How can you be sure that a stock will come good in the next 10 years? You can't, because you don't have the required insight into the markets. So why not leave the task to the people who are trained to invest in equities? This is exactly what mutual funds do. A specialised fund manager invests your money in a cache of stocks, which are chosen according to the fund's mandate. The manager tweaks the investments regularly to ensure that you get maximum returns. Here are some of the reasons mutual funds are a must-have in your portfolio:
Big and safe returns
Mutual funds offer the best of both worlds: high returns and safety. Though the returns may not equal to those from the best stocks, you rarely lose money by investing in funds for the long run. This is primarily because funds spread investments across stocks and sectors, which maximises the benefits of diversification. Therefore, you forgo less in terms of returns and gain more in terms of security.
Best minds at work
As mentioned earlier, mutual funds are run by fund managers who make moves based on in-depth research and analysis. These investment professionals don't follow the sound bytes on TV but make forecasts with the help of teams of experts that regularly study the market. As an ordinary investor, you do not have the time or the expertise to analyse the markets like these managers. Funds offer you the opportunity to tap into the resources of trained professionals to make money for you.
Financial planning
There is a fund for every need, strategy and time period. This is why they are perfect instruments for financial planning. If you are a conservative investor, choose large-cap equity diversified or index funds. If you are aggressive, pick from mid-cap, smallcap or sector funds. In case you want high returns without too much risk, opt for balanced funds, which invest in a mix of debt and equity. You can also bet on sectors by puting your money in funds that invest in stocks belonging to a particular industry, such as infrastructure funds, banking funds, etc.
Another option is to retrofit a fund to your financial goal. For instance, to build a retirement corpus, choose from equity diversified funds, which is one of the safest category of funds.
Starting small
Systematic Investment Plans (SIPs) allow you to invest small amounts in mutual funds regularly. The lower limit is as less as Rs 50 a month. Not only does this discipline your investments, it also averages out returns in a volatile market. A lumpsum investment before a bear day can wipe out all your investments. With SIPs, the hit impacts smaller amounts. Similarly, you never miss a bull run because you did not see it coming or because you were out of money. SIPs automatically ensure that you participate in every market movement.
Tax saving
Equity-linked savings schemes (ELSS) is one of the two market-linked, tax-saving instruments under Section 80C of the Income Tax Act (the other being Ulips). By committing to SIPs in ELSS, you can spread out your tax savings throughout the year without sweating to meet the deadline in March.
This also gives you the benefit of rupee-averaging much like the SIPs in other mutual funds.
