Benefits of Investment in Mutual Funds - Investing in Stock Markets | Investing in Stock Markets - B Com PDF Download

Investing in Mutual Funds can be a rather intimidating prospect for new investors. Sometimes, even seasoned investors are hesitant or unsure about the performance of their Mutual Fund investments.

Advantages of Investing in Mutual Funds.

1. Mutual Funds offer diversification in your investment portfolio : Investing in the stock market through Mutual Funds is a safer bet because Mutual Fund investments minimise your risk exposure. Without Mutual Funds, you will need to buy individual securities to diversify your investments. This leaves you exposed to higher volatility when the stock market crashes.

2. Mutual Funds are managed by professional fund managers : Scared of making a foray into Mutual Fund investments because you aren’t very comfortable with constantly having to time the market and realign your investment portfolio? That’s where Mutual Funds score.

If you’re wondering what happens to your Mutual Funds when the stock market crashes, you must know that your investments in the funds are handled by dedicated fund managers. These fund managers are responsible for monitoring the performance of the fund, reviewing your investments and realigning your asset allocation in order to gain optimal returns.

3. Spoiled for choice with Mutual Funds : It is definitely not a “one size fits all” formula with Mutual Funds. There are so many different types of Mutual Funds to suit every type of investor and their various financial goals. There are bond funds, stock funds, sector funds, money market Mutual Funds such as Debt Funds, and Balanced Funds – among many others. You can comfortably invest in Mutual Funds regardless of whether you prefer actively managed funds or passive funds.

So many different types of Mutual Fund investments allow investors to create a well-diversified investment portfolio.

4. Mutual Funds have lower investment thresholds : Contrary to the popular myth that’s floating around, you don’t need to have a lot of money to begin investing in Mutual Funds. You heard that right. Many Mutual Fund companies allow investors to begin investing with as little as Rs. 1,000. Some even permit investments as low as Rs. 500 per month.

5. Mutual Funds encourage systematic investing and withdrawals : Mutual Funds promote disciplined investing and give investors several options to make investing a regular habit. With a Systematic Investment Plan, you can invest a certain fixed sum of money in Mutual Funds on a monthly basis for a specific tenure.

6. Mutual Funds allow automatic reinvestment : Mutual Funds offer investors dividend payouts depending on the fund’s performance and gains. With Mutual Fund investments, investors can very easily opt to have their capital gains and dividends reinvested. These reinvested gains accumulate, eventually adding value to the investor’s total investment corpus. The reinvestment of capital gains or dividends is generally processed without a sales load or any extra fees.

If you are not looking for a regular source of income from the investment, it is advisable to choose to reinvest any profits paid to you by the Mutual Funds. This allows you to benefit from the power of compounding.

7. Mutual Funds are transparent : There are no hidden charges in Mutual Fund investments. All the required information about the fund’s holdings, performance and assets are available to all investors. This allows for transparency in the operation of Mutual Funds, which encourages investors to make informed investing decisions.

8. Mutual Funds offer liquidity : Some Mutual Funds allow investors to withdraw money from their investment in the fund. A few Mutual Fund schemes, such as Equity Linked Savings Schemes (ELSS), have mandatory lock-in periods. Equity Linked Savings Schemes have a lock-in period of 3 years.

Some other Mutual Funds also have exit loads, which are payable on making withdrawals.

9. Mutual Fund performance is tracked and recorded : It is important for Mutual Fund houses to maintain regular performance records of all the Mutual Funds they operate. These records are carefully analysed and audited. This ensures a degree of trust between the Mutual Fund and the investors.

10. Investing in Mutual Funds is safe : Just in case a Mutual Fund house goes bust, the shareholders of a Mutual Fund get a pay-out. This pay-out is a certain amount of money equivalent to their percentage of shareholdings in the Mutual Fund.

If a Mutual Fund is not performing up to expected standards or is consistently underperforming, the fund’s Board of Directors can choose to employ a new investment advisor to manage the Mutual Fund.

But remember, Mutual Funds have varying degrees of market risk and the value of a Mutual Fund will often fluctuate. Due to this fluctuation in the Mutual Fund’s value, investors may find that they get less than they expected from their investments.

However, don’t confuse the safety of Mutual Funds with the safety of capital. If you’re looking for investments which offer safety of your capital, you could consider Liquid Funds or Fixed Deposits.

If you are looking for less volatility but don’t mind lower returns on your investments then Debt Funds are your best bet.