- A mutual fund is a financial instrument that pools money from various investors and invests it in different financial securities to meet their financial goals.
- In addition to being managed by a specialist fund manager, mutual funds offer several advantages.
- They offer the benefit of diversification, are convenient, invest in a range of products, and follow a disciplined approach to investing.
A mutual fund is a financial instrument that combines the money of several investors and then invests the pooled amount into various financial securities such as stocks, bonds. In a mutual fund, the holder owns units of mutual funds. These units form a part of the holdings of a large scheme.
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In a mutual fund, the financial securities are chosen to meet investors' financial objectives. Asset management companies manage these mutual funds. Fund managers within these asset management companies manage mutual funds and ensure that the scheme investment goals are achieved.
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Why should one invest in mutual funds?
For many, investing can be a complicated process. Investors can choose from various stocks, bonds, real estate, and other money market instruments. However, there is no certainty that the financial instrument an investor selects would meet his/her financial objectives. There is also no assurance that the investors might make money from the investment. However, they do have the option of going for mutual funds that can offer the advantage of investing in multiple instruments based on the investor’s risk appetite.
On that note, let us look at some of the benefits of mutual funds.
- Diversification: One of the most important advantages of opting for mutual funds is diversification. An investor can lower the risks associated with a specific company or a particular sector, through a diversified portfolio. Diversification helps increase exposure to different stocks and sectors and thus limit the impact of potential headwinds in any one of them.
- Investment expertise: As highlighted earlier, mutual funds are managed by skilled & professional fund managers. They have the desired qualification and skills in selecting appropriate stocks and other financial instruments to get the best risk-adjusted
- Tax benefits: Mutual funds also offer the advantage of saving on tax. Funds such as ELSS (Equity-Linked Saving Scheme) provide tax exemptions. Several investors are attracted to this investment vehicle solely to avail tax benefits.
- Availability of various products: Mutual funds provide investors with a range of products that suit their requirement, based on risk appetite and objectives. Some of the products include debt funds, hybrid funds, liquid funds, and tax-saving schemes etc.
- Option to choose from different modes of investments: In mutual funds, an investor has the flexibility to select the mode of investment. An individual can either invest the amount in one go or opt for systematic investment plans. Investors can also choose from growth or dividend option depending on whether they want to benefit from compounded returns or get a regular income from their investments.
- Well regulated: Mutual funds are well controlled by the capital market watchdog of a particular country. It means that the asset management company or the mutual fund houses would have to fulfil various criteria set by a specific nation’s regulatory body.
- Disciplined investment: Mutual funds encourage investors to invest for extended periods as it is vital for wealth creation. Investing in a disciplined way helps meet one’s financial goals.
- Transparency: The financial vehicle also provides transparency as investors can keep track of the schemes and market by visiting the fund’s website. They can also look at offer document, annual report, facts sheets and other documents.
Besides, mutual funds also help lower transaction costs as the costs are spread across all investors in a particular fund.
Given the several benefits of mutual funds, investors looking for hassle-free, low-risk options are attracted towards this investment vehicle. With advancements in technology, multiple mutual funds to pick from, and growing awareness among investors, investing in mutual funds has become a much simpler process.
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