The 10 Reasons to Own Mutual Funds
Mutual funds are a great product for those who have no idea how the capital markets work.
Here are 10 reasons to own mutual fund units:
1) Your money is with professionals
When your tooth aches, you go to a dentist.
When you have a legal issue, you go to a lawyer.
When you feel sick, you visit a doctor.
When you need a haircut, you visit a barber.
Why not go to a professional, who has been trained in the science of managing money?
You are better off giving your money to a professional, rather than manage it yourself.
Medical catastrophes can atleast be cured.
Financial catastrophes can take an extremely long time to recover from.
It is dangerous if you begin investing on your own, especially if you have no time to do research and no knowledge of the financial markets.
2) Mutual funds are regulated entities
The fund manager can't play around with your money.
There are some rules and regulations in place to protect you, just like there are legal systems in a society to protect your best interests.
Fund managers are not allowed to put all of your money in just one stock or a couple of stocks that he loves.
That is not adequate diversification.
There are multiple companies or financial securities in a mutual fund portfolio.
That way, your risk is greatly reduced.
Even if one of those companies in the fund portfolio goes bankrupt, it wouldn't bother you much, because you never had a large stake in the business.
4) Asset class exposure
Mutual funds can give you exposure to assets that you normally wouldn't be able to obtain.
If you want to invest in foreign markets, you will have to go through tremendous number of legal processes to get permission to invest in that market.
A far better and a hassle free way is via a mutual fund.
You can invest in your local currency and the rest will be handled by the fund.
5) Record keeping
When you invest in a mutual fund, you get emails, notifications, messages etc...
You might take them granted.
However, those bits of information are vital to prove that you are indeed an investor in the fund.
Imagine giving your money to someone and having no proof that your money is with that person.
What legal recourse do you have?
6) Index exposure
As an individual investor, you cannot invest directly into an index.
It’s a complex process.
And it requires monitoring.
This is easily done by a mutual fund.
Index funds are low cost funds which do not require active management.
It’s like a machine.
If the index goes up 20%, your money will go up 20% too.
It is as simple as that.
Index funds is an easiest, yet the most effective investment you can ever do in your life.
Over the long run, index funds have the potential to beat actively managed funds.
7) Various flavours
You go to an ice-cream parlour.
You get a menu.
You can order all kinds of ice-creams there.
Same is with mutual funds.
What do you want to invest in?
Large cap, midcap, small cap stocks.
Gold and silver.
Just take a pick.
You will most certainly find what you are looking for.
8) Automatic investments
An SIP (Systematic Investment Plan) is probably the best invention ever made by the mutual fund industry, especially for people who do not know how to manage their money.
An SIP eliminates the need to time the market.
No 'expert' in the world can time the market.
Just keep putting money aside, every week or month.
It cannot get simpler than that.
Note: For sophisticated investors, who can read balance sheet of companies, an SIP might not be the best option. They are better off managing money on their own. These are people who have chosen to do research and due diligence on their own and who have a better than average understanding of the financial markets.
9) Ease of access
Making an investment in a mutual fund is as easy as eating an ice-cream candy.
Everything is digital.
Gone are the days of filling all the papers.
Nothing is easier today, than investing in a mutual fund.
Fund managers are obligated to meet redemption requests.
They have to honor your request, even if it means, liquidating a portion of their portfolio at a loss.
Barring extreme circumstances, a mutual fund investment is fairly liquid, unless you have invested in a fund which has a mandatory lock-in period of a certain number of years or months.
So, those were the 10 reasons I wanted to highlighted.
Remember, this is only for those who are beginners.
This is only for those, who neither have the time nor the inclination to manage their money.
For them, a mutual fund is a blessing.
Especially index funds.
Rohit Musale, CFA
5 January 2023