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Why Invest in Mutual Funds

What are the benefits of mutual funds?
Role of funds in a consumer's portfolio

What are the benefits of mutual funds?

• Convenience: Investors who have the time and the money can build their portfolio by buying one security at a time. But identifying, researching and monitoring securities can be a full-time job that requires a lot of commitment. Alternatively, investors can simply buy a mutual fund in the market that will save them a lot of time and regular monitoring of the performance of the individual securities that make up the fund.
• Diversification: A single fund can hold securities from 100s of different issuers or companies, far more than what an individual investor can realistically manage to hold in their individual portfolios. This diversification reduces the risk of a loss due to problems in one particular company or industry.
• Professional management: A mutual fund is managed by professional investors who do this full time. The resources available to them like traders who have practical experience in when to buy and sell securities, research team and access to company management is far more than what an individual investors can achieve on his own.
• Liquidity: Like shares, mutual funds are also liquid investments that can be bought or sold freely so that investors have access to their money when needed. However, certain shares might not trade freely because there is not market for them, and then the investor is stuck. Mutual funds do not face this problem of illiquidity.

Role of funds in a consumer's portfolio

• Growth and Inflation Hedge: Traditional savings instruments cannot keep pace with inflation and the rising cost of living. They give only 3.5% in a savings accounts. You can use a mixture of mutual funds to achieve a better return than what you can get in a savings account
• Source of Income: Can provide you with income if you invest in an income or dividend paying fund, along with giving you a modest capital appreciation
• How does it differ from Life Insurance Savings Product: A mutual fund is a capital market investment product that gives you a return based on the amount of risk taken by you.

  Life insurance on the other hand is not an insurance product, but rather a protection product that will compensate your family or survivors in case something happens to you.

  There are some types of life insurance that have an investment feature attached to them. Please understand that such type of hybrids can be recreated by you by simply combining a pure life insurance product along with a mutual fund. And, you will pay lesser in fees if you do this on your own, because these hybrids have much higher fees.

  These hybrids have a purpose in your portfolio if you are looking for some capital appreciation along with life/risk cover. Ultimately, you need to decide what your needs are and whether the product you are looking at meets your needs or not.