April 24, 2017
A renowned financial advisor once compared investing in Mutual Funds to ordering an affordable thali in your favourite joints where you can economically eat a variety of food you wish, in the same plate. What an amazing yet simplistic way to describe what Mutual Funds is all about!
The general public is not always aware of the know-how of stock market. One needs a lot of time and research to be put in to become an expert in this sector. But what if someone told you that a team of experts in the field of finance can manage your investments for you and that you can start investing with as less as INR 500 per month.
Let’s discover how mutual funds can help one climb the ladder of financial success:
Professional expertise: To invest in the stock market, one needs a deep and strong technical expertise of how the market works. Anyone with extra capital to park is a potential investor but to be a successful investor one needs to hand over the fund to a finance professional who can manage it.
Just like in case of companies, one has to hand over the responsibilities to the CEO as not everyone knows how to run a company similarly everyone does not know how to invest efficiently in the market. Thus, like one has to invest oneself in a company by buying the shares and acting as shareholders, in mutual funds too you invest and leave the day to day working to fund managers who have acquired deep industry knowledge to invest your money wisely, reaping profits for you.
Diversification: There has been an old saying which goes like: do not put all your eggs in one basket. This has a definite mathematical and financial relevance to it when it comes to investing in the market.
Diversification means spreading out of ones’ asset over a variety of mixed investments which ultimately leads to reduced risk. A good example for a stable portfolio would have investments in retail sector and industrial sector both to balance out the assets, so that if one sector goes down the other balances it out.
A truly diversified portfolio would have investments with varied capitalizations from diverse industries, with diverse issuers and varying maturities. For an individual investor to do all that, might cost a lot to him or her.
By buying mutual funds one gets the benefit of immediately investing in a diversified portfolio without the need of large cash requirements.
Economies Of Scale Advantage: It is a basic economic rule that the larger the production the lower the transactional costs gets. Since mutual funds are made up of investments from millions of investors, the management of fund costs goes lower.
To understand this, one must know the theory of volume discounts. If one buys one security at a time, the transactional costs would be higher rather than when one buys a mutual fund with ten to twenty stocks in the same package. Investing in equity funds would get one be charged around 2.25% of the initial capital, while just 1.5%-2% thereon for money invested every year. Investment in debt mutual funds might cost even less.
Ease Of Liquidity: If one has invested in open-ended schemes then based on the Net Asset Value (NAV) on the current day the investor can redeem their investment any day they want. If there is a specified lock in the period then it exists and one can easily redeem the investment directly in one’s bank account. If one has invested in close-ended mutual funds, it can easily be traded in the stock exchange and redeem their investment with considerable profits.
Get Better Of Inflation: One has to realise that money not invested properly is money lost. In mutual funds, the fund managers spend a considerable amount of time, money, effort, and research to come up with inflation competent returns. While one may consider investing in banks a great option, they do not realise that the money is being nibbled away with the rising inflation.
So, for example, one can buy 20 boxes of candies one year with INR 100. If they invest INR 100 for one year at the bank with 5% return on their investment, next year they shall have INR 105 to spend.
But if the inflation rate in India went on to 10% then the boxes would cost more than last year and one shall not be able to buy the same amount. In mutual funds, the managers create a diversified portfolio with inflation competent returns for the investors and thus one can remain safe from losing out on their hard earned money.
Secure & Transparent: With SEBI guiding and looking after all the mutual fund companies, investors can rest assure that their money is invested safely and that ultimately, they are themselves in control of their investment.