Why Invest in Mutual Funds

Why invest in Mutual Funds?

Let us first define the concept of Mutual Funds. These are funds where money is collected from investors to form a common pool and then deployed into various asset classes (equities, debt instruments etc.) to meet some stated investment objective. When you buy shares of a company, it makes you a part owner of the company and its assets. Likewise if you subscribe to a mutual fund you become a part owner of the fund?s assets.

Mutual funds, as an investment option is really advantageous compared to other investment avenues particularly when the capital to be invested is small and the scope for an investor to carry out detailed market research is minimal. The advantages are as follows-

1) Diversification of Portfolio: Mutual funds invest in a well-diversified portfolio of securities. This enables an investor to hold a diversified portfolio irrespective of his invested amount.

2) Diversification of Risk: As investments are made in a well-diversified portfolio, the risk of investing directly in one/two shares or other debt instruments also gets reduced. Any loss in particular companies or sectors gets off-set by gains made in other companies or sectors

3) Benefit of SIP: SIP stands for Systematic Investment Plan. This allows an investor to invest regularly with whatever small amount one can invest, without worrying to time the market.

4) Professional Management: The persons running a fund are professionals who have got the skills of managing the money as well as technical tools and the much-needed research works behind them. So one can be sure that the money is in safe hands.

5) Reduced Transaction Costs: When one invests directly, he has to bear all the costs such as brokerage or custody of securities. Here the mutual funds enjoy ? Economies of Scale?, as the funds pay lesser costs due to trading/investing in larger volumes.

6) Liquidity: Mutual funds are highly liquid. One can sell the units to the fund, if it is an open-ended or one can also sell the units in a stock exchange, if it is a closed-ended fund.

7) Wide Investment Objectives: Usually one can opt for growth or dividend options from the same scheme of a mutual fund. If one wants to accumulate wealth, he can go for the growth option and if he needs regular income out of his investment he can choose the dividend option.
Various Services: Mutual fund companies provide various services e.g., one can easily transfer/switch their holdings from one scheme to another. Buying/selling of units can also be done through internet, email or other means of communication. The fund houses also provide updated market information.

Although certain disadvantages are there, but investing in a mutual

fund is worthy. The shortcomings are a) there is no direct control over the decision of fund managers in day-to-day running of various schemes; b) investors have to be happy with the common portfolio of the scheme irrespective of one?s personal risk appetite. However taking into account the various benefits that an investor enjoys in a mutual fund makes it a much better option than the other investment avenues.