Why You Just Can't Ignore Investing In Mutual Funds

Mar 24, 2018

Do you want to save tax?

Earn higher returns than you earn on bank FDs?

Park a large sum of money for the short term?

And

Want to diversify your portfolio across asset classes without taking any pain yourself?

You will be surprised to know, a simple step to attain all this is through investments in mutual funds.

Unless you are stalwart in investing and can handle all your investments made across asset classes on your own, mutual funds are appropriate for you.

What makes mutual funds such a compelling proposition?

As you know, equity, fixed income, gold and real estate are the most common asset classes to diversify your portfolio.

Different factors drive them and sometimes, the same factors can have a different impact on their movement. For example, when the economy slows down, the performance of equity deteriorates. But during this period, the gold is likely to do well.

Since these dynamics are challenging to deal with, at least for average investors, it's better to trust the professionals who are experienced to manage your portfolio. Professional fund management is one of the reasons why mutual funds are so sought after.

The other reasons are:

Economies of scale - Since mutual funds manage money for number investors like you, they enjoy economies of scale in everything-right from the transaction costs to hiring experts.

In comparison, your personal transaction volume and scale of operations would be smaller, not providing much economies of large scale.

Lower entry level - How many stocks you think you can buy with Rs 5,000 if you invest independently?

Not many, at least the fundamentally robust blue-chips, right?

But when you invest in equities through mutual funds, you can get exposure to as many as 50-60 companies by investing an equivalent amount.

This portfolio diversification helps you reduce risk, which otherwise would pose a challenge had you done it individually in stocks with an equivalent amount. Likewise, had you invested in bonds directly, investing sensibly recognising interest rate scenarios would have been a challenge.

The sheer scale of operations, comfortably facilitate portfolio construction based on every scheme's unique investment mandate ---be it equity, debt, hybrid, money market, or gold. That's the difference between investing individually and investing through mutual funds.

However, mutual funds do not customise the portfolios for you. They have a standard portfolio for all, and against your investments, they issue units.

For this reason, before you invest, recognise the investment mandate of the scheme and make sure if it suits your risk profile, investment objectives, investment time horizon, and the financial goals you are addressing.

Flexibility - When you invest through mutual funds, you enjoy tremendous flexibility. There are as many as 16 categories of mutual fund schemes you can invest.

Plus, mutual funds offer an option to invest a small amount at regular intervals-popularly known as the Systematic Investment Plan (SIP)-which helps you accumulate money to satisfy your goals.

To transfer money from one type of mutual fund other, say debt-oriented fund to equity-oriented fund, you even have Systematic Transfer Plans (STPs). You can set up how much you wish to transfer each month or quarter, enabling you to stay invested, average your investment cost, regularly invest, and benefit from the power of compounding.

Further, some funds facilitate tactical asset allocation plans and trigger the facility to manage your portfolio from a financial planning perspective too. Also, if you wish to withdraw a certain amount at regular intervals, you have Systematic Withdrawal Plans (SWPs).

Liquidity - When you handle your portfolio independently, sometimes you can't sell off your assets when you need money. But with mutual funds, you have the ease to exit the fund for whatever is the reason. You can withdraw your investments any time you want-unless you have invested in the close-ended schemes.

Don't you think mutual funds can play a vital role in your journey of wealth creation?

Yes, isn't it?

But remember, selecting the best mutual scheme/s is crucial, so that you create wealth effectively. Ensure you invest in a mutual fund schemes that have a proven track record.

And prefer direct plans over regular plans, as the lower expense ratio of the former can create significant amount of wealth in the long run.

[Read: Mutual Fund Direct Plans - Everything You Need To Know]

After you invest in a mutual fund scheme, don't forget to track its performance periodically to make sure that it's still a good choice to depend on to accomplish your financial goals.

"Riches do not respond to wishes. They respond only to definite plans, backed by definite desires, through constant persistence." - Napoleon Hill

Remember, investing mutual funds backed by a personalised financial plan can make your dreams come true.

Happy Investing!

This article first appeared on PersonalFN here.

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