A mutual fund is a collective investment pool which comprises stocks, bonds, or a mix of both. Typically, a team of experts, known as fund managers, tend to manage mutual funds.
Mutual funds provide an investor with an opportunity to invest in stocks, which represent ownership in companies, and bonds, which are similar to loans given to governments or corporations.
Mutual funds are available in various types, catering to different investor preferences and risk appetites. For example, Equity Funds or Stock Mutual Funds invest primarily in stocks with an aim for growth and capital appreciation.
Similarly, Debt Funds or Bond Mutual Funds, which invest in fixed-income securities, provide stability and regular income.
Then there are Hybrid Funds or Balanced Funds, which offer a mix of growth and stability by investing in both stocks and bonds.
Diversification can be effortlessly achieved via investing in mutual funds. This way, in case one type of investment underperforms, others may compensate, thus reducing risk.
Fund managers are experts who take a call to acquire or sell, ensuring the overall growth and performance of the fund. This expert management is a crucial advantage for investors who may lack in terms of time or expertise to make these decisions on their own.
Moreover, mutual funds provide an inclusive investment option. An investor doesn’t need a large sum of money to participate. With minimal investment, an investor tends to get a piece of a well-diversified portfolio with various assets.
The shared nature of mutual funds generally lowers risk. If one investment underperforms, the impact on the overall portfolio is mitigated by the diversity of holdings. Also, fund managers act as expert guides who show the easiest path in choppy markets, making strategic decisions to optimise returns.
First and foremost, choosing the right mutual fund is crucial for ensuring financial success in the long run. In this regard, an investor is required to clearly define their financial objectives. They are required to analyse whether they wish for long-term growth, regular income, or a mix of both.
An investor must assess their risk tolerance as different funds carry varying levels of risk. So, it is important that risk appetite should align with the investment strategy of the fund. It is also important to understand the expense ratio, representing the fund’s operating costs, which impacts the overall returns.
Also, it is important to evaluate the historical performance of the fund. While past performance may not guarantee future results, it provides insights into the fund’s consistency, though.
It is possible to buy mutual funds directly from the companies managing the funds, often through their online platforms. Online investment platforms or robo-advisors can be utilised for easy browsing and investing. An investor can use fintech apps to buy mutual funds over the phone.
An investor can explore mutual funds via their bank’s investment services, either in person or through online banking. One can seek advice from a financial advisor, who can recommend suitable mutual funds based on financial goals.
An investor with a brokerage account can consider buying mutual funds through these platforms, offering a centralised approach to overall managing investments. Mutual funds provide a reliable financial option for investors of all backgrounds. They offer a simple yet effective way to participate in wealth creation in the long run.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.