Staying Fixed Gets You Nowhere

In India, most investors prefer to invest in traditional investment options such as Fixed Deposits (FD) or the Public Provident Fund (PPF). Traditional investment options carry relatively low risk and the returns on the investments are fixed. However, with the fall in interest rates, a number of investors have been choosing to invest their money in mutual funds.

A mutual fund is an investment instrument where capital from a number of investors is pooled together and invested in various securities and bonds. Unlike traditional investment instruments, investments in mutual funds can be made both for long-term or short-term goals. As a method of growing wealth, traditional investment instruments do not offer much. With mutual funds, the chances of building wealth are significantly higher. This is one of the key reasons for its popularity.

The following are some of the reasons why mutual fund investments are likely to be better investment instruments than traditional investment options:

  • Diversification
  • Mutual funds offer investors the option of diversifying their investment portfolio. This option does not exist with traditional investment instruments such as the Public Provident Fund (PPF) and Fixed Deposits (FDs). A diversified investment portfolio gives the investor exposure to a variety of funds while also minimising risk to market volatility.

  • Liquidity
  • Most traditional investment instruments come with a fixed tenure. While it is possible for investors to withdraw from a scheme after a specified amount of time, there is usually a penalty that is levied. With mutual funds, investors can withdraw from a fund at any point during their investment without having to incur and premature withdrawal charges.

  • Inflation
  • Traditional investment options have a fixed interest rate. Therefore, the inflation rate can reduce the percentage of returns. When inflation rate and taxation are taken into account, the returns earned through the investment are not that much more than the initial amount invested. Mutual fund investments tend to have comparatively higher returns and the dividends that an investor receives are free from taxation. This, in turn, provides the investor with higher liquidity.

  • Fund management
  • Mutual funds are monitored and managed by a professional fund manager. Investors need not worry about having to track the performance of their investment and can choose to buy or sell stocks in their portfolio by consulting their fund manager.

  • Equity exposure
  • With traditional investments, the exposure to equity investments is capped off at a particular proportion. With mutual fund investments, the investor can choose the proportion of their capital that they wish to invest in equity instruments. Therefore, investments can be made based on the investor’s risk appetite.

  • Higher returns
  • Most traditional investment instruments have a fixed interest rate. While this is one of the reasons why they are often chosen by most investors, the potential for higher earnings is curbed. With mutual funds, investors can enjoy the benefit of higher earnings based on the performance of the market at that point in time. Additionally, the absence of a fixed tenure is another factor that allows investors to cash out when their funds are performing well.

    The factors mentioned above are some of the many reasons why more and more investors are choosing to invest in mutual funds rather than traditional investment options. While the latter does offer a sense of stability with regard to the returns earned, the rewards associated with mutual fund investments tend to outweigh the risks involved.

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