Benefits of Mutual Fund Investments

The following are the benefits of investing in mutual funds:

Flexible Investment AmountsA mutual fund investment can be started with an amount as low as Rs. 500 while there is no limit on the maximum amount you can invest. But do keep in mind that in case of ELSS investments, you get the tax benefit only up to the Rs. 1.5 lakh 80C limit in a financial year.

Professional Management of FundsWith mutual fund, an investor can benefit from the professional management of his/her funds by an expert fund manager. Fund houses charge a nominal fee for the administration and management of a mutual fund scheme called Expense Ratio. The expense ratio of a mutual fund generally ranges between 0.5% to 1.5% and cannot exceed the limit of 2.5% set by SEBI. Fund houses always mention the returns generated by a mutual fund scheme after deducting the applicable expense ratio.

High ReturnsMutual funds offer long term returns that range from 7% (in lowest risk carrying liquid funds) and 15% or higher in case of most equity funds over a 5 year period. These inflation beating returns provided by mutual funds are one of the key reasons why many are choosing these market-linked investments over fixed income instruments such as fixed deposits.

DiversificationMutual funds allow investors to access a wide and diversified investment portfolio that can include equities of varying market capitalisations as well as debt and money market instruments for an investment amount which can be as low as Rs. 500. The diversified investment portfolio allows a mutual fund to provide an unmatched balance between risk and return.

Systematic Investment OptionA systematic investment plan (SIP) is a method of investing in mutual funds which allows investors to invest a fixed sum in a mutual fund scheme at predetermined intervals (daily, weekly, monthly, bi-annual or annual). SIP investments reduce the potential financial risk associated with a lump sum investment. It also enables an investor to increase/decrease the investment in line with the current financial situation of the investor.

Tax BenefitAn Equity Linked Savings Scheme (ELSS) is a type of mutual fund which helps an investor in getting a tax benefit in addition to the above-mentioned benefits. An ELSS comes with a lock-in period of 3 years and every ELSS investment qualifies for a tax deduction of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act. Even in the case of other (non-ELSS) equity schemes, capital gains from unit redemption up to Rs. 1 lakh in a fiscal are exempt from tax.