Common people participation into stock markets via Mutual Fund route is on the rise recently. They can be the best way to invest your money also. The reasons are the plethora of advantages Mutual Funds offer with minimum risk. Increasing awareness and decent performance by the world stock markets is also contributing to this rise.
Until few years back, the proportion of people going for Mutual Fund investments was significantly low. However in recent times,this proportion is picking up.
The reasons attributed can be increasing awareness among people, more ease of investing, better understanding about Mutual Funds among the retail investors and general public and lower investment costs etc.
The equities or the stock markets, realty, property business make the best investment routes for an investor.
Among them, equities are more popular. They can yield the best returns on your money invested.
You can invest in stock markets via stock investing or mutual funds. Stocks have the potential to give you best returns over long periods of investment.
But investing through stocks is risky when you are a beginner to investing and do not know how to invest.
Mutual Funds make a best alternative to stocks for beginners looking for investing in stock markets. Even experienced investors also use mutual funds to build wealth over long-term.
Mutual funds give the equity exposure but with a cushion of safety.
So are you a Mutual Fund investor? If not, are you looking to go for invest your money into the mutual funds? Let’s find out if it makes sense to invest your hard earned money into the Mutual Fund schemes.
Table of Contents
What are Mutual Funds ?
By definition, we can say that Mutual Fund is the scheme of pooling large sums of cash from a number of investors at a common place and putting that cash into a portfolio, made up of various market and non-market instruments like stocks, bonds, government securities and others.
This is done by professional fund managers which are hired by the asset management companies (AMC). These fund mangers charge hefty sums of fee from these AMCs which an individual investor can not afford to pay.
When the value of investment made by these fund managers increases over time periods, these investments are sold in profits. The AMCs after keeping their share of profit, distribute the rest of the profits among its investors.
The retail investors get these profits as returns on their investment. Same is true in case the investment made by the fund managers depreciates in value due to fall in their portfolio securities. So the losses are also born by the individual investors. Resultantly, the investors get less cash than they invested with the AMC.
Just like the stock prices are represented in the form of their Last Traded Price or Current Market Price (CMP), the Mutual Fund Scheme is represented in the form of Net Asset Value or NAV.
The NAV keeps rising or falling according to the performance of the Mutual Fund portfolio managed by the fund manager.
The day you invest in Mutual Fund, you are allotted the number of Units according to the NAV of that scheme on that day. If you invest ₹ 5000 @ NAV 50, you shall be getting 100 Units.
When you want to exit the scheme, the amount according to the NAV of your exiting day shall be credited to your bank account. If NAV rises to 60,you shall get 100 X 60 = ₹ 6000 and if NAV falls to 40, your investment shall be 100 X 40 = ₹ 4000.
There are so many types of AMCs which offer Mutual Fund schemes to investors, like Reliance, HDFC, ICICI, UTI etc. to name a few.
The AMCs charge small fee from you for investing your money into the Mutual Fund. Some Mutual Fund schemes are exempt from any fee, for example Liquid Mutual Funds.
[Earlier there was fee in the form of Entry Load when you buy the Mutual Fund and Exit Load when you exit out of that Mutual Fund but now Securities and Exchange Board in India (SEBI) has asked the AMCs not to charge the loads after August 2009]
Do They Really Make A Best Way to Invest Your Money?
Mutual Funds provide plenty of advantages to investors for investment purposes. They add versatility to the savings and investment portfolio of an ordinary person who is not familiar with working of stock markets. They provide a chance of equity exposure which can be a good bet for long term. Following are the main advantages –
Capital Appreciation – Mutual Funds have the capability to deliver higher returns compared to traditional savings schemes, especially the Mutual Fund schemes based on equities.
If you want to invest your money for long time (more than 5-10 years), it is better to opt for Mutual Funds than fixed deposits (FDs) or recurring deposits (RDs).
Over long periods, these funds may offer returns greater than 15% while FDs or RDs yield only 8-9%. In reality, some funds have even deliver above 20% returns to investors.
Professional Management – By opting for Mutual Funds, you get your investments managed by qualified professional fund managers. You need not keep tracking the stocks or the stock markets. Fund managers keep doing this for you, shuffling and switching the portfolios.
You are required to review the performance of the fund only, that too only once or twice a year to know that your fund is performing well and on par with the stock markets and the other funds.
Income Tax Benefits – After a period of one year, Mutual Funds investments provide income tax benefits as the returns on investments come under the preview of long term capital gains which are exempted from income tax liabilities. So there is hardly any tax on income from Mutual Funds as compared to fixed deposits where income is taxable.
[As per recent notification issued in 2018, Long Term Capital Gains is no longer tax-exempted]
Portfolio Diversification – As the pooled money is invested over various instruments, your investments get the benefit of Diversification. Diversified Equity Funds expose your cash to stock markets which are the best asset class for the investments. Consequently, you earn better returns on your money.
Transparency – Mutual Fund investments are highly transparent and well regulated by the securities watchdog (Securities and Exchange Board in India or SEBI). The amount you invest in Mutual Fund, you get Units allotted for that.
The Account Statement stating the balance Units is delivered to you. When you need to exit the Mutual Fund, the amount corresponding to Net Asset Value (NAV) of the Units is credited to your bank account in 3-4 business days.
Need Specific – You can go for any Mutual Fund scheme according to your requirement. In case you want the dual benefit of income tax saving along with growth of your capital, Tax Saver Funds or Equity Linked Savings Scheme (ELSS) are there for you.
For short term savings where you need liquidity along with more return on your savings, you can opt for Liquid Funds. Similarly there are Fixed Income, Debt, Balanced fund schemes and so on.
Systematic Investment – You can go for savings for your retirement, your children education or marriages etc. systematically via Mutual Fund route. Some schemes allow even as low as ₹ 100 per instalment savings in case you are unable to invest bigger instalment. These are popular as Systematic Investment Plans (SIP). There is also no upper ceiling on the amount invested in Mutual Funds.
Easy To Invest – Investing in Mutual Fund is an easy task. Just choose a right Mutual Fund scheme carefully and you can invest online directly by visiting the website of that AMC from the comfort of your bedroom.
Alternatively you can visit a local office of AMC, any broker in your locality or any Bank branch can do for you as now-a-days most of the banks provide this facility. The drawback of going via broker or bank is the additional brokerage cost they will charge.
Risks Associated with Mutual Fund Investment
Although there are plenty of advantages of investing in Mutual Funds, this is not devoid of risks associated with the investment. While going for Mutual Funds, you shall always come across a warning ;
“ Mutual Fund Investments are subject to market risks. Please read offer document carefully before investing “
So it is very important that you completely understand what you are going to do. Mutual Fund Net Asset Value or NAVs also keep fluctuating along with stock markets although the volatility is not as much as seen in stock prices.
If stock markets start falling, the Mutual Fund scheme having more exposure to equities will also see decline in investment value due fall in NAVs. They move rather sluggishly and are thus good for a common investor as the losses are not that bigger and you always have the time to exit before your capital erodes substantially.
But it doesn’t mean that you should stay away from Mutual Funds. You should know that Rewards don’t come without Risks.
The bigger the Risk, the bigger is the probability of Reward.
And you can manage these risks well by choosing the right type of Mutual Fund as there are several types of Mutual Funds. You may read about these types at Choosing The Best Mutual Fund For You.