The mutual fund industry has enjoyed substantial growth in terms of the assets under
management as well as the investors’ accounts. Of many reasons that contributed to
the growth of mutual fund industry, the fundamental one is the increasing
complexity of modern investment..
Expert Money Management
Individual investors may not have the time or professional expertise to decide which
fund to invest in or how to. A mutual fund company employs professional managers
to manage the money pooled in their funds. They decide which company share,
sectors/stocks or debt papers to invest the money or whether to hold on to the
capital. Their decisions will be in the investors’ interest..
Flexibility to switch funds
A serious investor (or fund manager) knows when to switch from the current fund to
another to keep up with or stay ahead of the market. There are many mutual fund
schemes that allow this. The asset manager has to keep a sharp eye on the market to
know this. This ensures better returns while not getting burned by market volatility..
Lock-in periods differ for every mutual fund. Starting from one month to none at all.
For instance, ELSS is a tax-saving mutual fund scheme with the shortest lock-in period
of 3 years. The longer the holding period (beyond the mandatory lock-in), the better
returns you earn and vice versa. Open-ended mutual funds generally do not have
lock-in periods and you can close/withdraw them anytime..
Investments based on goals & focus sector
Every investor has a financial goal. It could be a short-term goal such as an
international holiday or a long-term goal like fixed income post retirement. Also,
different schemes focus on different assets and outcomes with varying risk factors.
This allows investors to drive money to various asset classes as per their risk
appetites and goals..
Mutual funds invest across assets, company sizes and shares to spread the risks. When one
underperforms, the other gains can even out the loss. This is diversification. However, it is
recommended to not invest in too many (more than 5) as it may get difficult to monitor.
Also, stocks of these companies always tend to be homogeneous, which beats the
If you do not wish to make a one-time investment, you can invest in smaller and
manageable installments called SIP. Systematic Investment Plans foster financial
discipline in investors. As it averages the rupee cost, SIP is an ideal alternative to mid-
income and low-income investors. You can start with as low as Rs. 500 to make your
initial installment with ClearTax..
Economies of Scale:
Mutual funds also provide economies of scale. Buying one spares the investor of the
numerous commission charges needed to create a diversified portfolio. Buying only
one security at a time leads to large transaction fees, which will eat up a good chunk
of the investment. Also, the $100 to $200 an individual investor might be able to
afford is usually not enough to buy a round lot of a stock, but it will buy many mutual
fund shares. The smaller denominations of mutual funds allow investors to take
advantage of dollar cost averaging.
All these factors make mutual funds an attractive options for younger, novice and other
individual investors who don't want to actively manage their money: They offer high
liquidity; they are relatively easy to understand; good diversification even if you do not
have a lot of money to spread around; and the potential for good growth.
As a mutual fund investor, you get the benefit of having a professional manager reviewing
the portfolio on an ongoing basis. Professional portfolio managers and analysts have the
expertise and technology resources needed to research companies and analyze market
information before making investment decisions. Fund managers identify which securities to
buy and sell through individual security evaluation, sector allocation, and analysis of
technical factors. For those who have neither the time nor the expertise to oversee their
investments, this can potentially be invaluable..
Liquidity and convenience
All mutual funds allow you to buy or sell your fund shares once a day at the close of the
market at the fund’s NAV. You can also automatically reinvest income from dividends and
capital gain distributions or make additional investments at any time. For most stock funds,
the required minimum initial investment may be substantially less than what you would
have to invest to build a diversified portfolio of individual stocks..
The securities held within the portfolio often pay dividends or interest. Securities can also
be sold by the fund manager after rising in value. These types of events can help generate
income for the fund, which by law must be paid out to investors in the form of periodic
distributions. For the most part, investors who own shares in the mutual fund at the time
these distributions are made are responsible for the taxes on that money. However, the
income from funds that invest in municipal bonds may be exempt from federal, and in some
cases, state taxes..
Investors who own mutual funds that are not held within an IRA or another tax-advantaged
account may be subject to three different types of taxes:.
- Dividend income, which is generally taxed at your ordinary income tax rate
- Capital gains from the sale of securities, which can be taxed at your ordinary income tax
rate or the more favorable long-term capital gains rate, depending on how long the
securities were held by the fund.
- Capital gains when you sell or exchange shares of the fund at a profit; those capital gains
could also be taxed at your ordinary income tax rate or the more favorable long-term
capital gains rate, depending on how long you held those shares.