Objectives of Mutual Fund investing for investors?

Investors often ask this question; why should they not invest directly in equities and debt and why do they not need to go through the mutual fund route? What is the value that a mutual fund can add to the investment performance? To answer these questions, one needs to understand the core objectives underlying investing in mutual funds. The objectives of investing through the mutual fund route are not just about returns. It is about convenience, diversification, choice and the ability to pigeon-hole their investments to a long term financial plan. Let us understand each of these things in detail.

Mutual funds can help you enhance returns…

Many investors tend to believe that investing through mutual funds entails an additional cost and that takes away from the returns generated. It is right that mutual funds entail an additional cost in terms of managing the fund, which is ultimately passed on to the customer. But that is a small cost to bear when you consider the benefits that come from investing through mutual funds. Let us look at a few of them.

Mutual funds bring in professional management to the table. A fund manager is typically supported by an army of analysts and traders, each of whom is an expert in that area. The analyst helps identify opportunities that are emerging and strategizes what themes to play and what themes to avoid. A trader ensures that while buying and selling stocks the mutual fund gets the best price to enhance returns. Finally, the fund manager brings his macro understanding of the business. How to allocate, how much to allocate and how to shift themes are all decisions that are made by the fund manager. As a small investor, you may neither have the time nor the expertise to play the market in such a professional manner. This eventually enhances returns. Quality fund managers have managed to consistently beat the index and have helped unit-holders earn above normal returns.

It is also a matter of convenience…

When you buy an equity fund, you are actually buying a share in a diversified portfolio of stocks with a low entry barrier. Mutual fund investing can be entirely managed online once the requisite KYC is done by the investor. Fresh investment, SIPs, transfers, withdrawals can also be managed online without leaving the comfort of your PC. SIP is another great convenience that mutual funds offer. You systematically invest in quality stocks with just a simple instruction. Above all, mutual funds are highly liquid and you can realize the proceeds of your sale directly in your bank account within just 3 days. It is that simple!

Mutual funds diversify your risk…

The biggest risk in buying equities is that you may end up buying too much of a handful of stocks, themes or sectors. This adds a higher risk element to your portfolio. Mutual funds avoid that risk by spreading your money across a larger number of quality stocks. This ensures that an automatic diversification is built into your portfolio. Hence the impact of stock-specific or sector-specific variables will not be too large in a mutual fund. As an individual if you hold too many stocks, you may find it hard to track the performance of all these stocks and take appropriate entry and exit decisions. In a mutual fund, this job is done by a fund manager saving you the hassles of decision making in a volatile market.

Mutual funds offer a wide choice…

Mutual funds have something for everyone. There are aggressive funds for those with a higher risk appetite and conservative funds for those with a lower risk profile. If you want the safety of debt then you have a variety of debt funds to choose from. If you want to park funds safely for a short time, you have a choice of liquid funds to select from. And should you want a passive approach, you can just opt for an index fund which merely mirrors the index like Nifty or Sensex. In a different scenario, if you want to look at other asset classes like gold or foreign equities, then also mutual funds have an answer. You have fund of funds (FOFs) that invest in global equities indirectly and pass on the benefits to you. There are gold funds and ETFs which can mirror the price of gold for you. In short the choice offered by mutual funds is humungous.

It fits in perfectly with your financial plan…

If you invest in equities or bonds in isolation, it is fairly difficult to fit them into your financial plan. After all, a financial plan forms the basis of all your financial decisions. Mutual funds can solve that problem. Whether your allocation is to equities, short term debt, long term debt or other commodities, mutual funds offer a choice to encompass all of them. Additionally, mutual funds also offer customised plans like retirement plans and child education plans wherein the asset mix is managed according to the changing circumstances and an insurance component is also built in.

Your primary objective of investing in mutual funds should be a combination of professional management and the benefits of diversification. But, probably, the most important objective should be that it gels in perfectly with your long term financial plan.

Learn more about mutual fund market, top performing schemes, latest mutual fund market news and updates at Religare Online.

For all your mutual fund queries SMS ‘ASKMF‘ to 575758 and we will get back to you.

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