9 Reasons why you should invest in Mutual Funds in 2021
Everyone likes to grow and invest their wealth but hesitate in investing across various investment products due to lack of knowledge or fear.
A Mutual fund is one such investment option that could help you grow wealth to meet your financial goals either over the short-term or over the long-term. Before moving into the benefits of investing in mutual funds, let’s spend some to understand what are mutual funds and how do they work
What are Mutual Funds?
Mutual funds are collective investments made by pooling in funds from several individuals/companies. Mutual fund houses also called Asset Management Companies invest these collected funds in various investment avenues like stocks of various companies, bonds, commodities, gold, or even international equities and bonds.
Each mutual fund invests with an objective. For eg: A large-cap fund invests in those stocks with large market capitalization, a small-cap fund invests in stocks with a smaller market capitalization, a banking fund invests only in banking stocks, a balanced fund invests in a mix of equities (stocks) and debt.
Experienced individuals called Fund Managers invest in various financial products according to the objective of the scheme.
All investors own units corresponding to the value of their investments in the mutual fund scheme. The Asset Management Company charges a fee to manage the invested funds.
The returns earned by investment in various products are then given back to the investor in the form of dividends or growth in your capital invested (capital appreciation).
9 Reasons to Invest in Mutual Funds in 2021
Managed by Experts
Lack of knowledge, time, or expertise are some of the reasons that many of us quote to avoid investments in financial assets beyond fixed deposits. But fund managers who are experts in their field manage mutual funds. Yes, mutual fund investments are subject to market risks, but fund managers manage the risk in the best possible way.
Well Regulated and Transparent
All mutual funds are regulated by the Securities and the Exchange Board of India (SEBI) which is a government organization. Any mutual fund has to follow all rules and regulations set by SEBI. The interest of the investors is always paramount. Details like holdings in a particular fund, expenses incurred, the fund manager and his/her credentials, performance of a fund, etc are available in the public domain at all times.
So, you need not lose sleep over the safety of your investments made through mutual funds.
Ease of Investing
To invest in equities, you need a Demat account. But investing in mutual funds is easier; all you need is a bank account and completion of your Know Your Customer (KYC) formalities. You have a variety of avenues for investing in mutual funds like directly through the Asset Management Company, brokerages, online mutual fund platforms, banks, mutual fund agents, or registrars like CAMS or Karvy.
Ability to invest in amounts of your Choice
Many kinds of investments like real estate require an initial investment in big amounts which may be difficult for everyone. But, with mutual funds, you can opt for a one-shot investment or go through the Systematic Investment Plans(SIP) where you can invest any amount of your choice at a frequency that best suits you. You might be glad to know that in certain funds the minimum SIP amount can be as low as Rs 100.
Let the minimum amount of investment no longer hold your mutual fund investments back!
Suitable for all financial goals/risk profiles
Each individual has different investment goals; it could be a short-term goal needed to buy a laptop or a major life milestone like a marriage or a long-term goal like retirement, children’s education, or starting your own business.
There are a wide variety of mutual funds available that could help you achieve your goals. While debt mutual funds could help you achieve short term goals, equity mutual funds can be a good investment for longer-term goals.
Also, you could choose any sort of mutual fund based on the kind of risk that you are willing to take. If you are a risk-averse person, debt funds may be suitable, and for those who are risk-takers, you could go in for equity mutual funds. Or hybrid/balanced mutual funds could be the way to go for those who prefer the middle path.
Ability to reduce risk through diversification
Mutual funds invest in a variety of assets right from equities, debt, gold, commodities, real estate, and international equities/funds. The value of all investments does not rise or fall together. Many of these investments run in opposite directions. When equities do well, debt does not. Your total risk comes down and returns are cushioned when you invest across various asset categories.
Saves you taxes
Although investments like Fixed Deposits may be safe, they are not tax-efficient. Investments in mutual funds, when done through the Equity Linked Savings Scheme (ELSS) route, can save you taxes as well. ELSS investments of up to Rs 1.5 lakh qualify as a deduction under Section 80C.
The tax treatment on capital gains on the sale of mutual funds is also on the favorable side for the investor when you invest for longer-terms. The rates for various terms are
Short Term Capital Gains are taxed at 15% on equity mutual funds.
Long-term capital gains from equity funds over Rs 1 lakh per year taxed at 10%
Short term capital gains on Debt mutual funds are taxed as per your income tax slab.
Long-term capital gains on Debt funds are taxed at 20% with indexation benefit.
Any time withdrawal
You can redeem mutual funds (except ELSS which are locked for 3yrs) at any time you wish without incurring any penalty. This comes across as a valuable feature in comparison to other assets like fixed deposits where you will have to pay a penalty on premature withdrawals. However, depending upon your investment tenure, you may have to pay an exit load/capital gains tax on the withdrawal of mutual funds.
We have learned that mutual funds are collective investments. Investment related expenses are spread across all the investors. This helps in keeping the per-unit cost low. Similarly, the Asset Management costs like the Fund Manager Fee, operational costs, investment costs are also spread across investors.
While there are many benefits of investing in mutual funds, investors will have to keep in mind that investments in mutual funds are ultimately investments in the financial markets which are dependent on many factors like the interest rates, inflation, state of the global and domestic economy, government policies, etc.
Also, every investment that you make should be in line with your financial goals and your risk profile. Go ahead and make the most of the investment opportunity provided by mutual funds in 2021.