New investors can safely park their money in mutual fund schemes, provided the pick the right options and work with a leading fund house.
New investors are often wary of the many types of mutual funds being recommended to them. Most are not even sure that they want to invest in mutual funds in the first place! But if you are on the lookout for options that promise a good rate of return over the long run, with a low risk of loss, then MFs are certainly worth your while.
Here’s why you should consider mutual fund investments to kickstart your journey towards financial independence:
* Reduce risk through diversification.
As a new investor, your portfolio must comprise a mix of strategies and instruments that offer varying degrees of returns over different time periods. Creating such a portfolio is known as ‘diversification’. Mutual funds offer the best kind of diversification, since your money is not parked in just one kind of asset class or instrument. Mutual fund investments offer the benefits of varying vesting periods and maturities, apart from allocation in different industries and sectors. Thus, they offer lower risk: if one asset performs badly, others do well to cover the loss.
* Lower operational, transaction and redemption costs.
New investors are also concerned about fund management fees. However, mutual fund investments normally trade in high volumes, thus the bulk volumes offset high costs. In turn, the daily or even monthly transaction costs are considerably lowered. Thus, you are charged lower per unit of the MF by the fund house. But do note that you get lower operational costs only when you trade with a leading fund house, and not when you trade through a private broker.
* You can get long term gains instead of short-term losses.
New investors have the benefit of a longer investment horizon. It is known that the longer the time frame for investment, the higher is the return on the mutual fund. The longer you stay invested, the higher is the potential for seamless rate correction. Take your fund manager’s inputs on staying invested – do not fall into the trap of trading in response to short term volatility, since this will only make you incur losses.
* You have many options to invest and redeem.
Not only do MFs offer variety for different kinds of investors, they are quite easy to invest in and redeem. New investors may start off with an SIP if they don’t wish to park too much money in the fund. Others can consider ULIPs, or even regular payments via an STP (Systematic Transfer Plan). Meanwhile, some types of mutual funds switch from one fund to another based on your risk appetite and goals.