Importance of Investing in Mutual Funds in India

Unlike the previous generation, millennials don’t only believe in stockpiling savings through passive investments. They want to be more proactive when it comes to growing their wealth. Part reason is that savings instruments that promise guaranteed earnings offer moderate to low returns at best.

No wonder relatively safe and possibly lucrative financial instruments like mutual funds are becoming so popular with this demographic. However, even with soaring awareness about mutual funds, several millennials are still sitting on the fence, wondering whether to invest or not.

If you’re one such individual, here is why investing in mutual funds is essential this year.

 You get experts to manage your wealth

Know that what you choose in the face of mutual funds are stocks that are carefully handpicked by financial experts. They pick funds with the sole aim of providing you as high a return as possible.

With their careful vetting and years of financial experience, you more often than not get to invest in a profitable venture capable of earning excellent returns. Therefore, even if you're a novice investor, mutual funds are a safe and profitable instrument to invest in.

You can invest small and grow big

It's a fallacy that, as a millennial, you need a significant amount of money to build your mutual fund portfolio. In reality, it's the opposite! You can test the waters with only a few thousand rupees. What's more, you can indirectly invest in mutual funds through SIPs.

A SIP stands for a Systematic Investment Plan, where you invest a small amount every month. The SIP then invests pooled funds from several investors into assorted mutual funds. The good news is that SIPs start at just Rs. 500 per month and have the potential to earn considerable returns.

Additional Read: Long-Term Mutual Fund Strategy

Easy Access

Mutual funds offer an easy way for individuals to start investing without any financial expertise. These funds are diversified and professionally managed, reducing the need for constant monitoring.

You can easily start investing through online platforms like Tata Capital with amounts as low as Rs. 500. This accessibility has made mutual funds a popular choice for Indian investors seeking convenient investment options.

Tax Benefits

Investing in mutual funds offers several tax advantages, especially through Equity Linked Savings Schemes (ELSS). These funds qualify for tax deductions under Section 80C of the Income Tax Act, allowing you to claim up to Rs. 1.5 lakhs in tax deductions annually.

This can significantly reduce your tax liability, enhancing savings. Moreover, long-term capital gains (LTCG) from equity mutual funds are exempt from taxes up to Rs. 1.25 lakhs, making them a tax-efficient investment option.

Professional Risk Management

Mutual funds are managed by professional fund managers who carefully assess investment opportunities and craft strategies to mitigate risks. Moreover, they regularly analyse market conditions, economic factors, and other trends to adjust the portfolio to maximise returns.

This allows you to benefit from their expertise while optimising your investments and growing wealth.

Low Cost

Mutual funds typically offer low-cost investment options. This is because they pool funds from multiple investors, allowing fund managers to operate at a larger scale with lower management fees. Moreover, you don't have to pay a fee each time you buy or sell shares, which is common in direct equity investing.

This makes mutual funds an attractive investment option, especially for beginners or those with smaller amounts to invest.

Long-term Returns

Investing in mutual funds offers the potential for strong long-term returns, making them a popular choice for long-term financial goals. This allows investors to benefit from the power of compounding, where earnings on investments are reinvested, leading to significant growth over time.

While short-term returns can fluctuate due to market volatility, long-term mutual funds can help you generate attractive returns.

Allows you to diversify your financial portfolio

We understand if you strongly believe in investing in fixed deposits, PPFs, NPS, etc. These instruments are a great way to secure your future. But, all of them offer you low guaranteed returns. Supplement these investments by diversifying your finances into mutual funds.

Doing this will provide you with a mixed bag of investments. Some with a static earning potential, while others like different mutual funds, with a dynamic earning potential. The latter can reap double the rewards depending on market conditions and the category you invested in.

Ensure you stay liquid

Unlike certain savings instruments, most mutual funds come with nominal or zero lock-in requirements. Therefore, you can redeem your mutual fund units at any time of day and usually at no penalty. This helps you stay liquid as you can quickly encash your mutual funds in case an emergency strikes.

Additional Read: Important Tips to Pick Top-Trending Mutual Funds

FAQs on Mutual fund importance

1. What is the importance of mutual funds?

Mutual funds pool money from investors to invest in a diversified portfolio of stocks, bonds, and other assets. They offer easy access to a variety of stocks, reduce individual investment risk, and provide professional management for higher returns.

2. What is the main advantage of mutual funds?

The main advantage of mutual funds is diversification. By pooling funds from many investors, they invest in a wide range of securities, spreading the risk.

3. What is the main purpose of a mutual fund?

The main purpose of a mutual fund is to pool funds from multiple investors and invest in a diversified portfolio of assets.