exit charges is a key benefit, especially for investors who may need funds for an emergency.
Tax Benefits
Another benefit in mutual funds is equity-linked saving schemes (ELSS) which allow tax deductions of up to ₹1.5 lakhs under Section 80C of the Income Tax Act. Furthermore, long term capital gains (LTCG) from equity funds held for over one year are taxed at just 10% (if exceeding ₹1 lakh in a year).
The tax on mutual fund dividends depends on your income tax slab rate, as it is included in your total income. If dividend income in a financial year is more than ₹5,000, then TDS is deducted at a rate of 10%.
How to Identify the Right Mutual Funds?
While mutual funds offer multiple benefits, picking the right funds is key to maximising returns. Here are a few parameters to consider when evaluating mutual funds:
Track record: Study the fund's long-term performance across market cycles. A consistent track record indicates the fund manager's stock-picking expertise.
Portfolio: Analyse the sector and stock allocation of the mutual fund portfolio to assess diversification and concentration risk.
Costs: Check the fund's expense ratio, which can impact returns in the long term. Choose funds with lower expense ratios.
Fund Manager: Review the experience and performance of the scheme's mutual fund manager.
Fund House: Choose an established asset management company (AMC) with a long-term track record of stability and accountability.
Scheme Fit: Ensure the mutual fund investment objective and your financial objectives are aligned. Mutual funds offer retail investors an efficient and low-cost route to participate in markets and grow wealth. By providing diversification, liquidity, tax efficiency and professional management, mutual funds hold immense appeal for both first-time and seasoned investors.
Download the HDFC Bank SmartWealth App from Playstore/ Appstore to start your mutual fund investment journey today.
Disclaimer: This communication has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. HDFC Bank Limited ("HDFC Bank") does not warrant its completeness and accuracy. This information is not intended as an offer or solicitation for the purchase or sale of any financial instrument / units of Mutual Fund. Recipients of this information should rely on their own investigations and take their own professional advice. Neither HDFC Bank nor any of its employees shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way from the information contained in this material. HDFC Bank and its affiliates, officers, directors, key managerial persons and employees, including persons involved in the preparation or issuance of this material may, from time to time, have investments / positions in Mutual Funds / schemes referred in the document. HDFC Bank may at any time solicit or provide commercial banking, credit or other services to the Mutual Funds / AMCs referred to herein.
Accordingly, information may be available to HDFC Bank, which is not reflected in this material, and HDFC Bank may have acted upon or used the information prior to, or immediately following its publication. HDFC Bank neither guarantees nor makes any representations or warranties, express or implied, with respect to the fairness, correctness, accuracy, adequacy, reasonableness, viability for any particular purpose or completeness of the information and views. Further, HDFC Bank disclaims all liability in relation to use of data or information used in this report which is sourced from third parties.
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