Indian investors have accepted the many benefits of mutual funds investing. This shows in the pace at which mutual funds are now being used by individual and corporate customers to grow wealth. On last count, over ₹26,00,000 crores were in mutual funds. In this article, we see the many benefits of mutual funds as we give actionable advice on how one can take advantage of this quintessential financial tool.
What is covered in this article?
Benefits of Mutual Funds
The seven important benefits of using mutual funds to invest are –
- Discipline in Savings
- Invest small but make big portfolio gains
- Flexibility
- Convenience
- Professional Expertise
- Higher returns
- Ease off market timing pressures
Let’s look at each of these benefits in greater details.
Discipline in Saving
Saving money is hard with so many temptations around us. By automating savings, you get to put aside some money in a hassle free manner.
I prefer to put money aside into my SIP investment on the first week of the month, preferably on the 5th of the month. This way I have the satisfaction that I have taken a positive step to my financial freedom. It leaves me with the rest of the month to spend the money I have left.
How do you budget every month?
Small Investment Amounts Total to Big Portfolio Gains
Systematic. Investment. Plan. Three power words independently but as a group, Systematic Investment Plans or SIP serve many benefits. In this article, we look into the advantages of investing in mutual funds using the ever-popular SIP route
SIP is built on the premise that small investments can accumulate to a big corpus.
Look at it this way.
You start investing ₹5,000 per month in a diversified equity mutual fund. The fund is expected to grow at 12% per annum over the long run.
Now we aren’t being too optimistic or pessimistic with the compounding factor here.
How much will this ₹5000 per month grow to?
- 5 years – you would have invested ₹3,00,000 (i.e. ₹500 * 12 months * 5 years) over time and your corpus would have grown to ₹4,05,518
- 10 years – your ₹6,00,000 would grow to ₹11,20,179
- 20 years – your ₹12,00,000 would grow to ₹45,99,286
- 30 years – your ₹18,00,000 grows to ₹1,54,04,866
Give a thought to the 30 year SIP result.
An investment of ₹5,000 every month can potentially give you a corpus of ₹1,54,04,866. This is at a conservative compounding of 12% per annum (Indian equities have given much higher than 12%!)
SIP are one of the best solutions for attaining long term investing goals and one of the key benefits of mutual funds investing
Related Article: Best SIPs for Long Term Investing
How does that work?
You start with a small amount (a penny in a bucket) and gradually you will see the bucket getting filled with a lot more pennies. The best part is that a time will come when the pennies you gain every month will be much more than the penny you will be putting into the bucket.
This is where compounding comes into play and your previous investments deliver handsome returns.
Flexibility
Mutual funds and SIPs are extremely flexible instruments in many ways.
- Flexible payment frequency. You can choose from weekly, monthly and quarterly SIP.
- Flexible schemes. You can choose from multiple fund houses and multiple asset type. Mutual funds are available in equity funds, debt funds, liquid funds, international funds etc.
- Flexible duration. Choose from different tenures like 1 year, 5 years, 20 years and even perpetual
- Flexible modification. You can cancel or pause or increase your SIP
This flexibility can be used to create a high return portfolio with moderate risk and volatility.
Convenience
SIP are super convenient to set-up and start.
SIP are offered by all mutual fund companies (also called asset management companies) from their website. But you will need to register individually on all company websites which is not really convenient.
Got it. Any other way to do it?
Alternatively, explore websites and apps dedicated towards mutual fund buying and selling like ETMONEY, Groww, PayTM Money etc.
Starting an SIP is quite simple and with the use of online platforms can get started within 15 minutes if your KYC is already setup
Professional Expertise
Retail investors who just dabble with equities (stocks) generally do not possess the expertise to read financial statements, understand charts etc. This means they cannot make judicious call on when to buy and sell. These activities are best left to experts who are paid to do this job for you.
But isn’t professional advice expensive?
Mutual Funds comes with same professional expertise irrespective of whether you invest a few hundred rupees or crores. This is one of the most important benefits of mutual funds.
The fund managers have years of experience analysing stocks and bonds, they have valuation models, they interview CEOs and learn from regular investing activities. This expertise helps you earn above-average return on investments while managing risks.
Higher Returns
Mutual funds have been a proven winner in offering high returns over the long run over other financial instruments like PPF (public provident funds), recurring deposits, fixed deposits, real estate, gold etc.
Financial instruments in India got a big boost with the BJP-led government coming into power in 2014. With reform in the government’s mind and aided by a sagging real-estate, Indians and domestic institutions moved monies from savings and cash into equities using the mutual fund route.
Other initiatives like demonetization, Aadhaar, a vibrant payment architecture and the mushrooming of fintechs brought financial products to the doorstep of every Indian. Mutual funds has massive acceptance now.
So, how has been the performance?
Over the long-term (5 years and over), equities have really done well and have trumped other investment avenues. The chart below shows that equities have delivered far higher than traditional fixed deposits over a 5-year period. Equities have delivered 11.09% annualized returns. This is higher than PPF and real estate which have delivered 7.9% and 4.2% respectively.
OK. But isn’t it difficult to find the right plans?
For your benefit, I have created a compilation of the Best SIP plans for 2020 after analysing multiple factors like past performance, portfolio, risk measures, broad market levels etc.
Ease off market timing pressures
Since mutual fund SIP is more of a system than an investment mode, the practice of regular investments at regular time intervals help investors manage the highs and lows of the investment most effectively.
This means investors don’t need to guess market highs and lows. This is anyways, extremely difficult to do and not even the world’s top investors do this.
SIP allows you to focus on being in-the-market rather than doing a juggling act of moving in or out. There is enough data to support that being in-the-market over the long term is more beneficial than being out of it.
Additional Resources You Might Like
Here are some articles you might like:
- Rakesh Jhunjhunwala and his secrets to investing (Part 1)
- The trillion dollar index fund story that John Bogle started in the 1970s
- 5 steps on choosing the right term insurance plan for yourself