Mutual Funds a Better Option to Save
Mutual Funds remind us about the famous disclaimer – “Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.”Though the disclaimer has made Mutual Fund popular recently, you will be surprised to know that Mutual Funds have been existing since 16th Century.
A Dutch merchant Adriaan van Ketwich, had the foresight to pool money from a number of subscribers to form an investment trust – the world’s first mutual fund in 1774. The name of his mutual fund translates into ‘unity creates strength’. The idea of pooling resources and spreading risk found its way to the US by the 1890s. For the first time, ordinary investors with minimal capital could pool their resources in a professionally managed diversified basket of investments, rather than going to the more expensive route of buying individual stocks of varying risks. This was considered a giant step in the democratization of investments for the average person.
It was in 20th Century that Mutual Fund industry was first introduced in India. The mutual fund scheme that was first introduced in India by Unit Trust of India in 1964 was at the initiative of the Government of India and Reserve Bank of India. The Indian mutual fund industry continues to record impressive growth with rising retail investor’sparticipating in capital markets
To many people, mutual funds can still seem complicated or intimidating. But let us simplify it for you – A Mutual Fund is a professionally managed investment fund that pools money from many investors and invest the money in securities such as stocks, bonds and short term debt. Each investor owns units, which represent a portion of the holdings of the fund. The income/gains generated from this collective investment is distributed proportionately amongst the investors after deducting certain expenses.
First time Mutual Fund investors need to complete their KYC (know your customer) which is a one-time process. Once you are ready to invest after KYC verification, you can choose to invest with the help of a mutual fund distributor, registered investment advisor, stock market broker, bank or any other financial intermediary. But if you wish to invest on your own, you can either visit the nearest office of the fund house or visit their website to make an online investment or through any online platform. The choice to invest directly or through an intermediary lies with the individual.
Broadly any mutual fund will either invest in equities, debt or a mix of both. Further they can be open-ended or close-ended mutual fund schemes. Most mutual funds fall into four main categories – money market funds, bond funds, stock funds and target date funds. Each type has different features, risks and rewards to suit investors. It is like a person going to buy a car in a showroom. Each car serves a different purpose. An adventurer may prefer a sports car, while a family person will prefer a SUV. In the same way an investor will choose mutual fund scheme depending on their requirement.
Some of the important benefits of investing in mutual funds are
- Investing in financial markets requires some skills. One needs to research the market and analyse the best options. This requires significant time and commitment. But if you don’t have the skill or time, investing in mutual funds can be an excellent alternative. Here, a professional fund manager takes care of your investments and strives to provide reasonable returns.
- You have the opportunity to potentially earn higher returns than traditional investment options offering assured returns. This is because the returns on mutual funds are linked to the market’s performance.
- While investing in mutual funds you avoid the risk of putting all your eggs in one basket. When you invest only in a single asset, you could risk a loss if the market crashes. However, you can avoid the problem by investing in different asset classes and diversifying your portfolio.
- Mutual fund investors can claim a tax deduction. In case of traditional products, all interest earned is subject to tax.
To cultivate a habit of regular investing, mutual funds offer a facility known as a Systematic Investment Plan (SIP). One of the best features of Mutual Fund is that you don’t need a large amount of money to start investing. Most fund houses in the country allow investors to begin investing with as little as Rs.500. An auto-debit facility can be set up for your SIP where a fixed sum will automatically be debited from your bank account every month. An SIP offers an excellent way to invest regularly and without having to manually invest each time.
Mutual Funds have disadvantages as well.
- Less control over timing of gains
- Less predictable income
- No opportunity to customize.
We have walked through some vital information regarding mutual funds, it is fairly evident that mutual funds is one of the simplest ways to achieve your financial goals. But before you invest take an adequate time to go through different fund options. Don’t invest in a fund because your friend or colleague has invested in it. Identify your goals and invest accordingly. If required, you can approach a financial advisor to help you make the right investment decisions and plan your financial journey.
With this basic information about mutual funds, the disclaimer is now making senseJ.