While a greater fraction of people is engaging in investing, there are still a lot of misconceptions attached to it. A number of people associate stocks with high returns in a short period of time. Mutual funds, on the other hand, are associated with slow, delayed returns with a longer investment period. However, investing in mutual funds does not always mean menial returns over a prolonged period. Here are a few reasons why investing in mutual funds, even if for a short period, can be very beneficial.
#1 High Returns and Tax efficiency
A huge misconception associated with mutual funds is that the returns are not high enough. Mutual funds actually lead the way in investing in a large array of shares and other investment products. Mutual funds have regularly delivered exceptional returns compared to other instruments when it comes to investments. For investors who have lower risk appetites, there are debt funds they could invest in. These have greater returns than fixed deposits. For investors with a larger appetite for risk, there are equities which promise higher returns. Investing in equities through mutual funds is a safe way to expect returns without too high a risk. This is due to the Rupee Cost Averaging (RCA) which helps us catch lower price points through regular investing. Historically, equity funds have had high returns in the last 10 years, with returns averaging 10% to 15%. By investing in the right mutual funds, you could actually get returns as high as stock returns. Mutual funds offer huge tax benefits too. The Equity Link Saving Scheme (ELSS) has the shortest lock-in period and invests mostly in stocks that carry a higher risk. However, it is exempted from all taxes under 80C of the Income Tax Act, 1961.
#2 Investment Expertise
Most investors may not have the time or knowhow necessary for in-depth investing. Investing does require a lot of prior work – including thorough research and monitoring the market movement. Mutual funds are the answer for such situations. Mutual funds are managed in an efficient manner by a professional fund manager, who’s day job is ensuring you get the maximum bang for your buck. The fund manager actively tracks the market trends and manages the assets under the mutual fund schemes. They are trained to identify the leading stocks and recognize when to buy and sell them. As far as mutual funds are concerned, you know your money is in the hands of a professional investor and he or she is going to manage your funds better than you.
Image: How a mutual fund works. Image source: Corporate Finance Institute
#3 Risk Diversification
Portfolio diversification is a tenet of sound investment strategy for investors today. A lack of diversification is a risky thought and more often than not ends on the negative side of the scale. In mutual funds, this is an aspect already taken care of. Mutual funds are essentially a basket of stocks, and hence has the benefit of being pre-diversified. A part of the stocks have equity exposure which offer long-term growth while a fraction of the stocks includes fixed-income products which are able to balance out the risks. In equity mutual funds, the risks get spread across a number of sectors, thus reducing the overall risk. This is essential when some stocks perform badly. Their losses are counterbalanced by the profitable stocks. Mutual funds are therefore less prone to negative impact in the short term as compared to direct stock purchases.
Mutual funds are a very liquid investment. In fact, they have a separate name for them – liquid funds. Withdrawals can be made at any time and multiple banks have made the process easier by crediting the amount back to the bank as soon as you opt out of the fund. Liquid funds are debt mutual funds. Here, you can invest for a short period of time in various market instruments. They are generally used by investors to stock up their money for a short period of time (somewhere between a week to 3 months). Liquid funds are considered to be the least risky and least volatile.
#5 Ease of investment
Mutual funds have always been preferred by experienced investors due to their no-fuss undertaking. Investments can start as low as Rs. 500 per month through a systematic investment plan. There are also a number of categories you can choose from while deciding to invest. With the advent of the smartphone, everything, including accessing account statement, portfolio checks and selecting from potential investments can be done remotely. If you are new to investing, a good place to start is the Reliance Mutual Fund. It is amongst the fastest growing mutual fund houses in the country and has a number of tailored investment plans for various kinds of investments (including tax saving options).
There are numerous options in mutual funds from which you can choose one or more depending on your parameters. Investing for a long or short period is no longer an issue with each investment being tailored differently for the investors’ need. Having said that, it’s fairly obvious that mutual funds remain an attractive option in the short term as well.