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It was in 2017, probably in March, when the trade association of mutual funds, Association of Mutual Funds in India (Amfi) launched a campaign called ‘Mutual Funds Sahi Hai’ to position mutual fund investment as one of the top if not the topmost investment option in India.
The industry was still struggling with onboarding investors, new ones because of the lagging fear that you lose money in mutual funds. There was a lot of mis information and lack of investor education about the product itself.
Let me give you a balanced view on mutual funds to make an informed judgement.
Should I invest in mutual funds?
Why invest in mutual funds is a question that crosses every person’s mind who has long been an advocate of guaranteed and low risk products like FDs and RDs. The short answer to this question is YES! Yes, you should invest in mutual funds. If there could be Laws of Investment, one would never be overinvested in one particular investment. The basic reason to invest in something and to not avoid is you should not avoid any investment option for that matter. How much you invest will depend on how much is your risk.
Here are the reasons to invest in mutual funds:
Assortment: Mutual funds serve as an assortment of different stocks, bonds or even both in a single mutual fund plan. It gives you easy access to a range, multiple number of stocks or bonds with one strike. You can get the best of everything at one go. The number of stocks depend on fund to fund. For example Axis Focused 25 Fund is a basket of 25 company stocks only. There are other funds which invest in less or more than that number as well. The number of stocks is the fund manager’s discretion. But a fund’s exposure to equities or bonds on the whole has to be bound by certain regulations.
Indirect entry to stocks and bonds: Many times risk averse investors find it difficult to invest in stocks because of the high risk that it carries. Also, investing in single stocks will require a great deal of research and time from your end. If you have been avoiding the share market and individual bonds because of this or any other reason then mutual funds are the place to be for you. Mutual fund investment is an efficient direct investment into stocks and bonds.
Market-Linked: Returns in market linked products are not fixed to a particular number.
Returns: Returns in mutual funds can go up to early double digits if held for longer. It has been seen that over a longer period of time returns in mutual funds are nothing as compared to the interest you will earn in FDs and RDs.
Professional Management: Like i said investing in stocks would require you to do some background research, upskill yourself and invest a lot of your time along with your money. When it comes to mutual funds, there is a professional fund manager who is professionally and academically adept to understand the markets. You do pay some charges for the services of the fund manager but it is totally worth it. Mutual funds collect money from all its investors and the fund manager uses that money to invest in underlying assets.
Variety: You may still want to argue that market linked products are only for risk lovers. That is not the case. There is a lot of variety available when it comes to mutual fund options. There are mutual funds for risk lovers, for risk averse investors. Or example: equity is riskier than debt funds so if you want to avoid risk you can put more money in debt funds and less in equities.
Say you can take the risk of equity investments but you still want to be a but coservatuve, you can focus more on large cap equity funds which are less risky as compared to small- and mid-cap mutual funds. There are also some multi cap funds, like the Kotak Standard Multi Cap Fund which has invested in large-, mid- and small-cap funds. Different funds have different objectives. Hence invest in mutual funds to get the best of different asset classes.
Low Costs: Investing in mutual funds does not require you to open any separate accounts like the demat account or a trading account. The maximum charge you have to pay is the expense ratio which is a small % of your investment amount. Mostly it is less than 2% depending on the type of mutual fund.
Low minimum investment: When it comes to stocks, some of them cost as high as Rs 3,000 or more for one share. That is a high cost of investment. In mutual funds, specifically when it comes to SIPs, you can invest as low as Rs 500 per month. If you are going for lump sum investment, then in most cases the minimum investment is Rs 5,000.
SIP: SIPs can well be a separate feature of mutual funds as well. The minimum lump sum may be around Rs 5,000 but for many new investors and new earners this may be a big amount. SIPs let you access market linked products in a regular fashion: monthly, half yearly or even yearly in some cases. It is a very easy and cost effective way to invest in mutual funds.
Transparency: The mutual fund investment world is completely transparent. Transparency itself can help you solve your query on why you should invest in mutual funds. You can view which stocks or bonds your mutual fund is invested in, you will be able to see what percentage of the mutual fund corpus is invested in which asset, when does it change and by how much. You cam see who is managing your fund and what is his or her background and track record. The charges that will be levied on your investment is also very transparent. Fund managers are also made to work according to strict rules and regulations of the markets regulator, Sebi. So they are also under strict regulatory watch.
Now do you have an answer to why invest in mutual funds? Mutual funds also carry market risks. But if you invest judiciously, take all the necessary precautions, keep your investor education up to mark, understand your risk potential, do not chase quick gains and make informed decisions. Every investor’s profile is unique to them. There is no one-size-fits-all investment basket. So a mutual fund that suits your friends and family may not suit you. Stay informed, stay invested!
