A mutual fund is a professionally managed company that collects money from many investors and invests it in securities such as stocks, bonds and short-term debt, equity or bond funds and money market funds.
Mutual funds are a good investment for investors looking to diversify their portfolio. Instead of betting everything on one company or sector, a mutual fund invests in different stocks to try to minimize portfolio risk.
The term is typically used in the US, Canada and India, while similar structures around the world include the SICAV in Europe and the open-ended investment firm in the UK.
Cost of delay/impact of the composition of mutual funds
When you invest in a mutual fund over a long period of time, the returns you earn have a compound effect. However, if you delay your investments by a few years, you will lose anyway. This compound effect will widen the difference between what you will accumulate and what you could have accumulated if you had started investing a few years earlier. Take a look amutualfundssahihai.com/en/what-age-should-one-start-investing to understand it better.
The compounding effect shows its long-term magic because the longer you stay invested, the more time your money will get worse. The power of composition is like a magnifying glass whose magnifying power grows exponentially over time. If you delay your investments, either via SIP or lump sum, and invest a higher amount, you still won’t be able to reach someone who started investing, say five years before you. In case of SIP it could invest half of the amount you are investing, but your investments will still be late. Even with a lump sum investment, the delay of a few years would mean that your accumulated wealth will be less than someone who invested in lump sum a few years before you. This is a huge cost to pay to delay your investment decision.
If you start investing
in mutual funds early, even if your investment amount is small, you’re likely to accumulate much higher wealth in a few decades than if you start investing a higher amount, say 10 years later. It is just like the hare and the turtle story where slow and steady investments started at the beginning of life will help you comfortably achieve your goal instead of starting late even if you are willing to invest more.