There is always an inclination to look for good returns at the least possible risk. Many, in fact, say that they want to invest in instruments that give maximum returns at minimum risk. While that is utopian, we can strike a decent trade-off by assuming some amount of risk for good returns.
Mutual funds offer a comparatively lower risk profile compared to direct investment in equities. Funds from various investors are pooled and a fund manager manages the corpus. The corpus collected is invested in various companies, across sectors to mitigate the risk. Fund managers are specialists who are clued in on the market and also have access to information that the investor may find difficult to access – or he will get after a lag, by which time the market would have discounted the information.
Normally, equity investors go about investing based on tips, what their friend or broker advised, based on their general knowledge about some companies. This makes the portfolio a mish-mash of various stocks, which may not be diversified and may have poor fundamentals as well.
For most people who do not have a deep knowledge of finance, it would be a good idea investing through mutual funds. There are equity-oriented mutual funds, debt funds and hybrid funds, among others. But, within each of these categories there are several sub-categories, for instance, in equity mutual fund category there are large cap funds, mid cap funds, value funds, thematic fund and sectoral funds. A proper portfolio needs to be put together, taking into account the various categories and the individual schemes.
Mutual fund schemes allow one to invest even small amounts; for instance, even Rs 100 per month is possible in a scheme. Most companies permit a minimum of Rs 1,000 per month. Monthly investment through systematic investment plans is one of the best ways of investing, as many would find investing lump sums difficult. Also, since one gets income (in most cases) at the start of the month, it is easy to invest a portion of this every month.
Systematic investment plans also have the advantage of making timing the market redundant as the investor would be investing at all points in the market. This ensures that over time, the investor would get advantage of rupee cost averaging and would end up making money over time. Even if a person wants to invest one time, the money can be invested through the medium of systematic transfer from a debt fund to an equity fund over time. This will be very helpful, when markets are expected to be turbulent.
For any goal, savings in small lots is far easier than lump sums. Mutual fund investments in equity are popular vehicles to meet long-term goals as equities perform well over time. Sensex has returned about 18 per cent compound annual returns over its period of existence — 32 years.
Equity mutual funds too, have given sterling returns over their lifetime of over 10-15 years. There are many funds that have given even a 20 per cent plus returns over 10 year plus periods. For those who are a bit more conservative, hybrid funds with a preponderance of equity investments exist. The investment returns will be commensurately lower, but the risk assumed is also lower.
There are also hybrid funds that have a major portion in debt and some exposure to equity. This offers a good chance to participate in equity to some extent, to those who are averse to taking a lot of risk. Then there are full-fledged debt instruments too such as short, medium and long term funds, gilt funds and fixed maturity plans (FMPs).
Mutual funds hence, give an entire range of products to address the needs of every individual. Whatever the goals a person may have, a good portfolio can be put together for achieving them.
For instance, if a person has a short-term requirement of money say one year, an fixed maturity plan of that duration or a debt fund whose portfolio maturity coincides with the tenure, may be a good idea.
For comparatively longer periods, one could look at a mix of debt products, hybrid and equity-oriented products, to construct the portfolio. Since the mutual funds have assured liquidity and equity-oriented funds enjoy zero long-term capital gains, they are even more attractive.
In a nutshell, mutual funds lend themselves to investments for meeting the short, medium and long-term goals and that, too, at one’s pace and convenience. What is required is regularity in investments and reviews from time to time, to ensure that the funds ones have invested are still performing well.
Used well, mutual funds can work like a charm for investors seeking goal achievement.
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