Very often financial planners meet someone who intending to invest in stocks, bonds, real estate, mutual funds, gold etc.Such a statement clearly reflects that a large number of investors think that like stocks, bonds, gold and real estate, mutual funds are also an asset class which should be there in their portfolio.

MFs are Bridge to asset classes

The reality, however, is that a mutual fund itself is not an asset class. Rather it's a bridge to investing in various asset classes like stocks, bonds, gold, real estate etc. at a cost and risk which are usually lower than when an investor invests in these assets on his own.

This is possible because say if an investor invests in an equity mutual fund, he is actually, although indirectly, investing in stocks. This is since the equity scheme in which he is investing has a portfolio of stocks which is managed by a group of individuals who have experience in investing and managing money. Investors in debt, gold, real estate and commodities could also expect the same. In India, though, real estate and commodity mutual funds are yet to be launched.

Low risk, low cost

Since mutual fund schemes are managed by a group of experienced investment professionals, the chances of them losing money compared to one who does not have much experience in investing in stocks, debt etc. are lower.In addition market regulator Sebi has also put in a cap on the total expense fee that fund houses can charge their investors in each scheme (maximum of 2.75% per annum).

Better tax efficiency

Mutual funds also offer better tax efficiency when compared with direct investing. One of the reasons for this is the government's intentions to push retail investors to take the mutual fund route to investing.

When planning ones finances there is a requirement to invest in various asset classes. In such a situation mutual funds turn out to be one of the best options to invest and achieve ones financial goals. Mutual funds are basically a means to invest in any asset class with several advantages to the investors.

Mutual funds can be best explained if one compares it to a garden. In a garden there are many flowers and they are taken care by the gardener. In a similar way a mutual fund has many securities which are managed by a fund manager. This fund manager is concerned with generating returns for his investors and does not get married to a stocksecurity. This is a behavioural hitch while one looks at investing directly. He (fund manager) cuts all weeds (non-performing securities) and retains only the performing ones.

One of the clear advantages of investing in mutual funds is diversification which leads to reducing the risks associated with investing.

The common myth about mutual funds is that they invest only in equities. It is rather a tool which provides a pathway to invest in debt market, gold and even real estates. One of the biggest boons of a mutual fund is systematic investment which allows an investor to invest at regular intervals. This helps in rupee cost averaging which in turn helps investors get better risk-adjusted returns.

All in all mutual funds turn out to be one of the best products for an investors to help him achieve financial freedom. It is however important that product selection should be based on proper research and after understanding ones financial goals and risk taking ability.