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What Are The Benefits Of Investing In Mutual Funds?

What Are The Benefits Of Investing In Mutual Funds

Benefits Of Mutual Funds

It is most commonly asked question in India, Why should I invest in Mutual Funds? It is very risky! It is subjected to market riskd! It is Share Market! It is Gambling!

So for all of you out there who are not clear about this golden investment tool available in India, I am sharing the positive points of Mutual Funds.

Here are the benefits of investing in mutual funds.

Investing in Mutual Funds Is Very Easy:

Putting together a portfolio of stocks and bonds can be difficult, if not impossible, for the average investor. For example, the time and knowledge required to research and analyze a dozen or more stocks can be too challenging for most people. That's not to mention all the trades needed to build the portfolio, plus the ongoing research and analysis required to maintain the portfolio. But when it comes to investing in mutual funds, investors can get started investing with just one mutual fund.

Once you know your investment objective, which will include the number of years to invest and how much risk you're willing to take, you can choose the best mutual fund or funds for you. And depending upon the types of mutual funds you use, the ongoing maintenance required may be little to nothing.

Mutual Funds Offer Professional Management:

One of the primary reasons investing mutual funds is easy is because they're professionally managed. Rather than researching, analyzing, buying and selling stocks or bonds yourself, you have a skilled fund manager doing it for you. Professional management is at the core of how mutual funds works: When investors buy shares of mutual funds, they're pooling their money together.

Managers use this pool of money to buy the stocks or bond securities that end up forming one portfolio.

Think of mutual funds as investment baskets of securities. Each basket has its own objective and manager (or management team). The manager also has a team of analysts that assist in doing the research. Also keep in mind that, when it comes to management, mutual funds fall into two primary categories - one is active management and the other is passive management.

Managers of actively-managed funds will use their resources to try and "beat the market," which is to say that they'll attempt to outperform a certain benchmark, such as the S&P BSE 200 or Nifty index. However, the manager of a passively-managed mutual fund will not try to beat the index but will instead buy and hold a basket of stocks that will replicate the holdings and performance of the index.

Mutual Funds Are Well Diversified Investments:

The nature of mutual funds as pooled investments that are professionally managed means that investors generally can easily accomplish one of the most important standards of smart investing diversification. To diversify means to spread market risk by holding a variety of several different securities, rather than just a few.

Most mutual funds invest in dozens or hundreds of stocks or bonds within one portfolio.
Depending upon the type of fund, this accomplishes the fundamentals of diversification with as little as one or two mutual funds. However, when building a portfolio of mutual funds, especially as investment assets and objectives grow more complex over time, investors are smart to diversify across several funds in different categories.

The reason why diversification is important is that investing in just one or two securities can be too risky. For example, if an investor buys just a few stocks and those stocks see significant declines in price over a short period of time, the investor's portfolio can drop dramatically in value. But if the investor buys a mutual fund that holds 100 stocks, and a few of those stocks see price declines, the impact on the investor's account value is less.

Investment Costs Are Low for Mutual Funds:

Investors tend to overlook many aspects of building and managing a portfolio, and the most negative impact of those overlooked items often comes from expenses. Depending upon the brokerage firm or investment company, investors may be charged commissions for each purchase or sale of single securities, such as stocks. This can add up to thousands of rupees per year, per account, depending upon the frequency and size of trades.

However mutual funds can be significantly less expensive. A mutual fund manager will place all the necessary trades to maintain the mutual fund portfolio but the investor may only be responsible for one low expense. But if investors are not careful, investing in mutual funds can be more expensive than buying individual stock securities. To keep costs low, mutual fund investors are wise to buy no-load mutual funds with low expense ratios.

Investors Can Buy Many Different Types of Mutual Funds:

Investment objectives are unique to every investor, which means that there are many different reasons to buy mutual funds. Fortunately, there are several categories of funds that can suit any investment need. Some of the most common investment objectives include retirement and education, each of which may require different funds to suit the needs of the investor.

Retirement is generally considered a long-term investment objective. But there are mutual fund types, such as money market funds or bond funds, that are suitable for most short-term needs. Investors may also combine types of funds to tailor more specific investment objectives.

Mutual Funds Are Versatile Enough to be Used By All Types of Investors:

All of the advantages of mutual funds mentioned in this article combine into one advantage of flexibility. They're simple enough to be understood and used by beginners but versatile enough to be used by professional money managers, who often use them to build portfolios for clients.

A beginning investor may buy their first mutual fund to start saving for retirement, while a large investment firm might use the same mutual fund in a portfolio of funds for a major client, such as a wealthy trust client or an endowment fund used by a major university or non-profit organization.

Divisibility:

Many investors don't have the exact sums of money to buy round lots of securities. One or two lac rupees is usually not enough to buy a round lot of a stock, especially after deducting commissions. Investors can purchase mutual funds in smaller denominations, minimum at Rs. 500. Smaller denominations of mutual funds provide mutual fund investors the ability to make periodic investments through monthly purchase plans while taking advantage of rupee-cost averaging. So, rather than having to wait until you have enough money to buy higher-cost investments, you can get in right away with mutual funds. This provides an additional advantage liquidity.

Liquidity:

Another advantage of mutual funds is the ability to get in and out with relative ease. In general, you are able to sell your mutual funds in a short period of time without there being much difference between the sale price and the most current market value. However, it is important to watch out for any fees associated with selling, including exit load fees. Also, unlike stocks and exchange-traded funds (ETFs), which trade any time during market hours, mutual funds transact only once per day after the fund's net asset value (NAV) is calculated.

There's no doubt that mutual funds will stay for many more years and decades to come. With Crores of Rupees invested in mutual funds in the India alone, and popularity increasing in emerging markets, there's no reason to expect this versatile investment type will do anything but gain in popularity in the future.


Investing in mutual funds can be a smart move for almost any kind of investor. Beginning investors and professional money managers, and every experience degree of investor in between, can take advantage of the features and benefits of mutual funds and apply them to their investment objectives.

There are many qualities of mutual funds to learn but fortunately investing in them is much easier than making a list of the advantages!

Happy Investing!


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