Mutual Funds for You

Sample this:

  • Prices are rising and rising. Am I getting any richer by putting my savings in a bank fixed deposit?
  • I am extremely busy and do not have time and skills necessary to analyse and monitor my investments. Is it possible I entrust them to experts?
  • I cannot invest a one-time large lump sum. Can I invest small amounts periodically?
  • With my limited funds, is it possible that all my eggs are not kept in one basket?

Do these questions look familiar? Have one or more of these thoughts crossed your mind lately? Yes?  Relax. You are not alone. Like you, millions of Indians worry about their savings and investments every day. However, the good news is, they do not have to! The worry and fear about financial insecurity arises chiefly due to lack of awareness about investment options. And this ignorance may be costly. For one, in the era of persistent inflation, bank fixed deposits fail to generate returns that cover even the general price rise. Result: we might actually end up poorer when the fixed deposit matures!

In our country, many people do not fully understand wonderful financial innovations like mutual funds. This leads to fear of losing our hard-earned money, ultimately preventing us from reaping their benefits – that too without taking disproportionate risk. But, once we take time to understand mutual funds, their working, benefits and convenience offered, our apprehensions plummet. This knowledge empowers us with an exciting world of financial choices that may help us realize our dreams of a comfortable life devoid of financial cares.

smiling woman talking via laptop in kitchen

So, why mutual funds? Here is a partial list of reasons:

  • You do not necessarily need to have a large investible corpus at hand. You can begin with as modest an amount as Rs 5,000. Also, if you want to invest small sums regularly from your income like you do in a recurring deposit, mutual funds offer the Systematic Investment Plan (SIP) option to do just that – you can invest as low as Rs 500 per month!
  • Mutual funds offer schemes that suit almost any risk-return preference or investment goal you might have. So, if you are in your early 30s and want to accumulate funds for a house or your child’s education, you have aggressive equity funds to choose from. Likewise, if you are saving for your retirement and want safety with growth, you can invest in a medium risk fund that blends bonds and equity. So, you can choose your weapon that suits your aim, so to speak.
  • Some wise man said that the price of liberty is eternal vigilance. Research and monitoring are imperative for investing, especially in equity markets. However, most of us are too busy to really do that. Plus, the technicalities may be too much for us. In mutual funds, this job is delegated to professionals best equipped to do so. A lay investor can rest assured that their investments are always on the radar of an expert who will do the necessary tinkering as the markets move.
  • Another maxim of investing is avoiding concentration of investments to a few asset classes or avenues. Spreading your funds across a range of investment options is called diversification which leads to risk-reduction. With mutual funds, diversification can be achieved with even modest sums. How? The mutual fund pools the money received from all the investors and invests in a variety of securities or asset classes.
  • Then there is perhaps the most important benefit of having a hard-nosed investment professional manage our money. Mutual funds hire investment managers who are trained and experienced in the science and art of investing and incentivise them for generating superior returns.
  • You may ask – it is fine till this point, but what if I am in an emergency and need cash by liquidating my investments? The good news is all mutual fund units can either be sold in the stock market (close-ended funds) or to the fund house itself (open-ended funds). With your bank account details already supplied to the fund, selling your mutual fund investments is smooth and painless.
  • To boot, mutual funds are bound by stringent guidelines of SEBI, the market watchdog. The guidelines cover not just their working, governance and disclosure, but have in-built safeguards for retail investors.

Having discussed the plusses of investing in mutual funds, there are some caveats too. As every silver lining has a cloud, the flip sides of mutual fund investing are:

  • Generally, mutual funds generate returns over a fairly long period of time. One may witness unsatisfactory short-term performance. However, that should not cause panic.
  • Mutual funds relieve you of the tedium of researching individual securities, but selecting the right mutual fund also requires you to do some research due to their multitude. The Association for Mutual Funds in India (AMFI) reports the presence of 40+ fund houses with numerous schemes to choose from. So, you may feel spoilt for choice at times.
  • The returns you earn on a mutual fund scheme are net of fees and expenses charged by the fund. However, these expenses cannot be arbitrary and are subject to an overall limit set by SEBI.

In a nutshell, mutual funds present a smart investment opportunity. World over, in most of the developed world, mutual funds remain the preferred investment option for a vast majority of the population.

Mutual funds let your money keep working hard for you while you are busy living your life. So, identify your financial goals, select funds with matching objectives – begin today. The earlier you do, the more returns you are likely to earn due to the power of compounding. With benefits like convenience, diversification, customization and flexibility of choosing your investment amount, few investment avenues can ace mutual funds.

Team FinanceInsights

October 22

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