Why are mutual funds one of the most recommended investment strategies today? Beyond just convenience, they offer unique benefits that make them stand out. With India’s growing investor base and rising SIP contributions, mutual funds have become a go-to choice for wealth creation.
The industry’s rapid expansion indicates that more people choose disciplined and goal-based investing. Read on to discover the advantages of mutual funds in this blog!
Understanding Mutual Funds
Mutual funds are wealth-building instruments that pool money from several people and invest it in numerous financial securities, including government bonds, stocks, etc. Each investor owns units of a specific mutual fund, representing a small portion of the large unit. The securities are chosen to keep the scheme’s investment objective in mind.
In this sector, several AMCs (Asset Management Companies) manage mutual funds. These companies recruit fund managers to oversee various mutual fund schemes and ensure proper alignment with the scheme’s investment objectives. Instead of providing these services (fund management and others) for free, they charge an expense ratio from the investors.
Key Advantages of Mutual Funds for Wealth Creation
Mutual funds offer a plethora of benefits to its investors, including:
-
Compounding Benefits
When researching the benefits of mutual funds, it is probably the most significant one. By investing in mutual funds, investors can leverage the power of compounding, allowing the corpus to grow significantly over an extended period. As your returns and dividends get reinvested without manual intervention, you benefit from the power of compounding.
Even a small SIP in equity funds can create a large corpus due to a compounding effect over 10-15 years. This way, you can grow your wealth at an inflation-beating pace.
-
Managed by Certified Fund Managers
One of the prominent advantages of mutual funds is they are managed by professionals. From selecting the right stock and allocating assets properly to timing entries and exits, everything is managed by certified fund managers. They conduct research, analyse market reports and make well-informed investment decisions.
Being a first-time investor, you do not require the skill, time or resources. You can rely on qualified professionals, and ensure efficient growth of your hard-earned money.
-
Risk Diversification
It is one of the significant advantages of investing in mutual funds. You can spread your investments across several asset categories including debt, equity and gold and reduce the likelihood of risks. By not putting all your eggs in one basket, you enhance security, especially when a specific mutual fund scheme faces market headwinds.
Even if one fund in your portfolio declines in value, the others may remain unaffected or even encounter an increment in value. It means you do not lose your hard-earned money by investing in mutual funds if a specific component of your portfolio experiences turbulence.
-
Liquidity
You can easily liquidate units by investing in open-ended mutual funds to meet your financial needs. This process is available on any business day when banks and stock markets are open. This means you have easy access to your money, which is considered one of the top benefits of mutual funds.
When you redeem your mutual fund units, you get the amount in your bank account within one to four days. It depends on the type of scheme you choose. For instance, liquid funds and overnight funds are typically settled by the next business day.
-
Tax Benefits
When considering the various benefits of mutual funds in India, this advantage holds a prominent position at the top. For instance, in general, long-term capital gains are taxed at a lower rate compared to short-term capital gains, which usually have a higher tax rate.
Besides, you can save tax on profits up to ₹1.5 lakh under Section 80C of the Income Tax Act, 1961 by investing in equity-linked saving schemes (ELSS). However, these funds come with a 3-year lock-in period.
Top Factors to Consider When Choosing the Right Mutual Fund in 2025
While mutual funds offer a plethora of benefits, choosing the right fund is also essential. Consider the following parameters when evaluating mutual funds:
-
Track Record
You should check the fund’s performance across market cycles before investing. Choosing a fund with a consistent track record helps ensure stability and increase the likelihood of achieving your financial goals.
-
Costs
Research the fund’s expense ratio before picking a mutual fund. This factor can highly impact returns in the long term. Consider funds with lower expense ratios to reduce additional costs.
-
Fund Manager
You must check the experience, expertise and performance of the mutual fund manager before investing a chunk amount.
Final Thoughts
The list of advantages of mutual funds makes them a reliable and efficient investment option for wealth creation. With professional management and diversification, they help maximise returns while reducing risks. Whether you choose to invest a lump sum amount or through SIP, mutual funds can help you achieve long-term financial stability.
So, why wait? Open a FREE Demat account with Torus Digital today and start investing with confidence!
