A Mutual Fund is a professionally managed investment fund that pools money from various investors and invests them in a portfolio of securities in order to generate returns for its investors. Based on their contribution, investors are allocated 'shares' in the fund known as 'units'.
This post sums up the advantages of investing in a mutual Fund.
1. Professional Fund Management
Your investments are managed by professional Fund Managers who have years of experience in buying and selling securities. Decisions regarding "what or when to buy or sell" are taken care of by these professionals.
For most retail investors who do not have much knowledge about or the time to invest into the securities market, Mutual Funds provide a great investment option.
2. Lower Transactions costs
You are charged a 'brokerage fee' every time you buy or sell securities on your own account. While brokerage rates vary for one broker to another, the bottomline is that such fees eat into your profits.
However, since Mutual Funds buy or sell securities in bulk, they are in a better position to negotiate lower brokerage rates from the brokerage houses. This goes with the saying "The power of bargaining lies in buying anything wholesale."
3. Low Minimum Investment
With a low minimum investment criteria, Mutual Fund investments are open to all.
4. Systematic Investment Plans
Systematic Investment Plan (SIP) is an option where you invest a fixed amount in a mutual fund scheme at regular intervals. Apart for the fact that they are a more disciplined approach to investing, SIPs help you reach your financial goals faster by taking advantage of 'cost averaging' and the power of compounding.
5. Various Fund Choices
Mutual Funds offer various fund choices to their investors depending upon their risk appetite. These range from pure equity or debt funds to balanced funds (that invest in both debt and equity securities in varying proportions). There are also liquid funds that invest primarily in money market securities.
Mutual Fund schemes offer liquidity to investors by offering various exit options. While open ended schemes can be redeemed on any business day, units in a close ended fund can be bought or sold through a stock exchange.
Note: Be mindful of the fact that certain open ended Mutual Fund schemes charge an 'exit load' when redemption is made before a certain period of time.