Benefits of investing in Mutual Funds

Before we jump to benefits of investing in Mutual Funds, I would like you to read about basics of mutual funds and MF related terms for beginners. Mutual Funds are not one of those “Become rich overnight schemes”; it’s a process which will increase your wealth over a period of time. MFs provide some distinct advantages over investing in stocks directly, especially for an investor who doesn’t have time and energy to follow and understand day to day trends affecting the movement of financial markets.

Advantages of investing in Mutual Funds

A. Professionally managed
An investor gets to have his investment professionally managed without having to shell out a huge sum of money, as in the case of wealth management services. And as such, an investor also benefits hugely from the skilled handling of pool of funds by the fund manager of the AMC. This wayhe can save himself from the trouble of having to go through all the analysis & money shuffling by himself. As the fund manager performs this function for the entire funds in the scheme, all investors are benefited simultaneously.

B. Diversification
Mutual funds have this outstanding feature of providing the option of diversifying his investments in various companies without having to own a share of any particular company.This is especially beneficial to investors who have a small capital, for example if Mr. X wishes to invest in Apple Inc., Google Inc. and Microsoft Inc. which may require him to have $1200 altogether(going by the current market price of shares of these organisations) but he is left with $600 only, he can still fulfil his wish by opting for a mutual fund scheme of any AMC that specifically invests in the IT and software sector or in blue chip funds. Thus covering not only the above 3 companies,but also dozens of other good performing companies.

C. Transparency through NAV data issued daily
A mutual fund unit holder gets to know the value of his investment on a daily basis just like in the case of investing in the stock market. This lets an investor make a decision whether he wants to buy more units of the same scheme or another scheme or sell a portion or full of his current mutual funds investment.

D. Out-do inflation
Conservative investors never go beyond opting for bank based investment options like savings bank accounts, recurring bank deposits, fixed deposits, government bonds and pension plans whose returns barely out-do inflation and tax liabilities. But this is not the case with mutual funds (in most conditions). For example, if a country is observing an inflation of 6% and the fixed deposit interest rate is 7% for 1 year. So actually the investor is receiving 1% benefit on his 1 year investment without deducting tax, if payable. While in an equity based mutual fund an investor can see a minimum of 12% returns at same inflation and tax rates. His investment grows by 6% without deducting taxes, if payable.

E. Different asset classes
Mutual funds are of different kinds, comprising of equity funds, debt funds, commodities funds, index funds, international funds, sectorial funds, etc. These asset classes provide ample opportunity to investors with limited capital or financial knowledge to let their money grow. Here I would like to advise a beginner investor to do a bit of research on all of these asset classes to understand the risk-reward associated with each.

F. High liquidity
Liquidity means the ability of anything that has a monetary value to be easily converted to money. Financial assets that have high liquidity are real assets (example cash, gold, etc.) as they can be traded easily at the time of need. Mutual Funds provide high liquidity by allowing easy entry and exit of investors (only in case of open ended funds) and also shifting between different schemes under the same AMC with least time lag and penalty charges/ entry & exit load charges.

G. Power of compounding
Mutual funds either as lump sum or instalment investment renders the benefit of compound interest being earned and added back to the original sum put in by the investor, thus delivering a huge chunk of money at the end of his investment period when he wants to take out money.
Suppose an investor invests $6000 on 1st Jan, 2018 for a period of 10 years. At the end of 10 years if his investment scheme has been able to generate 15% returns on an average his money on 31st Dec, 2027 will be $24,000. In a mutual fund SIP scheme where an investor may choose to invest $50 every month for 10 years starting 1st Jan, 2018 assuming at the end of 10 years he also earns an average of 15% returns. His final lump sum received on 31st Dec, 2027 will be $14,000 of which $6000 is his investment over 10 years. This is the power of compounding investors are benefited from.

H. Caters to different classes of investors
Mutual funds are open for investors of different future needs and targets, different income levels, different risk taking attitudes, different time duration hence making itself a very lucrative and interesting option to turn to for investments.

I. Lower risk taking
By the very nature of mutual funds being a pool of funds being invested in multiple companies/ avenues& sectors at the same time in smaller portions rather than just equity or just commodities or just government or corporate debt makes the investors money lesser prone to higher levels of risk than investments in a handful of companies.

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