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Mutual fund is the investment tool which offers us to invest in a wider variety of investment vehicles and take advantage of professional money management with a nominal purchase amount. Mutual fund companies (AMCs) collect the money from their investors and invest that pooled money into individual investment vehicles according to some risk profile, money management philosophy, or financial goal. The mutual fund then passes along the profits (and losses) of those investments to its shareholders.
• A mutual fund is a type of investment vehicle consisting of a portfolio of stocks, bonds or other securities.
• Mutual funds give the investors access to diversified, professionally managed portfolios at a low price.
• Mutual funds are divided into several kinds of categories, representing the kinds of securities they invest in, their investment objectives, and the type of returns they seek.
• Diversification :
One of the most prominent advantages of investing in mutual funds is diversification. It is the process of spreading a given investment over multiple assets classes. Diversification helps us create an assorted portfolio that segregates the headwinds experienced in various sectors. Money is invested in a mixture of assets according to one’s risk appetite.
Diversification helps us reduce the risk associated with different asset classes. This proves to be beneficial when an underlying component of a given mutual fund experiences market headwinds. With diversification, the risk associated with one asset class is countered by the others. This way, you don’t lose out on the entire value of your investment if a particular component of your portfolio goes through a turbulent period.
• Professional Management :
In present day scenario, most of us do not have the time or resources to research and purchase individual stocks. This is where professional management becomes quite useful. Several people invest in mutual funds for the professional expertise it provides to one’s investments. A fund manager continuously monitors investments and adjusts the portfolio accordingly to meet its objectives. This professional management is one of the most important advantages of a mutual fund.
• High Liquidity:
We can easily sell mutual funds to meet our financial needs. Upon liquidation, the money is directly credited to investor’s bank account in few days. In case of Equity Mutual Fund it takes 3 working days and in case of Debt mutual funds the amount gets credited by 24 hours. There are a few exceptions as well.
• High Return:
As an investor we all aim to achieve a higher Return by investing in financial instruments such as mutual funds to beat inflation and increase our wealth. Mutual funds have greater prospects of potentially providing high returns over time as one can invest in a diverse range of sectors and industries.
• Well Regulated:
All mutual funds are regulated by the capital markets watchdog Securities and Exchange Board of India (SEBI). This means that all mutual fund houses are required to follow the various mandates as laid down by SEBI. This, in turn, protects the interests of the investors.
• Easy Investment:
It is very easy to invest in mutual funds, i.e. we can do this either online or offline with our existing Bank a/c. Unlike Share purchase, we do not need to create any separate account for Mutual Fund Trasaction. This ease of investment makes mutual funds are preferable avenue.
• Affordable:
Most importantly, investing in mutual funds is very affordable. For those who cannot earmark a significant portion of their earnings towards mutual funds, they can start investing in mutual funds with amounts as low as Rs500 at predefined intervals.
Mutual funds are divided into several kinds of categories, representing the kinds of securities they have targeted for their portfolios and the type of returns they seek. There is a fund for nearly every type of investor. Some common types of mutual funds are Equity Funds (Large cap / Mid cap / Small Cap, Flexi cap / Multi cap etc), Hybrid Funds (conservative / Aggressive / Arbitrage etc), ELSS Funds, Sector funds, Global Funds, Money market funds, alternative funds, Smart-beta funds, target-date funds, Funds of Funds etc.
This is known as a Systematic Investment Plan or SIP. On the contrary, if you have a significant chunk of money to invest, you can even make a lumpsum investment in a mutual fund. Many investors are confused which is better between to above two investment methods. Here is an article on SIP vs Lumpsum which will help you understand which is a better of the two.
Mutual funds aid you in realizing your life’s superior goals quite easily. In this video, we go through the different benefits of mutual funds that investors can capitalize on to grow their corpus and meet their financial goals.
