5 Reasons Why You Should Start Investing Early in Mutual Funds

As of 29^th February 2024, the total Assets Under Management (AUM) of the Indian mutual fund industry stood at ₹ 54,54,214 crore. If you are a first-time investor, a mutual fund investment can be an effective way to start your investment journey. Read on to know why investing in a mutual fund scheme can be a sound early investment option.

5 reasons why you must invest in a mutual fund:

• Early investing can help you benefit from the power of compounding: Investing in a mutual fund scheme through a systematic investment plan (SIP) can help you earn interest on interest, which exponentially grows your wealth in the long term. This concept, called the power of compounding, helps mutual fund investors grow their wealth and earn a significant corpus in the long term.  The power of compounding also helps investors combat inflation and maintain their purchasing power.

• Mutual fund investments can help you achieve your financial objectives on time: An increasing number of investors are following goal-based mutual fund investments today to achieve their financial goals in a fixed timeframe. One of the many benefits of mutual funds is that you can define a financial goal early on and invest regularly until you achieve it in the future. Using online SIP calculators can help investors calculate the value of their mutual fund returns on maturity.  

• You can reduce your tax liability through mutual fund investments: Several mutual fund schemes help investors save money on tax thanks to the tax exemptions provided by the Income Tax department. For instance, Equity-Linked Savings Scheme ELSS mutual fund investments which have a mandatory lock-in period of three years can help you get a tax exemption of up to ₹1,50,000 from your annual income under Section 80C of the Income Tax Act. You can look to invest in a mutual fund early and choose one that is tax efficient.

• Mutual fund schemes can help you diversify your investment portfolio: Another advantage of investing in mutual funds for beginners is portfolio diversification. Certain categories of mutual funds like hybrid funds invest in a combination of equity-linked and fixed income securities. This helps investors spread their risk across several assets, thus helping them reduce the portfolio’s overall risk. You must invest in a mutual fund scheme only after analysing your risk appetite.

• You can benefit from the liquidity offered by mutual fund investments: If you require instant cash in the early stages of your investment journey to take care of a financial emergency, mutual funds can help you. Redeeming one’s mutual fund units is very convenient for most categories of mutual fund investments. You can conveniently redeem the units of an open-ended mutual fund scheme in which you have invested. It takes 3-4 business days for the mutual fund house to credit the amount in your bank account depending on the type of mutual fund scheme. Liquid funds and overnight funds let you redeem your units by the next business day.

You can better plan your mutual fund investments by using an online SIP calculator to calculate your returns. Doing so can help you achieve your financial goals on time.