Saturday, November 15, 2008

Benefits of Mutual Funds

· Affordability A mutual fund invests in a portfolio of assets, i.e. bonds, shares, etc. depending upon the investment objective of the scheme. An investor can buy in to a portfolio of equities, which would otherwise be extremely expensive.

· Diversification It simply means that one must spread their investment across different securities (stocks, bonds, money market instruments, real estate, fixed deposits etc.) and different sectors (auto, textile, information technology etc.). This kind of a diversification may add to the stability of returns.

· Variety Mutual funds offer a tremendous variety of schemes. It offers different types of schemes to investors with different needs and risk appetites and it offers an opportunity to an investor to invest sums across a variety of schemes, both debt and equity.

· Professional Management When one person buys in to a mutual fund, they are handing their money to an investment professional that has experience in making investment decisions.

· Regulations Securities Exchange Board of India (“SEBI”), the mutual funds regulator has clearly defined rules, which govern mutual funds. These rules relate to the formation, administration and management of mutual funds and also prescribe disclosure and accounting requirements. Such a high level of regulation seeks to protect the interest of investors.

· Liquidity In open-ended mutual funds, one can redeem all or part of their units any time they wish. Some schemes do have a lock-in period where an investor cannot return the units until the completion of such a lock-in period.

· Convenience An investor can purchase or sell fund units directly from a fund, through a broker or a financial planner. The investor may opt for a Systematic

investment Plan or a Systematic Withdrawal Advantage Plan.

· Flexibility Mutual Funds offering multiple schemes allow investors to switch easily between various schemes. This flexibility gives the investor a convenient way to change the mix of his portfolio over time.

· Transparency Open-ended mutual funds disclose their Net Asset Value (“NAV”) daily and the entire portfolio monthly. This level of transparency, where the investor himself sees the underlying assets bought with his money, is unmatched by any other financial instrument. Thus the investor is in the know of the quality of the portfolio and can invest further or redeem depending on the kind of the portfolio that has been constructed by the investment manager.


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