For most investors who are beginners with limited investible amount, mutual funds offer portfolio diversification benefit. Even with an amounts as low as 100 rupees, one have have a diversified portfolio of 40-50 quality stocks.
Many retail investors will never be able to maintain such quality stock portfolio with so many stocks due to limited money available. Such diversification at individual level requires lakhs of rupees of investments. Most investors do not have required time, resources or knowledge to understand the dynamics of securities markets and track them at regular intervals. Moreover it is not fruitful for small investments to spend their time on investments. It will be better for such investors to utilise the professional expertise of qualified and experienced professional fund managers services by investing in mutual funds.
As mutual funds work on large scale they can offer the benefit of economics of scale. It simply means, spreading the cost of infrastructure and other expenses across thousands and lakhs of investors who invested in the scheme and proportion of such expenses for each investor will be very less.
Mutual funds in India are regulated by SEBI and offer a very transparent operations and records which are publicly accessible to all. Various mandatory documents of each mutual fund scheme allow investors to take a informed decision about their investments.
Mutual funds offer tax exemption in ELSS Mutual fund schemes up to 1,50,000 per financial year under section 80(C) of income tax act. Also as mutual funds as a trust are not liable to pay any tax on its income, as long as investors stay invested in the scheme, it offers tax deferral benefit which further increases investors returns.
Mutual funds, specially open ended mutual funds are highly liquid and provide exit options without much impact cost to investors. Redemption amount is credited in 3-4 days to investor’s bank account. Although, closed ended mutual funds can be existed in stock markets, they are less liquid compared to open ended schemes.
Investors can opt for various systematic transactions SIP – For systematic investments SWP – For Systematic Withdrawals and STP – For Systematic Transfers from one scheme to another.
Various reports, reviews and audits help investors to have a comfort that their money is in safe hands when they invested in mutual funds.
Some of the limitations of investing in mutual funds are
1) unable to have customised portfolio as per the investor’s choice
2) No control on costs (Anyhow, maximum expense ratio can not be more than 2.25% as per SEBI regulations)
3) Investors get confused in selecting suitable scheme from a myriad of available schemes in the market. Anyhow such investors can avail the services of qualified mutual fund distributors or Investment advisors.