This article throws light upon the top nine advantages of mutual fund. The advantages are: 1. Diversification 2. Expert Supervision and Management 3. Liquidity 4. Reduced Risk 5. Tax Advantage 6. Low Operating Costs 7. Flexibility 8. Higher Returns 9. Investor Protection.
Advantage # 1. Diversification:
A large number of investors have small savings with them. They can at the most buy shares of one or two companies. When small savings are pooled and entrusted to mutual funds then these can be used to buy shares of many different companies.
Thus, investors can participate in a large basket of shares of different companies. This diversification of investment ensures regular returns and capital appreciation at reduced risks as all the eggs are not put in one basket.
Advantage # 2. Expert Supervision and Management:
A small investor cannot be an expert in portfolio management. When he invests in mutual funds, he gets the benefit of expert supervision and management which mutual funds can afford because of large resources at their disposal.
The funds can be professionally employed through the mutual funds ensuring good returns. The mutual fund managers also have extensive research facilities at their disposal. They can analyse the performance and prospects of various companies and take better decisions in making investments.
Advantage # 3. Liquidity:
A peculiar advantage of a mutual fund is that investment made in its schemes can be converted back into cash promptly without heavy expenditure on brokerage, delays, etc. According to the regulations of SEBI, a mutual fund in India is required to ensure liquidity.
For open ended schemes, the investor can always approach the Mutual Fund to repurchase units at declared ‘net assets value’ (NAV). In case of close ended schemes, units can easily be sold in the stock market.
Advantage # 4. Reduced Risk:
As mutual funds invest in large number of companies and are managed professionally, the risk factor of the investor is reduced. A small investor, on the other hand, may not be in a position to minimise such risks.
Advantage # 5. Tax Advantage:
There are certain schemes of mutual funds which provide tax advantage under the Income Tax Act. Thus, the tax liability of an investor is also reduced when he invests in these schemes of the mutual funds.
Advantage # 6. Low Operating Costs:
Mutual funds have large investible funds at their disposal and thus can avail economies of large scale. This reduces their operating costs by way of brokerage, fees, commission etc. Thus, a small investor also gets the benefit of large scale economies and low operating costs.
Advantage # 7. Flexibility:
Mutual funds provide flexible investment plans to its subscribers such as, regular investment plans, regular withdrawal plans and dividend reinvestment plans, etc. Thus, an investor can invest or withdraw funds according to his own requirements.
Advantage # 8. Higher Returns:
Mutual funds are expected to provide higher returns to the investors as compared to direct investment because of professional management, economies of scale, reduced risk, etc.
Advantage # 9. Investor Protection:
Mutual funds are regulated and monitored by the Securities and Exchange Board of India (SEBI). The SEBI (Mutual Funds) Regulations, 1996 which have replaced the regulations of 1993, provide better protection to the investors, impart a greater degree of flexibility and facilitate competition.
From the above discussed advantages, we can conclude that investing in securities through mutual funds is a better choice than investing directly for the small investors. In addition, mutual funds are also relevant to the national interest and they have to play the role to fill the gap between supply and demand in the capital market.