Why investing in mutual funds is the best way to invest in share markets?

Disadvantages of investing directly into shares through a broker

Direct purchase of shares has many disadvantages:

  • An average investor does not have the time, the resources and the knowledge to do a thorough research of share markets
  • One does not have the huge amount of money to diversify portfolio across different sectors to diversify risks
  • Many people indulge in the practice of intra-day trading or very short term investing which proves to be disastrous for most

What is an Equity Mutual Fund?

An equity mutual fund is an investment scheme in which many investors pool their money for investments. This amount is then invested by professional managers into carefully selected shares after a conscientious research. The fund managers generally have high qualifications & many years of experience in equity research and fund management.

What are the benefits of investing in a mutual fund?

It is more beneficial for an investor to invest in Equity Mutual Funds. There are various advantages of investing in Equity mutual funds:

  • Mutual funds have very qualified and experienced fund managers who decide on which stocks to invest in based on thorough research and market experience
  • Fund Managers have a very extensive and capable research team, and spend a lot of time and money on research on various equity stocks
  • The asset size runs over hundreds of crores and hence the portfolio is diversified across various industries and companies, which helps to get higher returns at lower risks
  • The expenses are distributed across fund holders and the expense for an average investor is extremely low
  • Many top equity mutual funds have given consistently higher returns that index and returns of more than 15% consistently
  • Because of huge variety of schemes available, investors can choose appropriate schemes as per their requirement (For e.g. large cap, mid cap, diversified equity, value investing, growth investing, etc.)

What is SIP?

An investor earns good returns by investing for a long time in markets and by not timing the markets. An investor investing all his money at one time may risk investing only at the peaks and so will get lower returns compared to the investor investing at bottom. To avoid this, one should invest at peaks as well as bottoms to do a cost averaging.

SIP or systematic investment plan is the process of investing a fixed amount every month in a mutual fund. By doing this, the buying price of shares is averaged. Now the investor can safely benefit from the rise in values of stocks over time.

What are the historic returns of equity mutual funds?

Equity Mutual Funds have given consistently good returns in the long term.

Source: NSE Website, Amfi India website; Data as on 31st May-14. Past Returns may or may not be sustained in the future.

Long term returns of Equity Mutual Funds:

Past Returns may or may not be sustained in the future.