New to stock markets? Mutual funds offer best option

For beginners, mutual funds (MF) offer great option for investments and exposure to equity markets. This is because it offers many features of flexibility, transparency, diversification, liquidity, convenience and most importantly professional money management skills. All these factors combined and particularly offered at a very economical cost is what makes MF the go-for investment avenue.

Investment in equity markets are always complex and is not easy for the novice investors to wade through. Finding right companies to invest is forever a difficult task and needs varied tools to arrive at correct investments. The professional fund management approach is probably the biggest differentiator and also the most beneficial for the retail investor. Fund houses are equipped with teams of research and access to first-hand information which is difficult for a retail investor and at times even impossible.

Convenience of even starting an investment at as low as Rs 500 is a boon for a retail investor. The option to invest through systematic periodic installments with automatic instruction is very suitable to investors. Also, the advancement of user interface beyond the physical mode of transactions i.e. through online and app based, makes it seemingly fitting options for investors especially while withdrawing units from a MF.

The very option to withdraw required amounts at any point of time during investment provides for good liquidity for MF investors. The transparency of reflecting current value of the investment at any given day helps the investor to assess the investment worth and allow them to make decisions in real time.

Diversification is another hallmark that provides for risk management capabilities that an investor needs. With the regulation in place, there is restriction on the type of companies to invest, the proportion of allocation in an individual company/stock and even the sector in some cases. This describes the risk associated with each fund and thus lets the investor to judge whether to opt in or out of a fund.

The other advantage of MF is the flexibility they offer in terms of variability and options to invest. An investor could opt to invest in a large cap, mid cap, small cap and/or hybrid funds other than some other category. This variety in the investment options is now enhanced with the categorisation of funds by SEBI. It’s now become an easier way to opt for the choice of funds. The beauty of MF investments is the possibility to create a portfolio (with sub-option of growth or dividend that could address different needs of an individual at varied timelines of the lifecycle.

All these above characteristics come at an affordable cost and no upfront payment whatsoever from the investor. The net asset value (NAV) which is the difference between the gross assets and liabilities includes the deduction of costs which are a combination of trading expenses, compliance & audit expenses, fund management charges and others. So, by deducting the costs, which translate to be pretty small proportion usually lower than three per cent and below, every investor enjoys participating in the equity markets with expert assistance.

The economies of scale is also due to the very concept of MF where pooling of money across various investors with similar risk profiles, timelines and goals delivers a potential arsenal to employ high skilled personnel and also larger sums qualify for great bargaining power. All this influence to form a boundless opportunity to create wealth in a simple transparent and economical manner for an individual investor.

By: K Naresh Kumar
(The author is co-founder of “Wealocity”, a wealth management firm and could be reached at [email protected])