Mutual funds offer proxies for asset classes
You have equity funds for equity exposure, debt funds for exposure to fixed income securities and money market funds extremely consistent returns with minimal risk. Within each of these categories you are spoilt for choice. Equity funds offer you diversified options, index options and thematic options. Bond funds offer credit options and duration options. Even at the short end, you have liquid funds, liquid plus funds and short term funds. In short, you can actually make a granular choice.
Mutual funds offer proxies for tenure of goals
Equity funds work best in case of long term goals and debt funds or balanced funds work in case of medium term goals. Short term goals are best pegged to liquid funds. Once you know when the goal will mature, just peg an appropriate fund class with the goal and adopt a passive approach. There is no need to worry about stock selection, bond selection etc.
Diversify your risk through mutual funds
When you are working towards long term goals, it is not just about returns. The risk is equally important. You don’t want to put all your money in a stock like Kingfisher or in IL&FS bonds. That would be disastrous. When you invest through mutual funds, your investment is a participant in a much larger portfolio. Since large portfolios can afford to diversify much better, you automatically get that benefit. Equity funds diversify across sectors, themes and market cap brackets. Debt funds diversify across durations and credit quality. That reduces the risk of your long term financial plan.
Professional management comes as a part of mutual funds
This is an extension of the risk aspect. Diversification is used to reduce risk but it also means that you do a risk-return trade-off. You forego some returns to reduce the risk. How do you compensate for these returns lost? That is where professional management of funds comes in. With their team of analysts, smart traders, and access to sell-side research, mutual fund managers are better equipped to identify emerging opportunities in the market. This proactive thinking can give you that much needed edge.
Mutual funds make money work hard for you
If you put a corpus of Rs10 lakh in say a fixed deposit, you will at best earn 4% returns net of tax. It will take 18 years to double the money. There is no way you can create wealth. The answer is to make money work harder. There are 3 steps to that. Firstly, adopt an SIP approach to MF investing and allocate a fixed sum passively. Secondly, ensure that you opt for the Growth Plan so that returns are automatically reinvested. Thirdly, start early and hold it for a long period without disruption. The power of compounding will automatically make money work harder for you.
Finally, mutual funds are amazingly flexible
This is an aspect of mutual funds that is often overlooked but is critical to your financial goals. You can create wealth with a systematic investment plan (SIP). Secondly, in case you have received a lump sum payment, you can mirror a SIP and get the benefit of rupee cost averaging through a systematic transfer plan (STP). The convenience and flexibility that mutual funds offer is what makes them ideally suited for your long term financial goals.