Mutual funds offer several advantages, with the primary one being wealth creation through diversification.
As a new investor, it is quite a confusing and overwhelming scene at first, your mind is boggled by the various mutual fund schemes on offer and the benefits that each of them offers. But cutting aside the jargon and most of their technicalities, the point to remember is that mutual funds offer an ideal opportunity for long term wealth creation.
Consider the advantages of investing in mutual fund plans to kickstart your journey towards financial independence:
Risk reduction through diversification.
The adage ‘Do not put all your eggs in one basket’ certainly holds true in terms of your investment portfolio. It simply means that one mustn’t plug in all their money in one kind of instrument or asset class. Mutual fund plans offer the advantage of a diversified portfolio with varying vesting periods and maturities.
The mutual fund schemes are further allocated as per industry, sectors and markets, so as to offer varying returns in as per the market performance. This allows for risk mitigation: if one asset class performs poorly, its potential losses are covered by others doing well.
Several options to invest and redeem
Not only do mutual fund schemes offer variety for different kinds of investors, they are also easy to invest in and also withdraw from. You get the freedom to invest in a large sum of money by starting a ULIP, or opt for incremental equated payments every month with a SIP, or get a regular payback via an STP.
Many mutual fund plans also allow you to switch between one fund to another based on your risk appetite and goals. Ultimately, they help you build wealth over the long run.
Lower operational, transaction and redemption costs
Mutual fund plans normally trade in high volumes on the markets. This way, the daily/monthly transaction costs for these securities in high volumes is much lower since they are measured in bulk. In turn, you are charged less per unit of the scheme.
Operational costs of the scheme are also quite low. However, you get these benefits primarily when you trade via a fund house instead of a private broker – the latter will post higher charges for online purchase and monitoring.
Long term gains instead of short-term trading losses.
The primary benefit of investing in mutual fund investment schemes is that they seek a longer investment horizon – this ensures that rate corrections can take place seamlessly as the days go on. This is in variance with short term trading in volatile markets, where the potential for incurring losses is correspondingly higher.
Mutual funds help you stay the course without reacting constantly to market changes.