There are many reasons to invest in mutual funds. These reasons include diversification, compounding, professional management, and no lock-in period. But, what makes mutual funds stand out from other investment options? Read on to find out why. After all, you can only withdraw your money if there is a serious emergency. Here are 5 more reasons to invest in mutual funds. And, remember, diversification is the most important reason to invest in mutual funds.
Diversification
Investing in a portfolio that contains many different types of securities offers diversification benefits. It can reduce overall risk and smooth out fluctuations in returns. It is a good strategy for long-term investors who plan to take advantage of specific trends in the market. In addition, diversification helps to balance the risk of losing all of your money if one type of investment fails or another does poorly. Diversification helps investors diversify the types of assets they hold, thereby limiting the volatility of the market.
In addition, diversification can reduce volatility by minimizing the impact of volatile assets. A chart of hypothetical portfolios shows annual returns from 1926 to 2015, as well as the best and worst 20-year returns. The most aggressive portfolio is composed of 60 percent domestic stocks, twenty percent international stocks, and fifteen per cent bonds. Over the last 20 years, it has generated a best 12-month return of 136% and the worst return of 61%. For most investors, this is too risky.
Compounding
If you have ever wondered why mutual fund investments don’t earn compound interest, it’s because you’re not really earning it. Instead, you’re simply experiencing compound growth. The secret sauce to compound interest is time, and the number of compounding periods. Luckily, there are several tools out there to calculate compounding for you.
Compounding when investing in mutual funds is beneficial to your working money. While it increases your investment return, it can also increase your investment principal. While it can be tempting to cash out of your mutual fund investments, remember that investing involves some risk. You should carefully consider your personal situation, risk tolerance, and time horizon before investing. Remember that diversification doesn’t guarantee profits or protect you from losses in a declining market.
No lock-in period
One advantage of investing in mutual funds without a lock-in period is that you will not have to worry about a long investment term. In contrast, investors with equity-oriented investments will need to wait for the long term to reap their desired returns. A lock-in period will inevitably limit their investment liquidity. Therefore, it is important to evaluate the performance of each fund before making a decision.
Lock-in periods are common with IPOs and ELSS schemes. Lock-in periods prevent investors from selling their shares immediately after the IPO. They also benefit from prevailing tax laws, as you can claim tax deductions only on mutual funds with a lock-in period. This also means that you will have the opportunity to benefit from the long-term growth of your funds. However, you should be aware of the disadvantages of investing in funds with a lock-in period.
Professional management
The investment process for mutual funds is based on many factors, and the investor should determine which assets, sectors, and securities are appropriate for their goals. Depending on the cost and amount of involvement, the investor should select individual investments or delegate portfolio management to a professional. Likewise, investors should determine whether the manager’s approach will maximize the risk of the portfolio, or whether it will limit the returns to a minimum.
Whether you choose to have a professional manage your portfolio is entirely up to you, but it is a good idea to hire a professional manager if you need more than just an occasional investment decision. While it may be tempting to manage your own portfolio, hiring a professional manager can remove temptations to make emotional decisions and maximize your investment returns. Some investors may even trade managers like individual stocks, which can lead to imprudent behavior.
Easy to invest
Unlike individual stocks, mutual funds are not subject to the same restrictions as individual stocks. You can choose to invest in any sector of the stock market. These include small U.S. stocks, international stocks, and even bonds and real estate. Mutual funds pool money from many investors and buy a basket of securities. The investment manager makes all the decisions, so you don’t have to. Mutual funds can help you build your retirement portfolio.
While individual investors can invest in individual stocks, they are generally not suited for the average investor. Individual stocks require a substantial investment, and fractional shares don’t match the diversity of mutual funds’ portfolios. Additionally, a person investing in individual stocks has to conduct research on the companies they’re interested in, and monitor their positions constantly. Hence, many investors opt for mutual funds instead. The main advantage of mutual funds is that it’s easy to invest in them.
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