People have cravings for worldly things. Some cravings to be enjoyed might need a re-jig of the word “Cr” with an “S”. Yes we are referring to Savings. And incidentally “Cr” is the acronym for Crores. Ah! We are talking about money now.
Who does not want money, maybe barring a few souls? To deal with money, one needs a channelized and disciplined approach to make it work and create wealth. This requires systematic investments in carefully chosen avenues for generating returns. Sitting on idle or hard cash could prove risky too, what if it was withdrawn from the system by the political gods of death akin to the recent demonetization episode.
Historically or should I say traditionally, bank fixed deposits schemes has been a preferred investment route for people to park their earnings to secure a return on the investment. Why? because it is safe and assures a guaranteed return. Now that’s simple, ain’t not? It may also be due to the fact that earlier there was not a worthy alternate option to evaluate against the bank fixed deposits, something that resembles the current political scenario in TN.
And behold, enters the dragon- Mutual Funds, new kid on the block in the early part of 2000’s.It created a paradigm shift with respect to investing in equity by opening up the markets to all even if they were not well versed with the art of equity investing. Like the famous line from Hero Honda Ad fill it, shut it, forget it, once can do the same by investing in mutual funds. Of course the money will yield a reasonable return depending on market conditions.
Are Mutual funds the new age bank FDs? Well the answer seems to be in the affirmative with the big bang evolution of MF’s over the last few years. It has come a long way, but not long enough to embrace a wider acceptance. Guess it takes generations to build trust on financial products.
To start with, I like the word “Mutual”. It gives a “we” feeling, a kind of comfort that comes with collective will of people to put their money and trust in an idea floated as a fund and make it work for wealth creation.
For beginners ,(and believe me from my limited interactions, there are still people who have not explored MFs) a mutual fund is a fund option or scheme floated by Asset Management Companies or Fund Houses run by various financial institutions. It is open for all to invest in any mutual fund schemes until the AMC or the Fund House decides to stop accepting purchase requests. Mutual Funds are part of a vast regulated marked under the watchful eyes of SEBI and hence offers protection to investors.
There are a number of categories of mutual funds, say Equity oriented funds, Debt Funds, Liquid Funds, Equity linked savings scheme to name a few . Under Equity funds there are schemes pertaining to Large Cap funds, Mid Cap funds, balanced funds, sectorial funds, Blue chip fund, Top 200 funds each following a pattern of investment as the nomenclature suggests. Predominantly MFs invest in the equity market amassing huge quantities of shares of corporates listed in the NSE & BSE with the funds at its disposal. Debt funds invest in corporate bonds and generate a guaranteed yield much like a bond or a bank deposit. Liquid funds again invest in Debt & Equities achieving a conservative balance, but offers high liquidity to withdraw cash any time without charges. Equity linked savings scheme, popularly known as ELSS provide tax savings in the form of deductions u/s 80c and comes with a lock in period of 3 years, i.e. withdrawal or closure is restricted until completion of 3 years from the date of investment. Balanced funds invest in a mix of equity & debt, keeping the equity exposure low.
Mutual Funds are expressed in terms of units. Each scheme of a mutual fund collects monies from various subscribers. The pooled monies are used to invest in select /chosen equity shares which form the asset base of the fund. Each fund will be administered by a fund manager who is a subject matter expert on equities, possesses adequate experience in investing and has a firm grip on the equity market. The fund will have to incur expenses like salary to fund manager and other overheads to manage the fund. The excess over returns from Asset minus the total expenses incurred is expressed as Net Asset Value of the fund a.k.a NAV. The NAV of an operating fund keeps changing on a daily basis depending on the ability of the fund to earn returns. This NAV is the price at which a MF unit can bought and sold at any point of time.
Why MF’s? What makes it tick and attractive over other conventional forms of investment options. The underlying answer is MF invests in equities. Equities, given ideal market conditions can generate comparatively higher returns than a bank FD, RD, NSC or PPF or other fixed interest schemes which average between 7.5%-8.5%. Similarly Liquid savings funds have the capacity to generate higher returns than Savings Bank account rates. They invest in a mix of debt & equity .So one can park money from SB account in liquid funds, watch and pull out when they garner a return higher than SB account rates. No doubt equity is risky, but with risk comes returns. The more the risk, more is the opportunity to earn handsome returns. But there is a downside as well of losing your capital if the risk is too high and the markets fail to deliver on the back of various factors like recessionary economic conditions globally, political uncertainty, government policies, deadlocks, banking reforms, oil prices, unemployment rates, corporate underperformance etc., One can take a calculated risk based on his risk profile, funds at his disposal, objectives and needs. MF’s definitely provide the platform to do that.
How to play the game then to mitigate risk? The best approach is the Systematic Investment Plan (SIP) in MF’s which is akin to a recurring deposit model. You can issue standing instructions and make monthly investments on fixed rates as low as Rs. 500 per month and watch it grow and fall. But over a period it will net good returns. Why SIP? Because the investment is consistent and spread over a timeline in a SIP, it has the effect of beating market volatilities, absorbing the shocks and averaging the costs over a period. Which fund option to choose to start a SIP? The ideal choice would be ELSS which has a lock in period of 3 years and comes with tax benefits too. Give the fund and corporates sufficient time to plan their strategies and perform. At times the strategies of companies do not succeed or requires time to succeed or the market/economy goes through a downslide affecting your returns and even turning negative. Don’t panic, play the waiting game. If the companies are fundamentally strong, they will bounce back and the markets too will respond positively to their outcomes. This will make your returns to soar.
One can make a lump-sum investment also in a MF and withdraw any time. If the withdrawal is made within a year, there is an exit load on the drawings, i.e. a charge to pull out the money. Some funds charge an entry load too to fund and recover the initial costs associated with launching the scheme. Before investing in MF, you can read through the brochure of the scheme. It will provide you details with the funds managed by the scheme, profile of fund manager, details of where and how the funds would be invested and the split/mix of the investments. If it’s an operating fund, it would provide the track record of the fund like the capital growth achieved since inception and on an annualized basis plus the dividend history.
So folks, if you have got the appetite to take risk and explore alternative options for investments, MFs could prove to be your best bet. Trust the experts and let them handle your monies to earn higher returns. But if it fails, remember the waiting game. Happy investing!
P.S Disclaimer: The article is an attempt to spread financial awareness. The opinion of the author are subjective and personal and should be relied upon with individual prudence, judgment and not blindly. Seek professional advice before investing.