We cannot begin the discussion on the benefits of mutual funds without understanding the meaning of this phrase. Mutual fund refers to a financial instrument that pools the money of various individuals and then invests them in bonds, stocks, etc. Investors in the mutual fund program own units if the fund that is a representation of a section of the schemes’ holding. The managers keep the investment objective in mind while selecting the securities. Asset management companies have the responsibility of managing mutual funds. These managers have to make sure that the scheme meets its investment objectives.
Some people think that since managers invest mutual funds in stocks, it is better for them to invest through a broker and not mutual funds. You may think that stocks score over mutual funds because of the lack of control and fund expense ratios. However, mutual funds remain to be the best investment alternative for retail investors because the benefits of investing in them outweigh the cost. Here are some ten ways you stand to benefit by investing in mutual funds.
1. Risk Diversification
Risk diversification is the greatest benefit of investing in mutual funds. All stocks are exposed to market risk, sector risk, and company risk. Sector and company risks are unsystematic while market risk is a systematic one. The stock price may fall when the company has poor financial performance even if the market is rising. On the contrary, the stock price may still fall even if the company is performing well but the market is falling. Mutual funds assist the investor to diversify the unsystematic risk by investing in diversified stock portfolios across different sectors. Therefore, mutual funds have a lower risk than individual stocks.
2. Small Capital Outlay
As an investor, you will need a broad capital outlay to build a diversified portfolio of stocks. On the contrary, because mutual funds work on the principle of pooling money, the mutual fund investors can benefit by owning a diversified stocks portfolio that has a smaller capital outlay. You can purchase several units of diversified equity at a small amount of capital.
3. Expertise in Investment
You need a lot of expertise and experience to invest in the stock market. The most important part of investing in equities is to understand the trade-off between risk and return. Several retailers have lost a lot of money while trading in shares because of making poor risk and return trade-offs. Professionals who have a lot of experience and expertise in picking the right stocks manage mutual funds and hence you will get the best risk-adjusted returns.
4. Economies of Scale in Transaction Costs
Because mutual funds sell and buy securities in large volumes, the transaction cost per unit basis is lower than what retail investors incur when they sell or buy shared via stockbrokers. Therefore, it makes more economic sense to make your purchases through mutual funds than going for stock brokers.
5. Broad Range of Products
Having a variety of products also falls on the list of benefits of mutual funds. Mutual funds provide investors with a broad range of products that match their investment objectives and risk profiles. In addition to equity funds, you will also get balanced funds, liquid funds, income funds, and monthly income plans that meet different investment expectations.
The other advantage of mutual funds is that they have several applications and uses. You can either invest in a broad range of funds or in just one. Systematic withdrawal, automatic deposits, limitless investment strategies, long-term savings, short term savings, dividends, and annuity sub-accounts are all the different ways you can benefit from the flexibility of mutual funds. Even a beginner can invest in this plan without any problem.
7. Broad Range of Investment Modes
Also, mutual funds give investors a lot of flexibility when it comes to investment and withdrawal modes. As an investor, you can opt for a broad range of investment modes such as a one-time (lump sum) investment, systematic transfer plans (from the other mutual fund schemes), systematic investment plans, switches from one investment plan to another, and systematic withdrawal plans. You can invest in the growing alternative of the mutual funds if you would like to benefit from the compounded returns over an extended investment period. You may also put your investment in the dividend alternative if you want to generate regular income from this investment. You will not get another investment opportunity in the market that will give you such a broad range of investment modes.
8. Disciplined Investment
The prices of shares are highly volatile and may induce investors to either buy or sell within a short period because of greed or fear. Frequent trading can easily make you make losses. Mutual fund schemes encourage the trader to invest over an extended time horizon which is good for wealth creation. Moreover, systematic investment programs encourage the trader to invest in a disciplined way in order to meet their long term financial goals. The reason why most people fail to establish a substantial investment is the fact that they don’t invest in a disciplined manner. If you don’t invest your savings on a regular basis, you are likely to spend it in a luxurious lifestyle that does not promote wealth creation.
The other benefit of mutual funds is that it is easy to buy them. Some of the places that offer mutual funds include insurance companies, banks, mutual fund companies, online discount brokers, and brokerage firms. You can choose any of them depending on your personal preferences. As a beginner, you can open a mutual fund account in a matter of a few minutes.
It is easy to understand the concept of mutual funds. You can make something to be more complex than it is and mutual funds are not an exemption. The good thing about mutual funds is that you don’t need any prior knowledge and experience in the financial statement, economics, and financial markets to become a successful investor. Even beginners can easily invest in this scheme with the help of mutual fund managers.
From this discussion, you should have realized that mutual funds are among the best investment options that the market offers. The article presents some of the benefits of mutual funds. The investment has high returns and is less risky in comparison to the other alternatives in the market.