Top 7 reasons why you should invest in mutual funds

Investment experts always advise retail investors to invest in mutual funds. But why? In this article, the author provides seven reasons for investing in mutual funds.

In a recent survey it has been found that Indians are very good in savings but not good in investment. In fact many of us do not know the difference between savings and investment. We must invest properly for fulfilling our goals and for a proper retired life. Investment experts always advise us to invest in mutual funds. In this article, we will try to understand the reasons why we should invest in mutual funds.

# 1: Mutual funds give higher return

All of us are interested in higher return. Experts advise us to invest in equities which would beat the inflation. But at the same time, it is not everybody's cup of tea to invest in direct equities. We have no idea about various investment information. We do not know much about the micro economic conditions. We cannot interpret the balance sheets of the companies in a proper manner. So, for common investor, it is really more risky to invest in direct equities. Here comes the equity mutual funds! Equity mutual funds are managed by investment managers who have all related information in their finger-tips. So, instead of investing directly in equities, we must chose equity mutual funds. It has been found that for a time period of five years or more, equity mutual funds give significantly good return.

So far debt mutual funds are concerned; these mutual funds also give much better return than the fixed income instruments like PPF, FD, etc. So, if an investor is risk- averse but wants better return than PPF, FD, Corporate Bonds etc., he/she should opt for debt mutual funds.

# 2: Mutual funds are professionally managed

As already stated, all the mutual funds work under professional fund managers and their teams. These professional fund managers are much more knowledgeable than any individual retail investor. They take decisions based upon the knowledge and information available with them. So, mutual funds are professionally managed and we can get the benefit of their knowledge by paying a very small amount as professional fee.

# 3: Disciplined investing

Many people invest in recurring deposit schemes of banks and post office. Nowadays, Government recurring deposit schemes give a measly 6.9% p.a. return, which is not able to beat the inflation. If an investor instead of investing in recurring deposit schemes put the same amount in a mutual fund scheme through SIP, he/she will be much more benefited in terms of return over three years or more. So disciplined investing in mutual funds creates more wealth for individual investor.

# 4: Less/No lock-in

Perhaps we all know that all traditional investing instruments come with long lock-in period. This creates problem in case of emergency. If we are required to withdraw our deposits because of some emergency, the fixed income instruments like PPF are not very conducive. There are various regulations and ultimately we cannot withdraw the amount from such fixed income instruments on time. On the other hand, there is less or no lock-in period in mutual funds. So, in case of emergency, we can withdraw even more than 90% of money from our mutual fund accounts. This is a distinctive advantage of mutual funds over fixed income instruments.

# 5:: Mutual funds provide diversification

The investment experts always advise us: "Don't put all your eggs in one basket". This means the experts always advise us to diversify our investment. Mutual fund is an extremely potent instrument for diversification. No mutual funds put entire amount in a single equity. Diversification is the essence of investment philosophy of mutual funds. So, even if an individual investor invests in a single mutual fund, he/she automatically gets the benefit of diversification.

# 6: Different mutual funds as per suitability

The condition of every individual investor is not same. Some investor can keep money for a longer period of time, some cannot. Some investors are risk-averse while some investors can take more risk. Mutual funds provide solution to every type of investor. Within equity mutual funds itself; there are various special categories like diversified funds, large cap frunds, mid cap funds and small cap funds. The investor can choose in all these type on the basis of his/her risk- taking ability. Same is applicable for debt funds. Not only these two types, there are hybrid mutual funds which provide facilities of equity mutual funds as well as less volatility of debt mutual funds. So, the investors can chose their funds (for investment) according to suitability.

# 7: Investment in mutual funds is very convenient

Nowadays investment in mutual funds has become very convenient. Starting an SIP or making a lumpsum investment can be done online sitting at residence. Even tracking the performance of the investments can be easily done online. Bank mandate can be set up for SIP(s). We can easily increase or decrease our SIP on online mode. It is not at all required to visit the mutual fund office for investment or withdrawal. So, investors who do not want to visit mutual fund office(s), can invest in mutual funds from their residence or office.

Concluding comments

Keeping in view the aforestated seven benefits of investment in mutual funds, all of us must ensure that we invest regularly and systematically to get high return and generate wealth in the long run.

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Author: Neeru Bhatt08 Jan 2018 Member Level: Diamond   Points : 4

Mutual funds are good investment avenues. They invest in good companies and distribute the dividends to the investors.
Sometimes as market conditions are not good there could be stagnation in the market value of these funds and NAV of mutual fund units may decline significantly and investor has to wait for sufficient time till the NAV of units again come back to respectable levels.
The investor has to wait in such cases and if he requires his money before that he may incur losses. So people should keep this point in mind while investing that they may have to wait for their investment to grow and are also required to be invested for some time before they encash it.

Author: Natarajan09 Jan 2018 Member Level: Gold   Points : 8

Mutual Funds (MF) are good investment options for regular people who cannot track the stocks and shares everyday but want their money to grow much higher than the regular fixed deposits and importantly are willing to take a little risk.

Based on their risk appetite, they can choose debt MF, Hybrid or balanced MF or Equity MF in the ascending order of risk and chances of higher returns.

It is important to know that each MF is like a mini-company unit. It takes money to run and manage the activities including the salaries of all the people and this reflects on the returns, indirectly. New funds will have high overheads and our money may not bring a higher return as we expected it to.

Systematic Investment planning is a good option for people as it would be difficult to time the market and it can be done once a month so that it slowly keeps adding value and also earn better returns in the long run.

When we check for MFs, we will get to hear the terms large cap, mid cap etc. Basically, this means large companies that are well established, will grow slowly, returns will not be too high but in the event of a market fall or a loss, the companies will be in a better position to absorb it. So, if the risk profile is conservative and the time that money would be invested is long term, then choose large cap MFs.

Whatever is the choice, you (investor) need to show active participation in terms of following the growth, discussing with the financial adviser etc because ultimately the money is yours and any loss is not shared but borne fully by you. There would be times when you may have to switch to a different MF for better growth.

Lastly, it may sound silly to some, any investment in MF will need PAN number and a Bank account number, the government and IT track the investments in MFs. If you do invest, please bear in mind that you should be able to show the source of income for the amount invested. Before encashing MFs, please check whether it would attract Capital Gains tax.

Author: Ravi15 Jan 2018 Member Level: Gold   Points : 2

Everyone recommends to invest in Mutual Funds. But I rarely find anyone who could give right information regarding Mutual Funds. Here in this article, author has very clearly described pros and cons of Mutual Funds. I am beginner to Mutual fund investment and know almost nothing about it.

Author: Partha K.18 Jan 2018 Member Level: Diamond   Points : 9

I thank Ms. Neeru Bhatt, Mr. Natarjan and Mr. Ravi for reading this article and providing their valuable inputs on the subject.

Mr. Ravi: As you are a new investor in the mutual fund, I would like to state the following as a humble advice.

Mutual funds collect money from the investors as invest money in equities, bonds or both equities and bonds as per the mandate. So, there are three types of mutual funds, equity mutual fund, debt mutual fund, and hybrid mutual fund.

Now you should know how to invest in mutual funds. Firstly, you have to decide a target for investing. If it is a long-term target, put money through SIP route in a good equity mutual fund. If the target is 5 years away, put money through SIP in a good hybrid fund. If the target is 3 years away (or less), put a lump sum amount in a debt mutual fund.

You will get the list of good mutual funds in each category from some websites which deal with mutual funds. These are Value Research, Morningstar India, and Moneycontrol.

For investment in a mutual fund, you have to visit a mutual fund company office, register yourself, give a bank mandate and start SIP. You can also invest lumpsum through net banking.

I would suggest you not to fall into the trap of middlemen and agents. You are required to think carefully, choose fund as per your target and risk appetite and invest in Direct mode (not in Regular mode).

You have to acquire in-depth knowledge of mutual funds. You can study articles and check various fund information from the three sites mentioned above. These three websites would help you not to depend upon agents blindly for investment.

You can also read various articles on mutual funds which have been available in ISC. I have also tried to help the investors in this regard. Some of my articles on mutual funds are:-
(a) Know the differences between Debt Mutual Fund and Bank Fixed Deposit
(b) Top five tips to pick good mutual funds
(c) PPF rates are falling: What should the common investors do?
(d) Tax treatment of mutual funds in India
(e) Hybrid mutual funds - why to invest
(f) Debt Mutual Funds-Types and Investment Philosophies
(g) How to measure mutual fund risks – five statistical tools
(h) Different Types of Equity Mutual Funds

I hope the above information would help you during your initial days of investing.

Author: Dr. Paresh Gujarati23 Jan 2018 Member Level: Gold   Points : 1

Nice article. The article gives to the point information about mutual fund investment and its return. It is always desirable to invest in mutual fund if one do not know how to invest in stock market. The only way to get better return is mutual fund. The fund manager's responsibility gives us better return.

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