The mutual fund industry has grown at a phenomenal rate in the recent past. One can witness a revolution in the mutual fund industry in view of its importance to the investors in general and the country’s economy at large. The following are some of the important advantages of mutual funds :
(i) Channelizing Savings for Investment
Mutual funds act as a vehicle in galvanizing the savings of the people by offering various schemes suitable to the various classes of customers for the development of the economy as a whole. A number of schemes are being offered by MFs so as to meet the varied requirements of the masses, and thus, savings are directed towards capital investments directly. In the absence of MFs, these savings would have remained idle. Thus, the whole economy benefits due to the cost efficient and optimum use and allocation of scarce financial and real resources in the economy for its speedy development.
(ii) Offering Wide Portfolio Investment
Small and medium investors used to burn their fingers in stock exchange operations with a relatively modest outlay. If they invest in a select few shares, some may even sink without a trace never to rise again. Now, these investors can enjoy the wide portfolio of th investment held by the mutual fund. The fund diversifies its risks by investing on a large varieties of shares and bonds which cannot be done by small and medium investors. This is in accordance with the maxim ‘Not to lay all eggs in one basket’. These funds have large amounts at their disposal, and so, they carry a clout in respect of stock exchange transactions. They are in a position to have a balanced portfolio which is free from risks. Thus MF’s provide instantaneous portfolio diversification. The risk diversification which a pool of savings through mutual funds can achieve cannot be attained by a single investor’s savings.
(iii) Providing Better Yields
The pooling of funds from a large number of customers enables the fund to have large funds at its disposal. Due to these large funds, mutual funds are able to buy cheaper and sell dearer than the small and medium investors. Thus, they are able to command better market rates and lower rates of brokerage. So, they provide better yields to their customers. They also enjoy the economies of large scale and can reduce the cost of capital market participation. The transaction costs of large investments are definitely lower than that of small investments. In fact, all the profits of a mutual fund are passed on to the investors by way of dividends and capital appreciation. The expenses pertaining to a particular scheme alone are charged to the respective scheme. Most of the mutual funds so far floated have given a dividend at the rate ranging between 12% p.a. and 17% p.a. It is fairly a good yield. It is an ideal vehicle for those who look for long term capital appreciation.
(iv) Rendering Expertise Investment Service at Low Cost
The management of the fund is generally assigned to professionals who are well trained and have adequate experience in the field of investment. The investment decisions of these professionals are always backed by informed judgement and experience. Thus, investors are assured of quality services in their best interest. Due to the complex nature of the securities market, a single investor cannot do all these works by himself or he cannot go to a professional manager who manages individual portfolios. In such a case, he may charge hefty management fee. The intermediation fee is the lowest being one per cent in the case of a mutual fund.
(v) Providing Research Service
A mutual fund is able to command vast resources and hence it is possible for it to have an in depth study and carry out research on corporate securities. Each fund maintains a large research team which constantly analyses the companies and the industries and recommends the fund to buy or sell a particular share. Thus, investments are made purely on the basis of a thorough research. Since research involves a lot of time, efforts and expenditure, an individual investor cannot take up this work. By investing in a mutual fund, the investor gets the benefit of the research done by the fund.
(vi) Offering Tax Benefits
Certain funds offer tax benefits to its customers. Thus, apart from dividends, interest and capital appreciation, investors also stand to get the benefit of tax concession. For instance, under section 80L of the Income Tax Act, a sum of Rs.10,000 received as dividend (Rs.13000 to UTI) from a MF is deductible from the gross total income. Under the wealth Tax Act, investments in MF are exempted upto Rs. 5 lakhs. : 14 :
The mutual funds themselves are totally exempt from tax on all income on their investments. But, all other companies have to pay taxes and they can declare dividends only from the profits after tax. But, mutual funds to do not deduct tax at source from dividends. This is really a boon to investors.
(vii) Introducing Flexible Investment Schedule
Some mutual funds have permitted the investors to exchange their units from one scheme to another and this flexibility is a great boon to investors. Income Units can be exchanged for growth units depending upon the performance of the funds. One can not derive such a flexibility in any other investments.
(viii) Providing Greater Affordability and Liquidity
Even a very small investor can afford to invest in mutual funds. They provide an attractive and cost effective alternative to direct purchase of shares. In the absence of MFs, small investors cannot think of participating in a number of investments with such a meager sum. Again, there is grater liquidity. Units can be sold to the fund at anytime at the Net Asset Value and thus quick access to liquid cash is assured. Besides, branches of the sponsoring bank is always ready to provide loan facility against the unit certificates.
(ix) Simplified Record Keeping
An investor with just an investment in 500 shares or so in 3 or 4 companies has to keep proper records of dividend payments, bonus issues, price movements, purchase or sale instruction, brokerage and other related items. It is very tedious and consumes a lot of time. One may even forget to record the rights issue and may have to forfeit the same. Thus, record keeping is the biggest problem for small and medium investors. Now, a mutual fund offers a single investment source facility, i.e., a single buy order of 100 units from a mutual fund is equivalent to investment in more than 100 companies. The investor has to keep a record of only one deal with the Mutual Fund. Even if he does not keep a record, the MF sends statements very often to the investor. Thus, by investing in MFs, the record keeping work is also passed on to the fund.
(x) Supporting Capital Market
Mutual funds play a vital role in supporting the development of capital markets. The mutual funds make the capital market active by means of providing a sustainable domestic source of demand for capital market instruments. In other words, the savings of the people are directed towards investments in capital markets through these mutual funds. Thus, funds serve as a conduit for dis-intermediating bank deposits into stocks, shares and bonds. Mutual Funds also provide a valuable liquidity to the capital market, and thus, the market is made very active and stable. When foreign investors and speculators exit and re-enter the markets en masse, mutual funds keep the market stable and liquid. In the absence of mutual funds, the prices of shares would be subject to wide price fluctuation due to the exit and re-entry of speculators into the capital market en masse. Thus, it is rending an excellent support to the capital market and helping in the process of institutionalization of the market.
(xi) Promoting Industrial Development
The economic development of any nation depends upon its industrial advancement and agricultural development. All industrial units have to raise their funds by resorting to the capital market by the issue of shares and debentures. The mutual funds not only create a demand for these capital market instruments but also supply a large source of funds to the market, and thus, the industries are assured of their capital requirements. In fact the entry of mutual funds has enhanced the demand for India’s stock and bonds. Thus, mutual funds provide financial resources to the industries at market rates.
(xii) Acting as Substitute for Initial Public Offerings (IPOs)
In most cases investors are not able to get allotment in IPOs of companies because they are often oversubscribed many time. Moroever, they have to apply for a minimum of : 16 :
500 shares which is very difficult particularly for small investors. But, in mutual funds, allotment is more or less guaranteed. Mutual Funds are also guaranteed a certain percentage of IPOs by companies. Thus, by participating in MFs, investors are able to get the satisfaction of participating in hundreds of varieties of companies.
(xiii) Reducing the Marketing Cost of New Issues
Moreover the mutual funds help to reduce the marketing cost of the new issues. The promoters used to allot a major share of the Initial Public offering to the mutual funds and thus they are saved from the marketing cost of such issues.
(xiv) Keeping the Money Market Active
An individual investor can not have any access to money market instruments since the minimum amount of investment is out of his reach. On the other hand, mutual funds keep the money market active by investing money on the money market instruments. In fact, the availability of more money market instruments itself is a good sign for a developed money market which is very essential for the successful functioning of the central bank in a country.
Thus mutual funds provide stability to share prices, safety to investors and resources to prospective entrepreneurs.
(i) Channelizing Savings for Investment
Mutual funds act as a vehicle in galvanizing the savings of the people by offering various schemes suitable to the various classes of customers for the development of the economy as a whole. A number of schemes are being offered by MFs so as to meet the varied requirements of the masses, and thus, savings are directed towards capital investments directly. In the absence of MFs, these savings would have remained idle. Thus, the whole economy benefits due to the cost efficient and optimum use and allocation of scarce financial and real resources in the economy for its speedy development.
(ii) Offering Wide Portfolio Investment
Small and medium investors used to burn their fingers in stock exchange operations with a relatively modest outlay. If they invest in a select few shares, some may even sink without a trace never to rise again. Now, these investors can enjoy the wide portfolio of th investment held by the mutual fund. The fund diversifies its risks by investing on a large varieties of shares and bonds which cannot be done by small and medium investors. This is in accordance with the maxim ‘Not to lay all eggs in one basket’. These funds have large amounts at their disposal, and so, they carry a clout in respect of stock exchange transactions. They are in a position to have a balanced portfolio which is free from risks. Thus MF’s provide instantaneous portfolio diversification. The risk diversification which a pool of savings through mutual funds can achieve cannot be attained by a single investor’s savings.
(iii) Providing Better Yields
The pooling of funds from a large number of customers enables the fund to have large funds at its disposal. Due to these large funds, mutual funds are able to buy cheaper and sell dearer than the small and medium investors. Thus, they are able to command better market rates and lower rates of brokerage. So, they provide better yields to their customers. They also enjoy the economies of large scale and can reduce the cost of capital market participation. The transaction costs of large investments are definitely lower than that of small investments. In fact, all the profits of a mutual fund are passed on to the investors by way of dividends and capital appreciation. The expenses pertaining to a particular scheme alone are charged to the respective scheme. Most of the mutual funds so far floated have given a dividend at the rate ranging between 12% p.a. and 17% p.a. It is fairly a good yield. It is an ideal vehicle for those who look for long term capital appreciation.
(iv) Rendering Expertise Investment Service at Low Cost
The management of the fund is generally assigned to professionals who are well trained and have adequate experience in the field of investment. The investment decisions of these professionals are always backed by informed judgement and experience. Thus, investors are assured of quality services in their best interest. Due to the complex nature of the securities market, a single investor cannot do all these works by himself or he cannot go to a professional manager who manages individual portfolios. In such a case, he may charge hefty management fee. The intermediation fee is the lowest being one per cent in the case of a mutual fund.
(v) Providing Research Service
A mutual fund is able to command vast resources and hence it is possible for it to have an in depth study and carry out research on corporate securities. Each fund maintains a large research team which constantly analyses the companies and the industries and recommends the fund to buy or sell a particular share. Thus, investments are made purely on the basis of a thorough research. Since research involves a lot of time, efforts and expenditure, an individual investor cannot take up this work. By investing in a mutual fund, the investor gets the benefit of the research done by the fund.
(vi) Offering Tax Benefits
Certain funds offer tax benefits to its customers. Thus, apart from dividends, interest and capital appreciation, investors also stand to get the benefit of tax concession. For instance, under section 80L of the Income Tax Act, a sum of Rs.10,000 received as dividend (Rs.13000 to UTI) from a MF is deductible from the gross total income. Under the wealth Tax Act, investments in MF are exempted upto Rs. 5 lakhs. : 14 :
The mutual funds themselves are totally exempt from tax on all income on their investments. But, all other companies have to pay taxes and they can declare dividends only from the profits after tax. But, mutual funds to do not deduct tax at source from dividends. This is really a boon to investors.
(vii) Introducing Flexible Investment Schedule
Some mutual funds have permitted the investors to exchange their units from one scheme to another and this flexibility is a great boon to investors. Income Units can be exchanged for growth units depending upon the performance of the funds. One can not derive such a flexibility in any other investments.
(viii) Providing Greater Affordability and Liquidity
Even a very small investor can afford to invest in mutual funds. They provide an attractive and cost effective alternative to direct purchase of shares. In the absence of MFs, small investors cannot think of participating in a number of investments with such a meager sum. Again, there is grater liquidity. Units can be sold to the fund at anytime at the Net Asset Value and thus quick access to liquid cash is assured. Besides, branches of the sponsoring bank is always ready to provide loan facility against the unit certificates.
(ix) Simplified Record Keeping
An investor with just an investment in 500 shares or so in 3 or 4 companies has to keep proper records of dividend payments, bonus issues, price movements, purchase or sale instruction, brokerage and other related items. It is very tedious and consumes a lot of time. One may even forget to record the rights issue and may have to forfeit the same. Thus, record keeping is the biggest problem for small and medium investors. Now, a mutual fund offers a single investment source facility, i.e., a single buy order of 100 units from a mutual fund is equivalent to investment in more than 100 companies. The investor has to keep a record of only one deal with the Mutual Fund. Even if he does not keep a record, the MF sends statements very often to the investor. Thus, by investing in MFs, the record keeping work is also passed on to the fund.
(x) Supporting Capital Market
Mutual funds play a vital role in supporting the development of capital markets. The mutual funds make the capital market active by means of providing a sustainable domestic source of demand for capital market instruments. In other words, the savings of the people are directed towards investments in capital markets through these mutual funds. Thus, funds serve as a conduit for dis-intermediating bank deposits into stocks, shares and bonds. Mutual Funds also provide a valuable liquidity to the capital market, and thus, the market is made very active and stable. When foreign investors and speculators exit and re-enter the markets en masse, mutual funds keep the market stable and liquid. In the absence of mutual funds, the prices of shares would be subject to wide price fluctuation due to the exit and re-entry of speculators into the capital market en masse. Thus, it is rending an excellent support to the capital market and helping in the process of institutionalization of the market.
(xi) Promoting Industrial Development
The economic development of any nation depends upon its industrial advancement and agricultural development. All industrial units have to raise their funds by resorting to the capital market by the issue of shares and debentures. The mutual funds not only create a demand for these capital market instruments but also supply a large source of funds to the market, and thus, the industries are assured of their capital requirements. In fact the entry of mutual funds has enhanced the demand for India’s stock and bonds. Thus, mutual funds provide financial resources to the industries at market rates.
(xii) Acting as Substitute for Initial Public Offerings (IPOs)
In most cases investors are not able to get allotment in IPOs of companies because they are often oversubscribed many time. Moroever, they have to apply for a minimum of : 16 :
500 shares which is very difficult particularly for small investors. But, in mutual funds, allotment is more or less guaranteed. Mutual Funds are also guaranteed a certain percentage of IPOs by companies. Thus, by participating in MFs, investors are able to get the satisfaction of participating in hundreds of varieties of companies.
(xiii) Reducing the Marketing Cost of New Issues
Moreover the mutual funds help to reduce the marketing cost of the new issues. The promoters used to allot a major share of the Initial Public offering to the mutual funds and thus they are saved from the marketing cost of such issues.
(xiv) Keeping the Money Market Active
An individual investor can not have any access to money market instruments since the minimum amount of investment is out of his reach. On the other hand, mutual funds keep the money market active by investing money on the money market instruments. In fact, the availability of more money market instruments itself is a good sign for a developed money market which is very essential for the successful functioning of the central bank in a country.
Thus mutual funds provide stability to share prices, safety to investors and resources to prospective entrepreneurs.
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