4 Reasons to Invest in Mutual Funds

A mutual fund is a modern investment tool that offers investors capital appreciation in the long run. Asset Management Companies and fund houses collect money from investors sharing a common investment objective and invest this pool of funds across the Indian economy. The money is invested across multiple asset classes like equity, debt, corporate bonds, government securities, debentures, etc. A mutual fund may diversify its assets depending on the nature of the scheme and its investment objective.

Securities and Exchange Board of India, the regulator of commodities and securities in India have their own say on mutual funds – “Mutual funds are a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in the offer document.

Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with the quantum of money invested by them. Investors of mutual funds are known as unitholders.

The profits or losses are shared by the investors in proportion to their investments. The mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time. A mutual fund is required to be registered with Securities and Exchange Board of India (SEBI) which regulates securities markets before it can collect funds from the public.”

Mutual fund investors are allotted units in quantum with the investment amount and depending on the fund’s existing net asset value (NAV). The performance of a mutual fund may depend on the performance of its underlying assets and the sectors/industries in which they invest. Mutual funds are supposed to offer active risk management. Since mutual funds invest in multiple asset classes, if one asset class underperforms, it is less likely for all the other asset classes to underperform at the same time in tandem.

Reasons to invest in mutual funds

There are several reasons that make mutual funds investment worthy. However, here are 4 primary reasons to consider an investment in a mutual fund scheme.

1. Mutual funds offer two investment options – Lumpsum and SIP

Those seeking investments in mutual fund schemes are offered two investment options by the fund house. Investors can either make a lump sum investment, which is also the traditional way of investing in mutual funds. Or they can opt for a Systematic Investment Plan (SIP). Lumpsum investment might fit those investors who have surplus cash sitting idle with them. However, investors need to make a lump sum investment right at the beginning of the investment cycle. Investors are allotted units in large quantities in accordance with the NAV and investment amount. A Systematic Investment Plan, on the other hand is exactly opposite of lumpsum investment. SIP allows investors to invest in mutual funds in small quantities at periodic intervals.

2. Mutual funds investors can choose from direct and regular plan

If you want to buy a mutual fund scheme directly from the fund house then you can go with the direct plan. The expense ratio for owning a direct mutual fund plan is lower. On the other hand if you do not wish to visit the fund house personally and want to invest in mutual funds through a broke, aggregator or an agent, then you can go with the regular plan. However, since you are investing in a mutual fund via third party, the expense ratio of a regular mutual fund scheme is relatively higher.

3. Mutual funds offer multiple payout options

Just like there are two options for investing in mutual funds, there are multiple options for withdrawals as well. Investors can either choose from IDCW and growth payout options depending on their investment objective and financial goals. For example, if you are investing in mutual funds for regular income then you might have to opt for a IDCW payout option. On the other hand, those who are investing in mutual funds for the long run, growth option might work in their favour.

4. Long Term Capital Appreciation

If you are someone who has long term goals like retirement planning or building a wealthy corpus, mutual funds might help you achieve these goals. That’s because mutual funds tend to offer decent capital appreciation when one invests in them for the long run. Short term investments are generally exposed to market volatility and hence if you invest in mutual funds with a long term investment horizon, you might be able to reap some benefits.

These were some of the reasons one might consider investing in mutual funds. However, do bear in mind that investments made in mutual funds are exposed to market volatility and hence returns from such investments are never guaranteed.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.