Benefits of Mutual Funds

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Good mutual fund managers with an excellent research team can do a better job of monitoring the companies they have chosen to invest in than you can, unless you have time to spend on researching the companies you select for your portfolio. That is because Mutual funds hire full-time, high-level investment professionals. Funds can afford to do so as they manage large pools of money. The managers have real-time access to crucial market information and are able to execute trades on the largest and most cost-effective scale. When you buy a mutual fund, the primary asset you are buying is the manager, who will be controlling which assets are chosen to meet the funds' stated investment objectives.

Investing in mutual has various benefits, which makes it an ideal investment avenue. Following are some of the primary benefits:

Professional investment management - One of the primary benefits of mutual funds is that an investor has access to professional management. A good investment manager is certainly worth the fees you will pay.

Diversification - A crucial element in investing is asset allocation. It plays a very big part in the success of any portfolio. However, small investors do not have enough money to properly allocate their assets. By pooling your funds with others, you can quickly benefit from greater diversification. Mutual funds invest in a broad range of securities. This limits investment risk by reducing the effect of a possible decline in the value of any one security. Mutual fund unit-holders can benefit from diversification techniques usually available only to investors wealthy enough to buy significant positions in a wide variety of securities.

Low Cost - A mutual fund let's you participate in a diversified portfolio for as little as Rs.5, 000, and sometimes less. And with a no-load fund, you pay little or no sales charges to own them.

Convenience and Flexibility - Investing in mutual funds has its own convenience. While you own just one security rather than many, you still enjoy the benefits of a diversified portfolio and a wide range of services. Fund managers decide what securities to trade, collect the interest payments and see that your dividends on portfolio securities are received and your rights exercised. It also uses the services of a high quality custodian and registrar. Another big advantage is that you can move your funds easily from one fund to another within a mutual fund family. This allows you to easily rebalance your portfolio to respond to significant fund management or economic changes.

Liquidity - In open-ended schemes, you can get your money back promptly at net asset value related prices from the mutual fund itself.

Transparency - Regulations for mutual funds have made the industry very transparent. You can track the investments that have been made on your behalf and the specific investments made by the mutual fund scheme to see where your money is going. In addition to this, you get regular information on the value of your investment.

Variety - There is no shortage of variety when investing in mutual funds. You can find a mutual fund that matches just about any investing strategy you select. There are funds that focus on blue-chip stocks, technology stocks, bonds or a mix of stocks and bonds. The greatest challenge can be sorting through the variety and picking the best for you.

Return Potential - Well diversified mutual fund scheme offers good returns on investment. Assured return schemes are also available. But investor should care fully read the offer document, before investing.

Choice of schemes - Mutual Funds have offered a varied range of services among which following are popular-
  • Open/Close Ended Fund
  • Growth/Equity Oriented Fund
  • Income/Debt Oriented Fund
  • Balanced Fund
  • Money or Liquid Fund
All Types of MFs

Tax benefits - Investment in Mutual Fund scheme are tax friendly under specific provisions of the Income Tax Act, 1961 as the Government offers tax incentives for investment in specified avenues like Equity Linked Savings Schemes (ELSS). Pension scheme launched by the mutual funds also offers tax benefits.

Well regulated - MFs are well regulated by professional fund managers of Asset Management Company. On broader perspective MF Companies are managed and regulated by SEBI.

Economies of Scale - Mutual fund buy and sell securities in bulk at a time, this help in reducing transaction costs, and help to bring down the average cost of the unit for their investors. Thus provides economies of scale.

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(Last Updated on 12/23/2011)