Updated: Aug 21
It is hard to miss the advertisement featuring Sachin Tendulkar in the ‘Mutual Fund Sahi Hai’ campaign of AMFI (Association of Mutual Funds in India). Did you know Tendulkar is right about the benefits of mutual funds? Let us take a closer look.
But first, let us understand what is a mutual fund in simple terms.
Let me tell you a story.
Rahul, a Govt employee received his month’s salary at the end of the month. He took the money home and safely kept it inside the locker. Unfortunately, a thief robbed his house at night and he lost all his money. He had no money left to meet the expenses of the next month. Anjali, Rahul’s wife consoled him and told him that she had some money saved.
You see, every month Rahul used to give her an allowance to meet the monthly expenses. However, Anjali was able to save some money each month instead of spending all of it. She kept the small savings at different parts of the house. Some she kept in the safe which the thief robbed, some in between her sarees, some in the rice container and some behind the idols of her pooja room. Even though she lost money from the safe, the rest of her savings were still there.
Thanks to Anjali’s wise behaviour, they had enough money for the next month’s expenses.
This story might sound quite ancient, after all who stores money inside rice containers? Bear with me, this was just to drive home an important point.
i.e It is safer to spread your investments across different options rather than putting all your money in one place.
In the real world, the different options available for investors include Stocks, Bonds, Real estate, Gold, etc. These are known as Asset Classes. While making a decision to invest, we can either take 2 routes
Like Rahul – Invest all the money in a particular asset class. Here, if that particular asset class doesn’t perform well, you stand to lose a good proportion of your invested amount.
Like Anjali – Keep fixed sums in various asset classes. Here, even if an asset class faces losses, the gains in the other classes can make up for the losses. Hence your overall portfolio (ie. total money invested) is protected against significant losses.
Like Rahul, who invests in individual assets? Someone who is an expert in stock markets or someone who doesn’t mind making losses because he/she is really rich.
For others, like you and me, Anjali’s way of investing is more appropriate and the financial product suitable for such an investment is a Mutual Fund.
A mutual fund accepts money from investors (people like you and me) and invests them in various assets in such a way to minimise the losses of your investment and generate an average return. There are mutual funds that invest in equities (shares of companies), bonds (where you lend money to companies and Govt), gold, real estate, etc.
What makes mutual funds attractive?
1. Diversification –
Diversification saves your investment against losses in a particular asset class. For example, at a particular point in time, let us say the value of gold drops, but the rest of the asset classes like bonds or equities perform well. Thus, your overall investment makes significant gains. There is also the benefit of diversification within an asset class. eg: In an equity mutual fund (a MF that buys shares of companies), shares of a particular company falls, but the shares of other companies perform well. This balance the loss from a single company.
2. Professional Management –
Asset Management Companies (AMCs), also known as mutual fund houses are financial institutions that manage several mutual fund schemes. Each mutual fund is managed by fund managers, who are qualified professionals and with considerable experience in the market. They use their expertise and research to pick the right assets to maximise the returns for the investors at the same time ensuring minimal losses.
3.Minimum investment –
Similar to a Recurring Deposit (RD), you can start investing in a mutual fund with an amount as low was Rs 500 (for select schemes it is as low as Rs 100). You can decide a pre-determined amount (say Rs.500) to be deducted from your bank account at fixed intervals (weekly, monthly, quarterly, or bi-annual). This type of investment option is called Systematic Investment Plan (or SIP). Also, suppose you have extra cash with you, this can be invested in the MF (called lumpsum investing).
4. Better than FDs and RDs for beating inflation –
As a child, you would have seen your dad filling petrol in his Chetak scooter for Rs. 40/litre, whereas you are buying it at Rs 110/litre. This is inflation. This is why corporate employees ask for a hike every year and Govt. employees ask for pay revision. To meet the increasing living expenses. The percentage rate at which price increase happens is called the rate of inflation. Our money grows only if the return we generate in our investments is higher than that of inflation. During the past decade ending in the year 2022, the average inflation was 6.03%. During this period, stock market has given a return of 12% whereas our FD and RD gave 6-7% returns. Hence, you can invest in mutual funds to beat inflation and grow your money.
5.Liquidity (Easy to buy and sell) –
A sale happens when there is supply and demand for a particular item. An item is liquid when it can be sold very easily. Imagine you have invested in a stock of a particular company and you decide to sell the stock. Unfortunately, the stock is not in demand and nobody wants to buy it. Such a stock is not liquid and holding such a stock is no good when you are in need of money. However, you don’t face such a situation with mutual funds, unless there is a lock-in-period for a particular fund.
6. Systematic withdrawal plan –
There is an option to withdraw a fixed amount from the mutual fund at regular intervals. This facility earns an investor a regular income and is perfect for someone like a retiree. There is also an option to withdraw only the profits keeping the initial investment amount invested.
7. Fund for all needs –
The financial need of every individual is unique. You might want to save for your kids’ college expense or retirement planning or you want to generate regular income or you want to invest in mutual funds for a short duration for the higher interests, there is a fund for all your financial needs.
Now, I hope you have a good idea about the benefits of mutual funds. In India, there are 44 AMCs which offer 2500 mutual fund schemes. Finding the fund perfect for your financial goals will require expert knowledge.
What are you waiting for? Get in touch with our experts now and secure your finances.