Advantages of Mutual Funds for Investors
- M Manohar Rao
- Jul 11
- 6 min read
Tags: Wealth Management, Investment Lesson, Mutual Funds, Mutual Fund Basics, Stock market, Budget, Finance, Investing, Personal Finance, Investment, ETFs, SIP, Multi cap
Professional Management
Mutual funds offer investors the opportunity to earn an income or build their wealth through the professional management of their investible funds. There are several aspects to such professional management viz. investing in line with the investment objective, investing based on adequate research, and ensuring that prudent investment processes are followed.
Investing in the securities markets will require the investor to open and manage multiple accounts and relationships such as broking account, demat account and others. Mutual fund investment simplifies the process of investing and holding securities.
The fund management function is not restricted to research and selection of securities to construct a portfolio of investments, but also to take care of various administrative tasks like collection of corporate benefits (for example interest payments, dividends, rights issues, buybacks, etc.), or follow up on the same.
The calculation and publishing of NAV on a daily basis means that the accounting of the entire portfolio is done on a daily basis. The investor managing one’s portfolio independently would need to take too much efforts to take care of this part.
All these benefits come at a very low cost and is available even for the smallest investments. Further, the expenses charged for professional management of funds are quite reasonable.
Affordable Portfolio Diversification
Investing in the units of a scheme provides investors the exposure to a range of securities held in the investment portfolio of the scheme in proportion to their holding in the scheme. Thus, an investor can get proportionate ownership in a diversified investment portfolio even for a small investment of Rs. 500 in a mutual fund scheme.
With diversification, an investor ensures that “all the eggs are not in the same basket”. Consequently, the investor is less likely to lose money on all the investments at the same time. Thus, diversification helps reduce the risk in investment. In order to achieve the same level of diversification as a mutual fund scheme, investors will need to set apart several lakhs of rupees. Instead, they can achieve the diversification through an investment of less than thousand rupees in a mutual fund scheme.
Economies of Scale
Pooling of large sums of money from many investors makes it possible for the mutual fund to engage professional managers for managing investments. Individual investors with small amounts to invest cannot, by themselves, afford to engage such professional management.
Large investment corpus leads to various other economies of scale. For instance, costs related to investment research and office space gets spread across investors. Further, the higher transaction volume makes it possible to negotiate better terms with brokers, bankers and other service providers.
Mutual funds give the flexibility to an investor to organize their investments according to their convenience. Direct investments may require a much higher investment amount than what many investors may be able to invest. For example, an effectively diversified equity portfolio may require a large outlay. Mutual funds offer the same benefits at a much lower investment value since it pools small investments by multiple investors to create a large fund. Similarly, the Income Distribution cum Capital Withdrawal (IDCW) and growth options of mutual funds allow investors to structure the returns from the fund in the way that suits their requirements.
Thus, investing through a mutual fund offers a distinct economic advantage to an investor as compared to direct investing in terms of cost saving.
Transparency
An investor is well served if relevant information is available on time. Availability of such information is critical for making an informed investment decision. The structure of the mutual funds and the regulations by SEBI have ensured that investors get such transparency about their investments. There are three essential places from where the investor can get enough information for making informed decisions, viz., scheme related documents (SID, SAI, and KIM), portfolio disclosures, and the NAV of the scheme. Incidentally, even a prospective investor can access all this information.
Liquidity
At times, investors in financial markets are stuck with a security for which they can’t find a buyer–worse, at times they can’t find the company they invested in. Such investments, whose value the investor cannot easily realize in the market, are technically called illiquid investments and may result in losses for the investor. The bond market in India is wholesale, where transactions take place in very large lot sizes, beyond the reach of the common investor. MFs offer a route for investors to participate, even at a small ticket size.
Investors in a mutual fund scheme can recover the market value of their investments, from the mutual fund itself. Depending on the structure of the mutual fund scheme, this would be possible, either at any time, or during specific intervals, or only on the closure of the scheme. Schemes, where the money can be recovered from the mutual fund only on the closure of the scheme, are compulsorily listed on a stock exchange. In such schemes, the investor can sell the units through the stock exchange platform to recover the prevailing value of the investment.
If a ‘material’ development takes place related to investments in a mutual fund scheme, then such information is made available on time. This helps an investor to take an appropriate action, including taking out the money from a mutual fund scheme. This combination of transparency and liquidity enhances the safety.
Tax Deferral
Mutual funds are not liable to pay tax on the income they earn. If the same income were to be earned by the investor directly, then tax may have to be paid in the same financial year.
Mutual funds offer options, whereby the investor can let the money grow in the scheme for several years. By selecting such options, it is possible for the investor to defer the tax liability. This helps investors to legally build their wealth faster than would have been the case if they were to pay tax on the income each year.
Tax benefits
Specific schemes of mutual funds such as Equity Linked Savings Schemes (ELSS) give investors the benefit of deduction of the amount subscribed up to Rs. 150,000 in a financial year under Section 80C of the Old Tax Regime, from their income that is liable to tax. This reduces their taxable income, and therefore the tax liability.
Convenient Options
The options offered under a scheme allow investors to structure their investments in line with their liquidity preference and tax position.
There are also transaction conveniences like the ability to withdraw only part of the money from the investment account, the ability to invest the additional amount to the account, setting up systematic transactions, etc.
Investment Comfort
Once an investment is made with a mutual fund, they make it convenient for the investor to make further purchases with very little documentation. This simplifies subsequent investment activity.
Regulatory Comfort
The regulator, Securities and Exchange Board of India (SEBI), has mandated strict checks and balances in the structure of mutual funds and their activities. Mutual fund investors benefit from such protection.
Systematic Approach to Investments
Mutual funds also offer facilities that help investors invest amounts regularly through a Systematic Investment Plan (SIP); or withdraw amounts regularly through a Systematic Withdrawal Plan (SWP); or move money between different kinds of schemes through a Systematic Transfer Plan (STP). Such systematic approaches promote investment discipline, which is useful in long-term wealth creation and protection.
Disclaimer:
The information set out above is included for general information purposes only and is not exhaustive and does not constitute legal or tax advice. All complaints regarding Mutual Fund can be directed towards visit www.scores.gov.in (SEBI SCORES portal). Readers are requested to make informed investment decisions and consult Chaitanya Financial Consultants – 9000628943 / mfd.mmr@gmail.com to determine the financial implications with respect to investing in Mutual Funds.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
Join WhatsApp group for better and personalised communication regarding investment lessons, advice and help.
Note: Members of our WhatsApp group will enjoy lifetime free investment advice and will not be charged any consultation fee for mutual fund investments.
Support My Mission – Your Small Contribution Matters!
I am passionate about sharing financial knowledge and guiding people toward financial independence. Through my articles, I strive to provide valuable insights that can help you make smarter investment decisions and secure your future.
If my work has added value to your financial journey, I would truly appreciate your support. A small contribution from you—whatever amount you feel is right—will go a long way in motivating me to continue creating high-quality content.
💰 You can support me via:
✔ Paytm / Google Pay / Amazon Pay: 9000628943
✔ PayPal: manomatt@rediffmail.com
Every small payment is not just financial support—it’s an encouragement that fuels my passion for educating and empowering others. Thank you for being a part of this journey! 🙏
Here’s your chance to earn extra money effortlessly. Simply refer someone to invest in any mutual fund scheme, and as soon as they invest, you'll receive ₹100 - ₹200 instantly in your bank account via Paytm or PhonePay. Start referring and start earning today!
Comments