7 Reasons That Make Mutual Fund a Good Investment Option

The purpose of any investment is reinforcing financial independence.  To ensure it , the investment instrument should exhibit essential features like easiness in investment, multiple options for investments, inflation beating return, easy  liquidity,  transparency in end use of funds, transparency in charging fees and commissions,  different tenures to select from and multi-tasking feature that combines different capabilities like tax advantage and investment. Mutual fund (MF) carries all these features thereby making it one of the most sought after investment options for the investors.  

Let us examine the features of mutual funds that make it a good investment option. 

1.    Easiness in investment makes mutual fund a good investment option

Mutual fund investment can be carried out in multiple ways. It offers option of lump sum investment and periodical and steady investment. Investment in mutual fund can be carried out through mutual fund agents or branches of mutual fund houses. Investment can also be done through banks and other agencies.  First time investors can seek the guidance of MF agents. Once an investor becomes familiar with the investment, direct investment option can be explored by vising the branch of a mutual fund house or the website of mutual fund. 

2.    Multiple options for investment  make mutual fund a good investment option

Apart from direct and investment through agents, investments in MF schemes can be made in lump sum or through SIPs. Lump sum investment means making a single invest at a particular time. This is most suitable when the markets are down. Since no investor can correctly time the market, the best suited option is taking advantage of average cost of investment by regular and small investments through Systematic Investment Plan (SIP). For SIP, an investor need not have a significant amount and investment can be carried out even by investing small amounts as low as Rs. 500 per month.  SIP has evolved as the most suitable investment option for investments in MF schemes. 

3.    Inflation beating return makes mutual fund a good investment option

Inflation refers to the situation of continuous increase in prices. Wholesale Price Index (WPI)  and Consumer Price Index (CPI) are two most common tools employed to measure inflation. While inflation at controlled level is good for economic growth, uncontrolled inflation can affect the economy of a country adversely and in many countries central banks are mandated with the responsibility of containing inflation within specified bands. In India, Reserve Bank of India tries to contain inflation through its monitory policies.    

All investments offer return. However, if the return is not more than the inflation, the money value of the investment tends to decline. For example, many banks offer an interest of 3.50 percent in the savings bank accounts.  If the prevailing inflation rate is 6 percent, the interest rate of 3.50 percent means a decline of 2.50 percent in money value. MF investments are popular and many studies have revealed that they provide inflation beating returns over a period.  Often, the returns derived from mutual fund schemes for investment periods over 5 years are found to be more than the rate of inflation. 

4.    Easy liquidity makes mutual fund a good investment option

Some of the mutual fund schemes like Equity Linked Savings Scheme (ELSS) come with a minimum lock in period. But majority of schemes does not have any lock in period and in case of emergency, the units can be redeemed easily. If units in debt funds are redeemed, the amount will be credited to the account in 1-2 days. Redemption proceeds of units of investment in equity mutual funds and Exchange Traded Funds (ETF) will be credited to account within 4-5 days.  

5.    Transparency in end use of funds and transparency in charging fees and commissions 

SEBI is the regulator of MF industry in India. SEBI has mandated that MF schemes shall announce their holding in various instruments periodically. Apart from that they are required to announce changes in Total Expense Ratio (TER) as and when it undergoes changes. The regulator has also put in maximum ceilings for TER. Involvement of SEBI in the conduct of mutual funds ensures that the industry runs in a highly regulated environment protecting the interest of investors. 

6.    Different tenures available for investment make mutual fund a good investment option

Investment in MF schemes can be done from short term to long term.  For different financial goals, investors can chose the most suited option. For short term investments, debt mutual funds are best suited as they offer less volatility. For inflation beating return, investment should be for periods more than three years and investors can opt for equity mutual fund schemes. For long term goals like   marriage of children, higher studies of children, retirement planning etc, solution oriented schemes are best suited. There are also Hybrid schemes that combine the advantages of different schemes. 

7.    Multi-tasking capability makes mutual fund a good investment option

Multi-tasking is the characteristic feature that combines different capabilities.  Equity Linked Savings Scheme (ELSS) is a classic example for the multi-tasking capability of MF schemes. ELSS combines the advantages of long term investment and tax saving benefits. ELSS is an approved tax saver for claiming income tax benefit under Section 80 C. At the same time, it comes with a lock in period of 3 years. This lock in period provides sufficient time to the fund manager to generate good return.