Many investors think that since mutual fund invests in stocks thus they are better off investing in stocks directly without paying the additional fees of investing in mutual funds schemes. The mutual fund investments attract the expense ratio on the fund and also the investors have no control over the investments that they make. This is why many prefer to invest in the stocks directly without doing so through a mutual fund scheme.
The truth however is that investing in mutual funds is much better than investing in stocks directly advantages and disadvantages of mutual funds. The money that you invest in the mutual funds outweigh the mutual fund benefits that investments have to offer to you.
Before you understand the benefits of investing in mutual funds understand what mutual funds are.
The mutual fund is an instrument that invests people’s money in financial instruments. These invest in stocks, bonds etc.
Each investor who invests in the mutual fund scheme holds some units of the mutual fund and the unit that he holds is in proportion to the amount of money that he has invested in the scheme.
The securities that the mutual fund invests in are determined based on what the investment objectives of the investor are. The mutual funds are managed by professional fund managers and they manage the mutual fund schemes to ensure that the investor’s investment objectives are met.
The asset management company offers the investor various services and for this, they charge a fee to the investor. The expenses that are charged to the investor is proportionate to the amount of money that the investor has invested in the fund and how much units of the fund he holds.
There are many benefits to investing in mutual funds. The first and foremost reason advantages of mutual funds are that the mutual funds have a variety of schemes and this means that there is something for all. Whether you are averse to risk or want to invest your money for a short period of time, there are mutual fund schemes designed for your needs. See the importance of mutual funds in points.
One of the biggest mutual fund benefits is that it lets you diversify the risk. Every stock that you invest in is exposed to company risk, market risk, and sector risk. Company and sector risk fall under the category of unsystematic risk and the market risk falls under systematic risk.
The mutual fund investment allows the investors to diversify the unsystematic risk and this is done by investing in mutual funds in a diversified portfolio. This is done by investing in stocks of different sectors and thus the risk that comes with mutual fund investment is lower as compared to investing in stocks directly.
In order to build your own portfolio of stocks, the investor has to have a lot of money. Since the mutual fund investments are based on a pool of money the investors have the benefit if having a diversified portfolio with a much lesser amount of capital. The investor can buy the mutual fund scheme with a small amount of money and still enjoy diversification.
Investing in the stock market is not easy. One needs knowledge and lots of expertise to start investing in stocks. Even then the majority of them lose money when they do investments in the stock market directly. This is where investing through mutual fund has its mutual fund benefits.
The fund managers have a good understanding of the stock market and they understand equity investments. Many retail investors have seen their capital being washed off when they tried to invest in equities themselves. This is because the market is volatile and one needs lots of knowledge to pick the stocks, track them and know when to get out of the trade. The mutual funds are managed by those who have lots of expertise in the market and this is why they pick up the right stock and also adjust the returns.
Since the mutual fund investments are done in large quantities it thus lets you enjoy the economies of scale. The transaction costs that are much lower than what the retail investor has to pay towards buying stocks directly. This is why the investors enjoy this saving in their investments.
The mutual fund schemes offer types of products for every kind of investor. There are a variety of investment schemes that are designed to meet the risk and return portfolio of every investor. There are many kinds of funds offered by the mutual fund companies. These include equity funds, balanced funds, income funds, tax-free funds etc., You thus have plenty of options to choose from when doing a mutual fund investment. There are lots many tax saving mutual funds which allow Investor several types of tax benefits over their income and maturity amount too.
The mutual funds are designed such that they let the investor chose how they want to invest in the mutual fund schemes. The mutual fund investor has a lot of flexibility in terms of how to invest and withdraw money from the mutual fund scheme.
The investor can choose to invest a lump sum amount of money in the mutual fund scheme types of mutual funds or choose to do a SIP or a systematic investment plan. The investor can also transfer money from one mutual fund to another and switch from one scheme to the other
You can also invest in a growth mutual fund scheme so that you are able to benefit from the power of compounding. The investment modes are plenty and something that no other investment scheme offers to you.
The share prices are very volatile and the investors thus shy away from buying in the stock market. It could either be because of fear to invest in the market or because of greed to not exit the market fast. When traders trade frequently they end up in a loss. This is because they start to take irrational decisions. Mutual fund lets the investor invest in the market and stay invested for a long period of time which is important in order to create wealth.
When the investor agrees to opt for a systematic investment plan then it instills discipline in him and this is what lets him meet his long-term financial goals.
Many investors are not able to meet their financial goals because they do not have a discipline in investing. Savings, when not done in a disciplined manner, ends up in no saving at all. And thus mutual fund investments force you to start saving and building a corpus.
What are the advantages and disadvantages of investing in mutual funds?
Mutual funds are very liquid and thus you can enter and exit the mutual fund when you want. This can be done easily. The mutual fund can be sold in a small period of time and you get what the present NAV value is. However, some of them may attract a fee for early redemption so make sure that you know about these clauses. The net asset value of the mutual fund investment is calculated once during the day.
As with investing in any instrument mutual fund has its own set of risks. The mutual funds, however, are managed by experienced fund managers who know how to deal with the market fluctuations and they have been offering returns above the market performance. But for this, they charge you some fees to manage the mutual fund for you.
Mutual funds let even the layman who has no experience in the market to start investing in equities mutual fund benefits. You do not have to know how to read the financial reports or know how to read technical charts to be able to invest in stocks when you invest through a mutual fund scheme.
A mutual fund can be purchased online, mutual fund benefits and this makes it very easy to browse through the fund features to buy the mutual fund scheme. Even those who are beginners can easily invest in mutual funds once they know what the different kinds of mutual funds are and when they understand their risk-taking capability risks of mutual funds. When you invest in the fund online you do not have to worry about any sales push which the agent may do to push a fund to earn a better commission. Once you understand the scheme and are confident that it is the best for you and can then go ahead and invest in the scheme.
The mutual fund benefits of mutual fund investments are many and thus it is one of the best ways to invest in the equity market.