There are numerous possibilities available on the market, including stocks, bonds, shares, money market instruments, etc., when thinking about investing chances. In light of this, why do investors choose mutual funds above other options when investing in mutual funds?
Investors can combine their cash through mutual funds to purchase a diverse range of securities that are overseen by a qualified fund manager. Mutual funds give their investors a number of advantages, regardless of their goals—profits or ease. So, here are the reasons why should you invest in mutual funds.
Table of Contents
Beat Inflation
Mutual funds offer a great investment choice for securing your resources for long-term inflation-adjusted growth and preventing a decline in the purchasing power of your hard-earned money over time.
Through the use of mutual funds, investors can increase their inflation-adjusted returns without expending a lot of time or effort. Most people think of letting their savings “grow” in a bank, but they don’t think about how inflation might be eroding their money’s value.
Assume you now have Rs. 100 in savings with your bank. With this, you could purchase ten water bottles. Since your bank pays 5% interest annually, by the following year you will have Rs. 105 in your account. However, that year saw a 10% increase in inflation. Consequently, the price of a water bottle is Rs. 11. You won’t be able to purchase 10 bottles of water by the end of the year with Rs. 105.
Convenience
When you want to invest in a way that is convenient and time-saving, mutual funds are a great choice. Investors are free to pursue their course of life while their investments earn for them thanks to minimal investment amount alternatives, the flexibility to acquire or sell them on any business day, and a variety of choices based on an individual’s aim and investment need.
Low Cost
The low cost of investment that mutual funds provide in comparison to participating directly in capital markets is probably the biggest benefit for any investor. A young investor who is just starting out may not be able to afford the majority of stock options.
On the other hand, mutual funds are generally less expensive. Because of economies of scale, brokerage and fee expenses are reduced for investors.
Diversification
By spreading your investment over a variety of assets, mutual funds adhere to the maxim “Don’t put all your eggs in one basket,” helping to significantly reduce risks. Investors with minimal investment resources have access to fantastic investing opportunities through mutual funds.
Liquidity
In the case of open-ended schemes based on the Net Asset Value (NAV) at that moment, investors benefit from getting their money returned quickly. If your investment is closed-ended, as certain plans allow, it can be traded on the stock exchange.
Higher Return Potential
Mutual funds have the potential to produce a higher return on medium- or long-term investments because you can invest in a variety of sectors and companies.
Safety & Transparency
To provide you with a clear picture of how your investments are going, fund managers regularly disclose information about the current value of the investment, along with their strategy and prognosis. Additionally, you may be sure that your investments are managed in a disciplined and controlled manner and are in safe hands because SEBI regulates all mutual funds.
Risk is a component of all investment types. However, careful management, choosing fundamentally sound securities, and diversification can all assist to lower risk while raising the likelihood of longer-term, greater returns.
Different Kinds of Mutual Funds
India’s mutual fund market is constantly changing. Along the way, numerous industry organisations are funding investor education. Different kinds of mutual funds are created to enable investors to select a strategy based on the level of risk they are ready to accept, the amount that may be invested, their goals, the length of the investment, etc.
There are three kinds of mutual funds based on the investment maturity period:
1. Open-Ended – This investment strategy enables investors to purchase or sell units at any time. There is no set maturity date for this.
(a). Debt/Income – In a debt/income scheme, a sizable portion of the investable cash is directed toward bonds, other debt instruments, and government assets. Although capital growth is modest (in comparison to stock mutual funds), this investment option is suitable for those looking for a consistent income because it is relatively low risk and low return.
(b). Money Market/Liquid: This is a great alternative for individuals who want to spend their extra money on short-term investments while they wait for bigger opportunities. These programmes invest in short-term debt products and aim to give investors respectable returns.
(c). Equity/Growth – Among individual investors, equities are a popular type of mutual fund. Investors can anticipate capital growth over the long term, even if the investment may initially be high risk. Growth plans could be a good investment if you are looking for long-term advantages and are in your prime earning years.
(i). Index Scheme – In the west, the idea of index schemes is quite well-liked. These employ a passive investment method in which the fluctuations of benchmark indices like the Nifty, Sensex, etc. are replicated by your investments.
(ii). Sectoral Scheme – Sectoral funds invest in a particular industry, such as infrastructure, information technology, pharmaceuticals, etc., or in areas of the capital market, such as large caps and mid-caps. Within the equities market, this plan offers a chance with a somewhat high risk-high return trade-off.
(iii). Tax Saving – As the name implies, this programme provides tax advantages to its investors. The funds’ equity investments provide prospects for long-term growth. The 3-year lock-in period applies to tax-saving mutual funds (also known as Equity Linked Savings Schemes).
(iv). Balanced – With this plan, investors can experience growth and income on a regular basis. The proportion of investments in equities and fixed income instruments is predetermined and declared in the offer document relating to the programme. For cautiously aggressive investors, these are perfect.
2. Closed-Ended – This type of plan has a set maturity time in India, and investors can only make investments during the NFO (New Fund Offer) period, which is the original launch period.
(i). Capital Protection – This scheme’s main goal is to protect the principal sum while attempting to produce fair returns. These have a small exposure to equity and invest in high-quality fixed-income assets; they also mature throughout the scheme’s maturity period.
(ii). Fixed Maturity Plans (FMPs) – FMPs are mutual fund schemes with a predetermined maturity length, as the name implies. These plans typically include debt instruments that reach maturity at the same time as the plan, generating income through the interest component (also known as coupons) of the securities in the portfolio. FMPs are typically passively managed, which means that the debt instruments in the portfolio are not actively traded. As a result, the expenses incurred by the scheme are typically lower than those of actively managed schemes.
3. Interval It functions as a hybrid of open-ended and closed-ended schemes and enables investors to swap units at set intervals.
There are two types of mutual funds:
1. Actively Managed Funds: Professional money managers handpick investments for actively managed funds in accordance with the goals of the specific mutual fund. These goals can include investing overseas in small start-ups, concentrating on a certain sector (like the oil business), or diversifying between large-cap stocks and bonds.
2. Index Funds: On the other side, index funds do not engage in active management because they only try to mimic the positions in an index like the S&P 500.
Advantages of Mutual Funds
Diversification: A single mutual fund may invest in securities from a thousand different issuers, or perhaps more. This diversity significantly lowers the chance of suffering a significant financial loss as a result of issues in a certain business or industry.
Affordability: A modest sum of money can be used to start purchasing units or shares. Some mutual funds also enable you to make frequent, smaller-instalment purchases of additional units.
Professional Management: Many investors lack the time and knowledge necessary to effectively manage their personal investments, reinvest interest and dividend income, or research the tens of thousands of securities that are traded on the financial markets. Professionals with financial investing experience possess the knowledge, training, and resources necessary to investigate a variety of investment alternatives to manage mutual funds.
Liquidity: A mutual fund’s units or shares can be purchased and sold on any business day in the market, giving investors simple access to their money.
Flexibility: Many mutual fund providers handle a variety of funds (such as money market, fixed-income, growth, balanced, sector, index, and international funds), and you can switch between them for little to no cost. This gives you the flexibility to alter the balance of your portfolio as and when your personal requirements, financial objectives, or market conditions change.
Disadvantages of Mutual Funds
You entrust a seasoned manager with your funds when you invest in a mutual fund. The ability and judgement of that manager will have a significant impact on the return on your investment.
Few portfolio managers can outperform the market, according to research. When choosing a fund, look at the fund manager’s track record throughout time.
The return on your investment may be lowered by fund management service fees as well as additional administrative and sales expenditures. Whether or not the fund does well, they are almost always charged.
Due to sales commissions and redemption costs, redeeming your mutual fund investment in the near future could have a considerable negative influence on your return.
Information should not be construed as financial advice; it is provided primarily for educational and informational reasons. This is not a recommendation to purchase, sell, or hold any particular security.
Also Read: Difference between FMP and SIP
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