Mutual Funds can be the right investment option for anybody. No matter how experienced you are when it comes to choosing investments. Whether you are a rookie or a veteran investor, Mutual Funds (MFs)offer services that are way beyond a retail investors scope.
Some investors might think – ‘since Mutual Funds invest in stocks, why not directly invest in stocks and not in MFs’. Well, these investors do not know half of it.
Not all mutual funds invest in equity stocks, they have other types of investments in their portfolio like Govt. Debt and Corporate Debt.
In this post, we will remind you of the top benefits of investing in Mutual Funds. Once you read these benefits it will be really hard to get your mind off of MFs as an investment.
Additionally, we will share a Pro-tip about the types of MFs you can invest in for different time periods.
So without further ado, let’s get started with the Top 6 benefits.
1. Safety: Risk Reduction
The greatest advantage of Mutual Funds is that it allows you to spread your investments in different stocks and sectors.
This is the benefit of diversification which is not available when you directly invest in a few stocks and sectors. The company-specific risk is greatly reduced due to diversification.
Moreover, MFs also invest in other assets like govt and corporate debt (loans), derivatives. This further spreads the investor’s capital and hence reducing the risk.
If you invest in MFs, the majority of risk you are exposed to is market risk.
Bottom Line: Mutual fund risk is lower than direct stock investment risk.
2. Understandability – Easy to understand
Mutual funds investment is way simpler than stock and derivatives investment. Here, you do not need knowledge of economics, financial statements and markets to become a successful investor.
A simple definition of MFs for a beginner:
Mutual Funds are like a basket of investments. Each MFs or basket has multiple stocks or bonds. So when you buy a mutual fund, you actually buy an assorted basket full of different investments. EASY!
There are other things you should know about MFs, but MFs are relatively very, very simple as compared to other financial investment products.
3. Affordability – Smaller amounts can be invested
If you want to build a diversified portfolio for yourself, you will need a larger investment amount.
Whereas mutual funds gather money from a lot of people and hence they can build a diversified portfolio which requires huge capital investment.
So, if you want a well-diversified portfolio, the easiest way to achieve this is by buying MFs.
Many Mutual Funds offer units at a low price. It can be as low as ₹5000 in lumpsum or a ₹500 systematic investment plan (SIP).
4. Accessibility – Anyone can invest
You can buy a unit of MFs from various sources, like directly from the AMC (MFs companies), a registered broker, online discount websites, through an App.
More importantly, having a Demat account is not necessary. You can buy MFs by presenting a few of your documents like a PAN Card, address proof, a canceled cheque, and passport size photo.
In the current market, buying mutual funds is as easy as buying movie tickets online.
All you need to do is go online to the fund’s website and register. Once your profile is created and verified, you are good to go.
5. Cheap Portfolio Management Service (PMS)
Investing is a full-time job and requires some level of knowledge and expertise.
Professional portfolio management is an expensive financial service as it provides the user with great benefits. Before Mutual Funds came into play, these services were only available High Net-Worth Individuals or as we call them ‘The Rich’.
Thankfully, due to Mutual Funds, retail investors can now enjoy these benefits. All Fund Houses have qualified fund managers and a dedicated research team to pick the best investments.
By investing in MFs, you can save a lot of energy, time and money which you would have to spend on analysing stocks and allocating funds in them. Hence, you can focus on the things you enjoy in life.
6. Encourages Disciplined Investing
One of the main reasons why people are not able to create wealth is because they cannot commit for a long period of time. And the investment chain breaks due to some reason.
This can be taken care when you invest in Mutual funds through SIPs.
Mutual funds SIPs encourage people to invest over a long-term. Due to this disciplined investing habit, you will be able to control your lifestyle expenses.
Prolonged investing habit is the most crucial aspect of wealth creation.
As promised earlier, here are some Pro-Tips for you to further help you invest in MFs.
If you want to invest for 3 or more years. The best long term mutual funds would be Large-Cap Equity Mutual Funds.
Alternatively, if you want to invest for a shorter period of time. The best short term mutual funds would be Liquid funds or Arbitrage Funds.
Imp Note: The above are just types of mutual funds. There will be winning and losing mutual funds in each type.
To know more about which particular MF is the right option. Download The RefreshMint App. Here is Easy Explanation about Mutual Funds in the Cricket way.
We have presented these advantages to you assuming that you neither have the time nor the expertise to directly invest in stocks and other financial instruments.
If you consider yourself an investment guru and can devote a significant amount of time to this, then you can go ahead and invest in stock directly. However, we still believe that any single person will not be able to compete with mutual fund companies due to economies of scale.
A vast majority of retail investors, can not spare the time and do not have the expertise required for investing. Hence, mutual fund investing is the better alternative for retail investors. Also, before you start the investment process do read on how to think about goals and planning for them