Suparna Pathak: Welcome to another episode of Mon Money. I am Suparna Pathak and with me is investment advisor Saibal Biswas. Before we move forward, let us take a quick look at our opening screen.
Suparna Pathak: Saibal, everyone invests in Mutual Funds. More or less, everyone is of the opinion that investing in mutual funds will generate good returns. However, which Mutual Fund? Why Mutual Funds? Answers to these questions are still largely not known universally. If you tell us about Mutual funds – why we should invest in Mutual Funds, in what kind of funds…
Saibal Biswas: let me start by defining a Mutual Fund. To put it simply, a Mutual Fund is a vehicle that can carry many things simultaneously. A Mutual Fund is where we have collected different types of investments on the one hand while we have collected many investors on the other. They have all put their monies in the common basket and when the basket grows, the benefit is shared by them. This may be an oversimplification of things, but this is it.
What a Mutual Fund offers is professional management. These are professionally managed by Asset Management Companies. Naturally, if one were to manage the fund on one’s own, this kind of research, this professionalism would have lacked, or even the kind of funds available for investment would not have been there. For an individual, it would not have been possible to compile so many different kinds of investments.
The second advantage is risk diversification. If one were to invest in any one class of asset, it may lead to a disproportionately high amount of risk, but a Mutual Fund allows one to spread the risk evenly.
The third point is that one can invest in a Mutual Fund even with a low corpus fund which may be as low as Rs 500 or 1000. There may be many economically challenged people who may want to invest but are unable to because of the lack of funds. The Mutual Fund offers them a route.
Liquidity. Mutual funds are largely liquid. Some allow the withdrawal of funds within a day. In equity-based funds, investments can be withdrawn within two days. Basically, they are very liquid.
Because of the numbers involved – from investors to investments, to corpus funds – the cost of creating the basket also goes down.
So, a Mutual Fund offers a basket, at a decent cost, that is professionally managed and monitored by SEBI that also offers tax savings in cases. Overall, it is a great basket.
That is not to say that all funds were born equal. Debt funds, which are based on fixed assets, offer low returns while being exposed to lower amounts of risks. While equity funds offer higher returns with higher risks. There are also mixed baskets where debt and equity funds are mixed to create a Balanced Fund. This is to say that there are different categories of Mutual funds and one has to choose one according to one’s requirement.
Suparna Pathak: What you are essentially saying is that if one had, say Rs 100, one could have bought into a certain class of investment. Now if one invests the same amount with many others in a Mutual Fund, then professionals will invest the collected amount on behalf of everyone, freeing one of the worries relating to the why, when, and where of investing. The crux of the matter is that what one cannot do
individually, one can achieve through a Mutual Fund. Secondly, with a very small corpus fund, one can invest in a well-diversified basket – in bonds, in equity, perhaps even in real estate. The spreading of risks is also taken care of in a Mutual Fund
But are all Mutual Funds good? Towards which one should I turn?
Saibal Biswas: Risk. The choice of a mutual fund will depend upon one’s risk appetite. It will also depend upon one’s goals. For example, the goals that are on the longer term, allow one to tread a slightly riskier path. We have discussed in the past how, if equity is given adequate time, its riskiness goes gown increasing its returns. That is if one has long-term goals, one can consider equity investment as the chosen weapon.
Now suppose one has a short-term goal and wants to buy a car in two-year’s time. If the funds are deployed in the equity market, and it falls, that will be catastrophic. There is condemnation all round. But the fact remains, it was due to the wrong identification of the goal and the investment class. Here the identification and marrying of the right goal to the right investment is of paramount importance. That is why we say that for short-term goals, invest in fixed classes – they may be fixed deposits, mutual funds, bonds and the like, but for meeting long-term goals, use equity. The selection must be very precise and clear.
Suparna Pathak: many people pick up funds as it is said that the particular fund has posted the highest return. Should one make this the only factor or consider other things before choosing a mutual find?
Saibal Biswas: The return that is high today, may become low the next year if such returns were the result of high risk. What we look for is the consistency of returns. What kind of an outlook the Fund Manager has, the investment philosophy as it were. The Fund may follow a growth route or a value route but it should also accord some amount of safety. Otherwise, why will one take the Mutual Fund route?
Highest return should not be the consideration. It is good if such figures are posted, but what we look for is the consistency of returns with adequate safety.
Suparna Pathak: Investments, like relationships, is also about stability.
To sum up, what Saibal Biswas has said today is that one should invest in mutual funds, for even with a small saving, one can access all opportunities of investing in different parts of the market through them. He has also said that in order to identify the right fund to invest in, look for one that is stable, like peace is, in relationships. It is even better if you discuss with an expert advisor to seek out the right fund for yourself.
In the next episode we will see how investment advisors go about their jobs, how they analyze risks and on what they base their advice.
Saibal Biswas: keep watching.
Takeaway:
Identifying the right Mutual Fund is the trick in the game of investment. Consulting an advisor is advisable.
