Today Mutual Funds seems to be a better investment option for indian salaried employees or small business owners who can save monthly a fixed amount of small money and invest in these funds for their future.Since mutual funds investing do not require any special expertise in investing or arithmetic financial skills,these funds are easily understandable and accessible by the common people.All they have to do is that just select a mutual fund based on their goals and risk appetite.Once they select the mutual funds according to their requirement rest of the headache of selecting and buying stocks, time at which stocks to buy or sell is looked after the mutual fund manager.Fund manager is a person who has skills and financial investing experience through which he can generate maximum returns for their mutual fund investor.
Mutual Funds – A Quick Primer
A mutual fund is an investment vehicle that pools money from a multitude of people (investors like you and me). It uses this pool to purchase securities like stocks, bonds, and gold. As the prices of securities change, the mutual fund scheme makes its returns which is in turn the investor’s return. Professional money managers with decades of experience manage each mutual fund and take the call on which securities to buy and sell.
Broadly Equity Mutual Funds are divided into three categories-
Large Cap Funds- Large Cap Funds are baskets of blue chip companies stocks which have large market capitalization.These funds are more stable and give consistent growth on investment.
Mid Cap Funds- Mid Cap Funds are the group of funds that have future potential to grow big in the market and economy.Mid Cap Stocks tend to offer investors greater growth potential than large cap stocks but with less volatility and risk then small cap stocks.
Small Cap Funds- These funds are the bunch of stocks which have small market share in the economy and are more at risk to any volatility occuring in the market.Although they have the potential to give maximum return, they are highly volatile also which may not suit every mutual fund investor.
How Mutual Funds helps to grow investment Corpus
For small retail investors who do not have appropriate skills or time to invest directly in Stocks,mutual funds can be the best financial instrument to grow their investments because mutual funds provide returns that can easily beat the inflation and these returns are also good compared to the other investment options like PPF,Gold,ULIPs,FD etc.
If we analyze the return of different categories of mutual funds for last 5 years, we can observe that large cap funds have given nearly 12% to 13% CAGR Return which shows that it can beat inflation easily if one is investing their money for long term.Similarly,Mid Cap and Small Cap have also given return of approximately 15% CAGR and 18%CAGR respectively if money is invested for long term(more than 5 years).Debt Mutual funds have also performed consistently well in long term investment as it has given approx 10% CAGR Return.So any individual can invest in mutual fund according to his future goal and risk appetite.
One thing every retail investor should be cautious while investing is the expense ratio of mutual funds.Expense ratio is the amount that the asset management company charges to manage the investment portfolio of its investors.The expense ratio of actively managed funds is higher than passive managed funds(like ETF,Index fund).Expense ratio of Active managed funds is about 0.50% to 0.75%.Some Fund house can also charge upto 1%,but anything above that seems to be much higher because higher expense ratio if compounded annually can impact the investment corpus of the individual in the long term.In the long term investment,if expense ratio is increased by even 0.25% then it can reduce the investment corpus by a huge amount.So one should take a special note of expense ratio while selecting any fund for investment.
Another important point to mention is that mutual fund investing is done by either direct plan investing or through regular plan investing.one should always prefer direct plan for mutual fund investing because it provides better returns and like regular fund investing there is no commission to be paid to the broker.In direct plan one can buy mutual funds NAV(Net Asset Value) directly from the asset management company due to which there is no commission involved and it can provide better return compared to regular plan investing.
Expense ratio of funds is also less if we invest through direct plan as there is no commission of brokers involved in it.
The points mentioned above show that today mutual fund investing seems to be the best investment option available for the retail investors to grow their money and maximize their wealth.