How Do Mutual Funds Help You Invest Better?

Mutual funds can provide you products that can meet your financial goals with relatively lesser risk.

Mutual funds really but why?

Mutual funds can provide you products that can meet your financial goals with relatively lesser risk. The key benefits of investing in mutual fund (MF) are given below:

• Safety: MF offers you to choose the fund that suits your financial goals and risk appetite.

• Liquidity: MFs are almost as liquid as your bank deposits and other investment products. You can withdraw and get the money in your account on T+3 days basis, T being the day on which you did the transaction.

• Returns: MFs offers you to chose the fund that suits your returns and risk appetite. Historically equity has delivered higher return than any other asset class over a long period of time. As an investor you must consider Real returns (Returns – Income tax – Inflation).

• Diversification: Don’t put all eggs in one basket as it increases the risk of breakages. MF allows you to participate in products across investment class and also across various companies and institutions there by spreading your risk and letting you enjoy the benefits of diversification.

• Convenience: Once you open an account, that account becomes your identity with the MF. It also allows you to invest at your convenience, withdraw at your convenience, make payments directly through your bank etc. You can start as small as a monthly commitment of Rs.1000.

• Outsourcing of fund management: By investing in MF, you are basically outsourcing fund management expertise at a very nominal average total expenses ratio of 2.25% to 1.05% for equity funds and 2.00% to 0.80% for debt funds.

• Outsourcing of advisors: There are 43 mutual fund companies and over 1000 schemes to choose from. Imagine the amount of work that is required to find out what suits your financial objective. The best way forward is to consult a financial advisor who will advise based on your financial objective.

What are the various categories of funds available for investing?

In the modern world, there are multiple asset classes available for investing and within those asset classes there are multiple choices of fund managers. The asset classes/ fund categories available today are:

• Equity: Investments are made in equity shares of the company. This is most ideal for those who are looking at capital appreciation. However one should look at an investment horizon of five years and more.

• Debt: Investments are being made in fixed income instruments like fixed deposits, bonds, government securities etc. These funds give you a choice of time horizon from 1 week to 2 years depending on you financial objective.

• Hybrid funds: These funds give you the best of both the worlds by investing the amount both in equity and debt. Balanced fund is a very good example. This can be a very good starting point if you do not want to invest 100% in equities to start with. You should be looking to invest with a minimum 3 years time horizon.

• Gold funds: These funds invest in gold. Smart investors will invest in these funds and not buy physical gold. The fund will give you market related returns. The advantage is that you can always withdraw and buy gold or jewelry whenever you want to. The extra risk and cost of storing, making charges etc. is eliminated.

• International funds: You should be introducing geographical diversification in your portfolio. It reduces portfolio risk. You can invest in companies across the globe through these schemes.