Mutual Funds is a pool of funds collected from several investors used to invest in a number of securities such as bonds or capital raising instruments in the money market such as share equity. These funds are managed by experienced professionals known as fund managers. Fund managers prepare a diversified portfolio and to build a capital out of your invested fund along with other investors.
Think of it this way – If you buy a unit of a mutual fund, it would mean that you are buying a unit of the asset or portfolio prepared by the mutual fund company. Therefore, buying a unit of a mutual fund is not the same as acquiring the stocks of a listed company.
There are a number of advantages of investing in mutual funds. A mutual fund is a service that gives you a wide variety of sectors to invest in without having to exhaust yourself with research overload of individual stocks of different companies in different sectors.
Advantages of investing in mutual funds
1. Diversified Portfolio
A diversified portfolio will always save you from unforeseen downfalls of any sector. For instance, imagine you have a portfolio with investment in industry, real estate and energy sectors. Now, if in a particular quarter, the real estate sector takes a sudden hit and energy sector happens to flourish.
A diverse portfolio of that sort will not only save you from the losses incurred but also, you might be able to take advantage of the thriving energy sector. Thus, one of the benefits of mutual funds is that you can easily find diverse portfolios and gain superior returns.
2. Economies of Scale
We have come a long way from using old school filament bulbs to the new LED bulbs. Ever wondered how did these become so cheap that even the poorest households have LED bulbs to save power consumption?
This is an example of the economies of scale wherein with larger investment and greater production, you can bring down the ‘cost of production’. Thus, by pooling funds from several investors, mutual funds employ the fundamentals of economies of scale. The volume of their transactions helps save the cost of transactions.
3. Divisibility
An individual stock-picker can buy several stocks of lesser value in a company at once and be left with an odd sum of money in his account, while the advantage of investing in mutual funds is that your fund can be allocated to create an asset consisting shares of higher values instead of having to wait for several months, save and then invest.
4. Lastly, another perk is the professional management of your investment. The fund managers invest the funds into only a thoroughly researched portfolio.
So, besides considering the above advantages, you should still consider exploring more to understand your risk appetite. This approach will aid you in choosing the right funds to achieve your investment goals.