Mutual Funds are best and easy way for wealth creation

The Advantages Of Mutual Funds

Economies of Scale

The easiest way to understand economies of scale is by thinking about volume discounts; in many stores, the more of one product you buy, the cheaper that product becomes. For example, when you buy a dozen donuts, the price per donut is usually cheaper than buying a single one. This also occurs in the purchase and sale of securities. If you buy only one security at a time, the transaction fees will be relatively large.

Mutual funds are able to take advantage of their buying and selling volume to reduce transaction costs for investors. 

Divisibility

Many investors don't have the exact sums of money to buy round lots of securities. One or two hundred dollars is usually not enough to buy a round lot of a stock, especially after deducting commissions. Investors can purchase mutual funds in smaller denominations, ranging from 100 to 1,000 minimums. Smaller denominations of mutual funds provide mutual fund investors the ability to make periodic investments through monthly purchase plans while taking advantage of dollar-cost averaging. So, rather than having to wait until you have enough money to buy higher-cost investments, you can get in right away with mutual funds. This provides an additional advantage - liquidity.

Liquidity

Another advantage of mutual funds is the ability to get in and out with relative ease. In general, you are able to sell your mutual funds in a short period of time without there being much difference between the sale price and the most current market value. However, it is important to watch out for any fees associated with selling, including back-end load fees. Also, unlike stocks and exchange-traded funds (ETFs), which trade any time during market hours, mutual funds transact only once per day after the fund's net asset value (NAV) is calculated.

Professional Management

When you buy a mutual fund, you are also choosing a professional money manager. This manager will use the money that you invest to buy and sell stocks that he or she has carefully researched. Therefore, rather than having to thoroughly research every investment before you decide to buy or sell, you have a mutual fund's money manager to handle it for you.

The Bottom Line

As with any investment, there are risks involved in buying mutual funds. These investment vehicles can experience market fluctuations and sometimes provide returns below the overall market. Also, the advantages gained from mutual funds are not free: many of them carry loads, annual expense fees and penalties for early withdrawal.

Few disadvantages too

1. costs.

Surprised to see “Cost” in both advantages and disadvantages of mutual funds?Some mutual funds have a high cost associated with them. Mutual funds charge for managing the funds, fund managers salary, distribution costs etc. Depending on the fund, these charges can be significant.When you exit from your mutual fund, you might be charged an extra cost as exit load. Do check out exit loads before investing in a fund. Typically, exit loads are applicable if you sell your investments within a specified duration.Investors should note that different funds have different expense ratios. Passively managed funds like index funds or ETFs (Exchange Traded Funds) have lower expense ratios than actively managed funds.This is because passively managed funds track the underlying index and do not require a fund manager to take active investment calls.Lower costs reflect the operational efficiency of a mutual fund house.

2. Dilution.

Diversification has an averaging effect on your investments. While diversification saves you from suffering any major losses, it also prevents you from making any major gains! Thus, major gains get diluted.

This is exactly why it is recommended that you do not invest in too many mutual funds. Mutual funds are themselves diversifying investments. Therefore, buying many mutual funds in the name of diversifying dilutes your gains.

How to do mutual fund allocation ?
Suppose you have Rs 100 to invest in mutual funds. Allocate in such a manner that it is invested accross mid, small, micro  and Large caps. while the large caps gives stability of business, others have high growth potential. For ex: It is impossible to a company of size of reliance industries or Larsen& toubro to grow to grow 30-40 % a  year . however smaller companies can do that considering their smaller base.

So allocation can be done with a few multi cap funds or a mixture of large cap and small and mid cap funds.

We discussed that there are charges involved in investing in mutual fund. Lets see how it can be got rid off to our advantage.

6. You don’t have to win every argument. Stay true to yourself.

The above  life lesson is  from the widely known, highly popular column by Regina Brett. “45 lessons, written by a 90 year old”