10 reasons: Why should you invest in mutual funds?

While almost everyone you know has started investing in mutual funds, are you wondering whether you should take the plunge?

Being Small

Many of us believe that we need to save up a sizeable amount in order to start investing. But that is a misconception. Most mutual funds enable you to begin investing with as low as Rs 500 per month. One can purchase three movie tickets or maybe a couple of pizzas with this amount. Young adults in college end up saving this much after spending their pocket money.

One would be tempted to feel it is an insignificant amount to begin one’s investing journey. But what if as a 20-year-old, you started investing Rs 500 per month?

Assuming a modest CAGR of 12% over 25 years, you would have created a corpus of close to Rs 9.5 lakhs when you are 40. If you share this insight with any 45-year-old today, they would wish they had learnt about it two decades back as Rs 9.5 lakhs is still a significant amount.Therefore, it is important to learn early as to Why should you invest in mutual funds?

Take advantage of market's volatility

Volatility is the stock market’s ultimate truth. Before understanding how Mutual Funds take advantage of market volatility, let us understand the concept of market volatility. Volatility is the quantum of change a security’s price goes through during a given period of time. The change would be positive or negative depending on whether markets go up or down respectively.

When share prices fall, the mutual fund will purchase more units of shares. Individual investors keep waiting for the bottom and sometimes miss out on purchasing shares at mouth watering prices. However, through a regular SIP, investing regularly in mutual funds helps investors take advantage of rupee cost averaging – which means cost of purchasing units averages out over a longer period of time and reduces impact of short-term volatility on one’s investment. In simpler words, volatility ensures that there are opportunities for the mutual fund portfolio manager to buy units at cheaper prices which bumps up the return on investment over a longer period of time.

Warren Buffet often quotes that over the long term, there's only one direction the market will go. BSE Sensex has given a compounded annual growth rate of 16% since 1979 till December 2017. Not to forget the biggest crashes like Harshad Mehta scandal in 1992 and the global financial crisis in 2008. The bottom-line is that even the worst crashes are rather resilient to long-term returns. A correction or a crash may not necessarily be a negative thing for a long term investor.

Prudent investors would avoid herd mentality. A common reason why investors are unhappy is when they see the stock market rising, they see many people booking profits. They also get greedy and cash in. Similarly, when there is crash, the same investors believe that it is a wise decision to sell and cut losses. Thus investors buy high and sell low, which negates the primary goal of investing. Hence, the most important quality for a long term investor is temperament and not intellect. This highlights another bottom-line - Don't panic, stay invested.

Why should you invest in mutual funds? It helps inculcate financial discipline.

One of the most overlooked benefits of investing is inculcating a habit of regular savings. Individuals typically believe this -> Amount to invest = Income – Expenses. Whereas it should actually be -> Expenses = Income – Amount Invested. Systematic Investment Plans help inculcate a ‘saving habit’ as we invest a fixed sum at regular intervals and would spend the amount that remains after that.

Most investors aren’t aware that a SIP can be set up daily, monthly, quarterly or bi-annually.

The earlier one begins the better as good habits take time to form!

Why should you invest in mutual funds? It helps you achieve goals

Often, individuals get enticed by ad-hoc investing. Especially in products which promise amazing returns or claim to have incomparable features. These individuals find themselves with unwanted investments which are a result of making uninformed investment decisions. And when important milestones come up, the redeemed amount turns out to be woefully short.

Listing down goals and back calculating to figure out how much to invest regularly helps an individual to be financially and mentally prepared to achieve these goals when the time comes. This also reduces unnecessary stress which one may burden oneself with otherwise.

Goals can be primarily divided into short-term, medium term and long term.

Investments can be made in appropriate mutual funds to achieve all these different types of goals.

Setting proper goals shows us the exact investment amount needed for a duration in order to reach a specific corpus. We get clarity on how much monthly investment to make and when to sell mutual funds as and when our goals near.

Why should you invest in mutual funds? It can be liquidated easily at market rate

Mutual funds are liquid since investors can redeem their funds at any given point in time. The mutual fund units are sold as per market rates on the date of selling. The money gets credited in investors’ account within 1 – 2 working days in the case of liquid or debt funds whereas amount redeemed from equity mutual funds gets credited within 4 to 5 working days. However, it is applicable only to open ended schemes, which contribute to the major share of the mutual funds in India.

Close ended funds have lock-in period and the time horizon varies from funds to funds.

Why should you invest in mutual funds?It offers inflation beating returns

Let us try to understand what inflation is. Inflation is a silent thief. When the government publishes the rate of inflation @ 6%, this implies that the average cost of living for us has gone up by 6%. If we had to spend Rs. 100/- a month until last year, then we would spend Rs. 106/- a month this year. This implies keeping money stashed in lockers also looses value due to inflation as it is worth less today compared to last year when considered based on the goods or luxuries the same money can buy for us. This is typically the reason why our retirement pool more often than not seems insufficient at a later stage as people underestimate the impact of inflation.

What we need is an investment that provides a return higher than inflation rate so that our savings do not lose value over time. Example: If bank FDs give us 6% rate of interest, then Rs. 100/- invested last year would be worth Rs. 106/- today. This will allow us to buy the same set of goods that we could have purchased last year for Rs. 100/-.

But this is assuming there is no tax deducted at source as it would reduce our net return. Banks charge a TDS of 10% on the interest accrued if it is more than Rs 10,000 in a year.

Equity mutual funds, however, do provide an opportunity to generate inflation beating returns. While the returns do tend to be volatile in the short term, over a period of time, equity mutual funds have given a return of 12% to 15% which beats inflation. Even assuming a 10% long term capital gain tax on withdrawal of income, the net return would be adequate to beat inflation and put us in a comfortable position.

Why should you invest in mutual funds?It is hassle-free to invest.

Investing in Mutual Funds has never been easier than it is today. Creating an account happens quickly if all documents such as application form, KYC, Proof of Identity and Proof of address are submitted properly. One can easily start a SIP, modify, top up or even cancel it. Thanks to online platforms, process of investing in a mutual fund can be completed quickly. One can monitor fund performance on a daily basis thanks to the exhaustive reports offered by these platforms. Most online platforms also have an APP which can be downloaded into a mobile device and accessed to perform any operation at the investor’s convenience.

Transfer of funds from bank account to the demat account offered by the platform also happens smoothly.

Variety of mutual funds to choose from according to investor profile and objective

Have you just started working? Or wish to begin investing with your pocket money? Or are you at the prime of your career? Or does retirement beckon?

Do you wish to create a corpus to buy a house? Or do you want regular income? Or are you planning to save up for that solo trip?

Whatever an investor’s profile or objective might be, there will be a suitable mutual fund to consider. An investor

Mutual funds are broadly classified as Open-End Funds and Close-End Funds.

Open ended is the type of mutual fund, that does not restrict the number of units issued by the fund. Investors can issue and redeem units continuously, since there is no limit on the issuance of number of open-end fund units.

Closed-ended funds are a type of funds that are not redeemable from the fund. Unlike open-end funds, which one can redeem at any given point, investors in closed ended funds commit their funds for the duration of the fund. At the time of New Fund offering, the AMC issues a specific number of shares based on the amount of money raised. No additions can be made thereafter.

However, a goal based classification is into Growth funds and Income funds.


Growth Funds:

Growth funds usually put a huge portion in shares and growth sectors, suitable for investors who have a surplus of idle money to be distributed in riskier plans with high returns. This will also require the investment horizon to be longer as volatile markets may cause adverse movement in value of these funds and hence there may not be immediate or steady returns. Further investors looking for tax advantage may also consider investments in debt mutual funds so that they can use the indexation benefit as compared to fixed deposits.


Income Funds:

This belongs to the family regular income plans mutual funds that distribute their money in a mix of bonds, certificate of deposits and securities among others with some allocation to equity to generate incremental returns. Spearheaded by skilled fund managers who keep manage the portfolio’s volatility and sticking to the portfolio’s objective, these Funds have earned investors better returns than deposits and are best suited for risk-averse individuals from a 1-3 years perspective.

They can be classified further into Short term funds, Ultra short-term funds, Liquid funds. Further, as per risk appetite Equity funds can be classified into Large cap funds, Mid cap funds, Small cap funds and Sector funds.

Peace of mind as experts invest on your behalf

Most of us do not have the resources, time and know-how to analyse stocks and thereafter buy and sell. When it comes to investing in Mutual Funds, we can hand over our hard-earned money to the gumption of a professional management and meet our goals patiently. Fund managers do all the requisite research, buy and sell stocks as per fund objective. A portfolio manager is not only highly qualified but also has access to information which a lay investor wouldn’t.

This helps the portfolio manager take appropriate decisions to purchase or sell mutual fund units.

Tax benefits

Investing in Equity Linked Savings Schemes (ELSS) funds enables an investor to claim deduction of upto Rs 1,50,000 under Section 80C of Income Tax Act. There is a lock-in period of 3 years when one invests in an ELSS fund. Dividends paid out by Mutual Funds, up to Rs 10 lakhs in an year, are tax free in the hands of the investors.

Conclusion

Why should you invest in mutual funds? Mutual funds offer a dream package of all benefits in one investment. Therefore, it is high time to start one’s investing journey in the right direction and apire to attain financial freedom.