Preference of Mutual Funds for Investors
Mutual Funds are well known investment vehicles for investors. Investors with limited knowledge, time or money, mutual funds can provide simplicity and other benefits helps in deciding whether mutual funds are best for investors; here are a few key reasons to consider investing in mutual funds.
Mutual funds offering investors the opportunity to earn an income and build their wealth through professional management of their investible funds. There are aspects to such professional management namely investing in line with the investment objective, investing based on adequate research, and ensuring that prudent investment processes are followed.
Affordable Portfolio Diversification:
Units schemes give investors exposure to a range of securities held in the investment portfolio of the scheme. Very small investment in a mutual fund scheme can give in a diversified investment portfolio. With diversification, an investor ensures that all his eggs are 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 several lakh of rupees. Rather, they can achieve the diversification through an investment of a few thousand rupees in a mutual fund scheme.
Economies of Scale:
The large sums of money from so many investors can be pooled making possible for the mutual fund to engage professional managers to manage the investment operation and underlying risks. Individual investors with small amounts to invest cannot, by themselves, afford to engage such professional management.
Large investments corpus leads to various other economies of scale, costs related to investment research and office space get spread across investors. Added, the higher transaction volume makes it possible to negotiate better terms with brokers, bankers and other service providers. SEBI has fixed a limit on the brokerage that the schemes can pay on their purchases and sales of securities in the market. Correspondingly, there is a cap on the total expenses of every scheme.
Many times investors in financial markets are stuck with a stock for which they canít find a buyer; worsening, at times they canít find the company they invested in such scenario investments, whose value the investor cannot easily realise in the market, are technically called as illiquid investments and majority result in losses for the investor.
Investors in a mutual fund scheme can recover the value of the moneys invested, from the mutual fund itself. Depending on the structure of the mutual fund scheme, this would be possible, Closed-end schemes are listed in a stock exchange. Thus, before the scheme matures, the investor can sell the units in the stock exchange to recover the prevailing value of the investment.
Mutual funds are not liable to pay tax on the income they earn and if the same income were to be earned by the investor directly, then tax may have to be paid in the same financial year.
In Growth option schemes, the investor can authorise the moneys grow in the scheme for several years without any incidence of taxation by helping investors to legally build their wealth faster than would have been the case, if they were to pay tax on the income each year.
The investor receives dividends from any Mutual Fund scheme is tax-free in his hands.
Investment any, there are risks involved in buying mutual funds. These investment vehicles can experience market fluctuations and sometimes provide returns below the overall market. The advantages gained from mutual funds are not free: many of them carry loads, annual expenses and penalties for immature withdrawals.
AS Chakravarthy NCFM Hyderabad : Stock Market Training Institute