Why Mutual Funds Are Loved By Indians?
Mutual funds are one of the most popular investment options for Indian citizens. A mutual fund is a professionally managed portfolio that pools the savings of many investors to invest in multiple markets and asset classes. These funds invest in stocks, bonds, and other securities with the aim of outperforming market indices like the Nifty or Sensex. Generally speaking, these funds offer better returns than bank deposits or fixed deposits but they come at a price – they charge annual expenses on top of investment charges which can eat into your potential returns over time.
Investing can be overwhelming. There are hundreds of investment options to choose from and we have a tendency to react positively towards shiny objects that might make us feel more secure. While this is true with other assets too, it is especially pertinent when it comes to mutual funds.
For certain investors, the term mutual fund brings up associations with retirement planning and financial advisors who are able to manage our assets for us. But for most of us, these things don’t come in the form of an investment opportunity but as a plan we can do for ourselves.
So what should you invest in?
The first step towards investing is to find out what you want from an investment – your goals and how much risk you’re willing to take. Once you have this information, you can research, compare and analyze various investment products. You can consult with a monetary advisor or even hire one for a consultation. Meanwhile, as an investor you also need to understand the risk involved in every investment product.
Different types of mutual funds
The definition of a fund is that it is an entity that pools investor capital and invests these assets in a particular asset class like equity, debt and commodities. The most common forms of funds are Equity Linked Savings Plans (ELSP) which invest in stocks, Debt Funds which invest in debt instruments and Balanced Funds which invest in equities and debt instruments. Some other types are Hybrid Funds that invest in multiple asset classes like equities and fixed income.
Although there are hundreds of mutual funds you can choose from, the most common ones are Equity Funds, Debt Funds, Balanced Funds and Hybrid Funds.
Stocks and bonds in mutual funds
In an equity fund, the underlying asset may be a single company or it could be a stock market index like the Nifty. While bonds are offered by debt funds. Stocks and bonds in funds will not always match classification because there are tax implications involved in investing in stocks specifically when profits are generated on these asset classes. This leads to the distinction between Equity-Linked Saving Plans (ELSP) and Debt Funds from which people can choose from depending on their personal goals.
A word of caution on stocks
Stocks are highly speculative investments and are not recommended for beginners. It is best to first invest in a balanced fund before going into any high-yield schemes as they will offer better risk-to-reward ratios. Many novice investors take a wrong step by investing money in equities without knowing what they’re doing and getting tempted by higher returns since the investment horizon is small in India. The only way to ensure the long term growth of your portfolio is to invest over a period of 5 years or more when you correct mistakes, based on experience and after understanding where your financial goals lie.
Investing in debt funds
Debt funds are considerably safer than stocks and they can form an integral part of an investment portfolio. The key thing to remember is to not invest too much in a single fund and spread your investments over the various asset classes and funds. Investing in more than one fund also allows you to switch on or off your investment depending on market conditions, if required. The best way to proceed is to start with a small amount that you won’t miss if it goes away. If you are comfortable with the idea, then you can proceed from there towards investing in more aggressive options as per your risk appetite.
Investing through an ELSP
The best way to invest in stocks is to start investing early on a regular basis. The key is not to invest large amounts of money that you might miss in case it goes away but instead, invest as much as you can afford. One of the best ways to do this is through an ELSP which allows you to put in small amounts each month and over time build up a good amount of money that can be used later on for more valuable investments. There are many benefits to using an ELSP – they’re easy to understand and they avoid the kind of volatility associated with equities markets.
Choosing the right mutual fund for you
A good way to understand different funds is to use mutualfundsindex.com which has a comparative table of various funds. The investment profile should be the first thing you go by as it will give you a broad idea of what the fund invests in, its returns and risks involved. You will also want to know what your fees will be since these could sour the overall returns on your investment over time. Also, look at the inflow and outflow pattern since this helps you understand where new money comes from and where it goes when it’s withdrawn. This is represented by the inflow chart and outflow chart.
Since investing in mutual funds can be challenging at first, it’s best to consult a financial advisor who can offer valuable insights based on his/her experience. Someone who is a good investment manager will help you build up your portfolio in a way that you’re comfortable with and also optimize returns by suggesting suitable options that match your needs. If you choose to invest on your own, remember to always invest after doing research and then stick to it even in the worst periods. It may take time but the rewards will come over time.
“There are many benefits to using an ELSP- they’re easy to understand and they avoid the kind of volatility associated with equities markets.”
“A good way to start is to use a balanced fund and then add funds for investments on an as-needed basis.”
As an investor, you need to understand the risk involved in every investment product. You can also consult a financial advisor or even hire one for a consultation. Meanwhile, as an investor you also need to understand the risk involved in every investment product.