The demand for products facilitating investments has grown over time in search of a better lifestyle. Also adding to the depreciating currency value has forced investors to look at diverse array of investment solutions which can help them grow their wealth. A convenient way to increase potential returns & gain access to financial markets is provided by Mutual Funds. There is also a reason why mutual funds are growing in popularity.
Mutual Funds are created as basket of investments which invests in financial instruments like stocks & bonds according to their defined investment objectives. Investing in mutual funds allows an investor to gain access to asset classes like equities, bonds or fixed income securities, commodities & even bullion.
These investment vehicles are created by fund companies under the aegis of an investment trust and are owned by investors who buy units or shares in them. They are pools of investment formed from the money invested by investors in exchange for units or shares. They are managed by an investment team with portfolio composition decisions being taken by a fund or portfolio manager. The manager, with the help of research analysts, decides which instruments, stocks or bonds, go into an investment portfolio or fund, and which need to be sold off.
Importance of Mutual Funds
Mutual funds provide a host of benefits which make them important. Some of its aspects are mentioned below
For investors, one of the most prominent benefits is convenience. Here if the investor starts investing in a single fund, he/she gains access to a broad range of financial markets. A typical diversified fund can spread your money across ten different stocks with a portion invested in fixed income securities as well.
Further, if an investor wants to focus on one segment of the market, for instance, large-cap stocks, funds focused on this segment can spread out the investment across multiple large-cap stocks in just one transaction of purchasing the fund. If the investor were to try to do that themselves, it would take a lot of effort, transaction cost, and time to create an individual large-cap stock portfolio. The situation with investing in bonds is even more difficult if one tries to do it individually rather than taking the fund route.
Ease of Investment
Apart from this, mutual funds are easy to buy and sell. One can either engage the services of a distributor or agent to transact in funds or do it over the internet themselves. In the case of latter, the transaction amount is debited from or comes directly to the bank account linked to the mutual fund account depending on whether a fund has been bought or sold.
Spoilt for Choice
This feature follows from the convenience aspect discussed above. Investors have several choices when it comes to mutual funds. And given their investment objectives, funds provide access to a wide range of financial instruments, sectors, and strategies.
This is one of the factors, which is a key highlight of the importance of mutual funds. Due to lack of expertise several investors don’t have the confidence in taking the financial market route to grow their wealth. They feel they have limited or no capability to invest in stocks and bonds on their own and do not have the time to keep tracking their investments even if they manage to invest on their own.
Mutual funds take care of this issue by providing the expertise of the fund manager and their team of analysts, which perform the analysis of financial markets and instruments on a daily basis. They charge a fee for their professional services, which are bundled into the expense ratio of a mutual fund.
This assumes a lot of importance for investors as by investing minimal time and energy, they can add a variety of instruments to their investment portfolio.
How do Mutual Funds Enhance your profile?
For instance, among equity funds, there are diversified equity funds, large-cap funds, mid-cap funds, and small-cap funds as it comes to market cap classification. Then there are aggressive funds, which focus on beating market returns by a wide margin, and balanced funds, which are hybrid in structure due to a sizable allocation to fixed income securities or bonds. There are also sector-oriented funds, which focus on companies from a particular sector like banking, pharmaceuticals, or technology, among others. There are thematic funds as well. Meanwhile, ELSS (Equity Linked Savings Schemes) are diversified funds with a lock-in period of three years and provide tax benefits.
On the fixed income side, there are funds, which invest in government bonds, corporate bonds, or both. Further, there are duration-oriented funds like short, medium, or long-term and dynamic bond funds. There are fixed maturity plans as well, which compete with bank and post office fixed deposits.
It does provide portfolio diversification and ensures Risk mitigation management is ensured to the fullest
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Story Conceived & written by Editorial Team, Insourcing Multiplier