According to Investopedia, a mutual fund is a type of financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets. In other words, mutual funds are professionally managed investments money that pools money from several shareholders. These professional managers do their best to ensure that the investment generates profits.
In his book The Power Of Money, author Veneta Van Caspel said that “A mutual fund can do for you what you would do for yourself if you had sufficient time, training and money to diversify, plus the temperament to stand back from your money and make rational decisions.”
A lot of people don’t have that capability, which necessitates mutual funds investment.
Here are a few reasons why you might want to invest in mutual funds:
Diversification of assets involves investing in different forms of income-generating activities. It is advantageous because it reduces the risk of making big losses if you were to invest only in one area. It involves buying assets from different industries, such that you generate money from many different places. At the same time, it reduces the volatility of investing in one industry or firm and thereby increasing the instances of making profits.
For example, if a person invests in only one particular asset, once they lose that asset they have lost everything. Again, different assets are affected by different environmental changes and thereby making the generation of income inconsistent. But diversification helps to do away with that by investing in many different assets. You can either buy a mutual fund that is broadly diversified, or you can buy many mutual funds across various sectors and create your own diversification.
- Economies Of Scale
Economies of scale are the benefits that an enterprise accrues by operating on a large scale. In the case of mutual funds, when you buy many stocks or shares, you get a volume discount. It gives you high bargaining power. Given that mutual funds mainly operate on a large scale, they take advantage of this opportunity to reduce transaction costs for their investors. In actual sense, some mutual funds rely on these economies of scale to generate their own profits. The greater the assets, the greater the profits.
One of the main advantages of investing in mutual funds over other forms of investment is the aspect of liquidity. Liquidity refers to the ease of buying and selling shares. In a mutual fund, it is possible to do this on any business day and thereby providing the investors with easy access to their money. With other forms of investment, there may be complex procedures or added expenses, but when it comes to mutual funds the process is made much easier.
- Growth Oriented Investment
The chance of generating income from mutual funds are considerably higher than those in other investments. This ties in with the professional management that is offered by these mutual funds. When you invest in an equity mutual fund, you can opt for growth or dividend option.
A growth fund mainly invests in younger but promising companies that can deliver supreme returns. Given that the mutual funds are managed by experts, the chances of profiting from growth funds are still high. Mutual funds are therefore a great opportunity for investment because the generation of income is almost guaranteed.
- Professional Management
Sometimes a person may be interested in investing but doesn’t have the capability to make wise financial decisions. That’s the advantage of mutual funds because they usually have professional managers handling the investments. These professionals are usually educated, skilled and money-literate and therefore making it a safe avenue that ensures the generation of interest and profits. These fund managers make calculated risks and decisions regarding investment procedures. They know the available investments, the risks, costs of the investments and the overall procedures of investing.
Read more about mutual funds and check out how mutual funds are performing for a while before making a decision on whether it is worth it. Read up on Five Strategies For Long Term Investment Also check out Reasons To Have A Personal Finance Adviser
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