Over the last ten years the mutual fund industry has seen manifold growth. The reasons for this kind of hyper growth are not very hard to imagine: investors find that mutual funds are a great way of multiplying their money.
The five main reasons why one should invest in mutual funds are as under:
1. Professional fund managers
All the mutual funds are managed by professional fund managers. These fund managers have in-depth knowledge about:
The holistic view, which these managers take, has an edge over others. They invest funds into companies/stocks, based on their assessment of how fundamentally sound a decision is. They are not usually influenced by the general market sentiment.
2. Diversified risk
All mutual funds, be they equity-oriented or debt-oriented ones, invest in a number of either companies stock or bonds. This way the performance of the fund is not depended on the performance of any one particular investment decision but depends on the overall performance of all the decisions.
This way the risk is spread over a large number of stocks or bonds. Besides, the number of unitholders is fairly large, due to which the risk is borne by a large number of investors.
3. Sound investment strategy
The performance of any mutual fund cannot be measured over a short period (i.e. on a weekly or fortnightly basis) of time. This has done over a reasonable length of time (i.e. on a 3-month or 6-month basis).
The main reason for this is that the mutual funds do not indulge in speculative transactions and hence the corpus of the fund remains intact. Their investment decisions are based on sound and fundamental reasoning.
A lot of research and reasoning takes place before any investment is decision is taken.
4. Reshuffling of the portfolio
Fund managers monitor the markets on a daily basis, which may not be possible for a retail investor.
This way the managers keep on entering in to new counters (i.e. buying new stocks) which they feel are good for the fund and keep on exiting from those counters which they feel are either now overvalued or due to some other factors because of which staying invested in that counter may not be desirable for the fund.
This way the managers keep on reshuffling their portfolio on a continuous basis because of which they are able to maximise their profits by spotting the right opportunity at the right time.
5. Ease with which one can enter and exit the fund
Most of the schemes launched by the fund houses today are all open-ended schemes. Hence an investor can enter and exit the fund at any time he so wishes.
As a result mutual fund becomes a good investment options even for those who have short-term liquidity.
Once the investor is sure that his investment through the mutual fund route is relatively much safer than he himself investing it elsewhere, the next step for him is to identify the right fund house with an appropriate scheme which suits his investment need.
The author is a chartered accountant, currently working with a finance company.