Why you should invest in mutual fund

Things to know: Why you should invest in Mutual Funds

Why you should invest in mutual fund

MUTUAL FUNDS:

Mutual funds are professionally managed investment vehicles that collect money from many  investors to invest in a diversified portfolio of securities. This diversification strategy is the heart of successful investment, reducing the risks associated with different assets.

Why Mutual Funds?
Professional Management: Experienced fund managers, skilled investment professionals monitor investments. Such fund managers make well-informed decisions by conducting extensive analysis of markets to allocate investments and make returns.

Diversification: The Mutual funds invest in several securities. Thus, the potential effect of the low performing asset can be reduced. Therefore, Diversification can help in reduction of risk and increase the possible return from the investments.

Accessibility and Convenience: The mutual funds offer an hassle-free process of investing where one can invest with minimal investment requirements and investment processes easy and quick. SIPs make investments disciplined in any kind of market condition.

Liquidity: Most mutual funds allow redemption flexibility. That is to say, one can withdraw an amount without much trouble at a stipulated time from the investments.

Potential for High Returns: A managed mutual fund has a potential to deliver huge returns over long periods of time. The compounding effect wherein return is earned not just on the principal but on the subsequent earnings tends to churn out lots of money.

Tax Benefits: Some mutual funds allow having tax benefits under specific tax regimes for example, Equity-Linked Saving Schemes (ELSS).

Best advantages of Mutual Funds Investment

Mutual funds provide numerous benefits to all which attracts many people towards this type of investment:

1. Professional Investment Management: The job of selecting, purchasing, and selling securities is managed by professionals who have requisite skills, experience, and knowledge about the market. They monitor conditions in the market as well as other prevailing economic factors to decide appropriately regarding investments.

2. Active or Passive Management: Investors have the option to choose between actively managed funds, where managers try to outperform the market by actively trading securities, and passively managed index funds, which track a specific market index and aim to replicate its
performance.

3. Easy Redemption : Mutual fund investments have high liquidity, and investors may redeem their investments and access their funds as and when required.

4. Periodic Disclosures: Schemes of mutual funds are subjected to heavy regulations and houses of funds are liable to disclose their investments, performance, and expense ratios.

5. Protection to Investors: Regulatory body ensures that the interest of an investor is protected and the authority does not indulge in any wrong activity.

6. Customized to Your Requirements: A number of mutual fund schemes are available that cater to vast cross-sections of a risk profile, investment tenure and financial goals. Investors can select their equity funds, debt funds, hybrid funds, etc.

7. Building Wealth: Equities as an investment avenue have always yielded more returns over long periods of time and thus are most suitable for building wealth.

One of the biggest advantages of investing in Mutual Funds is SIP

Mutual fund investment by SIP is the most popular investment strategy offered by mutual funds.

This way, a person can invest a fixed sum monthly, quarterly, and yearly. This gives a disciplined approach to regularized investments, bringing in a host of benefits: 

SIP Investment Benefits

Rupee Cost Averaging: SIP will help you average out the cost of your investments over a period of time. So, at each point in time when market is low, you buy more units and at each point where it’s high, you buy fewer. Really reduces the impact that gets created by the market
volatility.

Compounding Power: Compounding becomes a reality as time passes, for returns on your investments. This goes on to make really great growth.

Compulsive Investing in SIPs: It can help you develop compulsive saving and investing habits. The investments thus ensure that you stay on track with your financial goals by
automating them.

Accessibility: They are accessible to all, regardless of the income level. You can begin with small amounts and increase it as you continue to grow your income.

Professional Management: Mutual funds are managed by experienced professionals who make investment decisions on your behalf. This can help you avoid the stress and complexity of managing your investments yourself.

How to Start a SIP:

1. Investment in Mutual fund: Select a scheme that fits in with your investment goal and risk appetite. The three most important criteria are the past performance of the fund, the expense ratio, and the experience of the fund manager.

2. How much to invest: Decide as to how much can be saved every month. Start with a small amount and increase it with increased income over time.

3. How frequently to invest: Either at monthly, quarter, or year end.

4. Systematic Payment Generation: You could get a standing instruction from your bank account to your mutual fund account. Thus, SIP investment would always happen in a scheduled way and will not depend on memory.

Best Mutual Funds Investing-How to Choose It?

Select the Best Mutual Fund: This may be one of the most critical steps for your investment process. This involves deep analysis above financial goals, risk ability, and the way the market behaves. To effectively make a decision, consider the following chief factors

1. Define Your Financial Goals and Risk Tolerance:
(a) Investment Objectives : Specify what are your financial goals. Do you aim to save for retirement, or fund for your child’s education, home purchase, or just mere accumulation of wealth?

(b) Risk Tolerance : Assess your comfort with fluctuating markets. Are you conservative, moderate, or aggressive as an investor? Your risk tolerance will determine the kind of funds that should be in your portfolio of funds.

2. Choose the appropriate fund type
(a) Equity Funds: These funds mainly invest in equity shares that carry higher possible return but also a higher risk. These are best suited for long-term investors who can afford a higher risk.

(b)Debt Funds: Debt funds invest in fixed income securities such as bonds and government securities that give relatively stable returns with an involved lower risk in the investments. It is ideal for conservative investors whose focus lies in the capital preservation along with regular generation of incomes.

(c) Hybrid Funds: A combination of equity and debt, that provides the appropriate balance between risks and return. Most suitable for investors who seek diversification and medium risk.

3. Note
(a) Past Performance: No guarantee for future performance but it reveals whether a fund has delivered past performance. Always ask for funds that have been giving good returns for a period of time.

(b) Expense Ratio: The lesser the expense ratio the higher the proportion your actual investment is being used in investing and more for your returns. Investment in low expense ratio funds.

(c) Experience of Fund Manager: A fine fund manager with significant experience plays a crucial role in the success of a fund. Suggest the tenure, track record and investment
philosophy of the fund manager.

(d) Fund Size: Bigger funds often have the flexibility to invest in larger amounts and diversify far more widely. However, sometimes too large a size defeats agility. Consistency in Performance: Look for funds which have clearly outpaced their benchmarks in a number of market cycles.

4. Diversify Your Portfolio:
Spread Your Risk : Invest in multiple funds across different categories so that any one fund that’s losing cannot weigh too heavily on your portfolio. A diversified portfolio tends to reduce risk and increase return.

5. Internet Based Resources:
Website for Researching Mutual Funds: Money control, Morningstar, Value Research Online sites are designed with comprehensive detail, ratings, and analysis of mutual funds.

Financial Advisor: Talk to a licensed financial advisor in order to get personalized advice according to your specific requirements and goals.