Many of your friends must have told you that Mutual Fund is a good investment option in India. However, to someone who is new, Mutual Fund can seem like a complicated topic with lot of complex terms such as NAV, AUM, expense ratio, etc. Hence majority of people in India tend to ignore this Mutual Fund investment option completely and leave it for another day.
People assume that it’s only for someone who has studied finance or someone who trades in stock market. However, little do we know, it is considered to be one the best investment option for any middle class person not only in India but throughout the world. However, the question is how do we know what Mutual Fund as an Investment option is, in the economy of India?
Long story short
Mutual Fund company collects money from middle class investors and make a pool of funds that is called Mutual Fund. It’s not easy for an average investor to pick the right stock or bond, hence the mutual fund company help in buying stocks or bonds on behalf of the investors.
Mutual funds companies diversify investment in multiple stocks and bonds which makes them less risky as compared to individual stock or bond. Hence the stock is picked and managed by experts called as fund managers.
Even if you invest as low as Rs. 500, it will be diversified in multiple companies. So if few companies aren’t performing well, others will take care of it and balance the return in the long term.
Lets take an example
Think of it this way, you want to invest in any company for example Reliance. However, the price of one share is currently Rs. 1200. So you can’t have a share in reliance with less than Rs. 1200 in your pocket. Moreover, if the price of share falls in future, your complete investment will be down.
However, in case of a Mutual Fund, even an amount of Rs. 500 can be diversified in multiple companies at different ratio and the list of companies will be changed from time to time by the fund manager.
Why do they say Mutual Fund investments are subjected to market risks?
Even though your investment in Mutual Fund is diversified in multiple companies, there are times when the whole economy or stock market performs poorly. These are called recessions, market corrections, bear markets, crises and so on.
So if you happen to need money during the time of crises and withdraw funds then you may even get less than principle amount. I’m not here to scare you but this is where things get interesting. Hence its important to choose the correct fund based on your risk taking capacity and duration.
However, if you decide to stay invested for long term, then there is no need to worry. You will only regret wishing you had invested more money few years ago.
Let’s talk some numbers
Less than 1.5% of Indians invest in Mutual Funds, whereas more than 50% of Americans invest in Mutual Funds and this is a huge difference. This is why companies in US gets more money and are able to expand their businesses easily. On the other hand, small businesses in India starve to death because of lack of capital.
A recent report on Mutual Fund Investments in India mentioned that investors in India are holding back from putting their money into mutual funds thinking it’s highly risky or due to lack of information on how mutual funds work.
More than 40% of people living in metro cities consider Mutual Funds as risky and remaining 33% doesn’t even know what is Mutual Fund.
Hence we see a lot of advertisement lately promoting Mutual Funds because it’s advantageous to investors, company and the economy.
How much profit can you expect?
Once you’ve invested, you’ll see the magic of compounding in the long run.
Broadly speaking, if you plan to stay invested for more than 5 years then you can randomly pick any Equity Mutual Fund and it is going to give you good profit. However, its advisable to invest in Mutual Fund based on your goal, requirement and capacity to take risk.
In general, mutual Funds offer anything between 12% – 15% compounded annually if you stay invested for long term (anything more than 4-5 years).
If you invest a huge amount and the market crashes then you may even lose the principal amount. However, you only lose the money when you withdraw it from the fund. If you keep it invested, it will recover, grow and multiply in long run.
What after investment?
After investing, you are free. “You have kept the money to work for you“ with professional fund manager as its guardian. You can check it after a certain interval of time (few months or yearly).
Investing is like sowing seeds. You cannot expect flowers next day. You have to give it some time to grow. Same is with fund managers, you have to give them time to realize their strategy. Checking your fund returns daily would either over-excite you or bring you in tension because the market moves up and down daily. These are called bullish or bearish market movements. So, its better to check once your investment in longer period of intervals such as quarterly or yearly.
The number of people investing in Mutual Funds in USA increased significantly in late 20th century when their country gain development. Initial investors gained enormous profit because they invested when the country was not developed.
Same goes with Japan when they saw their longest ever stock market bull run in mid 20th century when Japan turned from a third world nation to first world nation.
India is on a developing stage and the number of small businesses are rising. If we look at long term horizon (10-20 years from now). The demand for goods and services are definitely going to rise due to multiple factors such as population, increase in standard of living, etc. When demand rises, the profit for companies will rise and economy will grow.
Don’t just be a consumer, be an owner of those large companies who are going to shape the future of India and take your share of profit by investing now.
Is it really a best investment option?