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Tuesday, July 28, 2009

Why Mutual Funds Are the Best Option For Wealth Building

Mutual funds are making a strong penetration among common people. The reason is very clear. Every individual keeps interest to make money. But, due to lack of proper knowledge they hesitate to enter into the stock markets. So, mutual funds give a good platform for common investors.

Investments in any financial instrument requires some expertise. But, if we will talk about stocks, bonds and some special financial instruments then it requires more expertise and constant supervision to enable an investor to take informed decisions.

In general, Small investors usually do not have the necessary expertise and the time to undertake any study that can facilitate informed decisions while investments. This is the predominant reason for the popularity of mutual funds. Apart from it, there are many other benefits that can be taken by investing in mutual funds.

Investors can diversify their investments by investing in mutual funds. Small investors may not have the amount of capital that would allow optimal diversification. Since the corpus of a mutual fund is substantially big as compared to individual investments, optimal diversification becomes possible. As the individual investors' capital gets pooled into a mutual fund, all of them are able to derive the benefits of diversification.

Apart from it, investors can save transaction cost by investing in mutual funds. Transactions of a mutual fund are generally very large. These large volumes attract lower brokerage commissions and other costs, as compared to the smaller volumes of the transactions entered into by individual investors. The brokers quote a lower rate of commission to fund houses. So, investors can get benefit.

Other benefits are also with mutual-funds. Mutual funds generally offer a number of schemes to suit the requirements of the investors. Thus the investors can choose between regular income schemes and growth schemes, between schemes that invest in the money market and those that invest in the stock market, etc. Some schemes provide some added advantages also.

The most important thing is mutual-funds are managed by professionals. Mutual funds are generally managed by knowledgeable, experienced professionals whose time is solely devoted to tracking and updating the portfolio. Thus, investment in a mutual fund not only saves time and efforts for the investor, it is also likely to produce better results.

Liquidating a portfolio is not always easy. There may not be a liquid market for all the securities held. In case only a part of the portfolio is required to be liquidated, it may not be possible to sell all the securities forming part of the portfolio in the same proportion as they are represented in the portfolio. These problems can be solved by investing in a mutual fund. A mutual fund generally stands ready to buy and sell its units on a regular basis. Thus, it is easier to liquidate holdings in a mutual fund as compared to direct investment in securities.

Now days, fund houses are providing many option for investors. According to requirements, investors can choose the best option.

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