There are 5 key advantages of investing in mutual funds:-
1. Risk Diversification:
Mutual funds help investors diversify their risks by investing in a fairly portfolio of stocks across different sectors. A diversified portfolio reduces risks associated with individual stocks or specific sectors. If an equity investor were to create a well diversified portfolio by directly investing in stocks it would require a large capital outlay. On the other hand mutual fund investors can buy units of a diversified equity fund with an investment as low as
र 5,000/- only (even lower for ELSS funds). Further mutual funds are managed by professional fund managers who are experts in picking the right stocks to get the best risk adjusted returns. Retail investors often lack this expertise.
2. Economies of scale in transaction costs:
Since mutual funds buy and sell securities in large volumes transaction costs on a per unit basis is much lower than buying or selling stocks directly.
3. Tax efficiency:
Mutual funds are more tax efficient than most other investment products. Long term capital gains (holding period of more than 1 year) for equity mutual funds are tax exempt. Further dividends of equity funds are also tax free. For debt funds long term capital gain (holding period of more than 3 years) is taxed at 20% with indexation. Once indexation (due to inflation) is factored in the long term capital gains tax is reduced considerably, especially for investors in the higher tax bracket.
4. High Liquidity:
Open ended mutual funds are more liquid than many other investment products like shares, debentures and variety of deposit products (excluding bank fixed deposits). Investors can redeem their units fully or partially at any time in open ended funds. Moreover, the procedure of redemption is standardized across all mutual funds.
5. Variety of products and modes of investment:
Mutual funds offer investors a variety of products to suit their risk profiles and investment objectives. Apart from equity funds, there are also income funds, balanced funds, monthly income plans and liquid funds to suit different investment requirements. Mutual funds also offer investors flexibility in terms of modes of investment and withdrawal. Investors can opt for different investment modes like lump sum (or one time), systematic investment plans, systematic transfer plans (from other mutual fund schemes) or switching from one scheme to another.
hi,
ReplyDeleteMutual fund houses offer two kinds of schemes: Growth and dividend. In the growth option, profits made by the scheme are invested back into it. This results in the net asset value (NAV) of the scheme rising over time. When the scheme gains, the NAV rises and in case of a loss, it goes down. The only option to realise the profit in the growth option is to sell or redeem your investments. The dividend option does not re-invest the profits made by the fund. Profits or dividends are distributed to the investor from time to time. The amount and frequency of dividends is never guaranteed. Dividends are declared only when the scheme makes a profit and it is at the discretion of the fund manager. The dividend is paid from the NAV of the unit.
I am sure you understood the difference between both type.
Many time dividend option do not pay dividend but due to earlier year payment of dividend current NAV of dividend option and Growth option seems Different.
Thanks
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hi,
ReplyDeleteCan mutual fund investment turn zero ?
Well it's Rare, but before you invest you must check fund portfolio.
(rating,sector allocation,top 5 holding percentage,etc)
*Mutual fund are subject to market risk.
:)