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Mutual Funds and It's Importance

What are mutual funds?
A Mutual Fund (MF) is formed when capital collected by various investors is invested in purchasing company shares, stocks, or bonds. Shared by thousands of investors, mutual funds’ investments are collectively managed by a professional fund manager to earn the highest possible returns.


a. Liquidity
Unless you opt for close-ended mutual funds, it is relatively easier to buy and exit a mutual fund scheme. You can sell your units at any point (when the market is high). Do keep an eye on surprises like exit load or pre-exit penalty. Remember, mutual fund transactions happen only once a day after the fund house releases that day’s NAV.

b. Economies of scale in transaction costs
Since mutual funds buy and sell securities in large volumes, transaction costs on a per-unit basis are much lower than what retail investors may incur if they buy or sell shares through stockbrokers.

c. Diversification
Mutual funds have their share of risks as their performance is based on the market movement. Hence, the fund manager always invests in more than one asset class (equities, debts, money market instruments, etc.) to spread the risks. It is called diversification. This way, when one asset class doesn’t perform, the other can compensate with higher returns to avoid the loss for investors.

d. Safety
There is a general notion that mutual funds are not as safe as bank products. This is a myth as fund houses are strictly under the purview of statutory government bodies like SEBI and AMFI. One can easily verify the credentials of the fund house and the asset manager from SEBI. They also have an impartial grievance redressal platform that works in the interest of investors.

e. Best Tax Savings Option
Mutual funds help in better tax planning along with the higher returns from investments. You can get a deduction of up to Rs. 1.5 Lakhs under section 80C. ELSS tax saving mutual funds have the potential to deliver higher returns as compared to other tax-saving instruments like PPF, NPS and tax-saving FD.

f. Lowest Lock-in Period
Tax-saving mutual funds have the lowest lock-in period of only 3 years as compared to a minimum of 5 years for other tax-saving options like FD, ULIPs, and PPF. Plus, you have the facility to stay invested even after the completion of the lock-in period.

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