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Mutual Funds – Advantages

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Mutual Funds – Advantages

For the newbie earners, share market investment through mutual funds is a complicated subject, but once it understood and identify the advantages, it will be a convenient and easy investment option.

A mutual fund is an open-end investment instrument that is managed by professional fund managers who pool the money from different investors to purchase securities, bonds, equities, etc. The holdings in Mutual funds is called the portfolio of mutual funds.

Mutual funds provide many advantages to the investors which include professional fund management, dividend reinvestment, reduced risk compared to equity direct investment and it is convenient and easy to start with.  In this article, we will cover the various advantages of the mutual fund investment and things to consider before starting investing in MF for the newbie earners who would like to create wealth from the world of the share market.



How do Mutual Funds work?

  • Mutual funds are formed by the asset management company’s or the Independent Fund Managers who pools investments from various institutional investors or from an individual with investment objectives.
  • A fund manager manages the pooled investments with his in-depth understanding of markets, financial knowledge, and professional skills and generates maximum returns for the investors.
  • The fund houses charge an annual maintenance fee(AMC) for the service of managing the investments of individuals and it is called the expense ratio. These charges will vary from fund to fund and between different fund houses
  • The investors make money from the mutual funds through the receipt of dividends and capital gains of the stocks in the portfolio of the mutual funds.
  • An investor can either choose to reinvest the capital gains and compound the investments or earn a steady income by way of a dividend option by investing in mutual funds.
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How to Invest in Mutual funds?

There are 2 ways a newbie earner can invest money into mutual funds. As per the convenience of the investors, newbie investors can select either SIP mode or the lump-sum mode of investment. Units of Mutual funds are termed as Net asset value (NAV), it is the price at which investors can purchase or sell each unit of the mutual funds. All mutual fund transactions happen on the basis of the value of the NAV which updated daily after business hours. Investors can purchase the mutual fund units on the current NAV price either SIP monthly installments or investing as a lump-sum amount.

Lump-sum Investment Plan

In a lump-sum investment, mode investor can invest a significant amount of money at a time, on a particular mutual fund scheme by purchasing the mutual fund units at current NAV value. In  Lump-sum investment, an investor is investing the total amount of money in one go. In terms of returns, if the market goes up after the investment, the higher the amount of investment the better is the growth. A lump sum investment is an excellent way of investing for long-term investments.

Lump-sum investment is ideal for the investments considered for a period of more than 5 years. If a newbie earner gets into the market at right time, investors can make a huge profit from the lump-sum investment. An investor must invest based on their investment goals and the risk appetite which they can take.

SIP – Systematic Investment Plan

If a newbie earner is not confident in handling large amounts of money and doesn’t want to risk it, it is ideal to opt for a systematic investment plan. Through a SIP, a newbie earner can stagger the investments over time horizon by investing a fixed sum at regular intervals like weekly, monthly, quarterly, or half-yearly, as per the convenience of the investor. SIP investment can be considered as open-ended, I.e. it can be started or terminated at any time. Some fund houses also provide an option to the investors to pause the SIP for a while and continue whenever feel good to continue. Some fund houses will not levy any penalties for terminating the SIP before the minimum lock-in period.

By paying the installment of SIP, an investor is purchasing few more new units of the funds at the prevailing NAV. When an investor continues the SIP installments, over time, the cost of purchase of fund units averages out as when the markets are down, the investor purchase more fund units and vice versa. Through the SIP investment and investors get the benefit of both surging and falling markets and no need of worrying about the market movements.

Even-though as long as paying the installments, the invested amount gets rupee cost averaged, it will help to accumulate a large number of units of funds. Once investors stop the installments and wait for some time for the market growth, it will give a higher return on the base of market performance as NAV also increases correspondingly.

Advantage of SIP investment 

There are many advantages of the SIP mode of investment for the newbie investors, Few of them are listed below.

Financial goals:

Due to the Rupee cost averaging of the invested amount, investors fund is safe, even in marker downfall.

Wealth creation:

Due to the installment mode of payment, it helps newbie investors to develop the habit of discipline in financial matters. As disciplined Saving & power of starting early is the secret of the wealth creation, it helps the newbie earners to create wealth in the early ages.

Diversification:

In the SIP mode of investment in mutual funds, fund investment will be diversified to different domains or sectors of the market. Due to diversification, if one sector goes down, some other sector in the portfolio will help to maintain the asset value of the fund.

Able to invest in large funds:

 

In SIP mode and newbie, investors can start investing with a minimum of Rs. 100 per month, as these funds are used to purchase the bonds, equities, and stocks of the large companies, it will give an opportunity for the investors to invest in large firms with a small amount.

No worry about market movements:

As SIP investment can be started at any time and continue, newbie earners, need not worry about the right time to enter into the market due to the advantage of rupee cost averaging the market movement will not affect the fund. SIP investment always minimizes the risk of equity fluctuations.

Convenience:

A newbie investor can instruct the bank to facilitate the auto-debits option for the payment for the SIP premium. An investor can start and stop whenever they feel to do so, for the funds other than, funds had a minimum lock-in period. SIP investments are easy to monitor, liquidity if needed.

Fund managers:

In a SIP mutual fund investment, fund management companies assign a qualified fund manager to manage the overall fund, hence newbie investors will get a qualified fund manager to manage their assets, at a lower cost.

Compounding:

In SIP mutual funds, as our funds grow corresponding to the growth of the assets in the portfolio, it will give us a compounding fund growth effect. In addition, investors will get bonus shares and dividends, which will also work as compounding.

Easy to understand:

For newbie earners, no need to do a deep study about the share market and its movements for investing. Only need to understand the average growth, charges, and rules and regulations of the SIP which they are selecting. Newbie investors do not need to strain their head on the daily finances.

Better returns:

Even-though the SIP investment is subjected to market risks: Most of the SIP investment funds can grow exponentially after the completion of the installment period of the SIP.

Advantages of Mutual Funds?

Mutual funds are easy to start, investment instrument, which is professionally managed and will compound the invested amount over a long term. Mutual funds help the newbie earners to get an entry into the equity market, without having much knowledge in it. Below is the list of advantages of the mutual fund investment.

1. Professional management

For every mutual fund, there will be a qualified professional fund manager, who will conduct the research, make an investment decision and keep a track of the fund’s performance.  As investment decisions are done by professionals, investors can be assured that money is in the right hands and they will get the guaranteed returns.

2. Diversification

As mutual funds diversify the portfolio by investing the amount in a wide range of asset classes and stocks, mutual funds reduce the risk and offer a higher return. Therefore, even if one asset is not performing well, it will offer the returns as other funds perform well in the portfolio.

3. Higher returns

As mutual funds are invested in a variety of instruments that offers higher returns like bonds, blue-chip companies, etc, investors can get a higher return on the invested amount. Mutual funds also offer higher returns with lower risk as the fund is invested in different instruments.

4. Disciplined investing

Systematic Investment Plan (SIP) is a facility offered by Mutual funds companies that allow investors to invest small amounts regularly, which can be weekly, monthly, or quarterly to the Mutual funds. An auto-debit option of the SIP offers an excellent way of disciplined investment as the investments are happening regularly automatically from the linked account.

5. Convenience

Investing in mutual funds is easy and it can be started just with a few clicks in the portals of the fund managing companies. In online we can select the funds of our choice and monitor the performance. For Mutual funds, the KYC process can be completed in few minutes and it is very easy.

6. Low cost

Starting cost of Mutual fund investment is as low as 500 rupees for the Systematic Investment Plan ( SIP ) mode and 5,000 rupees for the lump sum mode of investment. For the Direct Plan mutual fund, an investor can start without paying any additional commission to the agents.

Things to consider as a first-time investor in mutual funds

Before start investing in a mutual fund, there are many factors that need to consider about the fund selection and the amount which need to invest in specific funds. For newbie earners, it will be risky, if start investing in a fund which they don’t know about the portfolio and the fund manager’s capability. The main points that need to consider are as below.

Identify your financial goals :

Select the fund according to the base of annual growth rate which meets the financial goals.

Decide on your investment amount :

For newbie earners, 10-15% of earnings in a year is an ideal amount to invest in MF.

Seek advice from the fund manager :

Discuss with mutual fund experts to get an idea about better investment choices.

Diversify your portfolio :

Select Funds from different domains like Index Funds, equity funds, and hybrid funds, etc.

Pick SIP (Systematic Investment Plans):

For a salaried person, it is ideal to select the SIP investment option instead of making lump-sum investments.

Why mutual funds are bad?

 

For newbie earners, a Mutual fund is the safe and easy investment option. However, Mutual funds investment can be considered as a bad investment when compared to direct investments in stocks, bonds, and commodities, if the investor has knowledge of these instruments.

Negative factors of mutual fund investments.

  • High expense ratios charged for fund management
  • Various hidden front-end and back-end charges.
  • Lack of control over investment decisions.

What is Blue Chip Fund?

A blue-chip mutual fund is a fund that invests only in the stocks or shares, of companies that are well-established. These companies will have excellent overall financial performance, hence it is called blue-chip companies.

CONCLUSION:

A mutual fund is a fund managed by a professional fund manager in a company who pools money from different investors and invests it in different stocks, bonds, etc. The performance of the mutual fund is based on the performance of the holding in the mutual funds.

For newbie earners before investing in a mutual fund, it is necessary to understand the difference between the SIP and Lump-sum investments and its advantages to select a suitable option that meets their financial goals. As Mutual fund investment offers different advantages to the investors, it is better to select a suitable fund as early as possible and start investing in it.

Thanks & Regards

Harry

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Harry
Harry J P is a Business development and sales professional passionate about sharing knowledge in the domain of sales, and personal finance which helps in Personal financial learning for newbie earners. This blog came out of the experiences in the domain of personal finance, business development, and the share market.

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