Mutual Funds – Why it’s not that complicated to invest in mutual funds than people think it is

mutual-funds

Future, in today’s world, is unpredictable and uncertain. A very secure job may also not be able to sustain everything that you hope to have or fulfil the comforts that you wish to provide to yourself and to your family.

Idle savings will only take you so far. However, here is something interesting to enhance and increase your income through the way of investing in mutual funds. The concept of mutual funds is that it is for everybody hence it is extremely simple, requires a very small initial investment (as low as Rs. 500), has reasonable risk to return ratios that have the ability to transform into a secondary mode of income.

The basic thought of investing in mutual funds however still seems to intimidate many. This however, is because of the simple reason that most still don’t know about what mutual funds actually are and often indulge in unnecessary procrastinations. It is much simpler in reality.

So, let’s start with a very basic definition.

A mutual fund is money in the form of savings collected from various investors with similar financial aspirations, safely kept to be invested in different kinds of securities as per the discretion of the fund manager in accordance with the scheme of the mutual fund opted for. The money earned by the investments is then reverted with profits distributed in the proportion of the investment made by every investor.

Let’s now take an easy example that will comprehensively take you through investing in mutual funds. Say you have five friends – P, S, A, G and Z . All six of you are working and earn enough to have savings after debiting all expenses.

Now, Z’s aunt and uncle have a lot of knowledge and experience in successful share-trading. Inspired from the money that they make, the idea of investing in the stock market is something that has always been very attractive for all of you, but who can spare the time to follow the trends all day long?

One day, Z comes up to all of you and asks you all to spare a portion of your savings to him. He will unite these savings into one pool and give the total amount to his aunt and uncle, who will invest in the stock market on all your behalves. Z will then distribute the profits based on the proportion of everyone’s contribution to the total money invested.

Hence in this case,

Z is the Mutual Fund that you have trusted to invest your money. Z’s aunt and uncle are the fund managers who invest the total money collected from you and your friends. That makes all of you the unit holders or investors.

Now some of you might think, why not invest in a Fixed Deposit as it doesn’t require analysing various fund houses, fund managers and is less of a hassle with a fixed return.

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However, the average fixed deposit will lay out an interest of 7.5% per year whereas mutual funds have known to deliver more than 20% returns in a year. So, say you have Rs. 1,00,000 to invest, then you stand to make Rs. 20,000 by engaging in mutual fund investment as opposed to Rs. 7,500 that you would stand to make through an FD.

Why not then invest yourself and try your own luck?

Although, it is obvious that trading directly could potentially fetch higher yields, it demands a very high amount as initial investment, time, knowledge and discipline. Hence it is wiser to entrust a mutual fund with an appropriately diverse portfolio with professionals who spend their entirety of their profession watching the markets. They invest in several companies spanning across a variety of industries and sectors.

This diversification increases return and reduces risk. What’s more? You can be sure that your money is being spent as every mutual fund is required to reveal the companies and segments that it invests in, and the proportion of investment.

Say that you have 1 lakh. You can invest in mutual funds by purchasing units issued by the mutual fund, the per unit price of which is also known as the Net Asset Value. Let’s say that with 1,00,000 rupees, you buy 500 units of NAV = Rs. 200. After a year the new NAV = Rs. 300 which would bring the net worth of your investment at Rs. 1,50,000, giving you a return of Rs. 50,000.

You receive your return based on the plan of the Mutual Fund you have invested in. If it’s a “Dividend Pay-out Plan”, the fund will pay you back the increase in NAV by declaring dividends from time to time.

In the “Growth Plan”, the returns earned by the fund, are retained in the fund, so your marker for returns is the increase in NAV. Dividend plans are suited for those looking for current income, and growth plans are for those looking for a long-term investment. There are also Dividend Reinvestment plans (where the dividend declared is used to purchase more units in the fund) and Bonus plans (where additional units in the fund are allotted, instead of dividend)

There are many such mutual fund houses in the market such as Birla Sun Life Mutual Fund, SBI Mutual Fund etc. These fund houses have years of experience and can grow your savings just as you would if you would invest with Z’s fund house.

Go with your gut, experiment and watch as your savings grow!