Is It Wise To Invest In A Mutual Fund?

The common refrain among investors is, whether it is really wise to invest in mutual funds. After all, you are relying on the judgment and discretion of an individual fund manager and you really cannot be sure of whether they will do a good job or not. Also, you are going to pay for the expenses of the fund management too. Does it really make investment sense after all these factors?

Actually, there are 6 reasons why mutual funds are a wise decision. Let us look at these key drivers that make mutual fund investing a wise decision.

That is where mutual funds really score. You do not have to worry about what equities to buy and what to sell. The fund manager takes care of all that. Additionally, the fund manager is also under pressure to beat the index on a long-term basis and hence they put their best foot forward in terms of managing funds. The outcome is that you have a product in equity funds that actually create wealth over the long run. You just need to focus on the discipline and the systematic approach to investing in an equity fund and that rest follows logically.

That is one of the key advantages that mutual funds offer. Let us look at this aspect in two different ways.?Firstly, you have a wide choice of fund classes. You can invest in equity funds, debt funds, liquid funds, balanced funds, gold funds etc. Therefore, for every risk profile, you have a structured product that is available. Even within the category of, say, equity funds you get the added benefit of diversification. The fund manager creates a portfolio of stocks that are spread across sectors and themes. This eliminates the concentration risk, which is likely when you buy equities directly. This reduces overall risk.

Whether you are holding an equity fund, debt fund or a liquid fund, mutual funds as an asset class are extremely liquid. You can monetize your equity fund holdings in T+3 days. Debt funds and liquid funds can be monetized in T+2 day itself. You do not have to worry about basis risk and market liquidity. You can submit your redemption request either online or offline and the same can be processed seamlessly. In fact, liquid funds are almost as liquid as a bank savings account. It is also possible to get funding against your mutual fund units subject to the applicable haircut.

This is a key point that makes mutual fund investment, a wise decision. When you create your financial plan, you identify long-term and medium-term goals. Then you need to tag assets for these future goals. The question is what assets to tag? Mutual fund SIPs are your best bet. For short-term goals, you can use liquid fund SIPs, for medium-term goals you can use debt funds or balanced funds and for long-term goals you can rely on equity funds. You just start an SIP, tag the SIP to the goal and all you need to do is monitor your fund performance against your goalposts. It is that simple!

If you were to go through the list of funds that are on offer, you will almost find an answer to every need. Within equity funds, you have diversified funds, index funds, and thematic funds. Within hybrid funds, you have balanced funds, MIPs and arbitrage funds. Debt funds category includes liquid funds, income funds, gilt funds, FMPs, credit funds etc. In short, you have a product to answer each requirement and each aspect of your risk profile. Mutual funds also go a step ahead. They also offer you solutions for retirement and child education via fund of funds (FOFs). The variety is there and is up to you to take your pick.

Essentially, mutual funds are all about expert guidance and assistance. If you try to manage your portfolio and financial plan yourself, then you are going to make a hash of it. Just crystallize your goals, tag appropriate SIPs to each goal and just let the fund manager do the job. The fund manager, after all, has the benefit of many man-years of experience, high-end technology support, corporate access, market information and research support. As a mutual fund investor, you derive the benefit of all of that.

The answer is that mutual funds are a wise decision. The earlier you start the better!