A Mutual Fund is a professionally managed type of collective instrument that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.
Mutual funds invest according to the underlying investment objective as specified at the time of launching a scheme. So, we have equity funds, debt funds, gilt funds and many others that cater to the different needs of the investor. The availability of these options makes them a good option.
While equity funds can be as risky as the stock markets themselves, debt funds offer the kind of security that is aimed for at the time of making investments. Money market funds offer the liquidity that is desired by big investors who wish to park surplus funds for very short-term periods.
Balance Funds offer investors having an appetite for risk greater than the debt funds but less than the equity funds. The only pertinent factor here is that the fund has to be selected keeping the risk profile of the investor in mind because the products listed above have different risks associated with them.
So, while equity funds are a good bet for a long term, they may not find favour with corporate or High Networth Individuals (HNIs) who have short-term needs.
Diversification
Investments are spread across a wide cross-section of industries and sectors and so the risk is reduced. Diversification reduces the risk because all stocks don’t move in the same direction at the same time. One can achieve this diversification through a Mutual Fund with far less money than one can on his own.
Professional Management
Mutual Funds employ the services of skilled professionals who have years of experience to back them up. They use intensive research techniques to analyze each investment option for the potential of returns along with their risk levels to come up with the figures for performance that determine the suitability of any potential investment.
Potential of Returns
Returns in the mutual funds are generally better than any other option in any other avenue over a reasonable period of time. People can pick their investment horizon and stay put in the chosen fund for the duration. Equity funds can outperform most other investments over long periods by placing long-term calls on fundamentally good stocks. The debt funds too will outperform other options such as banks. Though they are affected by the interest rate risk in general, the returns generated are more as they pick securities with different duration that have different yields and so are able to increase the overall returns from the portfolio.
Liquidity
Fixed deposits with companies or in banks are usually not withdrawn premature because there is a penal clause attached to it. The investors can withdraw or redeem money at the Net Asset Value related prices in the open-end schemes. In closed-end schemes, the units can be transacted at the prevailing market price on a stock exchange. Mutual funds also provide the facility of direct repurchase at NAV related prices. The market prices of these schemes are dependent on the NAVs of funds and may trade at more than NAV (known as Premium) or less than NAV (known as Discount) depending on the expected future trend of NAV which in turn is linked to general market conditions. Bullish market may result in schemes trading at Premium while in bearish markets the funds usually trade at Discount. This means that the money can be withdrawn anytime, without much reduction in yield. Some mutual funds however, charge exit loads for withdrawals.
All said and done, Mutual Funders! It is the right way to maximize sizable returns from a medium to long-term stand point. Rather than parking one’s money in Fixed Deposits, invest in Equities through professional Financial Managers to get decent returns, as equities as an asset class reward you more in the long run. Remember Mutual Fund Investments are subject to market risks. Please read the offer document carefully before investing.
NetIP Columbus started off 2011 riding a very weak wave of pervious years where the membership counts were declining and funds diminishing. We didn’t have a far reaching presence within the community where the NetIP name was known by all.
Parag Khanna is a leading geo-strategist, world traveler and author.
