Mutual funds have been a trendy topic among all consumers, regardless of their interest in the financial markets. Mutual funds are one of the few financial instruments that provide inflation-beating returns to the investors. .
The functioning of a mutual fund is simple. Asset Management Companies (AMCs) receive money from lakhs of investors. This pooled money is subsequently invested in a variety of asset classes as per the fund’s investment objective. A mutual fund can invest in stocks, bonds, government securities, and debentures etc.
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Here are some reasons to invest in mutual funds.
1) Direct and Regular Plans: If you're considering investing in mutual funds, you should be aware of the differences between direct and regular plans. Direct plan enables you to purchase mutual fund schemes directly from the fund house. In this case, your expense ratio is less. If you prefer to invest in mutual funds through an agent or broker, you can choose the regular plan. However, the expense ratio of regular plans is higher than direct plan.
2) Lumpsum and SIP: There are two ways to invest in mutual funds Lumpsum, which is a traditional method, and Systematic Investment Plan, or SIP. The lumpsum technique is appropriate for investors who have spare cash that they may not use, as it allows them to invest it all at once. SIPs allow investors to invest a little amount of money each month. The mutual fund's Net Asset Value (NAV) determines the buying and selling.
3) Product Variety: Mutual fund houses offer a broad array of schemes. Mutual fund schemes are developed with the investor's objectives and risk tolerance in mind. Aside from the well-known equity fund, there are other options such as hybrid funds, debt funds, tax savings (ELSS), liquid funds, and so on. Different schemes are appropriate for different types of investors.
4) Long term Goal: If you wish to save for retirement, pay for your children's education, or build a large fortune for yourself, investing in mutual funds, works like a charm. When you invest for the long term, mutual funds provide capital appreciation. Due to market volatility, investing in mutual funds for a short term horizon is not ideal.
5) Discipline Investment: Investment in mutual fund encourages investors to take a long-term approach to investing. Investors frequently fail to build wealth owing to a lack of discipline in their saving habits. But with the help of the SIP method in mutual funds, investor discipline has become easier. It has taken the emotion out of investing, so investors don't have to sit on the edge of their seats during bear and bull markets.
These are a few factors to think about when investing in mutual funds. However, before investing in any mutual fund scheme, you must first determine your objectives and risk tolerance, and then choose the appropriate scheme for you.
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