INVESTOR BENEFITS

BENEFITS OF A MUTUAL FUND

Small investors can enjoy several advantages when they invest through the mutual fund route. Not all mutual fund schemes or investors can boast to give all these benefits to the investors but each one gives you one benefit or the other.

SMALL AMOUNTS

The biggest benefit for small investors is that they can invest using very small amounts of money. In the absence of mutual funds many of these investments would not have been possible at all. For example one can invest regularly each month into an mutual fund scheme with a sum as low as Rs 500 or Rs 1000 each month. A similar amount would have got the investor precious little in terms of actual holdings in the debt market. In case of a bond issue where the face is value is Rs 10,000 they would not even be able to procure 1 bond.

If an investor has say Rs 1,000 with him then quite a few stocks would be out of reach because their values are more than the sum available for investment. On the other hand they can use the same sum to buy the available number of mutual fund units

The use of the small amounts for investment is not restricted to just the initial investment but is applicable at all points of time, This means that at any point of time if there is some amount lying in the account then this can be put to use whereby it will earn a higher amount of return than what would have been the case had it just remained in the savings account. In fact the money here can do things which would not be possible otherwise. This means that the amounts can be utilized as pert he need both in terms of investing and withdrawal

The use of the money in terms of withdrawing it from the scheme does not receive as much attention as the investment part but its role is no less important. Being able to get some of your money back when you need it without disturbing the other part of your entire investment is a greater benefit for investors because it ensures that their entire investment plan does not go for a toss due to some small decision on the side.

DIVERSIFICATION

Even if an investor is able to buy a few assets with the amounts available with them there is little scope for diversification, which results in an increase in risk. Diversification in simple words is nothing but holding a large number of stocks or securities so that the entire holding is not influenced in the same way due to a certain event in the market. An investment in a mutual fund can provide one with the necessary diversification even with the small amounts that one may have.

For example With a sum of Rs 5,000 an investor might be able to get just 1 share of Infosys, 1 share of Bajaj Auto and 1 share of Tata Steel at July 2006 price levels. On the other hand the same amount invested in a mutual fund which is diversified in nature would help the investor get around 20-25 shares which would reduce the risk as compared to the small holdings in an individual capacity

There are different levels of diversification that investors can make use of. The most common one is to ensure that in a particular holding in an asset class all the investments do not bear the same functions or features so that they will not move in a single direction based upon the happening of certain events. However taken further the real benefit of diversification is to ensure that your entire investment portfolio is such that there is adequate breadth as well as variety in it.

An individual can diversify across various asset classes when their portfolio increases. This possible with the help of a mutual fund whereby the money c an be moved to different types of schemes both in the equity as well as the debt side. Similarly one can now also ensure that the money is diversified between investment in various countries as there are international funds where one will hold equities or debt instruments of foreign countries. This gives the investor a benefit of really ensuring that his money is working well.

MANAGEMENT EXPERTISE

Most people do not have the time and resources to manage the funds on a day to day basis. In this sense giving the funds to a mutual fund who would the employ professionals to deal with the investments is like outsourcing the work t people who can do it the best. This ensures that an individual can get the benefit of professionals at a small cost to take care of their investments.
The fund managers that are employed by mutual funds are professionals in the area of investments. What is more important is that they do this job for the entire day which means that unlike an investor who might have several things and areas to look into the job of a fund manager is just to manage the funds in a particular scheme where they give their total attention. This is expected to result in a better performance however this is not always the case. In that sense investors have to be careful while making their investments because just giving their funds to a mutual fund because it ahs expert fund managers will not guarantee any results for the investor. There is a need to study the performance of the various fund managers too and then select schemes managed by those fund managers who are good performers so that one is able to benefit from the performance that they show in their schemes
CHOICE

With the development of the mutual fund industry there is a wide choice available for investors when they go out to invest their money. Options like debt schemes, equity schemes, monthly income plans, sectoral schemes are all present which means that an investor can select the schemes in the right proportion to what they would like to achieve with the investment. They can also select investments across asset classes and recreating the same kind of portfolio on an individual basis along with its monitoring would be a very tough task indeed.

LIQUIDITY

There is adequate liquidity for a mutual fund investors when they want the necessary funds. This means that the fund will be available to the investor when they require it would going through large amounts of paperwork. This might not be the case with regular investments where it might take several days for one to liquidate the necessary amounts.

Using the right combination one can create the required liquidity in the mutual fund portfolio. One of the best cases of liquidity is with respect to equity oriented schemes. In several cases with respect to various shares it is very much possible that an investor will be unable to sell the shares on a particular days the volumes in the scrip have dried up. On the other hand when an investor puts through a sale transaction on a mutual fund then this has to be executed at the prevailing net asset value at the end of the day and the investor will receive his money. There are some restrictions on this which is mentioned in the fine print of the offer document wherein in case there is a major crisis the fund can restrict the redemptions however in normal market conditions there is little to worry for the investor,

In addition the funds have developed a high quality service delivery whereby the funds are available to the investor in the shortest possible time. In case of several liquid schemes the investors also have the option of using instruments like direct cheques and even ATM cards.

CONVENIENCE

There is a lot of convenience that investors experience when they invest into mutual fund schemes. Starting with the amount of the payment to the place where the mutual fund investments are accepted there is an element of convenience that is built into the picture.

Assume a case where an investor wants to invest a fixed sum regularly each month into a scheme. Here they can make use of a systematic investment plan in order to ensure that there is a regular investment going in without much of a problem. On the other hand consider the situation where an investor has landed up with a large sum of money right now and would like to invest this but in a regular manner over the next one year. Mutual funds have the right options to ensure that even this can be done through the use of a systematic transfer plan where the money will lie in a debt mutual fund so there is a small appreciation in the value here and at the same time there is a transfer each month to the intended account of the investor.

Take one other case where the investor would like to say 20% returns and then take his money home. Even this is possible as the mutual funds have a trigger limit option whereby when the investment reaches a certain level a specified action will take place in the fund. This means that even the selling decision can be taken care of by the fund with the investor having little to do

TAX BENEFIT
There are a host of tax benefits that an investor can earn with the help of mutual funds. First dividends are tax free in respect of all mutual funds while in case of equity oriented funds even the long term capital gains earned will be tax free in the hands of the investor. This means that the investment can be quite tax efficient with quite a bit of the payout free from the tax clutches of the investors. In case of equity oriented schemes there is no dividend distribution tax and hence the investors benefit indirectly too and this is another tax benefit for them. While direct investments into assets would also qualify for several of these benefits mutual funds are not worse of than elsewhere

SIMILARITY WITH VARIOUS ASSET CLASSES

A mutual fund holds assets as part of its portfolio and this determines the performance of the scheme. The question that most people ask is how is a mutual fund different or similar to assets that it holds

One basic factor that investors have to consider is that the performance of the asset and the mutual fund investing in the asset will move in a similar direction. Thus if there is a bond fund and the prices of bonds fall then the value of the bond fund will also decline. Similar is the case with equity shares and equity oriented funds.

This means that a mutual fund cannot be divorced from the overall movement in the asset class into which it is invested. Thus one should not expect miracles from mutual funds but the better performing mutual fund will be one which rises faster when the market is going up and at the same time falls slower than the fall in the market. This is the way in which the performance of the fund will have to be considered rather than just look at the absolute figure.

One should look only at asset classes that are of the similar type rather than looking at different asset classes. This means that if you are holding a debt oriented mutual fund then you cannot compare its performance to that of equities because here you will end up comparing two entirely different things. Once this difference is realized one can comfortably look at the various mutual funds and how they have performed

While one would expect similar movement between a fund and its underlying assets there will be some difference in t he way the movement takes place. For example incase of equities the price may shoot up 20% in a day while in case of a mutual fund this will not happen unless the value of he entire assets of the fund rise by a similar percent.

Similarly in case of a daily purchase of shares by an invest to these are made in the market and here the shares are bought from another investor however in case of a mutual fund the units in an open ended scheme are bought and sold to the fund itself and hence the total units outstanding will keep changing every day. In that sense the most important thing to consider in case of a mutual fund is its NAV rather than several other figures that one would normally look at.