Mutual funds have become a prolific source of investment for most investors in the last few years. It is simple and easy to be understood by first-time and small investors. Additionally, mutual funds have proved to be a great savings scheme in the last few years.
Here are some benefits of mutual funds;
1. Professional management
In mutual funds, money is pooled in from several investors which are then allocated into equities or other assets such as liquid assets, debt, gold, etc. It means that when you hold units of the mutual fund portfolio, you are a part owner of the entire portfolio. In addition to this, a professional and experienced fund manager manages your portfolio. The fund manager is assisted by dealers, traders and analysts to ensure you get the maximum benefits from your portfolio.
2. Diversification across asset classes
Diversification of assets is important as it allows you to have a variety of funds in your portfolio. They diversify and spread the risks as well. Thus your profitability is not dependant on just a handful of stocks.
For instance, say you have invested directly in equities and have one aluminum and one steel company in your portfolio. Next day, suppose the metal market crashes, you may suffer some serious losses in your assets. If you would have invested in a diverse spectrum, this problem would not have arisen. In a wider spectrum, the risk is spread and you are saved from profitability issues.
3. A wide choice is available
Mutual funds offer you a plethora of funds to choose from. You can choose from different types of equity funds such as mid cap, small cap, thematic, index, diversified, etc. Within debt funds, you can opt for credit risks across durations. In addition, you can choose long –term funds, short term fund, corporate bonds, gilt funds, etc. You can also combine both the asset classes and opt for a balanced fund where you can select the debt/equity mix that you want.
For more customization, you can choose dynamic fund in which the fund manager will manage the allocations actively to ensure that you get the best of the changing market conditions.
Apart from asset classes, mutual funds also allow you to time your investment. You can invest in lump-sum or in the form of a systematic investment plan (SIP). You can even structure the withdrawals as dividends, capital gains or systematic withdrawals.
4. Mutual funds are highly liquid
The best part about investing in mutual funds is that they are extremely liquid. You can easily redeem your holdings in case of open-ended funds. In case of debt and liquid funds, the money will be in your bank account on T+1 day. In equity funds, you can get the money in T+3 days in your bank account. Liquidity in case of closed-ended funds may be an issue. However, you have the option of secondary market liquidity through the listing.
In addition to the above benefits, mutual funds are also tax-efficient compared to other assets such as real estate and bank fixed deposits (FD). In other words, investing in mutual funds is a great way to create wealth over a period of time.