Hello friends, today we will talk about what is a mutual fund. How much we can see on TV that mutual funds are correct ”Mutual fund Sahi Hai” but Still there is fear in my mind. What If I make a loss, are they showing the truth in the ads? Many doubts are there, why this happens? Because many of us are not aware of mutual funds, and how it works.
Why you should invest in Mutual Funds?
The biggest fear in People has that if I make a loss in mutual funds, if I lose my money, and our films/movies have made this stock market Infamous.
So here I tell you, there are probably 300, 400, and 500 schemes in the market and even if you pick the worst scheme you got a very bad advisor and he told you the worst scheme, 99% chance that if you stay invested for more than 7-8 years, then your return will be more than FD. You will get a 9%-10% return, even if you select the worst scheme in this market.
That’s why there is nothing to fear and it’s almost impossible, that you will lose in the long run. But if you have selected a good scheme, then your Returns can be as high as 22-23%. That means, your average return can be between 10% worst case20%-22% in the best case which is much better than gold, property, or any other asset class. That’s why you cannot afford to avoid Mutual Funds, because of this return potential.
Also, Read | Why Mutual Funds Are Better Than Stocks: A Comprehensive Guide
Investing in mutual funds is very important, you will get better returns. So now, that your fear is gone let’s talk about, what’s mutual funds concept and how it works. And with that how can you invest in funds?
What is a mutual fund?
This blog post is designed for beginners who want to know all the basic things, about mutual funds. First, let’s talk about, what are mutual funds. Many people think that mutual funds are the only way of investing in the share market. But with mutual funds, you can invest in gold, if you want, you can invest in real estate, you can invest in debt funds, or if, as you know you can invest in share market or equity. You can invest in all four through mutual funds.
But mostly when it comes to the risk and return of mutual funds, basic queries come to mind like, the risk is high, it can be a little volatile, but returns are high. Maybe it can go a little up and down, all of this is in the context of equity and not with all other investment types.
To understand the mutual fund properly, the important thing is to know the share market, what are the basics of the share market. Before going further, I would recommend you to read this blog post in which you will understand the basics of the share market so your share markets concepts will be cleared.
How to Invest your money?
Now, there are three ways to invest in the share market. First, research by yourself, what shares are good and what are bad. And pick your shares for yourself. The advantage is, that you are not dependent on anyone you’re not paying any fees to anyone. The disadvantage is that it’s time taking. It takes time to find good shares. You don’t have the knowledge to do that and it takes time to get the knowledge.
The second is that you take the help of an expert. The advantage here is, you don’t have to give time, just dependent on them. The disadvantage is, you have to make regular transactions, and an advisor can tell you to buy this share, don’t buy this they will take their fees also, but you have to do that buying and selling, regularly.
The third way is mutual funds. Through a mutual fund, you can also invest money in the share market. Where you don’t have to track regularly, fees are low, you don’t need to have stock-picking knowledge you just have to select a good fund. The basic purpose of mutual funds is, as for equity funds to give you exposure to the share market and to invest in the share market.
How does it work?
Now, let’s find out how it works. See, if you want to invest Rs-20,000 and you want to invest by yourself with the help of an advisor. Advisor has told you, you can invest in MRF, Page Industries, or Eicher Motors shares. So that one share is above Rs-20,000, and you only can spend Rs-20,000 so you can’t buy it, and that’s a big problem by going direct or through a advisor. But, what a mutual fund does is, it takes Rs-500 from you and Rs-500 from someone else, this way it will take Rs-500 from 100 other people.
Now it has Rs-50,000 and bought 2 shares of Page Industries. So, if you were alone and invested Rs-500 then you couldn’t have bought Page Industries shares. Now, as there are 100 people to invest their money, so together you can buy 2 shares of Page Industries.
Now, people are 100, but share 2, so how will they be divided? So Instead, mutual funds buy 2 shares and give you mutual funds units. So think, 2 shares were bought, Rs-25,000 each so a total of Rs-50,000 is invested. 100 people have invested, so the mutual fund will give you units of 500. So all of you have collectively become holders of those 2 shares. This way mutual fund gives you an opportunity to invest in more companies for less money which you cannot do by direct investing.
Now, how do mutual funds do this? They form a fund management company, called AMC. That company launches funds and asks people for money like, we have launched a multi-cap fund and will do all kinds of medium and small investing. We have this expert, who is the manager of the fund, this is their track record. We assure you that we will give you good returns, so come and give us your money.
So, people like you like me, who will be interested in some Rs-500, some Rs-1000, Rs-10,000, Rs-20,000, and Rs-50,000 will give that AMC, Asset Management Company for fund. All the collected money will be called AUM, which is an Asset under Management.
So suppose that this time Rs-2000 were taken and 50 people were there, now Rs-1,00,000 have come. Now, AMC will appoint a fund manager whose an expert in picking shares. Now, he will make a strategy, for where to invest this Rs-1,00,000.
Rs-20,000 in one share, Rs-5000 in another, and will invest that Rs-1,00,000 in the share market. And will give you that mutual funds schemes unit. You can sell at any time, money will be sent to your account in 2 days. So this is the basic concept of the mutual fund. Mutual means shared, like sometimes we say in shared rooms at hostels. A mutual fund is such a fund, where everyone’s money is shared and a pool is being made. And, they are buying shares with that pool money. It’s the simple concept of mutual funds.
Advantages:
Now, let’s see the advantages and disadvantages. The first advantage is more diversification with little money. If you want to spend only Rs-2000-4000 and not more than that, then you cannot buy many shares. But in mutual funds, where everyone’s money is pulled, and invested in many companies, so your Rs-2000 can be invested in many companies, which you cannot do directly. With little money, you’ll get more company exposure and get more diversification.
Second, if An expert is managing your money so if you tell an expert yourself to invest Rs-2000 for you then the expert will say, you have only Rs-2000, but my fee is more than Rs-2000, so how can I give you my advice? But in mutual funds, where thousands of people like you come together and pay their fees then you get the expertise of a fund manager at a very cheap price. And, the cheap price is called Expense Ratio.
What happens is, if you are investing Rs-100 in mutual funds so for that Rs-100, it depends on the scheme, roughly Rs-98 to Rs-99 is spent on that scheme and the company takes Rs-1 or Rs-2, for the expert’s salary This is called Expense Ratio. A Less expense ratio shows that your fund manager is charging the least fees.
Third, you invested money once, and then mutual funds will keep on buying and selling shares. So you do not need to worry about your transactions again and again. So you can enjoy your life with comfort, without thinking that which share to buy and which one to sell.
Fourth, you must have heard about SIP. Once you set the mandate in the bank that every month, from your account Rs-1000, Rs-2000, Rs-5000, as much as you want, Keep deducting it and keep investing in the scheme. Every month, you do not have to do anything manually you have put in the SIP, and it keeps investing what you save in salary and automatically will be deducted from the bank. You can stop SIP whenever you want and can decrease or increase the amount whenever you want it’s all at no charge absolutely flexible.
Also, Read | SIP vs. Lump Sum Investment: Analyzing Returns and Strategies
Think that, if the SIP is running but there is no money in the account so the SIP will be bounced. many people fear it, but there is nothing to fear, it’s not like check bounce, only Rs-5 to Rs-10 are taken as bank mandate charge, and no other loss is there.
So until now, I have told all the good things about mutual funds. So, is mutual funds the best and there’s no flaw? It doesn’t happen with anything and it’s my duty to tell you the disadvantages and wrong things also.
Disadvantages:
First is the greed of that mutual fund company. Many mutual fund companies are there, that want more and more money to come to their schemes. They will do a lot of marketing, hire more people, and just wants a lot of money. Because of the amount invested in that company, the company will earn 1%-2% of it. So performance is good or bad, they don’t care much. So sometimes the simple focus of some companies is just marketing and not managing it.
Second and this is a big flaw. It’s not in the hand of the mutual fund’s manager when to invest in shares and when to take them out, it’s in your hands. If you give them money, they will invest. If you want redemption, saying you don’t want to continue, give my money back. Then mutual funds managers have to sell the shares and give your money back.
So sometimes happens, when the market crashes and all the share prices are down and the shares are available cheaply. So the fund manager who is an expert wants to invest in these cheap prices. But normal people panic, that the market is crashing and they have to get out so they apply for redemption and take back their funds.
The fund manager, in compulsion, has to sell those shares, at a loss and which he invested and give you your money back. When he wants to make more money so he can buy cheaply, nothing happens by him saying or not saying. If the common man, at large would want to get out of mutual funds then the fund’s manager had to sell the shares and give you your money back so you and that fund will both make a loss.
Third, the entire fund’s performance depends on the fund manager and research team. So sometimes, the research team wants to save their jobs they don’t buy such stocks, which can give more return but is risky they don’t want to take risks. so many fund managers, to save their jobs and reputation only invests in well-discovered and well-known stocks so returns are not as high as you expected.
Also, Read | LIMITATIONS OF MUTUAL FUNDS: UNDERSTANDING CASH POSITION AND MANAGING LARGE SUMS
Sometimes the fund’s manager wants and has got a good idea in the small or large cap category, but even then he cannot invest because the mandate and directions of the scheme are restricted for example mid caps only. For this reason, the performance suffers. This does not happen when you personally invested, in any stocks you like, big or small companies, you can invest.
Best ways to invest in Mutual Funds:
Now let’s talk about the biggest use of mutual funds. Mutual funds should be used for your goal planning. Like, if you want to get your kids married, after 15 years, you need their education funds after 10 years, if your retirement is in 20 years, you can select mutual funds, according to these.
You can make one fund for kids’ education, one fund for marriage, and one fund for your retirement. And besides that, you can take a fourth high-risk fund if you want to go on a holiday, or have a foreign location dream, This fund should be high risk, because it’s luxury, not compulsion.
if you cannot go, then your life won’t be ruined. So for this, take a fund that is a little risky it can happen that you make a lot of money and go on a nice vacation, or you make a little less money because it was a high-risk fund so you didn’t get good returns, made some losses and went on a domestic vacation. But this is such a goal, where you can take a little risk.
You can’t take a risk on a kid’s education, should be a safe fund. You can’t take a risk on kids’ marriage, should be a safe fund. But for vacation, you can take risks. So in this case, it’s for an example, not investment advice. According to me, if you’re planning this then you can take two large-cap funds and one mid or multi-cap fund for vacation. So like this, you can design your portfolio, according to your goal.
I say it again; this goal planning is just for example. Your exact goal planning depends on your need, how much money you want, after how many years, and how important is that money, depending on all that factors. Despite that, how many dependents are there? Is there any other earning member? Are the number of dependents going to increase? There are many factors. So you have to make a good portfolio, according to these factors.
Hope that you cleared your basics about mutual funds.
Happy Investing!