Why Mutual Funds are best way of investment
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Welcome to Financial House......your place to Learn and Earn
updated on 15 Aug 2016
When considering investment opportunities, the first challenge that almost every investor comes across is various investment options like stocks, bonds, shares, money market securities, bank fixed deposit etc. Each and every investment option has got its merits and need to be selected based on our own requirements.

For example - If you are safe investor and don’t want to take risk and expect low to moderate returns then you can prefer bank fixed deposit or corporate fixed deposit in short safe investments with low returns, for more information about this you can visit this page
As this section is dedicated to mutual funds so we will discuss in detail about investments in mutual funds.

History has shown that investment in stocks and mutual funds provided excellent returns in long run with risk and high returns. But it is also true that if investor can hold the investment in mutual funds for long term then risk is minimized and returns are increased.
In the following section we will mention why investors and especially new comers to investment and stock market should consider mutual funds over others to achieve their investment goals

Mutual funds allow investors to put their money for a diversified selection of securities, managed by a professional fund manager.

In mutual funds there are various options like as shown in below chart.
Different Types of Mutual funds

I. Open-Ended - This scheme allows investors to buy or sell units at any point in time. This does not have a fixed maturity date.

1. Debt/ Income - In a debt/income scheme, a major part of the investable fund are channelized towards debentures, government securities, and other debt instruments. Although capital appreciation is low (compared to the equity mutual funds), this is a relatively low risk-low return investment avenue which is ideal for investors seeing a steady income.

2. Money Market/ Liquid - This is ideal for investors looking to utilize their surplus funds in short term instruments while awaiting better options. These schemes invest in short-term debt instruments and seek to provide reasonable returns for the investors.

3. Equity/ Growth - Equities are a popular mutual fund category amongst retail investors. Although it could be a high-risk investment in the short term, investors can expect capital appreciation in the long run. If you are at your prime earning stage and looking for long-term benefits, growth schemes could be an ideal investment.
3.i. Index Scheme - Index schemes is a widely popular concept in the west. These follow a passive investment strategy where your investments replicate the movements of benchmark indices like Nifty, Sensex, etc.

3.ii. Sectoral Scheme - Sectoral funds are invested in a specific sector like infrastructure, IT, pharmaceuticals, etc. or segments of the capital market like large caps, mid caps, etc. This scheme provides a relatively high risk-high return opportunity within the equity space.

3.iii. Tax Saving - As the name suggests, this scheme offers tax benefits to its investors. The funds are invested in equities thereby offering long-term growth opportunities. Tax saving mutual funds (called Equity Linked Savings Schemes) has a 3-year lock-in period.

4. Balanced - This scheme allows investors to enjoy growth and income at regular intervals. Funds are invested in both equities and fixed income securities; the proportion is pre-determined and disclosed in the scheme related offer document. These are ideal for the cautiously aggressive investors.

II. Closed-Ended - In India, this type of scheme has a stipulated maturity period and investors can invest only during the initial launch period known as the NFO (New Fund Offer) period.
1. Capital Protection - The primary objective of this scheme is to safeguard the principal amount while trying to deliver reasonable returns. These invest in high-quality fixed income securities with marginal exposure to equities and mature along with the maturity period of the scheme.

2. Fixed Maturity Plans (FMPs) - FMPs, as the name suggests, are mutual fund schemes with a defined maturity period. These schemes normally comprise of debt instruments which mature in line with the maturity of the scheme, thereby earning through the interest component (also called coupons) of the securities in the portfolio. FMPs are normally passively managed, i.e. there is no active trading of debt instruments in the portfolio. The expenses which are charged to the scheme, are hence, generally lower than actively managed schemes.

III. Interval - Operating as a combination of open and closed ended schemes, it allows investors to trade units at pre-defined intervals.
What are the Benefits of investing in Mutual funds
• Professional Investment Management
Mutual funds hire full-time, high-level investment professionals. Funds can afford to do so as they manage large pools of money. The managers have real-time access to crucial market information and are able to execute trades on the largest and most cost-effective scale.

• Diversification
Mutual funds invest in a broad range of securities. This limits investment risk by reducing the effect of a possible decline in the value of any one security. Mutual fund unit-holders can benefit from diversification techniques usually available only to investors wealthy enough to buy significant positions in a wide variety of securities.
• Low Cost
A mutual fund let's you participate in a diversified portfolio for as little as Rs.5,000/-, and sometimes less. And with a no-load fund, you pay little or no sales charges to own them.

• Convenience and Flexibility
You own just one security rather than many, yet enjoy the benefits of a diversified portfolio and a wide range of services. Fund managers decide what securities to trade, collect the interest payments and see that your dividends on portfolio securities are received and your rights exercised. It also uses the services of a high quality custodian and registrar in order to make sure that your convenience remains at the top of our mind.

• Personal Service
One call puts you in touch with a specialist who can provide you with information you can use to make your own investment choices. They will provide you personal assistance in buying and selling your fund units, provide fund information and answer questions about your account status. Our Customer service centers are at your service and our Marketing team would be eager to hear your comments on our schemes.

• Liquidity
A mutual fund let's you participate in a diversified portfolio for as little as Rs.5,000/-, and sometimes less. And with a no-load fund, you pay little or no sales charges to own them.

• Transparency
You get regular information on the value of your investment in addition to disclosure on the specific investments made by the mutual fund scheme.
Beat Inflation
Mutual Funds help investors generate better inflation-adjusted returns, without spending a lot of time and energy on it.While most people consider letting their savings 'grow' in a bank, they don't consider that inflation may be nibbling away its value.

Suppose you have Rs. 100 as savings in your bank today. These can buy about 10 bottles of water. Your bank offers 5% interest per annum, so by next year you will have Rs. 105 in your bank.

However, inflation that year rose by 10%. Therefore, one bottle of water costs Rs. 11. By the end of the year, with Rs. 105, you will not be able to afford 10 bottles of water anymore.
Mutual Funds provide an ideal investment option to place your savings for a long-term inflation adjusted growth, so that the purchasing power of your hard earned money does not plummet over the years.

Investors have the advantage of getting their money back promptly, in case of open-ended schemes based on the Net Asset Value (NAV) at that time. In case your investment is close-ended, it can be traded in the stock exchange, as offered by some schemes.

Higher Return Potential
Based on medium or long-term investment, mutual funds have the potential to generate a higher return, as you can invest on a diverse range of sectors and industries.

Safety &Transparency
Fund managers provide regular information about the current value of the investment, along with their strategy and outlook, to give a clear picture of how your investments are doing.

Moreover, since every mutual fund is regulated by SEBI, you can be assured that your investments are managed in a disciplined and regulated manner and are in safe hands.

Every form of investment involves risk. However, skilful management, selection of fundamentally sound securities and diversification can help reduce the risk, while increasing the chances of higher returns over time.