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Jun 28, 2012,18.23 IST

Why Mutual Funds are the best among pool of investments?

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As the value of money decreases with the passage of time, it becomes essential to deploy one's savings in appropriate channels of investment. An unused amount, if not invested will eventually lose its purchasing power. Right investments at the right time help to tide over financial hardships and also provide for early retirement. There are several investment options with different risk and return profiles that cater to the investor's appetite for the same. Equities rank the highest in the risk and return matrix while postal savings are on the lower side of the matrix. Individuals must invest according to the risk appetite high, medium, or low that can be and the time horizon - short-term or long-term - of the investment.
 

 

 

 

 

 

 

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.

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.

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.

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.

To have a balance between risk and returns, investors must consider mutual funds as one of the investment options. The benefits of mutual funds make the investment lucrative:

  • Investment decisions are based upon thorough research and proven expertise of the fund manager.
  • Diversification of risk is lowered with mutual funds as they invest across different industries and stocks.
  • The benefits of scale in brokerage, custodial and other fees translate into lower costs for investors.
  • Mutual fund investments offer a lot of flexibility with features such as systematic investment plans, systematic withdrawal plans, dividend reinvestment and a minimal investment amount of Rs 100.
  • It is easier to liquidate holdings in mutual funds as compared to direct investments in securities or any other investment avenue.
  • Equity Linked Savings Schemes (ELSS) offer tax rebates to investors under Section 80C of the Income-tax Act. Also, dividend income from mutual funds is tax-free in the hands of the investor.
  • Mutual funds provide a wide spectrum of investment options like core exposure to equity, debt, liquid, ETF, balance, Funds of Funds and arbitrage funds.

How to invest?

An investor in mutual funds has umpteen schemes to choose from. To select an appropriate mutual fund scheme according to the investment objective and financial goals the investor should take help of a Certified Financial Planner or Financial Advisor (AMFI Certified) to simplify the process further.

 

 

 

 

 

 

 

 

 

 

 

Footnote:

If the mutual fund application form is submitted to the AMC on a trading day by 3.00 pm then the same day's NAV will be applicable. If submitted after that, the NAV of the next trading day is applicable

Source: Nirmal Bang

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