Did you know | Why you should invest in a mutual fund?

Did you know | Why you should invest in a mutual fund?

They help you diversify

A mutual fund (MF) is mandated to diversify across scrips and sectors. If you try and invest in scrips directly on your own, it won’t be feasible to diversify across 30-40 scrips, the typical number of scrips an equity MF invests in. In a single equity scheme, you can, for instance, invest in the top scrips across multiple sectors, such as banking, fast-moving consumer goods and capital goods. Diversification has other benefits. If one or few stocks in a single portfolio goes down, your losses will be limited in an MF because there are chances that other stocks may save the day for you. For instance, if you invest 1,000 in a single scrip, whose share price is 1,000 and the scrip drops by 20%, your corpus drops to 800. On the other hand, if your MF invests 10% of its total corpus in this stock, your corpus will drop to just 980 {(10% of 1,000) – (20% of 100)}.

They are transparent

Unlike traditional fixed-return options such as postal savings and fixed deposits, where you don’t exactly know where your money gets invested, but MFs tell you—typically, on a monthly basis—exactly where and in what proportion your money is invested. Earlier, MFs disclosed their portfolios only twice a year. However, in recent years, even state-run fund houses have pulled up their socks and offer full portfolio disclosures every month. Since your returns in MFs are marked to market, it is better to know where your money is invested into.

They allow small investments

With an amount as low 5,000, you can invest across scrips and sectors. If you wish to invest in, say, the Nifty index that consists of 50 scrips, you need to put at least 40,000 as per closing stock prices prevalent on 20 January to buy a single share of each of the 50 companies. However, you can buy all these stocks at the same time if you invest in an index fund, with a minimal investment of just 5,000.

They are managed by professionals

Fund managers are full-time professionals, whose job is just to manage your money. There are stringent requirements to set up asset management companies and since there’s a financial commitment to be made, especially after 2009 when entry loads were abolished making selling MFs tougher, there is no room for frivolity. Though the industry has its share of bad apples, good houses manage your well money and aim to build a track record.