What are the benefits of mutual funds?
Personal finance is full of mutual fund news. Mutual Funds were here, are here and will be there unless something radical happens to the human race and economics. The mutual fund advantages which make mutual fund scheme a preferred means of investment is perhaps mainly the opportunity to earn big returns and profit handsomely with just little efforts of making a purchase decision choice of a mutual fund scheme, and then just get on with your own work and life and leave the rest to the mutual fund manager.
Off course the mutual fund manager will charge a certain fund management fees called expense ratio as a percentage on mutual fund returns, yet this in no way diminishes the attractiveness of mutual fund benefits as the returns are mostly still in double digits. Any other investment option can hardly match the top mutual fund returns packaged along with a whole lot of other mutual fund advantages.
Mutual fund advantages concerning best mutual funds return
Mutual fund benefits include the ability of mutual funds to generate higher returns than other investment options. The lowest returns albeit risk-free returns are yielded by savings deposits and after that fixed deposits. Most people now prefer investing in short-term debt based mutual funds than invest in fixed deposits as they get around 10 % returns on the debt based mutual fund investments. Mutual fund advantages include a wide range of risk profiles. Mutual fund risks/return profile can vary according to mutual fund type and fund objectives. Debt based mutual funds with low-risk portfolio profile and high liquidity objective can return around 9% to 10 % one-year returns. Balanced mutual funds portfolios which comprise both equity and debt instruments having moderate risk profile can yield around 11 to 12 % one year to two returns.
Equity-based mutual funds can take around two years to generate good enough returns. Below one-year returns can be negative. Equity funds risk portfolio measures higher on the risk scale as compared to the debt and balanced equity funds since the portfolio comprises of equity stocks which are not immune to market volatility. Most equity fund schemes start generating very high returns in the three to five year period. The underlying mutual fund advantage of investing in equity funds or ELSS is the high three-year return of 19 to 20% and above. There are several types of equity-based funds, and returns from equity-based funds can be extremely high depending upon the equity portfolio construction, as high as above 35 % (over three-year investment horizon).
Managed portfolio enhances mutual fund benefits
An important mutual fund advantage is that investors need not manage their investments. Mutual fund investments are pooled investments, and the fund is actively managed by the fund manager and his supporting team of analysts. The fund manager is consistently involved in making the fund perform above fund category index benchmarks and category average performance parameters. Mutual fund advantages include high competitiveness among category funds that bring out the best of fund management skills. Top mutual funds compete with category peer funds on the performance parameters. Fund managers decide the objective of the mutual fund portfolio and decide portfolio constituents and their corresponding proportions guided by the portfolio objective. Thus mutual fund portfolios vary on the risk-return scale. Within a particular category, fund managers try to screen off unnatural volatility and even achieve lesser volatility on the strength of their estimates regarding future performances of the constituent stocks. Thus even when category benchmark index reflects the slump of the stock market, top performing mutual funds, especially in the equity funds category, continue to show good enough positive returns and comparatively low volatility concerning benchmark, category average, and peer funds. Fund manager adds to the mutual fund benefits several folds as without astute fund management a mutual fund’s returns can dwindle. While making mutual fund investment decisions, past fund management record of the fund manager is important criteria.
Mutual fund benefits concerning funding volatility and risk
Highly risk averse investors who only trust the risk-free investment options like fixed deposits may opine that mutual fund investments, after all, do carry a certain bit of risk. Extreme risk averseness can make investors miss on several mutual fund advantages that could have been realized. As investors mature in life through the starting salary stage into higher paying roles, they gain more confidence and start understanding the true meaning of managed risks and the potential to reap high rewards from them.
In stark contrast to the highly risk-averse investors are the capital market investors who are used to the lows and highs of the capital markets and are always hopeful of offsetting the losses, they suffer from unusual gains. Investors with high-risk appetite may find mutual fund benefits highly rewarding, especially the returns from equity-based mutual fund schemes. The entire risk is taken off their shoulders, and returns are no less competitive than investment in direct equity stocks. Investors with low-risk psychology, who keep thinking about mutual fund benefits they can attain, yet cannot just make up their minds, can make a starting with top rung low risk, short-term, debt mutual funds.
Mutual fund advantages concerning lock-in period
As compared to the long-term PF, PPF, and pension fund schemes with a maturity of fifteen years, mutual fund benefits include a lower lock-in period of up to three years. Most mutual funds do not have a lock-in period of more than three years. Short tenure, debt mutual funds can have a lock-in period of one year, equity mutual funds have a lock-in of three years. Investors cannot withdraw fund from mutual fund account before lock-in period. Exit load of 1 % is levied for premature withdrawal. People seeking low lock-in mutual fund advantages can also consider investing in index mutual funds with a lock-in of only 20 days.
Tax benefits as a part of mutual fund advantages
Mutual fund advantages can include tax deduction and exemption benefits as per provisions of section 80 c and section 10 of income tax act. All mutual fund schemes do not offer tax savings benefits. Investors who seek tax savings among mutual fund benefits should search for schemes under the tax saving mutual funds. Tax saving ELSS funds with a lock-in of three years qualify as tax saving mutual funds. Tax saving benefit for mutual fund investment is both in the form of tax deduction benefit and tax exemption benefit.
Tax deduction benefit implies contribution made as the invested amount in mutual funds as lump sum or SIPs can be deducted from the taxable income. Tax exemption benefit implies that any benefit, income or return received from mutual fund scheme will not be considered taxable income and the income need not be added in the taxable income base while filing income tax returns. ELSS schemes typically qualify for these two kinds of tax benefits. However, from next tax year, ELSS returns above Rs 1,00,0000 in a financial year will be taxed @10 % long-term capital gains tax. Nevertheless, ELSSs will continue to yield high double-digit returns even if taxed.
Mutual fund benefits and mutual fund variety
One of the several mutual fund advantages is the variety of mutual fund schemes. Mutual fund schemes have broad category divisions and several other variants in specific categories. A mutual fund is a portfolio set defined by member stocks and their proportions, and hence many gainful combinations can be arrived at. Mutual fund schemes have enough scope of offering variety. Variety of mutual fund products as a salient mutual fund benefit makes it a popular choice of investment among people all over the world. The broad categories of a mutual fund can include debt, hybrid, and equity mutual fund products. Many people may think that debt mutual funds are low risk and low gain funds, but there can be aggressive debt-based schemes with very high returns in the short run. Still, many others may be of the opinion that equity mutual funds have high risk and high gain, yet the large-cap equity funds have been yielding quite high returns with a low-risk score as compared to the small and mid-cap funds.
Mutual fund advantages and capital market investment opportunity
The capital market trades in equities and IPOs. Top ranking capital instruments may be in high demand and common people may not be able to buy enough units as a single investor. Mutual fund benefits include benefits of pooled investments. As asset management companies have huge fund base, they can invest in a big way to purchase capital market instruments directly and offer them to the common public as mutual fund schemes. Direct investment in equity can be quite digressive for people belonging to different professional spheres and can strain their mental faculties enormously. Mutual fund advantages offer the opportunity to invest indirectly in capital markets without the need to work out investment technicalities or investment of most precious resource called time.
SIP feature among mutual fund benefits
Since most asset management companies have started offering a systematic investment plan, mutual fund benefits have gained more weight for investors. SIP investment mode is a major mutual fund advantage as now even people with small regular savings can invest a part of their money in mutual funds and get an opportunity to earn high returns. Mutual fund Sip can be started with as minimum as Rs 500 monthly investment.
SWP and redemption feature among mutual fund benefits
Units of open-ended mutual fund schemes can be redeemed on their net asset values. If an investor wants to increase investment in the open-ended mutual fund scheme then s/he can buy more units of the mutual fund. On the other hand, if an investor wants to dissolve part of holdings in the open ended mutual fund scheme, then s/he may redeem it with the mutual fund company. Easy redemption of open-ended mutual fund scheme makes the mutual fund scheme equipped with liquidity feature and is a major mutual fund advantage. Investors can also start a systematic withdrawal plan SWP after completion of lock-in period, whereby they can withdraw part or whole of mutual fund returns or even invest amount regularly. Close-ended mutual fund plans cannot be redeemed. No amount including returns can be withdrawn from close-ended mutual funds before completion of the maturity period.
Mutual fund advantages include mutual fund tracking and transparency features
Mutual fund schemes are transparent schemes. Asset management companies which offer mutual fund product plans to the public, periodically publish performance data of the mutual fund product offers on standard parameters like risk, return, NAV, growth, portfolio composition and other pertinent information. The NAV and daily returns are among the daily published data. Returns are calculated on daily, weekly, monthly, tri-monthly, half-yearly, yearly, one year, two years, and three-year basis. Funds with long-term horizon also calculate five years, ten years and returns since inception. Returns above one year are annualized and returns within one year are actual returns.
Fund rating agencies also publish mutual fund scheme data and information and compare the mutual fund schemes with category benchmark, category average, and category peer funds. Fund rating agencies also accord ranking within fund categories and are a firsthand source of information of top-ranking mutual fund schemes in different categories. The online ready availability of performance related data on mutual funds greatly enhances mutual fund benefits and features.
Easy online purchase among mutual fund benefits
And finally, mutual fund advantages include the advantage of easy online purchase of mutual fund schemes. Visit the Policy Bazaar portal to know all about top ranking mutual fund schemes and select a mutual fund that suits your investment preferences and risk flavors. Policy Bazaar portal offers online instant calculator and comparatives of the top ranking mutual fund product in a snapshot as well as detailed navigation format.