A mutual fund is a financial instrument that pools the money of different people and invests in different financial securities like stocks, bonds, etc. Each investor in a mutual fund owns units of the fund, which are part of the shares of the system. The securities are selected taking into account the investment objective of the fund. Mutual funds are managed by asset management companies (AMCs). AMCs appoint fund managers to manage the various mutual funds and ensure that the investment objectives of the system are met. For fund management and other services provided by AMC, investors are required to pay a fee.
Benefits of investing in Mutual Funds
Liquidity- The most important advantage of investing in a mutual fund is that the investor can redeem the units at any time. Unlike fixed deposits, mutual funds have flexible withdrawals, but factors such as pre-exit penalties and withdrawal fees should be considered.
Diversification- Diversification reduces the risk associated with portfolio building, thereby reducing the risk further for the investor. Since a mutual fund is made up of many securities, the investor’s interests are protected in the event that other securities are bought down.
Expert Management- A lot of investors don’t have the time and resources to research and buy individual stocks. This is where professional management comes in handy. A fund manager continuously monitors investments and adjusts the portfolio accordingly to achieve his or her goals. This professional management is one of the most important advantages of a mutual fund.
Flexibility- Investors do not need to put down a large amount of money to invest in mutual funds. If you receive a monthly salary, you can choose a systematic investment plan (SIP). Thanks to SIP, a fixed amount is invested monthly or quarterly depending on investors’ budget and convenience.
Accessibility- Mutual funds are easily accessible and one can start investing and buy mutual funds from anywhere in the world. This factor makes mutual funds available globally and easily accessible. Also, you don’t need a Demat account to invest in mutual funds.
Smallcase- A better alternative to Mutual Funds
Smallcases are a group of securities that are built on a specific strategy, theme, sector or idea. SEBI registered professionals create and manage smallcases. A smallcase comprises up to 50 stocks that are carefully picked to reflect a strategy. Smallcases focus on a trending market theme or a financial model such as zero debt or risk profiles such as aggressive, conservative or balanced.
To invest in a smallcase, one needs a Demat and a Trading account. Moreover, one can invest in a lump sum or through systematic investments. The minimum investment in a smallcase varies depending on the stocks in the portfolio. Since investing in a smallcase is similar to trading, brokerage and transaction fees apply.
The investor can invest in all stocks in Smallcase. However, they can also make changes to the portfolio by adding and subtracting a few stocks. In addition, they can also change the weight assigned to each stock. When investors invest a small amount, the money is debited from their trading account and the shares are credited to their Demat account the next day. Smallcases have no lock-in period and investors can sell them at any time.