To many people, Mutual Funds can seem complicated or intimidating. We are going to try and simplify it for you at its very basic level. Essentially, the money pooled in by a large number of people (or investors) is what makes up a Mutual Fund. This fund is managed by a professional fund manager.
It is a trust that collects money from a number of investors who share a common investment objective. Then, it invests the money in equities, bonds, money market instruments and/or other securities. 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, by calculating a scheme’s “Net Asset Value or NAV. Simply put, a Mutual Fund is one of the most viable investment options for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.
Many of us dread the thought of managing our own investments. With a professional fund management company, people are put in charge of various functions based on their education, experience and skills.
As an investor, you can either manage your finances yourself, or hire a professional firm. You opt for the latter when:1. You do not know how to do the job best – many of us hire someone to file our income tax returns, or almost all of us get an architect to do our house.
Professional fund management is one of the best benefits of Mutual Funds. The infographic on the left highlights all the others. Given these benefits, there is no reason why one should look at any other investment avenue.
There is a beautiful Chinese proverb, “The best time to plant a tree was 20 years ago. The second best time is now.”
There is no reason why one should delay one’s investments, except, of course, when there is no money to invest. Within that, it is always better to use Mutual Funds than to do-it-oneself.
There is no minimum age when one can start investing. The moment one starts earning and saving, one can start investing in Mutual Funds. In fact, even kids can open their investment accounts with Mutual Funds out of the money they receive once in a while in form of gifts during their birthdays or festivals. Similarly, there is no upper age for investing in Mutual Funds.
Mutual Funds have many different schemes suitable for different purposes. Some are suitable for growth over long periods, whereas some may be for those in need of safety with regular income, and some provide liquidity in the short term, too.
You see, whatever stage of life one is in, or whatever one’s requirements, Mutual Funds may have solutions for each one.
Several questions rest in a potential investor’s mind regarding the ideal amount to invest. People consider Mutual Funds as just another investment avenue. Is it really the case? Is a Mutual Fund just another investment avenue like a fixed deposit, debenture or shares of companies?
A Mutual Fund is not an investment avenue, but a vehicle to access various investment avenues.
Think of it this way. When you go to a restaurant, you have a choice to order a la carte or buffet/thali or a full meal.
Compare the full thali or the meal with a Mutual Fund, whereas individual items you order are the stocks, bonds, etc. A thali makes the choice easy, saves time and also some money.
The important thing is to Start Investment Early, even if small, and gradually add on to your investments as your earnings increase. This gives you better prospects of better returns in the long run.
Mohan and Rohan moved to a Metro City as opportunities to earn and spend were higher.
Rohan looked at the income opportunity and decided to enjoy life. Mohan, on the other hand, decided to save and invest his earning, in order to survive in the city.
Mohan was concerned when he learnt about Rohan’s lifestyle and tried explaining him the benefits of saving young with numbers.
Mohan had started investing at the age of 25. He was investing ₹ 5,000 per month and earned @10% p.a. on his investments. In all, he would invest ₹ 21 lacs and accumulate a sum of ₹ 1.70 crores at 60 years of age.
If Rohan started investing ₹ 30,000 per month even at the age of 46, his total investment over the years would be ₹ 54 lacs. Earning @10% per year on his investments, he would accumulate less than ₹1.2 crores when he’s 60.
Although Rohan invested ₹ 54 lacs as against Mohan’s ₹ 21 lacs and both earned at the same rate of return, Rohan would accumulate a larger sum due to the time he gave to his investments.