Do you want to know what mutual funds are and what are the advantages of investing in mutual funds?  Well, you are in the right place. In this article, we will discuss the meaning of mutual funds and the advantages of mutual funds briefly.

So let’s start with the meaning of mutual funds.

Meaning of mutual funds:

Typically saying, a mutual fund is a pool of money made up with the contribution of different investors but managed by a fund manager. The contributed money is invested in different securities such as stock, bonds, gold, etc. Basically, it provides a gateway to enter into the share market with diversified risk and less cost.

Let’s understand with an example-

There are three persons A, B and C. all of them want to invest in the share market but following these problems:

1. Have only 200 rupees to invest but the share is of Rs.1000
2.  Do not have knowledge about the financial market
3.  Afraid of the volatility of the market.

Here comes the role of mutual funds. With mutual funds, all the given problems can be solved. The money will be collected from A, B, and C and the investment will be made in securities and units will be provided to them according to their contribution. Thus, A can have units according to his investment, B can avail the benefit of professional management of its funds by the fund manager and C can diversify its risk and can enjoy investing in the share market. Now we are clear about the meaning of mutual funds. Let’s know about the advantage that you can avail of while investing in mutual funds.

Advantages of investing in mutual funds

Professional management

The first and foremost advantage of investing in mutual funds is that you get professional management. If you are not aware of the market and don’t know how to invest, then there is no need to worry. In mutual funds, your fund manager will take all the major decisions regarding the allocation of funds.  Thus, it becomes too crucial for you to check the fund manager’s record before investing in any mutual fund schemes.

Diversified risk

In mutual funds, the risk of the investment gets diversified as the fund manager doesn’t invest in only one security. The funds are invested in stocks, bonds, gold, and other securities. The risk is mitigated with the diversification of the funds in more than one asset class. Thus, market volatility can be avoided with diversification.

Liquidity

Liquidity becomes a major consideration while investing in mutual funds. There is a feature of liquidity in mutual funds unless you opt for close-ended mutual funds. You can redeem your units at any point in time, there is no restriction unless it is a close-ended fund. This is one of the benefits of investing in mutual funds.

Tax efficient

Mutual funds are tax efficient as compared to other investment options and that’s the benefit of investing in mutual funds. Although, mutual funds which are held for a longer period are more tax-efficient For example-You can invest up to Rs 1.5 lakh in tax-saving mutual funds which is covered under Section 80C of the Income Tax Act, 1961.

Can start investing with small amount

Yes, if you don’t have a large amount to invest, not to worry you can start with a small amount of money. You can start investing with a mere 500 or 1000. What a great advantage of investing in Mutual funds.

Safety

All mutual funds companies come under the regulation of SEBI and AMFI. All major considerations like historical performance, fund manager, and his experience, type, and nature of the mutual fund scheme, is disclosed in the scheme to the investors.

No. of choices

There is a number of options available in mutual funds such as equity mutual funds schemes, debt mutual funds, and hybrid mutual funds, etc. You can make your choice according to your financial goal. For example, if you are looking for long-term investment for capital appreciation and ready to take risks then you can go for choosing equity mutual funds. This is the best investment option in mutual funds.

Cost

Another benefit of investing in mutual funds is the cost that is less as compared to other investment avenues available for investment and the expense ratio charged typically 2-3% of the total investment of the year.

Easily accessible

In the modern world, investment options like mutual funds are on your tip you can easily access them and start investing. There are many channels like brokerage firms, registrars, agents, and banks, and the easiest online mutual fund investment platform.

SIP or lumpsum -your choice

There are two ways of investing- one sip (systematic investment plan) and the other is a lump sum. Thus mutual funds provide flexibility for investors.

Now as you are aware of the advantages of investing in mutual funds. But before you start investing, you need to consider the disadvantages of investing in mutual funds also as every coin has two sides. So, only knowing the good side is not acceptable you need to know about the disadvantages of investing in mutual funds as well to make a good and efficient decision. There are many disadvantages such as dilution, high expense ratio, exit load, longer lock-in period, etc. which you need to consider while opting for mutual funds.

 You can also browse the full article on risks associated with investing in mutual funds.

Happy Investing!

Disclaimer: Taking advice from a mutual fund advisor is recommended before investing.