Mutual funds are a favourite product for a lot of investors, for various reasons. But there are still many who need a nudge to step into the game and start investing. In this article we will list out the right reasons for you to start investing in mutual funds.
Before that, let us take a look at the basics like how mutual funds work, how to invest in mutual funds and what are the different types of mutual funds.
Basics of Mutual Funds
Mutual funds work by collecting money from a number of investors, which is managed by an individual with the goal to gain returns on that money. Mutual funds are offered by an Asset Management Company (AMC), for example, SBI mutual fund, Reliance Mutual Fund and HDFC Mutual Fund. How can we invest in mutual funds? Mutual fund investment can be done in multiple ways, either offline or online. You can go directly to the AMC to start an investment, or go online on their website to make a transaction. You can also go to a financial adviser, broker or an agent to make an investment. In this case, you will pay a share of your money as commission. Alternatively, you can go to online platforms like Groww which allows you to invest in mutual funds free of cost. All you need is the required documents and a bank balance equal to the chosen amount.
Types of Mutual Funds
There are different categories of mutual funds depending on the asset class, risk, time horizon and so on. The regulatory body in India, SEBI has categorized mutual funds into five. Each of them have several subcategories. An interesting fact about mutual fund types is that each mutual fund have two different schemes to offer an investor: direct and regular. These decide how much expense ratio, that is the fee you pay for managing your money, of the mutual fund. For different mutual funds, the expense ratio varies, and the investor is in control of the decision whether they should invest in direct or regular.
Why Invest in Mutual Funds?
Here are a few benefits of mutual funds which make mutual funds important.
- Ease of Investment
In investment, mutual fund is the byword for convenience. With the evolution of Fintech platforms, investing in mutual funds is a matter of few clicks. Link your bank account, set up a systematic investment plan or do a one time transaction. Your money is invested, and you become an investor.
Because there are so many types of mutual funds available, every investor has an abundance of choice of mutual funds. These vary in terms of risk, investment goals, asset class, fund house and so on.
More than seeking rewards in the form of dividends, shares have become all about demand and supply. Buying and selling is an important factor that adds to the convenience that mutual funds offer. Liquidity is the technical term for how fast you are able to buy and sell. Mutual funds are one of the most liquid investments available.
- Professional Management
The assets in a mutual fund is managed by a professional who has experience managing funds. Their expertise is especially useful when the market is volatile and changing rapidly. Best performing mutual funds have a good management team that understands the market as well their own goals.
- Systematic Investment Plan
Among the factors that make mutual funds the most attractive is systematic investment plan (SIP). A SIP allows you to become an investor at amounts that are unbelievably small. What makes SIP convenient is that they are affordable and makes you a disciplined investor in a few clicks. Similarly, you can also withdraw the rewards of your investment in a systematic, progressive manner. If you do not wish to withdraw all your investments at once but would like to enjoy some benefits periodically, Systematic Withdrawal Plan (SWP) allows you to do exactly that. With an SWP, a selected amount is automatically withdrawn from your investment and deposited in your account at regular intervals. To calculate your SWP amount, use an SWP Calculator.
If you are still wondering why mutual funds are important, talk to an investor who knows how to invest in mutual funds. Keep in mind, no matter what you hear, do your own research before investing.