Professional Management
Mutual funds offer investors the opportunity to earn an income or build their wealth through professional management working on their investible funds. As such professional management invests, in line with the investment objective, based on research and ensure follow of prudent investment processes.
Portfolio Diversification
Units of a scheme give investors exposure to a range of securities held in the investment portfolio of the scheme. Thus, even a small investment of Rs 5,000 in a mutual fund scheme can give investors a diversified investment portfolio. With diversification, an investor ensures that all the egg is not in the same basket. Diversification helps reduce the risk in investment. In order to achieve the same diversification as a mutual fund scheme, investors will need to set apart huge sum of money. Instead, they can achieve the diversification through an investment of a few thousand rupees in a mutual fund scheme.
Convenient Options
The options offered under a scheme allow investors to structure their investments in line with their liquidity preference and tax position. 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 & Exchange Board of India (SEBI) has mandated strict checks and balances in the structure of mutual funds and their activities. As such Mutual fund investors enjoys a protection.
Better financial planning
Mutual funds offers various features which helps in better financial planning like for investors who wish to invest regularly can avail Systematic Investment Plan (SIP); or withdraw amounts regularly through a Systematic Withdrawal Plan (SWP); or move moneys between different kinds of schemes through a Systematic Transfer Plan (STP). Such systematic approaches promote an investment discipline, which is useful in long term wealth creation and protection.
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 as short term or long term capita gains. Mutual funds offer options, whereby the investor can let the moneys 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.
Economies of Scale
Large pool of money brings in benefits of economies of scale which further helps mutual fund to engage professional managers to manage the investment. Individual investors with small amounts to invest cannot, by themselves, afford to engage such professional management. It also takes care of the costs like costs related to investment research, office space, administrative costs which gets spread across investors. Further, the higher transaction volume makes it possible to negotiate better terms with brokers, bankers and other service providers.
Liquidity
At times, investors in financial markets are stuck with a security for which they can’t find a buyer and thus fasces an issue of liquidity Such illiquid investments, may become complete loss for investors. In contrast, investors in a mutual fund scheme can recover the value of the money invested 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 closure of the scheme. Schemes where the money can be recovered from the mutual fund only on closure of the scheme, are listed in a stock exchange. In such schemes, the investor can sell the units in the stock exchange to recover the prevailing value of the investment.
Tax benefits
Specific schemes of mutual funds popularly known as Equity Linked Savings Schemes give investors the benefit of deduction of the amount invested, from their income that is liable to tax. This reduces their taxable income, and therefore the tax liability. Further, the dividend that the investor receives from the scheme, is tax-free in his hands.
Where Mutual funds enjoys a host of advantages, it certainly have few Limitations also stated as follows
Lack of Customization
As compared to Portfolio Management Schemes (PMS) to large investors, mutual funds lacks in offering customisation. In a PMS, the investor has better control over what securities are bought and sold on his behalf. On the other hand, a unit-holder is just one of several thousand investors in a scheme. Once a unit-holder has bought into the scheme, investment management is left to the fund manager (within the broad parameters of the investment objective). As such, the unit-holder cannot influence what securities or investments the scheme would buy. Since Mutual fund is more meant for investors who mostly lack the time or the knowledge to be able to make portfolio choices. Therefore, lack of portfolio customization is not a serious limitation in most cases.
Wide variety to choose from
With over 800 mutual fund schemes offered by 38 mutual funds – and multiple options within those schemes – make it difficult for investors to choose between them. Greater dissemination of industry information through various media and availability of professional advisors in the market should help investors handle this overload.
