What is a Mutual fund ?
If you are looking for a way to grow your money and achieve
your financial goals, you might have considered investing in mutual funds.
But what are mutual funds and how do they work?
In this blog post, we will explain the different types of
mutual funds, their advantages and disadvantages, and how they compare to other
investment options like bank deposits and stock market.
Mutual funds are pools of money collected from many
investors and invested in various securities like stocks, bonds, money market
instruments, etc. by a professional fund manager.
The fund manager decides which securities to buy and sell
based on the investment objective and strategy of the fund. The investors get
units of the fund that represent their share of the fund's portfolio.
The value of each unit is called the net asset value (NAV) and it changes
daily based on the performance of the underlying securities in the Stock Market.
There are different types of mutual funds based on their
asset class, investment objective, risk profile, maturity period, etc. Some of
the common types are:
-
Equity funds:
These funds invest mainly in stocks of companies across
different sectors, sizes, and geographies. They aim to generate capital
appreciation over the long term by benefiting from the growth potential of the
stock market. They are suitable for investors
who have a high risk appetite and a long investment horizon.
- Debt
funds:
These funds invest mainly in fixed income securities like
bonds, debentures, treasury bills, etc. They aim to provide regular income and
capital preservation by earning interest from the securities. They are suitable for investors who have a low to moderate risk
appetite and a short to medium investment horizon.
- Hybrid
funds:
These funds invest in a mix of equity and debt securities in
varying proportions. They aim to balance risk and return by diversifying across
different asset classes. They are suitable for
investors who have a moderate risk appetite and a medium to long investment
horizon.
-
Money market funds:
These funds invest in very short-term debt securities like
commercial papers, certificates of deposit, etc. They aim to provide liquidity
and safety by earning interest from the securities. They are suitable for investors who have a very low risk appetite
and a very short investment horizon.
- Index
funds:
These funds invest in the same securities and in the same
proportion as a specific market index like Nifty 50 or Sensex. They aim to
replicate the performance of the index by passively tracking its movements.
They are suitable for investors who want to
invest in the broad market without active fund management.
- Sector
funds:
These funds invest in stocks of companies belonging to a
specific sector like banking, IT, pharma, etc. They aim to capitalize on the
growth potential of the sector by taking concentrated bets. They are suitable for investors who have a high risk
appetite and a strong conviction about the sector.
-
Thematic funds:
These funds invest in stocks of companies that are related
to a specific theme like infrastructure, consumption, environment, etc. They
aim to benefit from the long-term trends and opportunities in the theme by taking
diversified bets. They are suitable for
investors who have a high risk appetite and a long-term vision about the theme.
Advantages of investing in Mutual funds
One of the main advantages of investing in mutual funds is
that they offer diversification across different securities, sectors, and
themes.
This reduces the risk of losing money due to poor
performance of one or few securities.
Another advantage is that they offer professional fund
management by experts who have access to research, analysis, and tools to
make informed investment decisions. This saves time and effort for investors
who may not have the knowledge or resources to do so themselves.
Another advantage is that they offer flexibility and
convenience for investors who can choose from a wide range of mutual funds
based on their risk profile, investment objective, time horizon, etc.
Investors can also start investing with as low as Rs 500
per month through systematic investment plans (SIPs) or withdraw their money
anytime through systematic withdrawal plans (SWPs). Investors can also
switch between different mutual funds within the same fund house without any
tax implications.
Mutual funds also offer transparency and accountability
for investors who can track their portfolio performance, NAVs, holdings,
expenses, etc. through regular statements and reports provided by the fund
house or online platforms.
Mutual funds are also regulated by the Securities and
Exchange Board of India (SEBI) which ensures that they follow certain rules
and guidelines to protect investor interests.
Mutual funds can also help investors save tax by
investing in certain categories like equity-linked saving schemes (ELSS) which
offer tax deduction under Section 80C of the Income Tax Act or debt funds which
offer indexation benefit for long-term capital gains tax
How patience influence investement in Mutual fund?
Investing in mutual funds is not a get-rich-quick scheme. It
requires patience, perseverance, and optimism to achieve your financial goals.
Why patience is important for
mutual fund investors?
Patience is the ability to wait calmly for something without
getting restless or anxious. It is a virtue that can help you overcome many
challenges in life, including investing. Here are some reasons why patience is
important for mutual fund investors:
- Patience helps you ignore short-term market fluctuations
and focus on long-term performance.
The stock market is volatile and unpredictable in the short
run.
It can be influenced by various factors such as economic
conditions, political events, corporate earnings, global news, etc. These
factors can cause the prices of stocks and mutual funds to fluctuate daily,
weekly, or monthly.
However, these fluctuations do not reflect the true value or
potential of the underlying companies or sectors. If you are patient and do not
react to every market movement, you can avoid making impulsive decisions based
on emotions such as fear or greed.
Instead, you can focus on the long-term performance of your
mutual funds and their ability to generate consistent returns over time.
- Patience helps you benefit from the power of compounding.
Compounding is the process of earning interest on interest or returns on
returns. It is one of the most powerful forces in investing that can help you
multiply your wealth over time. However, compounding works best when you invest
for a long period and reinvest your earnings. If you are patient and stay
invested for years or decades, you can benefit from the exponential growth of
your money.
For example, if you invest Rs 10,000 in a mutual fund
that gives 12% annual return and reinvest your earnings, you will have Rs
31,058 after 10 years, Rs 96,463 after 20 years, and Rs 2,99,599
after 30 years.
However, if you withdraw your earnings every year or switch
your funds frequently, you will miss out on the compounding effect and end up
with much less money.
- Patience helps you avoid timing the market and follow a
disciplined approach. Timing the market is the act of trying to predict the
best time to buy or sell stocks or mutual funds based on market trends or
forecasts. It is a risky and futile strategy that can result in losses
or missed opportunities. No one can accurately predict the future direction of
the market or its movements. Even professional fund managers and analysts can
make mistakes or miss out on some opportunities.
Instead of timing the market, it is better to follow a
disciplined approach of investing regularly and systematically in mutual funds
through SIPs (Systematic Investment Plans).
SIPs allow you to invest a fixed amount every month or
quarter in a mutual fund of your choice. This way, you can average out your
cost of purchase and benefit from rupee cost averaging. You can also take
advantage of market dips and buy more units at lower prices.
Canara Robeco Flexi Cap fund
Launched on 10.09.2003.
After 20 years the fund has shown a NAV of Rs 213.54
ie 500000 invested in 2003 stand now at
Rs 1,06,77,000.
You read it correct. It is one crore six lakhs
A reward for your patience for 20 years.
ie Almost 20 times your money could grow for the investment made in Mutual fund with a goal and have patience.
How to develop patience as a mutual fund investor?
Patience is not something that comes naturally to everyone.
It is a skill that can be developed and improved with practice and awareness.
Here are some tips to help you develop patience as a mutual fund investor:
- Have a clear financial goal and a realistic investment
plan.
Before investing in mutual funds, you should have a clear
idea of why you are investing and what you want to achieve with your money.
You should also have a realistic investment plan that suits your risk profile,
time horizon, and return expectations.
Having a goal and a plan will help you stay focused and
motivated throughout your investment journey.
- Do your research and choose your mutual funds wisely. Not
all mutual funds are created equal. Some may perform better than others
depending on various factors such as fund manager's expertise, investment
strategy, portfolio composition, expense ratio, etc.
Therefore, you should do your homework and choose your
mutual funds wisely based on their past performance, risk-return profile,
consistency, ratings, reviews, etc. You should also diversify your portfolio
across different types of mutual funds such as equity, debt, hybrid, etc., to
reduce your risk and optimize your returns.
Instead you can contact your personal Wealth Advisor, a Mutual
Fund distributor who is expertise in counselling and giving advice to choose
the best fund for you. Moreover he is Registered under AMFI( Association of
Mutual Funds of India) which governs and monitor those advisors/Distributors for
providing you correct advice which is beneficial for the investors.
- Monitor your portfolio periodically but do not obsess over
it. It is important to control the urge to withdraw the money before your Goal
is reached , if you do not have the dire necessity.
The return calculated above is @ 12 % , but most mutual
funds perform more than 12% and some crossing 20 % also.
Economic Scenario
Why to choose mutual funds over other investment options?
1.
Bank Deposits does not match inflation . It
affects the real rate of return.
2.
Stock Markets are highly volatile and very high
expertise is needed , even then the risk of loosing capital is unavoidable.
3.
Bonds and Savings schemes offer a better return
,but not at par with Mutual fund . More so the lock in period affects the liquidity
if case of emergency
4.
Gold also is highly volatile and lower than the
Mutual funds.
All the above issues addressed in
investing in mutual funds , and it is the best investment option suggested for
Long term as well as short term goals .
For further free counselling over
phone/personal please feel free to contact :-
S.Sridhar Rajasekar
9442388779
AMFI Registered Mutual Fund Distributor.
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