One of the biggest benefits of mutual funds is risk diversification. Every stock is subject to three types of risk – company risk, sector risk and market risk. Company risk and sector risk are unsystematic risk, while market risk is known as systematic risk. Mutual funds help investors diversify unsystematic risks by investing in a diversified portfolio of stocks across different sectors. While individual stocks have both unsystematic and systematic risks, mutual funds are only subject to systematic risk or market risk.
Investing in stocks and bonds requires considerable expertise and experience. You need to have knowledge of financial markets, industry sectors, individual companies and research expertise. A major advantage of mutual funds is that they are managed by professional fund managers who have the desired qualification, expertise and experience in picking the right stocks or other instruments to get the best risk adjusted returns. The fund managers are supported by the research team of the AMCs.
Lower transaction cost due to economies of scale is another advantage of mutual funds. Since mutual funds buy and sell securities in large volumes transaction costs on a per unit basis is much lower than what retail investors may incur if they buy or sell shares through stock brokers.
Mutual funds offer investors a variety of products to suit their risk profiles and investment objectives. Apart from equity funds, there are hybrid funds, debt funds, liquid funds and tax savings schemes etc. to suit different investment requirements. The benefits of investing in mutual funds is that you can invest in the appropriate product suitable for your specific needs and risk appetite.
Flexibility in terms of modes of investment and withdrawal is one of the advantages of mutual funds compared to other investment options. Investors can opt for investment modes like lump sum (or one time), systematic investment plans (SIP), systematic transfer plans (STP) and systematic withdrawal plans (SWP).
Mutual funds encourage investors to invest over a long period of time, which is essential to wealth creation. Furthermore, the advantages of mutual fund systematic investment plans or SIPs is that they encourage investors remain disciplined to meet their various financial goals.
One of the advantages of mutual fund investing is that you can meet various types of investment objectives like capital appreciation and income. Equity mutual funds can help you create wealth through capital appreciation, while debt mutual funds can generate income for you. Hybrid mutual funds can help you in both capital appreciation and wealth creation.
Lump sum is the traditional way of investing. In lump sum investing, you invest your entire amount in one go. The entire lump sum amount earns returns from the day the amount is invested till it is redeemed. Tactical lump sum investments also enable to take advantage deep market corrections. Over long investment tenures, the power of compounding is the maximum in lump sum. Lump sum investments are also preferred for short term investments, so that you can maximize your returns.
For investors seeking protection from unfavourable market tendencies while sustaining good returns, market-neutral funds meet the purpose (like a hedge fund). With better risk-adaptability, these funds give high returns where even small investors can outstrip the market without stretching the portfolio limits.
In SIP, you invest your savings in mutual funds at regular intervals e.g. monthly, fortnightly etc. When registering your SIP, you need to give a bank ECS mandate whereby a fixed amount will be auto-debited from your bank account at regular frequency (e.g. weekly, fortnightly, monthly etc.) specified by you and get invested in the scheme of your choice at prevailing NAVs.
Another biggest advantages of mutual funds is Systematic Transfer Plan (STP). It is a mechanism by which an investor is able to transfer a fixed or variable amount from one mutual fund scheme to another mutual fund scheme. If you are investing for your long term financial goals and at the same time, are concerned about short term volatility in the market, you can invest your capital in a low risk debt or money market (e.g. liquid) mutual fund and use STP to withdraw fixed amounts from your debt / money market mutual fund and transfer to equity funds on a regular basis over several months.
Systematic Withdrawal Plan (SWP) is a mutual funds facility using which you can draw fixed amounts from your mutual fund investment at regular intervals (e.g. monthly, any other interval as specified by the AMC). SWP works by redeeming the required number of units at prevailing NAVs to meet your SWP cash-flows. The SWP will continue as long you have sufficient unit balance to meet your cash-flows.
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