Investors now strongly believe that equity is one of the best asset classes to create wealth over the long term. Financial planners advise them to start investing with mutual funds to start wealth creation journey instead of direct stocks.
What is the benefit of investing in MFs as compared to direct investment in stocks?
The biggest advantage for a mutual fund investor is that he has the services of a professional fund manager, who tracks, evaluates and researches sectors and companies on a regular basis.
As an individual investor, one does not have the time and the resources to research, track and identify stocks on one’s own. An individual may get carried away due to sentiment and may go overboard on a particular stock.
A fund manager evaluates risk before buying a stock and there are guidelines in place. There are limits on how much a fund manager can invest in each stock and each sector, which helps in the long term. A fund manager’s decision to invest in a particular share is backed by strong research by the team.
How much money do you need to invest in mutual funds?
You can start with small amounts in mutual funds. You can start with as little as Rs 500. There is no need to open a demat account, too. Many blue-chip stocks themselves quote at a high price, making entry point in stocks generally cost higher than mutual funds.
You can also choose to invest systematically every month using SIP route by writing a simple mandate to the fund house.
What tax benefits does a mutual fund offer as a product?
When an investor buys and sells shares before completing one year, he has to pay short-term capital gains. However, in a mutual fund, the fund manager may keep transacting in shares at varying points of time.
If investor remains invested for over one year in an equity fund, his gains are tax free since securities transaction tax is already deducted.
What liquidity do mutual funds offer?
In a bear market, you may find individual stocks could be illiquid. If you wish to sell large quantities, the price goes down or there could be no buyers. Similarly, on a good announcement, the stock may be on upper circuit.
Such liquidity problems are not faced by a mutual fund investor. An open-ended fund can be bought/sold at that day’s NAV by simply approaching the fund house or its registrar or a distributor.
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