We hear about mutual funds almost every day but are not very much familiar with them. But have you ever given a thought as to what are mutual funds, why we should invest in mutual funds or what are the benefits of investing in mutual funds?
I am going to answer each of your queries one by one. So first of all, I am going to explain mutual funds with the help of an example, for the benefit of those who do not know what exactly mutual funds are.
Say for example you and your friends want to organize a party. So, what you all guys do? Each one of you makes a contribution so that all of you can enjoy the party together, Right! The concept of mutual funds is also similar in the sense that they pool money from various investors who have similar investment objectives. The pooled money is then invested and managed by an experienced fund manager.
Now let us discuss about the various benefits offered by mutual funds:
FULFILLING YOUR FINANCIAL GOALS
Every individual on the planet craves for something or the other. It could be buying a home or spending retirement days in peace or could be as small as going on a vacation. But however, most of us only make fantasies about these and do not make a plan to achieve our goals.
Now you might be thinking that how should I plan for my goals? Well, the mutual fund is the perfect answer to your query. An individual can achieve any of his goals by just aligning his mutual fund investments to the goals.
Mutual funds are managed by a team of qualified personnel who put proper due diligence before buying any shares or debt instrument. These professionals are well versed in the activities they perform. An investor is in a better position as they can avail the services of qualified professionals at a very low cost. SEBI regulates the mutual fund industry and provides all the operational guidelines for its management.
NO NEED TO TIME THE MARKET
Mutual funds allow an investor to invest either in lump sum or SIP. If an investor opts for SIP then the need for timing the markets is eliminated. The reason why this aspect is important is that no one can predict the markets well in advance. Markets always run on the principle of uncertainty. Hence SIP helps an investor in walking through the dense fog of uncertainty.
WELL DIVERSIFIED PORTFOLIOS
If you will have a look at any of the mutual fund scheme portfolio then you will find that the portfolios are well diversified across various underlying securities and sectors. The reason for such diversification is that it protects the portfolio from falling.
Also one can save up to Rs 46800 in taxes by investing Rs 150000 in ELSS funds. Not only this will help an individual to save taxes but also tend to earn higher risk-adjusted returns. Also, the lock-in period in ELSS funds is just 3 years which is the lowest if we compare it to the lock-in period of other instruments like PPF, NPS, etc.
HIGHER RISK ADJUSTED RETURNS
Most of the individuals feared while making any kind of investment. They are usually more concerned about the capital which they are investing in. I am not going to say that investments in mutual funds especially equity-oriented are risk free. Equity as an asset class also contains risk; however that should not be the reason to avoid the best asset class which helps in generating higher risk adjusted returns.
Hence one can always take a calculated risk, based on his risk profile.
I hope that you are familiar with the compound interest and how it works. However, you might not be aware of the fact that what wonders compounding can do to your investments. This is why compounding is called the eighth wonder of the world. If you want to create long term wealth then start making investments in the mutual funds now.
For example, if you would have invested Rs 100000 now @15% then after 10 years and 30 years the value of the corpus would be 4.04 lacs and 66.21 lacs respectively. I hope that the figures would have blown your mind.
Mutual funds help in providing financial security to investors. For example, a person can plan his retirement with the help of mutual funds. All he has to do is to invest a certain amount of money towards building his retirement corpus.
Hence we can say that mutual funds provide a sense of financial security to its investors.