WHY ONE SHOULD INVEST IN MUTUAL FUNDS

It is a known fact that Indians have vested their trust in Fixed Deposits as it is considered safe as capital invested doesn’t fluctuate and the maturity value is predetermined due to fixed rate of interest during the time of investment. These fixed deposit provides rate of interest just over the prevailing rate of inflation. More-over if the interest earned from these fixed deposit is withdrawn for consumption, the capital invested will gradually lose its purchasing power, although the principal amount will remain intact. The other investment options which Indians also rely the most is investment in Public Provident Fund (‘PPF’) and Post Office Deposits. Undoubtedly these investments are safe but it has failed to beat inflation and provide the real returns. The specified lock-in-period of fixed deposits, PPF and Post Office Deposits is also a matter of concern during liquidity crises. The below table depicts the rate of interest over period of years from Fixed Return Investment options: 

This fall of interest rate over the years is a great concern for risk averse and conservative investors, as it has failed to provide the real returns. Thus investors should think of alternative investment options whereby they can earn real returns.

What if I show you an investment opportunity whereby you select the investment based on your risk appetite and which has ability to provide better returns than fixed deposits? Yes, its Mutual Funds. After hearing the word mutual funds we imagine the tagline “Mutual Funds are subject to Market risk, please read all the scheme related documents carefully”.  This tagline is generally written to make investors aware about the risk associated with the particular investment scheme. However the hidden fact is that these mutual fund investments suffice the need of all investors from zero risk bearing ability to high risk bearing ability. These mutual fund schemes are broadly categorized into Debt schemes, Hybrid schemes and Equity schemes whereby debt funds are the least risky, hybrid funds are moderately risky, and equity funds involve the highest risk. However, the reward is directly proportional to risk. Higher the risk, higher the returns.

Mutual Funds have different schemes whereby each scheme follows structured investment by investing in pool of assets which includes investment in equity shares, corporate bonds, company debentures, company deposits, soverign government bonds, commercial papers etc. These investments are managed by experienced Fund Managers. Except for ELSS, mutual funds offer highest liquidity. One can invest in lumpsum or Systematic Investment Plan (‘SIP’) mode. One can begin an SIP with as little as Rs. 500/- per month. Thus mutual fund industry has lot of diversity and has huge potential to generate wealth. Based on one’s risk appetite mutual fund can generate returns from 7% to 30%. Inspite of this potential to create wealth, recent AMFI data shows that approx. 2 crores Indians only invest in mutual funds which is less than 1.5% of population. This figure shows lack of education and awareness about mutual fund investments.  

Hope this blog helps you in taking investment decisions. Keep sharing… keep gaining.

-          By CA Dhruval Shah

You may reach out to me at dhruvalcshah@gmail.com.

 

Disclaimer: The above blog is for knowledge purpose only. The author will not be responsible for any investment gains or loss, do consult your investment advisor before taking any investment decisions.