What is a Mutual Fund?

A mutual fund is nothing but a carefully managed professional investment option that combines the investments of different investors in order to buy securities.

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Advantages

Some of the advantages that a mutual fund offers are:

  1. Higher economies of scale

  2. Increased and greater level of diversification by holding more securities

  3. Reduced risk because of greater diversification

  4. More liquidity on a daily basis because of the selling mentality of investors at regular intervals

  5. Management by professional investors and portfolio managers to ensure greater fund investments

  6. Offers better investment opportunities to participate in investments apart from the larger investors

  7. Highly convenient with great service

  8. Safety in the hands of the government, as all mutual fund investments are regulated and overseen by a government organization

  9. Transparent and easy to compare because all mutual fund investments are forced to present to their investors with the same information so that they can easily compare each option and not get confused

Disadvantages

On the other hand, like all investment options, mutual funds to have certain disadvantages, namely:

  1. Incur different expenses and fees

  2. Have no much control over the timing of gain recognition

  3. Offer income that is less predictable

  4. Provides no scope to customize the investment plan

  5. Subjected to minimal market risks

Although the advantages outweigh the disadvantages of mutual funds, you need to be careful while investing in mutual funds to prevent risks and losses.

What Must You Do Before Investing in Mutual Funds?

  1. Create a Goal – It is important to realize why you are investing in mutual funds, as this will help you streamline your investment options. Therefore, be it for a wedding, education, or simply for earning more money, define your actionable goal

  2. Plan your Holding Period – With a definitive goal, comes a definitive timeline. This is very important when it comes to mutual fund investments, as different plans offer different levels of risk based on the holding period. Hence, you need to plan the intended holding period to minimize the risks involved.

  3. Plan your Investment Method – There are two ways by which you can invest in mutual funds. One is by paying the lump-sum amount at one go and the second is to invest systematically, otherwise known as Systematic Investment Planning or SIP. Although the former option is only a one-time affair, financial analysts recommend investors to plan systematically their investments as a part of their short-term financial planning.

  4. Invest in your Financial Education – One of the most important things that many new investors forget these days is to study in terms of investment options, knowing market risks, risk management, the power of compounding, or at least a basic crash course on the different terminologies used in the investment world.

What Must You Not Do While Investing in Mutual Funds?

While adopting some of the common tips before investing in mutual funds, it is also necessary to be aware of things that you should not engage in as well. These include:

  1. Taking a break from monitoring the stock market index and focussing more on your goal

  2. Do not invest in small schemes that offer returns in one year

  3. Do not ignore the risks

  4. Do not attempt to invest more than what is needed

  5. Ignore the surrounding noise correction, rebalancing, and book profits