A mutual fund is an investment scheme owned by a professional asset management team. These teams work to bring people who invest in securities such as bonds etc, together. Therefore, a mutual fund becomes an investment vehicle which is in the form of a collective fund.
- Mutual funds are highly liquid. You can easily sell off mutual funds whenever you want without much change in their value.
- Choosing to invest in mutual funds means that a single investor can participate in different types of asset classes and industries sectors at different costs.
- Mutual funds can be utilised in a number of ways. One could invest in a single fund or multiple.
Mutual funds are different from stocks. Mutual funds can be considered as a pool of stocks, where money from several investors is invested. On the other hand, a stock is a part of ownership in a company. Purchasing a share implies purchasing some ownership in that company. Stocks are managed by the investor himself, whereas mutual funds are handled by a professional management team. Stocks are more of a direct investment whereas mutual funds constitute an indirect investment.
Which begs the question - why should you invest in mutual funds over other forms of investments?
Benefits Of Investing In Mutual Funds
The benefits of investing in mutual funds are plenty, and some of them can be critical to your selection when starting your investments.
- Easy access: There are a number of options through which the purchase of mutual funds can be made. These are online brokerage firms, insurance companies, banks, no-load mutual fund companies etc.
- High liquidity: Liquidity refers to the ease of getting funds in and out in times of need. Mutual funds are highly liquid. You can easily sell off mutual funds whenever you want without in their value. The parameter that needs to be taken care of is that unlike other forms of investment which can be sold at any hour of the day, mutual funds can only be transacted once per day after their Net Asset Value (NAV) has been calculated. A mutual fund can be purchased or sold any time during the day. The price at which a mutual fund is sold will be subject to its NAV of that particular day.
- Diversification of funds: Choosing to invest in mutual funds means that a single investor can participate in different types of asset classes and sectors at different costs.
- Professional management of funds: Unlike other forms of investment, where an investor directly deals with his/her investments, in case of mutual funds, all investment needs are taken care of by a professional management team in the most cost-effective way. This saves a lot of the investor’s time and provides the required technical expertise so that he/she makes informed decisions. The team carefully researches and analyzes all the available options before investing.
- Flexibility of investing: Mutual funds can be utilised in a number of ways. One could invest in a single fund or multiple. There are a number of investment strategies one could chose from. For example: retirement plans, dividends, short term/ long term savings etc.
- The benefits of investing in mutual funds are plenty, and some of them can be critical to your selection when starting your investments.
- In case of mutual funds, all the investment needs are taken care of by a professional management team in the most cost-effective way.
As is the case with any form of investment, there are risks involved with mutual funds too. You should carefully analyse all the options available to you before making an investment. You might need to incur some expenses with respect to transaction charges, withdrawal penalties etc. Nonetheless, the benefits outweigh the risk, so make an investment only after a careful analysis.