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Mutual Funds – Let’s take the fear out of it!

Introduction

Stock market in recent times has shown some lucrative returns which made everyone wish to invest their money into the market and get some piece of the pie. However, the stock market can be scary without proper deep knowledge. There are many technical terms, entry & exit points, which stock to pick, among other factors which make the market scary even for the people with broad knowledge. Appointing some managerial services from professionals and banks can be quite expensive and may require a minimum of 10s of lacs.

Stock Market

Although now-a-days, everyone knows what is stock market and how it works, but still for the sake of this article let me give you an overview.

So lets say Mr. Narendra and Mr. Rahul started a small company with an exciting business idea with equal ownership into the company and slowly the business started to grow. Now to expand further, the company needs additional funds either through loans or through giving some share of the company to someone else. For initial funds requirements, money can be asked from friends, families, private investors like Mr. Amit, Mrs. Sonia or Mr. Anil but in the long run almost every company wants to be listed on a stock exchange.

Now what’s listing and stock exchange? In the long run, companies give a share of their ownership to the general public in exchange for multiple benefits. So whenever a company wants to sell their shares to the general public they get themselves listed on a market where shares are traded i.e., stock market.

So now to get listed, Mr. Narendra and Mr. Rahul will approach the regulatory body of the stock market (i.e., SEBI for India) to get their company listed on one or more stock exchanges located in India with the purpose of getting funded by the general public and enjoy other benefits of being listed.

But all these look simple at first glance, but believe me it’s not. The turns and twists of the market can bluff anyone and it surely takes deep knowledge and time to understand the market.

Mutual Funds for Beginners Demystifying Investments

Mutual fund

In simpler words, mutual funds are nothing but a pool of money gathered from a large number of the general public and invested into the market. Anyone with an active PAN and proper KYC can invest into mutual funds. Investment in mutual funds can be made either with a one-time lumpsum amount (minimum Rs. 5,000 for most schemes) or with a fixed amount paid periodically over a specific period of time (minimum Rs. 500 for most schemes). The period payments are called SIPs (Systematic Investment Plan).

Let’s take another example where a group of five friends decide to invest some money in the stock market, but neither of them have the expertise. So all of them approached Mr. Arvind, who is an expert in stocks. Each of all gave Rs. 10,000 to Mr. Arvind for investing. He invested their money in the stock market and over a period of time returned their money with 2x profit. With this example let’s analyze the benefits of mutual funds.

Why Mutual Funds?

Well, the most famous investor of all time, Mr. Warren Buffet advised to never put all eggs in one basket. So instead of investing in one or two stocks, through mutual funds, one can invest in multiple shares without the hassle.

  • Diversified investment – Instead of investing in just few stocks with limited money, via mutual funds investment in multiple stocks can be made even with small amounts.
  • Expensive stocks – Suppose the price of stock of company ABC is Rs. 12,000, then none of them can afford it on its own, but with accumulated money they can buy 4 shares of ABC with Rs. 2,000 to spare.
  • Expert knowledge – Investing in the stock market through mutual funds does not require expertise, rather an expert is appointed (i.e., fund manager) who manages the operations of such funds schemes.
  • Micro-manage – With fund managers, investors themselves do not need to manage their investment, the manager looks after the technical nuances of investment.
  • Minimal charges – Fund managers charge minimal fees for their services, whereas PMS (Portfolio Management Services) or banks may charge heavily for such services.
  • Ease of investment – Buying and selling of mutual funds is so much easier, and with everyday launching apps, mutual funds can be traded with just some simple clicks.

Which Mutual Fund to pick?

Well the final and most important question is how to decide which mutual fund to pick. There are many criterias which can help you choose the mutual funds that suit you the best. Out of so many factors, few are below for your help:

  • Purpose – Your purpose of investing effects strongly on your choice of mutual fund. Your purpose or goal can be short term or long term, risky or safe, fast or slow, etc.
  • Source of investment – Whether the money to be invested is out of spare money or regular expenses money.
  • Tenure – Period of investment affects the returns a lot. Investors who invest out of their spare money instead of their active expense money usually tend to invest for a longer period of time.
  • Risk appetite – Your appetite of risk majorly contributes to your decision, risky investors prefer small cap funds whereas safe investors prefer large cap.
  • Frequency – Investments can be made in lumpsum or in parts periodically on an initially determined date of every period.

Above factors are not mutually exclusive to each other and investments can be made with combinations of above factors.

Different types of mutual funds:

Debt or Equity,
Thematic,
Sectoral,
Aggressive or Conservative,
Multi Asset allocation,
Payout or reinvestment,
Capital allocation.
Tax saving.

Journey of a thousand steps starts from one. Similarly mutual funds can get you a long way into achieving your financial goals. Start small, be persistent and patient and watch the magic happen.

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One Comment

  1. नितीन चौधरी says:

    म्युच्युअल फंड बद्दल एवढी छान माहिती…..मुद्देसूद माहिती
    पहिल्यांदा च वाचावयास मिळाली…..आपले आभार

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