You might have come across these lines about Mutual Funds very often: “Mutual fund Sahi hai”, “Investing in mutual funds is subject to market risk” and advertisements like “Long term main mutual fund Sahi hai”.
Like most people, you must have had these questions:
How “mutual fund Sahi hai”?
Why mutual funds and not stocks?
To simplify things for you, let me tell you a quick story about mutual funds:
Suppose you have a college project to complete and wish to do it with multicolour pens: aka Green, Blue, Black, Red, etc. Buying all the pens will cost you ₹20. But you only have a ₹10 note to buy the pens.
The shop owner offers you a 5 in 1 pen with low performance in terms of quantity. This pen will cost you ₹10. After some thought, you realise that you only need these pens for a project, after which they would be of no use to you. You decide to buy this pen to complete your project.
Mutual funds are similar to a 5 in 1 pen!
How? Through one scheme/Fund you can buy the shares for multiple companies within your budget.
If you go to a broker and ask him to buy shares for multiple companies, it will cost you too much. But if you ask him to buy one mutual fund with an investment starting from ₹100, it will offer you many shares. Let me demonstrate with an example-
Suppose you go to the market and wish to purchase one share of ‘XYZ Ltd’. The price for this share is around ₹1500. However, you only have a budget of ₹150 to invest.
While you do not have enough cash to purchase the shares for ‘XYZ Ltd’, buying one share in mutual funds for ₹150 gives you an option to not only invest in ‘XYZ Ltd’, but also in a lot of other companies along with it!
People with enough money and time should go for direct investment in shares to accumulate good wealth over time. But people with less expertise who wish to earn wealth can go for mutual funds. Mutual funds are managed by experienced fund managers with good knowledge about the market.
Note that every fund is not perfect for each person because it depends on the risk-taking capacity. I have been asked numerous times whether a person should invest in a particular fund or go for SIPs.
A proper analysis is the ground rule before investing!
Before putting your money into mutual funds, you need to make a proper analysis of that particular fund. Check for its returns in the last 1 year, 5 years, 10 years, etc. Check for the Assets Under Management (in other words, the investment fund’s latest value in the market), Fund Manager and Fund Manager Experience, AMC reputation in the market, etc.
The historic returns should always be more than the fixed deposit. I will suggest you to first make your own risk assessment because investments in funds also have risks, either in Equity Fund or in Debt funds.
Of course, an individual should start with SIP, but not in a systematic investment plan, in Smart Investment Plan. In my next blog, I will be explaining more about the concept of a Smart Investment Plan.
Have any questions regarding Mutual funds? Get in touch with us to know more.