Why do people buy MFs?

Mutual Funds provide the following benefits, which is why people invest in MFs and maybe why you may want to consider buying MFs instead of individual stocks directly.

Diversification:  Mutual Funds invest in a range of industries, companies, and geographies which helps reduce the over all risk of the MF, which is then better able to preserve capital and any dividends it may provide. Risks specific to a business, an industry or sector of the economy, or to a country are all balanced out to ensure that the MF does not sustain significant downside due to any adverse event.

Professional Management:  MF managers, also called Fund Managers, do all kinds of research, qualitative and quantitative, to maximize the returns on the MF while minimizing risks.

Economies of Scale:  Individually, the investor may not have as much available capital to invest in so many companies to build a high return, diversified with low risk, and cost effective portfolio of investments. By pooling the investments of millions of investors, the MF is able to provide economies of scale in building a high return, diversified with low risk, and cost effective or low cost portfolio that you can invest in with very nominal investments one time or on a regular (monthly / quarterly / yearly) basis.

Liquidity:  MFs provide liquidity in terms of buying and selling of MF units by an investor. You can buy or redeem as many units you want at the NAV, net asset value, of the fund at any time. For example, if you are buying or selling units of a MF and put in the order today before a given cut-off time, then today’s NAV is applicable to your order. Based on this applicable NAV, money is deducted from your account to buy units or credited to your account from the sales of your units. The number of units you bought or sold is credited to or debited from your MF holdings, respectively.

Back to Types of Investments