Mutual funds are subject to market risk.
But it is possible to manage that risk.
What is mutual fund?
Mutual fund is an AMC (Asset Management Company) that pools money from different investors, invest on their behalf and charge nominal fees for it.
In simple words,
If you don’t know how to drive a car, you take help of driver. In same way to invest in stock market you take help of mutual fund (fund manager).
10 reasons to invest in mutual funds
Mutual fund invests your money in various individual stocks. If some stock does not do well. It will not impact your money as amount invested in that stock is low. Hence your risk is reduced due to diversification.
If you Invest directly in stock, you can select only two, three or max five companies shares. But mutual fund invest while diversifying in many stocks and different sectors because it has money of large group of investors.Hence if one company does not do well, exposure to such company is less and your portfolio is safe.
You can also get tax benefit u/s 80C by investing in specific mutual fund like ELSS.
Dividend received from mutual fund is also exempt.
If you invest in FD it gives return of 6% to 7% per year. Inflation rate in India is 6%.
So effective return is 1% (7%-6%).
Equity mutual fund can give you return upto 15%. Muual fund can give 11% effective return.
You can beat inflation by investing in mutual funds. FD cannot give you inflation beat return.
If you invest in FD, you are actually losing your money.
Achieve financial goal
Don’t just invest to get returns. You will fall in trap of greed to get more and more return.
Start with end of mind.
Plan a goal you want to achieve in coming years like buying car, going on a vacation, for child’s education etc.
You should know amount required for your financial goal.
Suppose you are planning for foreign vacation. See below table.
If you invest Rs. 7742 monthly in mutual funds then after 4 years you will be able to accumulate Rs. 504990 and go on a foreign vacation.
[table id=2 /]
Mutual funds are managed by professional who understands stock market very well.
They are professional and well trained to invest in stock market. They can do more in-depth research than you as they have right knowledge, skills and tools to carry out research.
Mutual fund charges 1% to 2.5% as fees for managing your money.
Charges are very nomial compared to PMS (Portfolio Management Servies) or any other services.
Mutual funds take money from large number of investors, so they are able to charge low fees because of economies of scale.
Easy to understand compare to stock market
To invest in stock market you should learn to read balance sheet, Profit and loss account, and other financial data.
It consumes time and energy. So, you can give money to mutual fund to do this task on your behalf.
You should check past returns, fund manager, expense ratio. I will write detailed article on it soon.
You can invest in mutual fund in form of SIP. SIP stands for Systematic Investment Plan. SIP allows you to invest in mutual fund at regular interval.
Fix amount will be auto-debited from your account and invested in mutual fund.
So your behaviour will not impact your investment.
Easy to invest
You can invest in mutual funds in 7 ways:
1. Offline investment directly from fund house.
2. Online investment from mutual fund website
3. Through bank
4. Through demat account
5. From third party example: AMFI, Kuvera, Kaarvy etc.
6. Through agent
It isnot necessary to have demat account to invest in mutual fund.
Variety of options
Various mutual funds schemes are available today. You can select whether you want to invest in equity, debt or both (hybrid fund), index fund, etc.
As per your financial goal you can choose type of mutual fund to invest.
If your goal is less than 3 years you should not invest in equity. Invest only in debt or F.D., don’t expose your money to unnecessary risk for short term goal.
If your goal is more than 3 years you can invest in equity.
Start Investing in mutual fund if you still have not started.
Start saving money and setup SIP. If you don’t take action NOW, your financial life will not change.
Comment below your thoughts on mutual fund.