“Mutual Funds Investments are subject to market risks. Please read the offer documents carefully before investing.”
– Every TV ad about Mutual Funds
This blog writer doesn’t know much about saving money or investing wisely. The TV ads seemed so boring and people talking about it even more so. So when Ayush Bhargava, our regular financial consultant, agreed to sit us down and talk about Mutual Funds, we realized to our surprise how simple and interesting everything actually was.
Here’s what we learned.
What are Mutual Funds?
Keeping it simple, Mutual Fund is a pool of funds, where individuals, or a group of people come together and collectively invest their money into equities, bonds, and other securities. Then each of the investor gets some percentage of share in proportion to the amount invested which is in the form of units.
To invest this collected amount, a Fund Manager is hired who works according to the kind of fund he is managing. If it’s long term growth fund, then his priority is to beat the index over the long term. If he is managing debt fund then he would try to generate high returns with lowest risk.
What are the Different Options available in Mutual Funds?
Basically, there are three categories of Mutual Funds available in India – Equity Fund, Fixed Income Fund and Money Market Fund. There are many other categories but they are more or less variants of these three categories –
i) Equity Funds: This is the largest category of Mutual funds. The money collected through this kind of schemes is invested into direct equities in the secondary market. The objective of this kind of fund is long term growth.
ii) Fixed Income Funds: These funds are also known as Income funds and Bond funds. The primary objective of these funds is to generate regular income for the investors as mostly who invest in this fund are conservative investors or retired people. The risk associated in this fund is much lesser then in Equity fund.
iii) Money Market Funds: These funds are also known as Liquid funds. These are the safest among all the categories. Although the returns are less but still the capital is protected. These are also known as the alternative to your bank account but the return generated is almost double of what you get in savings account.
Advantage of Investing in Mutual Funds:
Equity Mutual funds are considered as the alternative to direct equity. With limited knowledge, time and money people find mutual funds a popular investment vehicle for their savings. Let’s look at few points which are beneficial for any investor:
- Liquidity – Mutual funds are the most easy to trade. It is very easy to get in and get out which makes it more attractive. Many people keep their savings a/c money into liquid funds as the returns are higher and easy availability of money. In simple words, one can sell mutual funds in a short period of time.
- Diversification – A famous quote about investing ‘Never put all your eggs in one basket’ really applies when one invests in mutual funds. Diversification means mixing of different investment styles. It helps in lowering the risk by spreading the money across different options available.
- Professional Management: A common person finds it difficult to keep a track of the stocks. It requires research and time to pick the best of the stocks so that the desired return is generated. Mutual fund schemes are managed by professional fund managers who are experts in the field of stock picking. They research and analyze different sectors and then invest the money to achieve the objective of the scheme.
How to Select the Fund which is Right for You?
Every fund has its own strategy of investing. For example, some only invest in blue chip stocks while others invest in corporate and government bonds. One should always invest in those mutual funds that serve the purpose of investing. Before investing one should identify the goals and need of investment. Once the goal is clear, then it would be easy to pick the right kind of mutual fund scheme.
Mutual funds are considered to be the best investment vehicle for the first time investors as well as for the established one. The advantage of this product makes it more attractive to look out for. If one is looking out for a professionally managed fund then it is the one stop solution for you. Also one can seek the help of his/her advisor to choose the right scheme to invest in.
InFocus Guest Writer: Ayush Bhargava
A practicing CFPCM and a Postgraduate in Financial Planning, Ayush is the founder of a financial planning servicing to professionals, and currently writes financial plans and personal finance articles for the GettingYouRich.com blog.