Wealthy Wednesdays: Why you should invest in mutual funds?

In everyday terms, a mutual fund is a pool of money collected for investment in the stock market or money markets for optimum returns. According to the Investor Words definition, a mutual fund is an open-ended fund operated by an investment company, which raises money from shareholders and invests in a group of assets, in accordance with a stated set of objectives. For most mutual funds, shareholders are free to sell their shares at any time, although the price of a share in a mutual fund will fluctuate daily, depending upon the performance of the securities held by the fund.
Just as Banks have the Reserve Bank of India, the Securities and Exchange Board of India (SEBI) is the regulatory authority for Mutual Funds.

In their offer document, mutual funds announce the manner in which the money would be invested, whether in stocks or elsewhere, in what proportion, and also provide a risk assessment of the scheme for the investor's information. But one must be aware that higher returns are always accompanied by high risks. Besides, mutual fund investments are subject to market risks, so do read the offer document carefully before you invest. You have the option to invest when a new fund is launched or you can invest in an on-going scheme, which has a satisfactory performance record. A one-time compliance of the Know Your  Customer (KYC) norm is essential before you can invest in mutual funds.

A word of wisdom–exercise due diligence before investing. Repose trust in the fund. And set a reasonable time for the fruits to ripen before you pluck

PROS
-Your investment is in the hands of an expert. The fund manager is ably supported by a team of analysts and researchers and therefore, you can hope for an efficient and judicious handling of your money. Over a decent stretch of time, wealth creation is possible, when the returns are greater than the tax and inflation rates.

-Investment can be in small or big amounts,  in regular SIPs (Systematic Investment Plan) or at random intervals, entirely at your convenience.

-You will be able to create a diverse portfolio so that all the eggs are not in one basket. A downtrend in one segment of the economy will be offset by another. This is important when you have no clue about the various companies listed in the exchanges.

-The Net Asset Value (NAV) of your investment is available online. This enables the ease of tracking your investment at your convenience. Redemption or encashment is easy. The end-of-day value as declared by the fund, multiplied by the number of units held by you will be credited to the bank account provided by you.

-Tax benefits accrue. Investment in specified schemes are tax deductible. Dividend income is tax exempt and the redemption after three years does not attract capital gains tax.

CONS
-When you invest, there is an entry load or charge. This means that if you invest ₹5,000, after deduction maybe ₹4,900 or so is actually invested. Straightaway, there is a sense of loss. In certain cases, at the time of redemption, there may be an exit load too.

-Mutual funds are best in the long term, more than five years or even closer to 10. They are also subject to market risks. In the event of a fall in the market, the principal you had put in can be fast eroded and rebuilding the corpus can be quite a painful experience.

-As an amateur and believing in the long term, you may unknowingly continue to put in money in a losing venture. There may be occasions when the erosion and uncertainty can cause unnecessary panic.

-Though in the hands of experts, not all funds have been able to generate excellent returns consistently. And as past performance is not a measure of the future, for your own sake, you need to stay invested and be alert and aware of economic developments.

-There is no assurance or guarantee of return, either of the principal or of dividend. Future projections are at best theoretical. A healthy risk appetite is recommended.