Are you getting afraid of investing in stock market? But can’t control yourself when your friends are making lakhs of money from stock market? Then a good way to invest in stock market is via mutual funds. But why you should invest in mutual funds?
If you are thinking why should I invest in a mutual fund, then I must say with growing income and inflation in Indian economy, households are experiencing a need to grow their money through a safe and secure channel to fulfill their long-term financial goals. Hence, mutual funds prove to be the option that saves the day.
All traditional investment options like Fixed deposit, Recurring deposits, PPF account or even endowment insurance plans will not give you a decent return which can at-least beat the inflation. In such a scenario, investing in stock market can give you a good return. But again, stock market investment is highly risky, so it is better to go in Mutual fund way to have the flavor of stock market. In this article we will discuss about what are mutual funds and how do they work.
What is Mutual Fund Investment?
Mutual funds are professionally managed trusts known as AMCs (Asset Management Companies) that pools money from various investors for investment in various classes of assets to achieve certain financial goals. So rather than investing individually, the person pools his/her money with others and that pool is managed by a fund manager appointed by the asset management company, who uses his investment management skills to invest it in various financial instruments. In return, the fund manager charges a small fee for the services.
An investor earns profit through capital appreciation and dividends are also declared. The gain or loss of the fund is the gain/loss of the entire set of investors, who are unit holders of the scheme. Every fund allows investors to invest through various schemes with every scheme having a specific financial objective.
Mutual funds invest in equity, debt instruments, money market securities, gold, etc. depending on the objective of the scheme. Equity funds offer high risk-return profile whereas debt funds are less risky with low returns.
Why You Should Invest in Mutual Funds?
Now the question arises, why you should invest in mutual funds? Due to numerous benefits offered by mutual funds, they prove to be a favorite choice for investors.
- Firstly, they are simple to invest. You do not need a de-mat account to invest in a MF. Also, one can invest online in mutual funds and start with an amount as small as Rs. 500 which is very convenient.
- Secondly, they are transparent and safe. This is because you hand over your money to a professional and relieve yourself from the hassle of managing your portfolio yourself. Many provisions of Indian tax laws make mutual funds tax-efficient. They assist unit holders to save money with the help of tax-deductions and low transaction costs.
- Thirdly, they allow investors to diversify and reduce risks while investing. Many balanced schemes exploit various sectors or securities at a time. So MFs are good for diversification and hedging risks.
There are many other reasons for you to invest in mutual funds but, one of the fundamental benefits of mutual funds is financial planning. To fulfill long-term investment goals, merely saving is not the solution. For this, a certain amount of risk has to be taken, based on the nature of the objective.
Mutual funds help your savings to combat inflationary pressures and allow you to generate additional income over long periods. Hence, a prospective investor should consider mutual funds before making a decision of any sort.
So, I hope you are now clear about what is mutual funds investment & why you should invest in mutual funds. In fact, in these inflationary times, one should not look for avenues to save, but search for avenues to invest. Hence, mutual funds are a decent option for an individual to achieve one’s financial goals.