Why is Mutual Fund the Best Option? What are the advantages and disadvantages of mutual fund investments?

what do you think is the best option?

Definitely mutual funds! Even though the other financial assets have certain benefits, mutual funds have some very strong advantages that pull them to the top of the investment list!

1. Mutual Fund Vs Bank Deposits

The yield on bank deposits becomes negligible after accounting for inflation and tax as compared to a mutual fund in which the dividend received is completely tax exempt and the liquidity provided is higher than that of bank deposits.

2. Mutual Fund Vs PPF

Public Provident Fund (PPF) was till date one of the best options available. However, over the years the reduced yield on PPF makes it less attractive for investors. Also the high yield comes at the expense of liquidity and growth. PPF has a lock-in period of 15 years.

3. Mutual Fund Vs Corporate Bonds

Tax effect makes the net returns from corporate bonds and debentures less attractive as compared to mutual funds, which enjoy tax exemptions on dividend received. Also investors need to be extremely careful about such investments and must ascertain that the issuing company is credit rated. Corporate bonds also have less liquidity as compared to mutual funds.

4. Mutual Funds Vs Financial Institution

Bonds Although financial institution bonds have high compounded returns, they are unsecured and more prone to interest rate risks as compared to mutual funds. Mutual funds, on the other hand, are much more diversified as they invest in a variety of instruments like money market and debt

Mutual Funds…

Combine the advantages of each of the investment products.

Dispense the short comings of the other options.

Adjust returns for market movements.

What are the advantages and disadvantages of mutual fund investments?

Advantages

professional management

Investors get a chance to increase their income with the help of Professional management

Professional management helpsinvestors:

Invest as per their investment objectives

Invest on the basis of suitable.

research Follow sound investment processes

Affordable Portfolio Diversification

Mutual fund schemes offer investors a wide range of securities to invest in, regardless of the investment size. This greathy reduces investment risk.

Economies of Scale

Since a large number of investors pool in money collectively, it is possible for mutual funds to provide certain services to its investors such as:

Providing professional management

Reducing costs by spreading expenses across investors

Negotiating better terms with brokers, bankers and other service providers

Liquidity

Liquidity is a measure of the ability and ease with which assets can be converted to cash.

Investors can get back the value of their investment amount from the mutual fund itself.

Tax Deferral

Investors have the option to let their money grow in a scheme for a number of years, thus deferring tax liability.

Tax Benefits

Certain mutual fund schemes reduce the taxable income of investors by allowing the amount invested to be deducted from the income liable to tax

Investors do not need to pay tax on dividends received from mutual fund schemes.

However, dividends from certain categories of schemes are subject to dividend distribution tax, which is paid by the scheme before the dividend is distributed to the investor. Long term capital gains arising out of sale of debt and liquid funds are subject to long term capital gains tax, which may be taxed at a different (and often lower) rate of tax.

Convenient Options

Investors are given the option to structure their investments according to their liquidity preference and tax position.

Investors are also allowed to:

Withdraw a part of their investment amount

Make additional investments to theiraceount

Set up systematic transactions

Investment Comfort

After investors make an initial investment with a mutual fund, the investment process for future investments is very simple.

Regulatory Comfort

SEBI protects mutual fund investors by ensuring that strict policies and processes are followed with regards to mutual fund structure and activities.

Systematic Approach to investments

Mutual funds help investors:

Invest regularly through a Systematic Investment Plan (SIP)

Withdraw amounts regularly through a Systematic Withdrawal Plan (SWP)

Move money between different schemes through a Systematic Transfer Plan (STP)

Disadvantages

Lack of Portfolio Customization

Unit holders do not get to decide which securities or investments should be bought by the scheme.

Choice Overload

With more than 800 mutual fund schemes offered by over 40 mutual funds, as well as numerous scheme options, investors find it difficult to make a selection.