Why Mutual Fund

Mutual funds are for all reasons and seasons. Here are a list of advantages mutual funds offer to the investors 

Why mutual funds? This is a very general question we hear when someone advises to invest in mutual funds. Though mutual funds were launched way back in 1963, the MFs have recently received attention post demonetisation and digital India campaign. Even the SEBI (Securities and Exchange Board of India) and AMFI (Association of Mutual Funds in India) have taken initiatives for raising awareness among people about mutual funds. SEBI, which is always proactive when it comes to investors' protection, has recently taken various steps to curb the mis-selling of mutual funds.



When it comes to mutual funds, people usually narrow down their investment decision on two major factors; first, returns (specifically which are guaranteed) and, second, risk. This is the major reason why people prefer bank FDs (fixed deposits) and government securities, which gives them guaranteed returns with less or virtually no risk. But these are not the only factors one must look at while investing. So, why should one must invest in mutual funds and what are the factors that makes mutual fund a better investment product?

 

This is the third article of the knowledge series sponsored by Sundaram Asset Management Company, which will cover various topics important for your financial well-being. 

Return

Return is one of the factors that people consider more than anything else. That is why when someone suggests investing in mutual funds, people ask 'what is the rate of return that mutual funds would provide as compared to bank FDs?'. It is very crucial for people to understand that return depends on various factors, viz. asset class, time horizon for which one wishes to invest, investment objective, etc. If we look at the historical performance of mutual funds, then they are one of the best performing products that have provided good inflationadjusted returns. In fact, MFs have provided better margin over inflation.

Professionally managed by experts

Mutual funds are one of the products which are professionally managed by the fund manager. Fund manager is the professional who takes the investment decisions on your behalf. Fund manager are well-qualified and experienced to develop and implement the investment strategy in line with the investment objective of the mutual fund.

Discipline

To get good return on investments, it is very important for the investor to be disciplined. Mutual funds with its SIP (Systematic Investment Plan) facility allow investors to invest small amounts periodically as decided while starting the investment. This period may range from daily to annually. This will allow you to stay invested in a disciplined way through regular investment.

Liquidity

In terms of liquidity, mutual funds are much better than any other traditional products like bank FDs, PPFs, ULIPs, etc. as mutual funds have no lock-in period, except the ELSS (Equity Linked Saving Scheme) which has a lock-in period of three years, which is also the least lock-in period as compared to other products. Though there is an exit load that may be levied on early exit, still technically mutual funds are highly liquid.

Diversification benefits

It is always said that while investing don’t put all your eggs in one basket. This means that you must spread your investment across asset classes to reduce your risk. In mutual funds, you get the benefit of diversification by default as the fund manager invests in various stocks of different sectors, and even with hybrid mutual funds, the fund manager invests in both equity as well as debt. Though this in no way means that you must invest all your money in a single mutual fund, investing in large number of mutual funds beyond a certain limit will not give any diversification benefit.

Ease of tracking

The tracking and monitoring of your mutual funds is easy. As all things are online, you can get your mutual fund statement online. Not just that, nowadays with the help of technology, you can also create your goal and allocate the mutual funds to them and track their progress.

STP, SWP and SIP facility

Mutual fund is the only product which has a facility of STP (Systematic Transfer Plan) wherein you can transfer funds from one mutual fund to the other, SWP (Systematic Withdrawal Plan) wherein you can withdraw a certain sum of money at defined intervals. It is reverse of SIP (Systematic Investment Plan), wherein you invest a certain sum of money at defined period of time. The period may range from daily to annual basis.