Mutual funds are a resource for pooling funds from investors and investing the capital raised to achieve a common investment objective. Mutual funds have designated fund managers who are constantly reshuffling, buying / selling securities in quantum with the scheme’s performance. A mutual fund’s performance highly depends on the performance of its underlying assets and all the sectors and industries in which it invests. The investment objective of a mutual fund scheme is to achieve capital appreciation over the long term by investing in a diversified portfolio of securities. Mutual funds offer active risk management which is why several investors avoid investing in direct equities and instead invest in mutual fund schemes.
What are some of the benefits of investing in mutual funds?
Mutual funds offer active risk management
Every mutual fund scheme is assigned a fund manager (sometimes a team of fund managers) who is responsible for ensuring that the scheme is able to achieve its investment objective. Fund managers along with the team of expert market research and analysts follow an investment strategy by taking calculated risks to help the mutual fund scheme outperform its underlying benchmark. Having a team of experts managing your investment portfolio might help investors earn decent capital gains. If you wish to understand how equity markets function but do not want to risk your finances by investing in direct equities, you can consider investing in actively managed mutual fund schemes.
Mutual funds offer liquidity
If you keep aside ELSS, a tax saving equity scheme that comes with a statutory lock-in period, all mutual fund schemes offer immense liquidity. This means you can buy mutual fund units at any time or even sell your current units during any working day and expect the sum within a few days. Also, you need no redeem all your mutual fund units. Only units worth your income needs can be redeemed while the rest of the corpus will continue to accrue interest. Such kind of flexibility and liquidity may not be possible with conservative schemes like bank FDs that come with lengthy statutory lock-in periods.
Mutual funds offer diversification
The investment objective of most mutual fund schemes is to offer capital appreciation by investing in a diversified portfolio of securities. Having a diversified portfolio ensures that if any one of the underlying assets underperform, investments in other asset classes can even out the losses. Having a well-diversified investment portfolio might help investors minimize their overall investment risk and create a commendable corpus over the long term.
Do not sell your mutual fund investments over the short term. Here’s Why
Mutual funds like equity schemes have outperformed all other investment avenues over the long term. Investors can target their life’s long term goals by remaining invested in mutual funds for the long run. Over the short term your mutual fund portfolio may suffer some losses, but you are bound to create wealth over the long term. To ensure that you continue investing in mutual funds till your investment objective is accomplished, consider staring a monthly SIP in a mutual fund scheme of your choice. SIP is an easy and convenient way to invest in mutual funds. Investors can also refer to SIP calculator, a free online tool accessible to everyone. SIP calculator can give a rough estimate on the capital gains that you may receive at the end of your investing journey.
Mutual funds may offer decent returns over the long run, but they do not guarantee capital appreciation.
