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3 reasons why you should invest in mutual funds

Last updated on: October 19, 2012 15:57 IST
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3 reasons why you should invest in mutual funds

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Noopur Runjhun

Investment is a tricky business. Most of the aam janta, till a couple of years ago gladly stayed away from anything that had anything to do with bulls and bears unless they were nicely caged and chained live specimens. A huge section of the masses, for the longest period of time equated stock markets with scams ala Harshad Mehta and considered it wise to stay away.

However, with a booming Indian economy that celebrated the advent of 21st century, markets became more and more open and accessible, quickly and effectively moving beyond the traditional perceptions.

This change has been extremely positive, not just in terms of macro benefits for the economy but also micro benefits for the individual investors. Amongst these numerous positives, diversification of investment tools is one of the most important benefits that accrued to the common investors.

Mutual funds are one of the many investment tools that are available for the investors that can be used to harness the market benefits with varying degree of risks.

Mutual funds, by design, have a lot of benefits for the common/lay/first time investors. Based on our interaction with Akosha regulars including consumers, agents and related finance veterans, we culled out the most straightforward reasons from basic investment wisdom.

We deliberately avoided complex reasoning and stuck to the basics of why any lay investor should consider mutual funds as an investment option.


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3 reasons why you should invest in mutual funds

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1. Easy to understand, easy to allocate

Mutual funds can be broadly divided into equity, debt and balanced funds. For any first time investor, if they are aware of these three categories and how they operate, allocation of investment as per their long term financial goals is fairly simple. 

For starters, equity funds are high risk, high return funds that invest directly in stocks and hence gain or lose directly from market fluctuations. Debt funds on the contrary are low risk, low return funds that primarily invest in debt instruments like government bonds, fixed deposits and approved private deposits. Balanced funds allocate resources to both stocks and bonds, striking a balance between risk and gains.


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3 reasons why you should invest in mutual funds

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2. Risk appetite based allocation to maximum benefit

In simpler terms, mutual funds allow investors to allocate their resources to various funds based on the extent of risk they are willing to take or capable of taking. A simple thumb rule -- if you want to stay invested for a long term (anywhere between 5 to 10 years), equity funds are your best bet because despite being high risk funds, equity funds are known yield rich returns to investors who remain invested in them for long enough. For people who can't afford that long a span (mostly retired individuals in later years of their lives), debt fund is the way to go.

Safer than their equity counterparts, they usually give a guaranteed return. Fixed deposits in banks serve similar purpose and there is usually no drastic difference between interest rates offered by debt funds and fixed deposits.

However, market cycle does have a role to play and debt funds can be used as a way to diversify the portfolio and avoid concentration of money in fixed deposits.

As an essential bottom line, mutual funds are NOT short term investments. If you don't plan to remain invested for three years or more, or if you are prone to impatience, mutual funds are definitely not for you.


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3 reasons why you should invest in mutual funds

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3. Systematic and disciplined investment, maximised gains

Systematic investment plans (SIPs) are the best feature of mutual funds. For the uninitiated, SIPs allow investors to distribute their investment into periodic (usually monthly) installments that are, in most cases, auto-deducted from the investor's account. This is very easy and manageable mode of investments, where investors don't need to spare bulk of their savings.

Besides, maintaining investment discipline, SIPs have a technical benefit in maximising the gains and neutralising the market fluctuations over a period of time. Simply put, when the market is low, your SIP amount shall fetch you a larger number of units as compared to when the market is on a high and the same amount shall fetch lesser number of units (because unit value or NAV fluctuates with the market), thus effectively neutralising the fall. The pre-requisite, however is the same -- you have to remain invested for a long term to secure the benefits.

There are plenty of other reasons why mutual funds are a preferred mode of investment. But as we mentioned, we have stuck to grandma's piece of wisdom for the lay investors. With experience, investors gain more knowledge about various instruments and market dynamics but these pointers are sufficient to get any investor started.


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Related News: NAV , SIP

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