Mutual funds for mutual benefit.

You get a call from your banker,” Sir I have Best performing mutual funds for you”. You turn him down ,thinking Mutual funds are complex equity products .But it’s not true ,In reality Mutual funds (MF)are very fundamental product .To put simply the concept of Mutual Funds, suppose there are 4 people who want to travel to a same destination. All of them waiting at a Bus Depot. The Bus is indefinitely delayed, so these 4 people agree to share a taxi to their destination. They Hire a taxi and reach their destination. The Taxi here is the Mutual fund instrument, and passengers, the MF investors.

How it works?

Suppose Mr. A, Mr. B Mr. C have ideal funds of Rs. 100 each. They want that there money to earn fair return over the time. They approach XYZ Company who pools money and invest in other financial instruments. XYZ Co.’s Fund Manager would purchase instruments worth Rs.300 which would serve the investor’s objective. The Investors are allotted Units of the schemes at a price, which is called Net Asset Value (NAV) for e.g. Rs. 10 .So the Investor will get 10 units each .Appreciation of the value portfolio of the MF schemes will increase the NAV of the scheme. If after 1 year the NAV of the scheme increases to Rs. 12/unit, the investor has earned a return of 20%p.a.

Mutual fund groups people, having similar investment objective and invests in equity, debt or money market instruments .In India the concept of mutual funds was initiated by UTI in the year 1964. There were very limited Mutual fund schemes and lesser Companies(Asset Management companies) offering Mutual funds at that time . The Mutual fund industry has grown very rapidly in the last two decades, with assets of more than Rs.7.5 trillion at present. Those who have invested in reputed MFs in last decade would vouch for the returns they have earned. We often don’t take the Mutual funds as a return earning instruments. Even if we invest, we have a very casual approach towards what we are buying.

Some of the reasons to buy Mutual Funds

1. Ideal for first time equity Investors.
2. Benefit of Professional Fund Management.
3. Low transaction Cost
4. Portfolio Diversification
5. Choice of variety of asset class.
6. Liquidity.

Mutual funds are mostly popular to masses as tax saving Instruments. The Equity linked saving schemes (ELSS) of MFs offer Deduction u/s 80C of Income tax Act. 1961. But MFs have gained more importance rather just being a Tax saving instruments. Today, Mutual funds are actively used by the financial planners in formulating one’s financial plan. The Asset of the MFI has grown considerably over the year due the increase in the awareness of the MF products and the returns delivered by the Mf schemes.

Investors Looking for Investment in Mutual funds should consider following points.

1. Financial goal & current portfolio.

The investor should ascertain his requirement in terms of the period of investment, Returns and risk capacities. This requirement should be matched with the respective schemes of MFs available. It should also be seen that the portfolio is neither getting concentrated to any sector or capitalization (say Mid cap Funds) nor inclined towards more of equity/debt instruments. This should be calibrated accordingly to ones situation in life.

2. Scheme Objective

There thousands of MF schemes available in the market, with different objective of investment and returns. One should ensure that his investment objectives are justified by Scheme objectives. This is essential, as to achieve the set portfolio returns.

3. Scheme Options & types : Investing in MF is advantages as an investor get varied alternative avenues to invest .Basic category of MFs schemes are

1. Equity Schemes
2. Debt Schemes
3. Hybrid Schemes
4. Money Market Schemes

One should get a clear understanding of the nature of the scheme by reading the scheme related documents and invest accordingly .MF equity schemes give options namely, Growth option, dividend reinvestment option /pay out option. The Investors who wish to get capital appreciation over the period should opt for Growth option. The investors, who wish to get intermediate cash flows in form of dividend, should opt for the dividend option. The investor may also opt for dividend reinvestment option, if they want to invest their dividend at those prevailing NAVs in the same fund.

4. Reputation of the AMC. The Asset Management Companies(AMCs) are the companies which are formulated by the trust , which in turn established by the sponsorer s. One had to ensure that the sponsorer of the Mutual fund House are reputed and have good standing in the financial industry. This will result in ultimate safe keeping of the invested sum by the unit holders.
5. Past performance of schemes: The performance of the MF schemes is based on the returns of the underlying Assets, and these assets may give varied returns over a period. So just investing in funds seeing a particular period return would be unfavorable. Long term past performance of the Mf schemes over 3- 5 years should be seen while finalizing a MF schemes for investment. This ensures that the fund has performed in all market conditions. One should also see that the MF schemes have outperformed their respective benchmarks indices over the period under study.
6. NFO trap: Most of us think that it is prudent to invest money in every NFO , as the units are available at lowest value(face Value). This Belief is not true , one should only invest in a NFO if there is specific requirement of the portfolio. For the first Time investor a exposure in international or sector funds is not advisable.
7. Exit Loads & Tax benefit. In case of the investor withdraws the invested sum before the stipulated time period as decided by the Mutual Fund House; fraction of sum is deducted, which is called the exit load. One should be aware of such deductions, and lower Exit load funds should be preferred. Where the investor wants to invest in mutual funds to gain a Income Tax deduction, he should only invest in Equity Linked Saving Schemes (ELSS), if invested otherwise, the very purpose of investment is defeated.

Recently the entry Load on the Mutual funds was abolished and online transaction of the MFs was flagged off, paving way to increase retail participation. This has also made MFs the accessible to investor in every corner of the country .Mutual funds are ideal instruments for those who want sizeable returns on their investment but lack adequate knowledge of the Markets. So, don’t ignore any phone calls from your Financial Advisors.