Top Benefits of Investing in Mutual Funds

An increasing number of people invest in mutual funds to diversify their portfolios. It is a popular investment instrument among those who wish to grow their wealth with minimum risk. It is imperative to understand mutual funds and their benefits, so your investment strategy has a smooth sailing.

What is a Mutual Fund?

A mutual fund is an investment instrument that pools money from people and invests it in varied financial securities, such as bonds and stocks. These securities are carefully chosen, keeping the investment objective of the scheme in mind. Every investor in a mutual fund scheme owns units of the fund, which represent a portion of the holdings of the scheme. One of the primary reasons people invest in mutual funds is that they provide access to a diverse array of assets, which would be hard to find on your own.

Mutual funds are managed by asset management companies (AMCs). These companies typically appoint fund managers to manage diverse mutual fund schemes, ensuring the objectives of the scheme are met properly.

Benefits of Investing in Mutual Funds

Scope for Diversification

As mutual funds hold a basket of investments, they provide instant diversification. This can go a long way in minimising your portfolio risk and volatility. Investing in mutual funds would be an easy way to diversify investments across multiple securities and asset categories like gold, debt, and equity. This helps spread the risk and makes sure that you will not have all your eggs in one basket.

For instance, a balanced fund would hold a mix of bonds and stocks, based on the notion that the prices of bonds and stocks do not generally decline in tandem.

Minimal Time Commitment

While it is possible to ensure diversification in your portfolio investments, doing so would take a lot of time and research. It is not easy, especially for new investors, to identify investments that complement each other. However, in the case of mutual funds, the research and monitoring would be done by AMCs on your behalf! It will save you the trouble and give you maximum returns.

Professional Advice Included

The holdings of every mutual fund are selected by professional investment managers based on their expertise level, knowledge base, and sophisticated investment approach. You will automatically benefit from this as you choose to invest in mutual funds.

Low Minimum Investment

Apart from being time-consuming, building your own basket of diversified holdings can be costly. After all, you would have to invest a minimum amount in each stock/bond you want to own. On the other hand, in the case of mutual funds, your money would be pooled with that of a large group of investors. Hence, the mutual fund minimum investment amount is quite budget-friendly. In India, the Securities and Exchange Board of India (SEBI) has mandated that the minimum amount for mutual funds would be INR 100. Funds with lower minimum investment requirements are designed to be more accessible to retail investors and would make it easy for you to grow your wealth.

Lower Trading Costs

The overall trading costs incurred when buying and selling dozens of individual investments as the market changes can be high. On the other hand, each investor holding a piece of a mutual fund shares its trading costs, which makes these costs more affordable.

Investing Discipline

Mutual funds are managed by professionals, who make decisions related to the funds on your behalf. This ensures your investment decisions are not driven by fear in a down market or optimism in an upmarket. Rather, you simply have to focus on the long-term growth instead of trying to time the market over the short term. By doing so, you can avoid missing out on potential gains when markets rise.

Well-Regulated

Mutual Funds are regulated by the Securities and Exchange Board of India under SEBI (Mutual Funds) Regulations, 1996. SEBI has laid down stringent rules and regulations to ensure investor protection and maintain transparency with an appropriate risk mitigation framework and fair valuation principles.

Assured Liquidity

Mutual funds are easy to buy and sell at any time. They are available through several financial institutions and investment firms.

A Range of Options

There are multiple types of mutual funds available today. Hence, no matter your financial goals and needs, you can easily find an appropriate mutual fund to invest in. Pure equity funds, for instance, maximise returns but carry relatively higher risk. On the other hand, money market funds minimise risk but offer lower returns. There is a mutual fund for virtually every type of investor. You need to assess your investment budget, financial goals, and risk appetite to select the ideal mutual fund to invest in.