(Newswire.net — December 30, 2021) —
Introduction
There are multiple stock options in the market today, such as equity, bonds, government securities, money market instruments, and more. If you are a beginner or do not have knowledge regarding the stock market, then choosing the right stocks becomes a challenge. Further, the right stocks will align with an investor’s financial goals and risk appetite. Hence, analyzing everything as a whole is crucial when investing. This is where mutual fund investments come into play. It helps the investor earn returns by investing in professionally managed securities or assets. Now let’s examine mutual funds in more detail.
Mutual funds investment: What is it?
Founded in 1882 under the Indian Trust Act and regulated by SEBI, mutual funds have gained popularity among investors. A wide array of products has attracted a growing number of retail investors to this industry. Once the investors’ money has been collected, it is invested in a variety of securities such as stocks, gold, and debt. Investments are handled by professional fund managers with expertise in stock market analysis. The goal is to create wealth or generate returns over time for investors. Risk is inherent in every investment, including mutual funds. However, the online mutual fund calculator allows investors to calculate the expected returns, including the associated risks.
What are the pros and cons of investing in mutual funds?
Every investment has its perks and disadvantages. A prudent investor is the one who analyzes both and then decides whether to invest in the same. Following are some advantages and disadvantages of investing in mutual funds :
Advantages
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Risk diversification
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Mutual funds invest in a variety of stocks, offering different returns and risks, which reduces the overall portfolio risk during market volatility. One stock’s return may cut the losses of another, reducing the overall loss.
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Affordable
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Investors usually do not have sufficient capital to invest in multiple stocks. The mutual fund industry provides investors with access to multiple stocks across different sectors that are professionally managed at a nominal fee. Furthermore, mutual funds have low operating expenses or expense ratios.
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Professional assistance
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To earn the best returns on a mutual fund investment, the portfolio should be rebalanced continually according to market movements. As a result, investors may not have the needed skills or time to devote to the task. It is in such cases that the expertise of the managers of the mutual funds becomes invaluable.
Disadvantages
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Lower profits
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If an investor invests in equity stock, they are doing so with the intention of earning high returns. The risk is reduced in mutual funds, but to reduce the portfolio risk, low return funds may be invested. Hence, the overall return of a portfolio may be lower than that of equity stocks.
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Exit charges
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Investors who invest in close-ended mutual fund schemes may incur fees if they wish to liquidate their money before the maturity date. The same goes for ELSS (equity-linked savings schemes) funds. Hence, lock-in options should be carefully reviewed.
What to consider before investing in mutual funds?
Investing in mutual funds is very convenient, whether you do it as a lump sum or through a systematic investment plan. The registration process is simple and quick. However, there are a few factors investors need to consider before choosing a mutual fund:
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Investment objective
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The market offers a variety of mutual fund schemes with different investment objectives, such as wealth management, retirement planning, and so on. Each scheme carries different risks. Hence, an investor needs to understand their risk appetite, personal financial goals and invest accordingly.
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Liquidity requirement
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How soon an investor requires funds? Whether it’s emergent? All these questions need to be considered. In open-ended mutual funds, investors can redeem them anytime. However, this may not be an option for close-ended mutual fund schemes.
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Understand fees and charges
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When investing in mutual funds, it is important to consider all the costs involved. A mutual fund’s expense ratio indicates the fund’s overall operational costs. Different mutual funds have different expense ratios. A higher expense ratio does not guarantee a better fund performance. A mutual fund calculator can be used to estimate the reasonable return post these expenses.
Final thoughts
After reading the above article, you will have a fairly good idea of what mutual funds are all about. Despite the apparent appeal of these investment options, investors need to keep a disciplined approach. If there are any questions or doubts, investors should consult their financial advisors. In addition to using an online mutual fund calculator to estimate returns, investors may consult financial advisors online to select the right investment.