Many people fear investing in the stock market for quite obvious reasons, the major being the loss. Not everyone has the time, patience, and knowledge to always be on the lookout for stocks/equities that can give higher returns in the future. People who are employed in jobs, running a business, or doing some daily errands cannot take out enough time to manage their stock portfolio actively. And it is not wise to take risks if you cannot do all these things. However, you cannot escape FOMO. On one hand, you cannot bear high risks, but on the other, you do not want to miss the opportunity to churn out profits from the market as well. So what is the way out? This is where the advantages of mutual funds come into play.
Mutual funds are a type of investment instrument that pool funds from a number of investors and invest in a number of stocks. The portfolio of the stocks is managed by experts known as fund/asset managers. When it comes to investing, the advantages of mutual funds over equities are many. Let us discuss those in detail.
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Investing: Top Advantages of Mutual Funds Over Equities
When it comes to mutual fund advantages over equities, the key points that we will discuss are:
Diversification: Lowers Risks
Most experts prefer diversification when it comes to investing in the stock market. However, since not everyone can take out time to invest in a range of stocks to build a diversified portfolio, investing in mutual funds can prove to be advantageous.
Unlike investing directly in equities, where you have to invest a particular amount only in one or a few stocks, mutual funds invest your funds in a number of stocks. This diversifies the portfolio and lowers the risk. In case, some stocks are in red, others will give profits and will keep your overall investments in green. It is seen that even during extremely choppy or falling markets, mutual funds have protected investors’ profit by minimizing losses to a substantial degree.
Active Management
One of the key advantages of mutual funds is that most of them are actively managed by experts. These experts, known as fund managers, have deep knowledge of investing in the equity market. They manage the pool of funds collected from different investors and always strive to generate returns. This specific feature, out of all the advantages of mutual funds, is extremely beneficial for investors who want to rely on experts for the management of their funds. The aim of actively managed mutual funds is to generate more profits than the market and hence, be more profitable and less risky than investing in equities.
Less Expensive
This is one of the major advantages of mutual funds over equities. You can start investing in mutual funds with a capital of as low as Rs 100. Although the same is true for equities, in which, you can even buy a stock of Rs 1., the catch is however the cost of exit. Mutual funds come with a small fee called the expense ratio, but investing in equities bring you a number of expense like brokerage fees (for both buying and selling) and other transaction charges. Thereby, the advantages of mutual funds are best utilized by low-capital investors.
Convenience
There are a number of things that you need to learn before investing in equities. You have to learn to read the graphs, candle patterns, support, and resistance, etc., in order to make a sound investment. All these complexities are absent in mutual funds. You just need to choose a mutual fund and simply invest the desired amount. The units will be allocated to you within a couple of days and then you can see the performance of the fund on the dashboard.
Option to Invest Systematically
You cannot gain anything substantial by investing Rs 1,000 or 3,000 in equities. However, mutual funds give you the option to invest periodically with the Systematic Investment Plan. If you are able to save only Rs 1,000 or even Rs 100 per month, you can start a SIP and allow your savings to grow gradually over time. Investing regularly in mutual funds also give you to earn higher returns in the long term, thanks to compounding.
You can make small and regular investments in mutual funds
Liquidity
Suppose you want to invest in stock from which you expect higher returns in the near future. However, the price of the stock is extremely high at Rs 5,000. So you purchased only one unit at a price of Rs 5,000. Now, the stock’s price has increased to Rs 5,500 and in order to secure the profit of Rs 500, you need to sell that single unit. However, in the case of mutual funds, you can sell as many units as you want. You can sell 10%, 25%, 40%, etc., as per your plan and keep the remaining amount invested.
The advantages of mutual funds are good in number compared to equities. They are the best investment instruments when it comes to generating higher returns but remain safe simultaneously. There are a number of mutual funds to choose from. You can easily compare all based on their performance build your portfolio accordingly.
