5 Benefits of Investing in Mutual Funds
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Mutual Fund is an investment vehicle where the money collected from investors are later used to invest in various securities such as shares and bonds. Mutual Funds is a simple investment option especially meant for individual investors.
Mutual funds help you to plan your finances to reach your financial goals at ease. These goals can be both short and long term goals.
There are different types of mutual funds as well to cater to the individuals of different age, investment horizon and risk profile.
Here are some of the benefits of investing in a mutual fund:
Investing directly in a particular stock or a bond involves a lot of research. Researching the right stock or bond takes time and technical expertise as well. Hence, investing directly may not be everyone’s cup of tea. Mutual fund solves this problem. Every fund is managed by an expert fund manager who selects the stocks as per the fund’s investment objective. A team of research analysts help the fund manager to select the right stock. The fund manager decides what stocks to invest and exit. Hence, you can shift all your investment worries to the fund manager.
Mutual Funds are diversified investment option because every fund invests in a number of securities. It is mandated by the market regulator, Securities and Exchange Board of India (SEBI), that a fund can’t have more than 10% allocation in a single security. This makes sure that the fund is diversified.
Diversification helps to reduce the risk associated with a single paper. The underperformance of a single stock is averaged out by the positive performance of other stocks.
Investors have multiple ways to invest in mutual funds. The two main ways to invest in mutual funds are the Systematic Investment Plan (SIP) and a one-time lump sum investment. SIP is a facility provided by the mutual fund houses that help investors to invest systematically in a mutual fund of their choice. It is especially useful for salaried people who earn a fixed sum of money every month. Investors can easily set up a SIP amount where the SIP amount will be auto-debited from the savings account on a monthly basis.
Another way is the one-time lump sum investment. Investors can invest lumpsum when they can invest a substantial amount at one go. One can also invest lumpsum in the fund with existing SIPs.
Investing in mutual funds also give you the benefit of compounding. Compounding helps you to increase your initial investment much faster. When you stay invested for a longer time, the impact of compounding is higher. Simply put, compounding is when the return received is based on the initial investment along with the returns received in the earlier periods.
| SIP | Rs. 10,000 | Rs.10,000 |
| Time | 10 years | 15 years |
| Rate of Return | 12% | 12% |
| Total Amount invested | Rs.12 lakhs | Rs. 18 lakhs |
| Amount Grown to | Rs. 23 lakh | Rs. 50 lakh |
| Difference | Rs. 11 lakh | Rs. 32 lakh |
In the above example, we see that by staying invested for just five more years (15 years), the corpus of the in investor will grow to Rs. 50 lakh. The total investment made by the investor in these 15 years is just Rs. 18 lakh.
The expense ratio is the expense associated with running a fund. The expense ratio is highly regulated by the SEBI and fund houses can’t charge more than a specific expense ratio. The limit to the expense ratio is based on the assets managed by the fund. The expense ratio of mutual funds is very transparent and it includes all the costs such as distributor charges, marketing charges, management fees etc. You can easily find the expense ratio in the factsheet.
The expense ratio is a nominal fee. It makes MF one of the cheapest investment options. If you would have gone direct, you may have to shell a higher amount when investing or exiting an investment. If you had a diverse portfolio consisting of a number of stocks, the amount would have been far higher.
A mutual fund is one of the best and easiest investment options for individuals. It gives the benefit of an expert fund manager, diversification, easy investment, compounding and it is a cheap investment option. So invest in mutual funds today.
Here’s why you should invest in mutual funds through SIP
Should you invest directly in Stocks or Equity Mutual Funds?
