For beginners, the world of investing is mesmerizing and yet intimidating. If you are looking to create wealth in short period of time, equity is the best asset class and you need to invest in the stock market. However, it is important to get some experience in the investing world before you are ready to dabble in the stock investment. If you are new to investing and still want to make some small gains, the best option for you is mutual funds. There are different kinds of funds available according to the life stage and investment horizon a person is looking at. There are money market funds and investment grade funds for risk takers. Then, there are tax-exempt funds and balanced funds for people who are targeting retirement in a few years. So, it totally depends on your life situation. Here are three reasons for investing in mutual funds.
Low Risk
Many people consider mutual funds as conservative and low risk products. However, they are not very conservative, yet they reduce the risk to a large extent. If you have a low risk appetite and rightly so because you are investing for the first time, it is important to shift the burden and instead of investing in stocks, where the risk is too high to low risk products such as index funds such as Vanguard index funds.
Asset Allocation
You know, the number one thing that one needs to learn in investment 101 is asset allocation and rebalancing. It is not easy to master these skills, it comes with experience but you need time to do that. It requires discipline as well. If you are time impoverished or lack the financial knowledge, it is better to invest in a mutual fund, where you get an expert support in asset allocation. There are several funds like Vanguard, PIMCO etc. that are considered best and allocate and rebalance your assets to maximize your returns.
Diversification
Diversification is another important part of the success of financial investors. In fact, diversification is the key to combat the volatility of the market. The mutual funds invest your money in different asset classes and within the same asset class, they diversify across different sectors. This helps to give you a risk adjusted returns. A new principle in investing is “don’t keep all the eggs in one basket.”
However, at the end of the day, it is the quality of your investment that matters. There are some fund houses that may not be reliable. So, the good thing to start with is big names like Vanguard small cap and mid cap funds. These funds are doing well for past few years.
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