Mutual funds is nothing but a fund created by different investors who pool-in their money, which later is used in purchasing different securities. This fund is managed by professionals who decides where to invest the funds and where to move the same at appropriate times. The investors are liable to profit & loss on pro-rata basis, subject to the underlying investment. This is roughly the overall concept of mutual fund, but why should you invest in mutual fund? Let’s see
1. Return base: Any investment decision is based on two basic question, i.e risk and return. Mutual fund are based on the compound interest principle, where the principle amount along with interest earned are clubbed on consistent basis helping in creation of wealth. Let us assume it with a monthly SIP of Rs 5,000.
Therefore, if you invest Rs 5,000 per month, then considering the average rate of return on the fund is 15% per annum, your value of investment grows 150% in fifth year and a whopping 375% in fifteenth year.
2. The anti-inflation drug: Burying money under mattress or stuffing in cookies jars will only help in saving money but not inflation. The power of money decreases every year, i.e a Rs. 10 note can help you buy a 1 apple today, but it won’t the same day next year. Mutual fund is that anti-inflation drug which through diversification keeps the inflation at bay. Equity based mutual fund reflect the progress of the economy, therefore if the country’s GDP grows at 5% then return hover around 12-13%.
3. Other options: Let us look at the comparison of different options with mutual fund.
4. Professional touch: It is true that somethings are better left with professional and it is apt when it comes to investment. Direct investment in stocks or equity requires years of knowledge and study in order to predict the upward or downward surge, and time your investment. In mutual fund that is not the case, as the funds are managed by experts who have deep knowledge about the market and its abilities. Therefore, mutual fund investments let you do your job without worrying too much about market trends.
5. Liquidity: Life is full of uncertainty, thus an emergency fund requirement should not receive a shock treatment of lock-in. Although certain funds attract lock-in but it is very minimum when compared to other investment avenues. Moreover mutual fund are extremely liquid in nature, as one may sell of certain units as per fund requirement at the current NAV and receive the amount in bank in maximum two working days. This partial liquidity does not affect the remaining fund or future investment, which continues as normal.
6. Tax-savings: A very important aspect in today’s date, as often many other tax saving option either provide a very long lock-in period or render a minimalistic return. Mutual fund acts a double edged sword where minimum lock-in with maximum returns are almost guaranteed. In addition to that, there is tax emption on liquidation for an amount up to Rs 1 lakh.
7. Diversification: One of the built-in aspects of mutual fund, as all eggs come into one basket. When buying stocks directly, one has to match its entire price, for example if one has to buy a maruti Suzuki shares he/she may have to pay 6919 (22nd Feb closing price) for just one share. Now in mutual fund even if SIP amount is as low as 500 Rs. Some fraction of that amount will certainly go in buying the Maruti Suzuki share as well, meaning a low amount of investment can still help in achieving better portfolio.
8. A fund for every need: Saying that mutual fund are highly risky is a myth, as these fund do not only concentrate on equity or stocks, but they also target low risk options such debt funds, or money market instruments. This gives the investors a wide range of options to choose from depending upon their age, objective and ability to take risk.
9. Wealth creation: Considering the fact that mutual funds employ the compounding interest formula, it is easy to say an inflation free, wealth is initiated once you start investing. One can have different targets like, son’s education or daughter’s marriage or retirement, where an amount let us say 22 lakhs is in mind in 10 years of time, he or she can build that by investing 9,600 every month in any fund which gives not less than 12% of annual return.
10. Easy to opt-in & opt-out: Minimum documentation and SIP process help enrolling of mutual fund become a breeze. One can also opt for lump sum investment at any time of the month or quarter. Exit option is even more easier as all you have to do is sell the required units any time and receive the money within two working days in your designated bank accounts.
There you go, mutual funds are the right way to save your hard earned money, as they take care of your future and you can live your present peacefully. Mutual funds are not entirely risk-free. However the amount of risk involved is very calculated, which always makes them the most attractive options among investors.
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