Mutual funds have been one of the most promising and popular investment options in India. It is a process of pooling money or funds from the public to purchase securities like bonds, stocks, instruments, and money markets. Professional money managers operate mutual funds and select the assets that can produce income or capital gains for the investors. Needless to say, every mutual fund portfolio is designed to justify the investment objectives mentioned in the prospectus.
The best part about mutual funds is that it gives both individual and small investors access to the professional portfolios of bonds, equities, and other securities. Similarly, every shareholder contributes proportionally in all the gains and losses of the mutual funds. The change in the total market capitalisation of the funds determines the performance of the mutual funds. And this figure is derived by combining average scores of all the underlying investments.
You see, mutual funds are a brilliant investment option for all the individuals who have limited funds and want to get exposure to professionally managed portfolios. It also allows investors to diversify their portfolio by investing in several instruments at the same time. However, the manager will allot assets proportionally according to the amount invested by each investor.
The fund manager’s prime motive is to give optimum returns to all the investors that are in sync with the mutual fund’s objectives. He manages the mutual fund daily and makes decisions about buying and selling of securities as per the fund’s investment objectives. So what do you think are the factors that are making mutual funds a hot investment option in India? Keep reading on as we highlight the 5 key benefits of investing in mutual funds.
5 Key Benefits of Investing in Mutual Funds
Mutual fund investment showers several benefits on the investors. Diversification, professional management of funds, flexibility are some of the factors that make it an ideal investment option.
1. Professional Management of Funds
The first and foremost advantage of investing in mutual funds is access to the professional fund management facility. It is a great advantage for the new investors who have limited knowledge about this sector but are keen to invest in mutual funds. The professional fund managers will manage the investments pooled by the fund houses or asset management companies (AMCs).
These are experienced financial professionals who come with an excellent track record of investment portfolio management. Apart from this, there is also a supporting team of experts and analysts who choose the highest performing stocks and assets from the market.
These assets have the potential to offer promising returns in the long run. Furthermore, investing in mutual funds is a seamless process. The entire buying and selling of securities are done at the current Net Asset Value (NAV) of the plan.
Investors only need to take care of arranging funds for investment. And, the rest will be taken care of by the managers and their analyst team.
2. A Low-cost Investment Option with no Lock-in Period
You see, the majority of the mutual funds come with a zero lock-in period. It allows the investors to enter and exit the mutual fund plan any time as per their convenience. On the other hand, if you go for lock-in mutual funds, you will not be able to withdraw funds before the maturity date. Equity Saving Schemes or ELSS is one such example that comes with a lock-in period of at least three years.
Although some investments might offer you premature withdrawals, it will come for an exchange of a penalty. But most of the mutual funds are open-ended and come with different redemption exit loads. According to market experts, mutual funds are one of the low-cost investment options in India.
The asset management companies or fund houses charge a very small amount to manage mutual fund investments. The charges usually range somewhere between 0.5%- 1.5% of the amount invested. As far as the upper limit is concerned, it cannot go beyond 2.5% as per the SEBI guidelines.
3. Offers Diversification, Flexibility, and Liquidity
The best part about mutual funds is that it offers diversification to the investors. Mutual funds invest across shares and asset classes of several companies. It also helps in reducing the concentration risk to a larger extent. In the cases where one asset fails to perform as per the expectations, the other securities can make up for the loss. Investors should not worry about the market impulsiveness as their diversified portfolio will offer some stability.
The majority of the investment options lack one basic element, flexibility. And it is where mutual funds step in. It offers much-needed flexibility to investors. Moreover, the combination of investing through SIP with no lock-in period has made it an even more profitable investment option. People can also consider it as an excellent option to raise an emergency fund for their start-ups.
All these factors have made mutual funds a favourite investment option of the millennials. Moreover, the no lock-in feature of mutual funds provides you with higher liquidity. The redemption request is just a few clicks away, and you can receive the money within 3 to 7 days.
4. Systematic Investment Plan (SIP)
The highlight of investing in mutual funds is that it allows you to invest a small amount regularly through SIP. The frequency of this SIP can be monthly, quarterly, or annually as per your convenience.
Apart from this, you can also determine the ticket size of your SIP, but it cannot be less than the minimum investment amount. The investors can start or terminate their SIP at their discretion. It also offers you the power of compounding and buying more securities in smaller quantities.
5. Allows you to Switch Funds
Mutual funds allow its investors to switch funds as per their convenience. You see, when an investor decides to move his entire investment or a part of it from one mutual fund scheme to another, but in the same fund house, it is referred to as switching. Whereas, switching the fund houses altogether is called switch-in and switch-out.
A good investor knows when to switch funds according to the profitability of the asset mixes. However, your mutual fund manager will guide you throughout the process and can also recommend the best scheme to switch in. Please note that all the mutual fund plans and houses are under the reach of RBI, AMFI, and SEBI.
Therefore, you should not worry about the safety of your mutual fund investments. All you need to do is, analyse the schemes, its risk profile, style of investment, investment horizon, and pick the best plan.
These were the top five benefits of mutual funds. Investors can connect with banks, life insurance companies, mutual fund dealers, and investment firms to invest in mutual funds. Mutual funds are one of the safest and most profitable investment options in India.
However, make sure you read all the related documents carefully as mutual funds are subjected to market risks. Connect with a market expert to understand more about its types and investment process. Good luck.
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Q. How to pick the right mutual fund?
Ans. You see, the best way to choose a mutual fund is by checking if it’s investment objectives are in line with your financial goals. Please note that it has nothing to do with its past performance or fund manager.
Q. How can I redeem my mutual fund units?
Ans. Mutual funds come with no lock-in period. It means you can redeem them anytime. All you need to do is inform your agent or fund house, and you will get money in 3-7 days.
Q. Which is better; SIP or a lump sum?
Ans. It completely depends upon the market scenario and the individual. You need to first assess your requirements and risk profile before selecting the right option for you. Ideally, if you are not into risk-taking, then you should SIP and vice-versa.