When it comes to budgeting, it's not just about managing expenses; it's also about optimizing your idle funds. Rather than allowing these funds to sit unused in your bank account, you can invest them to earn a return on investment (ROI) and safeguard their value against inflation.

Finding the right investment opportunity can be challenging due to the excessiveness of options available. Choices range from shares and bonds to mutual funds and other market securities, each with its own advantages and disadvantages.

Investing in mutual funds, rather than individual stocks or bonds, can significantly reduce risk to a greater extent. However, the key question remains: is it safe for businesses to invest in mutual funds?

What are mutual funds?

Mutual funds are market-linked instruments that invest in equity or equity-related securities, debt, and money market instruments. The net asset value (NAV) of a mutual fund scheme is influenced by the market prices of the securities in its portfolio.

Additionally, investing in mutual funds can reduce risk compared to investing in a single stock or bond. Investors earn returns based on the fund’s performance after deducting any fees or expenses.

Things to consider before making a mutual fund investment

When choosing a mutual fund, there are several key factors to consider:

Fund Performance:

Investors should evaluate the performance of the mutual fund scheme before investing. Compare its 3-5 year performance against the benchmark and the fund category, and assess the consistency of its performance.

Net Asset Value (NAV):

NAV represents the market value per unit of mutual funds and is a crucial factor for many investors. Mutual funds with a high NAV are typically more expensive and may offer less growth potential, while those with a lower NAV are more affordable and provide greater growth opportunities.

AMC Performance:

An Asset Management Company (AMC) manages and oversees mutual funds and other investment vehicles. Investors should assess the performance of AMCs similarly to how they evaluate fund performance.

Expense Ratio:

All funds incur certain costs and fees, including managerial and operational charges. Checking the expense ratio is important, as even minor differences can significantly affect wealth growth.

Exit Load:

Some funds impose an exit load if you withdraw prematurely. It's essential to check whether the schemes have an exit load or if they are free from it.

Assets Under Management (AUM):

AUM refers to the total assets managed by a mutual fund scheme. A larger AUM for equity funds can make it challenging for the fund to enter or exit companies, but it is beneficial for liquid funds or other short-term debt funds.

When are mutual funds considered to be a bad investment?

There are instances when investing in a mutual fund may not be advantageous, particularly when management fees are high. Factors such as a high annual expense ratio, substantial load charges, or elevated fees make it less ideal.

High Annual Expense Ratio: Mutual funds must disclose their fees as a percentage to cover operational costs. These fees can sometimes reach up to 3%, which makes the investment less appealing.

Lack of Control: Investors do not have the authority to select and manage individual securities within a mutual fund. This can be unsuitable for those who desire complete control over their portfolios and want the ability to regularly rebalance their holdings.

Load Charges: Mutual funds often have various share classes with front- or back-end load fees applied when buying or selling shares. These load fees, ranging from 2% to 4%, can diminish the returns generated by mutual funds, making them less attractive to investors.

Is it safe for businesses to invest in mutual funds?

When used correctly, mutual fund investments can yield good returns with minimal risk, especially when compared to individual stocks or bonds. For business owners, keeping track of stock market dynamics can be challenging, making mutual funds an ideal investment. Here are some reasons why investing in mutual funds is considered safe for businesses:

Regulation by SEBI: Mutual funds are regulated by the Securities and Exchange Board of India (SEBI), ensuring they operate within specific guidelines and adhere to strict investment policies. This regulation provides business owners with a sense of security and trust.

Risk Reduction through Diversification: Mutual funds reduce investment risk by diversifying across various assets.

Professional Management: Managed by experienced professionals, mutual funds offer a hassle-free investment option for business owners and minimise the risk of poor investment decisions.

Cost-Effectiveness: With low investment and management fees, mutual funds are a cost-effective option for businesses.

High Liquidity: Liquidity is a crucial concern for businesses, and mutual funds are highly liquid, making them an attractive investment choice.

Conclusion

Ever since mutual funds have come into the market, their convenience and flexibility make them an attractive investment option. However, like all investments, mutual funds are subject to market risks, and there is no assurance that the objectives of the mutual fund plans will be met. Therefore, before making any investment decisions regarding a mutual fund scheme, it is advisable to seek professional advice to ensure a well-informed decision.