Basics of Investing: Mutual Funds
This is our reason for being! We believe that mutual funds are the best investment instruments for you.
What are Mutual Funds?
In the previous sections you read about stocks and bonds. Mutual funds are simply portfolios of stocks, bonds, and other investment instruments. The value of each portfolio is the sum of the value of the investments (stocks, bonds) which they hold. You own a portion of the portfolio when you purchase a 'unit' of it. That's it!
Why Mutual Funds?
Let us count the ways:
1. They are already well-diversified:
Mutual funds spread the risks involved in investing because they buy into a good variety of stocks and bonds.
2. Less stress:
They are managed by professional Fund Managers.
3. You can invest all over the world.
If you invest in stocks, you can only invest in the stocks of your own country. But mutual funds can invest in various business sectors. This way, you have a lot more opportunities. Think Pharmaceutical sector might boom? Or Technology sector? Or Infrastructure sector? Mutual fund picks out the best companies in these sectors for you. We have a range of global funds too.
4. You only need a small amount of investment to start with.
Investments start mostly at Rs. 1,000 and Rs. 5,000. You can even arrange to have your bank account SIPed (Systematic Investment Plan), so that you automatically acquire a certain amount of units every month. Stocks will cost you a bomb for just one lot. With a mutual fund, a small sum buys you into a well-diversified portfolio.
5. Redemption is immediate.
If you own stocks, you might not be able to sell them off at the price you want because there are not enough buyers in the market. But with mutual funds, the issuer is bound by their agreement to buy it back from you at the day's prevailing price no matter how large the number of units you hold.
6. It is relatively safe.
If you are concerned about volatility, you can choose a fixed income mutual fund that can give pretty stable returns. Generally, over the medium to long term, these still perform better than your fixed deposits.
7. Most important of all, you can reap tremendous returns.
Over the long term, mutual fund investment can reap very handsome returns. Some good mutual funds have returned more than 200% in a year. That means that an investment of Rs. 1,000 at the beginning of the year would turn into Rs. 3,000 at the end of it! Many have given about 10% - 15% average annualised returns every year. To get a sense of what this means, try out our Budget Analyzer.
Next : The hidden costs