What Makes Mutual Funds Click as an Investment Option

  • 16 Feb 2024
  • Read 7 mins read

What makes mutual funds as an investment really click?

Mutual funds in India have grown exponentially in the last 8 years. It has grown into a $500 billion AUM industry. Even in the US, the real momentum to mutual fund investing came only after the AUM crossed $1 trillion, so the big story may be yet to come. It is not just about size but also about spread. Today, mutual funds have over 13.5 crore folios (mutual fund accounts unique to an AMC). Out of these, SIPs account for 5.5 crore folios with monthly SIP flows topping Rs12,000 crore on a consistent basis.

That brings us to a fundamental question. Do mutual funds help you to invest better in the markets, and if so how?

 

You can spread your risk smartly

As a direct equity investor, there are too many risks like macro risks, industry risks, company risks, volatility risk etc that you are exposed. It may be practically impossible for most investors to sift through this maze of risks and arrive at an investment decision. One way is to diversify by spreading your money across various asset classes (especially the ones with low correlation). Here again you are limited by your capital. Mutual funds offer a smart alternative to auto diversify your portfolio.

Fractional ownership 101

Everyone is talking about fractional ownership. You may be hesitant to pay Rs86,000 to buy one share of MRF. You can do so for a fraction of the amount through mutual funds. Mutual funds offer the best way to let the experts manage a large portfolio smartly and share the benefits with you through the issue of units. Today, it is possible to participate in an NFO with Rs5,000 and in a SIP with Rs500. It is as simple as that!

Get the best minds working for your

A mutual fund is an institutional set up. There are fund managers, a CIO, number of dealers and they are getting the best deals for your from the brokers. The expert fund managers with years of experience bring in-depth research skills, market knowledge and the power of networks to your portfolio. It is like the best minds are working for you and trying their best to enhance your returns and wealth.

An array of products to choose from

The kind of choice that mutual funds offer, you just cannot imagine anywhere else. You can choose between equity funds, debt funds, gold funds and liquid funds. Within debt funds, you can choose between long duration and short duration. Within equity funds, you have a choice of large cap funds, mid-cap funds, sectoral funds, thematic funds, index funds and multi-caps. In short, you have multiple opportunities to reduce your risk and enhance risk-adjusted returns.

Look for a needle in the haystack or buy the haystack

The legendary Jack Bogle of Vanguard Funds famously said, “Why look for a needle in a haystack, when you can buy the haystack?” He was referring to the merits of passive investing (investing through index funds and index ETF). Today, nearly 14% of the total assets under management in India are passive and growing rapidly. Mutual funds offer a low cost alternative in the form of passive investing to investors.

Flexibility is the key in mutual funds

One of the biggest advantages in mutual fund investing is the flexibility that it offers. 

For those who do not want to risk investing lump-sum, they can opt for systematic investment plans (SIPs). These are more disciplined and also conducive to long term wealth creation. In case you want to make a lump-sum look like a SIP, that can be done through a systematic transfer plan (STP). Here a fixed sum can be swept out of a liquid fund into an equity fund on a regular basis. For retired persons, systematic withdrawal plans (SWPs) offer a smart way of taking out returns and principal in a systematic manner for fixed target pay-outs. SWPs are also more tax-efficient than dividend plans.

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Mutual funds sync best with long term goals

The best way to start investing in mutual funds is by starting with your long term goals and medium term goals. You have mutual fund choices to peg on to long term goals and also to short and medium term goals. Due to their flexibility and versatility, mutual funds are best positioned to invest for achieving financial goals in a systematic manner.

Apart from the above, there are also other factors that work in favour of mutual fund investing. For instance, they are liquid and also transparent in terms of disclosures. In most cases, mutual funds are also more tax efficient. But the biggest justification for investing in mutual funds is the comprehensive financial planning support that they provide. In that, mutual funds are almost matchless!