Why do people use mutual funds?

Why do people use mutual funds?

Why do people use mutual funds?

Body:

Mutual Funds have emerged as a favorite investment vehicle as it has many advantages over other forms and avenues of investing, particularly for the investor who has limited resources available in terms of capital and ability to carry out detailed research and market monitoring.

Portfolio Diversification

Investment in a mutual fund enables investors to hold a diversified investment portfolio, which would otherwise require big capital.

Professional Management

The investment management skills, along with the research into available investment options, ensure a much better return than what an investor can manage on his own.

Reduction in transaction costs

Mutual funds are excellent for the new investors because you can invest small amounts of money and you can invest at regular intervals with no trading costs. Stock investing, however, carries high transaction fees making it difficult for the small investor to make money. By pooling investors' monies together, mutual fund companies can take advantage of economies of scale. With large sums of money to invest, they often trade commission-free, a benefit passed on to investors.

Reduction/Diversification of risk

An investor in a mutual fund acquires a diversified portfolio no matter how small his investment. Diversification reduces risk of loss as compared to investing directly in shares or debentures where all the risk of potential loss is the individual investor's.

Liquidity

An investor in a mutual fund can liquidate the investment by selling the units to the fund if it is an open-ended fund, or by selling the units in the stock market if the fund is close-ended.

Convenience and flexibility

Mutual fund management companies offer investor services that a direct market investor cannot get. Within the same fund family, investors can easily transfer/switch their holdings from one scheme to another. They can also invest/withdraw their money at regular intervals in most open-ended schemes. Investors can buy and sell their units through the internet or email or other communication means. They also get updated market information from the funds.

Safety

Mutual funds industry is well regulated; all funds are registered with SEBI, which lays down rules to protect the investors.

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