Why Invest in Mutual Funds?

In the last post, we saw what a mutual fund is. However, it is important to understand why a mutual fund is an attractive investment. This understanding is important for anyone who wants to invest in mutual funds.

Stress free wealth generation

This is the primary reason why you should consider investing in mutual finds. An active Mutual Fund is managed by a fund manager while a passive mutual fund tracks an index or commodity. Both of these funds helps you gain market linked return while saving you from the need to make investment decisions on your own. Basically, in case of a mutual fund, you are delegating the investment decision to a professional who is responsible for making the decision.

Higher Returns than conventional instruments

Conventional Investment instruments like Bank FD’s provide an interest rate that hardly keeps up with inflation after deducting tax. However, investing in equity mutual funds, historically have given higher returns than these traditional instruments, while the capital gains are completely tax free post one year. In the case of debt mutual funds, even though the gains are taxable, you are given indexation benefit.

Tax saving along with market returns

Equity Linked Saving Schemes are Tax Saving Mutual funds which invest in equities. These funds provide returns linked to the performance of the market, while they help you save tax also. Investing in ELSS has the lowest lock-in period among all the tax saving instruments under 80 C. Herer your money will be locked in only for 3 years, while the next lowest, Tax saving FD, locks your money for 5 years.

Investing in Commodities

In India, the only commodity in which mutual funds are allowed to invest in is Gold. These mutual funds, called Exchange Traded Funds in Gold, tracks the commodity price of Gold. Investing in these funds makes sure that you get the same benefit as investing in Gold, while saving on the storage costs associated with the yellow metal.

Wide Variety of Funds

Mutual Funds come in all sizes and shapes. The fund that you choose will depend on your specific needs. For example, someone who doesn’t want to have his money locked in, can chose an Ultra Short term liquid fund. These funds invest in cash instruments and therefore have no lock in or exit load. Other funds are large cap funds, mid cap funds, small cap funds, hybrid funds, elss funds etc.

Given that mutual fund investment carries these benefits, it is prudent that you include mutual funds in your portfolio. It is important to know how to select the best funds and also how to invest in them. This, we will deal with, in the upcoming posts.

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