The mutual funds’ industry is growing exponentially in India. There are many reasons that make mutual funds the best investment option. Before we look further into the benefits of investing in mutual funds, let us first understand what is a mutual fund.
What is a Mutual Fund?
A Mutual Fund is a common pool of money gathered from many investors. The pooled money is invested in different types of securities like stocks, bonds, money market instruments and various other securities. These investors get a proportional share of the fund’s profits, losses, income and expenses. The group of securities that a fund invests in is the portfolio of that fund. A mutual fund is managed by an Asset Management Company which appoints a Mutual Fund Manager to manage the portfolio of the fund. A fund manager is a qualified professional who decides which stocks to pick.
Depending on your investment goal and risk profile, you can choose a mutual fund. A simple way to select a mutual fund is to understand the risk-return balance. The risky a fund is, the higher the return. Similarly, if you go for a low-risk fund, returns generated will also be low. Then, there are funds which have a balanced risk-return profile.
How does a Mutual Fund generate returns?
When you invest in a mutual fund scheme, you get a certain number of units of that MF scheme in return. Units of an MF scheme are the same as shares of a company. Every unit has a Net Asset Value (NAV) which is the market value of the securities in an MF scheme divided by the number of units in an MF scheme. Here is an example.
Suppose, you invest ₹ 5000 in an MF scheme, which has a NAV of ₹ 50 and you get 100 units of the scheme in return. After one year, the NAV becomes ₹55, giving you a return of 10% on your investment. This is how you earn returns in an MF scheme.
What are the reasons for the popularity of a Mutual Fund?
The reason for the popularity of mutual funds is the benefits it offers to investors. Here are some of its benefits.
Liquidity
Investments in a mutual fund are fully liquid. In case of open-ended funds, an investor can redeem their units anytime as a mutual fund offers the flexibility of withdrawal. However, consider the scheme’s exit load before pulling out.
Regulated
Mutual funds are highly regulated investment options as they are regulated and monitored by SEBI. SEBI puts investors first and ensures that fund houses follow all the regulations. All the investments and disclosures are done in a transparent manner.
Diversification
Mutual funds are diversified investments which reduce the risks for the investor. It invests in a variety of securities across sectors, so a decline in the value of one security is balanced by the rise in the value of other.
Flexibility
Mutual funds allow the flexibility to invest in smaller amounts at regular intervals monthly as per convenience and budget. It also develops a habit of regular savings.
Professionally Managed
An investor need not worry about where to invest with a mutual fund. They are professionally managed by experts which helps you earn profit and therefore it is the easiest way to invest in equities even if you don’t have much knowledge of the market.
Profitable and Convenient
A mutual fund gives good returns over a long period and has the potential to beat inflation. It is a simple way to invest in equities, with risk mitigation. Mutual funds invest in different types of securities and thus cover a range of investment needs and also provide tax benefits.
The Bottomline
Compared to other investment options, MF schemes are undoubtedly more convenient and profitable investments in the long run. In addition, the expense ratio for managing the fund is also relatively low. Start your investment journey with mutual funds and find a plan that aligns with your investment goals.
FAQ
Quick, blog-friendly answers to common questions.
A Systematic Investment Plan (SIP) is a way of investing a fixed amount in a mutual fund at regular intervals, usually monthly. In real market conditions, SIPs spread your investments across different market levels. When markets are higher, the same amount buys fewer units. When markets are lower, it buys more units. Over time, this can help average the purchase cost.
SIPs can be useful during volatile phases because they reduce the pressure to time the market. You keep investing through ups, downs, and sideways phases with the same routine. Instead of reacting to daily market movement, SIPs help maintain consistency and stay aligned with your objective.
Compounding is when your returns start generating returns of their own. In the early years, growth looks slow because the base is small. Over time, as the base grows, even the same rate of return can create larger gains—this is the “snowball” effect.
The key drivers are time, consistency, and patience. Start early, invest regularly, and avoid interrupting the process. Compounding feels quiet at the start and becomes meaningful when it gets time to work.
Mutual fund investments are subject to market risks. Read all scheme related documents carefully.
