Gone are the days when people completely relied on conventional investment schemes for achieving their life’s financial goals. Our grandparents and even our parents always ensured that whenever they received extra income through bonuses or any other source, they would always invest that money in bank fixed deposits or post office deposits. And they were right to some extent. Back in the day, traditional investment avenues like bank FDs offer decent fixed interest rates. However, recently interest rates in India have witnessed a slump and are all time low. Although such conventional schemes offer guaranteed returns, the current interest rate on such schemes stands at 4% to 5%. Targeting long term financial goals that require one to achieve a commendable corpus may seem impossible. A 5% fixed interest rate means that if you invest Rs 1000 every year for the next five years, your total investment will be Rs. 5000 and the interest earned would be only Rs. 250. On the other hand, market linked schemes like mutual funds are offering returns that may span anywhere between 10% to 15%.
That’s not it. Here are five solid reasons why you should consider investing in mutual funds:
- Mutual funds offer diversification
One major reason why a large number of investors consider equity funds over direct stock market investment is that direct stock investments invite concentration risk. On the other hand, an equity scheme invests in a basket of such securities thus giving investors exposure to multiple such stocks through a single investment. Portfolio diversification in mutual funds is not restricted to equity funds. Even if you invest in debt mutual funds, these funds invest in fixed income securities and debt related money market instruments like debentures, corporate and government backed securities, commercial papers, treasury bills, etc. A well diversified portfolio does not only avoid concentration risk but also allows the overall investment to generate better risk adjusted returns.
- Active and passive management
There are a plethora of options under the mutual fund gamut and investors, based on their investment objective and risk appetite can decide whether they want to invest in an actively managed mutual fund or passively managed mutual fund. Active funds are actively managed by the portfolio manager who is constantly involved in buying and selling securities and ensuring that the portfolio is able to favor the lucrative market conditions. On the other hand, passive funds are designed to mimic the performance of their underlying index with minimum tracking error. Passive funds have a low expense ratio since the fund manager has very little say in how the portfolio performs and generates returns.
- Choose from growth and dividend
Mutual funds come in growth and dividend options. In the growth option, the returns earned by the scheme are invested back inside it and over the long term this can increase the Net Asset Value (NAV) of the fund. On the other hand, the dividend option is ideal for investors who seek regular income. Since the dividends distributed by the scheme are deducted from the scheme’s NAV, this may lower the NAV in the future.
- SIP option
Most mutual funds have the option of a Systematic Investment Plan(SIP). SIP allows investors to save and invest a fixed sum at periodic intervals. Investors can start their mutual fund investment journey with an amount as low as Rs 500 per month.
- Achieve financial goals
If you have any short term goals like buying a car, renovating the house, or any long term goals like building a commendable retirement corpus, securing your child’s financial future, or any goal that needs a wealth creation plan, you can target these goals through different mutual fund schemes.