Does the ‘Mutual Funds Sahi Hai’ advertisement ring a familiar bell? The series of ads would appear on prime time television. This campaign was launched by the Association of Mutual Funds of India (AMFI) to increase the awareness of mutual fund investments for all. The AMFI considered the educational campaign to be a necessary move because around 95% of Indian households are known to let their money stay idle in their bank accounts. On the other hand, less than 10% of people invest in mutual funds, according to a survey by SEBI.
In this article, let’s discuss why it is better to park your money in mutual funds instead of your bank account.
Benefits of mutual fund investments
1) Higher returns
Mutual funds can offer much higher yields compared to a savings account. Generally, a savings bank account offers an interest rate of 3.5 – 4% annually. Yields on fixed deposits are a bit higher (around 6.5-7.5%), but if you see the trend, it is clear that the interest rate on savings accounts has been coming down over time.
However, when it comes to mutual funds, your returns can be anywhere between 10 – 15% annually. In fact, many mutual funds in the market have consistently offered 20% or more in the past ten years. This means, you not only earn inflation-beating returns, you can also reach your financial goals at a much faster rate.
2) Tax benefits
When you invest in Equity Linked Saving Scheme (ELSS) funds, you can claim a tax deduction of up to Rs. 1.5 lakh each year under Section 80C of the Income Tax Act. ELSS funds come with a three-year lock-in period, but it is the lowest duration, compared to all the other tax-saving instruments in the market. This means you not only get higher returns; you can also enjoy tax benefits by investing in mutual funds.
3) Investment discipline
Unless you win a lottery, it may not be possible to earn crores of rupees overnight. Creating a large corpus of wealth for your family takes time, and the best way to achieve this goal is to invest consistently over a period. And for this, you require investment discipline. Luckily, mutual funds give you the provision to invest in a well-defined manner through Systematic Investment Plans (SIPs).
Once you select a mutual fund, invest a fixed amount of money each month through the SIP. To begin with, invest small amounts, and as your income levels rise, you can increase the amount. This way, you can cultivate investment discipline and invest towards your goals for the long-term.
4) Investment option available for different goals
When you put your money in a savings account, you simply dip into it whenever a need arises. However, in the case of mutual funds, you can invest your money in specific funds to achieve specific goals. This is because there are thousands of mutual funds in the market and each fund is designed for a purpose. For example, you have ultra-short term funds, debt funds, equity funds, thematic funds, hybrid funds and so on. You can invest in a particular fund based on your investment goal, risk appetite and time-limit to achieve the goal.
As the name suggests, a fixed deposit comes with a fixed tenure. You cannot withdraw your money from your bank account prematurely without paying the penalty. Mutual funds offer a greater degree of liquidity in comparison. If you want to get good returns, but need to withdraw funds at a quick notice, you can invest in liquid funds or ultra-short-term funds. Here, you don’t have to pay any penalty to withdraw your money.
Mutual funds offer a ton of benefits to investors. And the good thing about mutual funds is that you don’t need to be a financial whiz to be successful. Anyone can start investing in mutual funds to create wealth over the long term. However, for that, you need to start investing now.