If I ask you which is the safest place for your money, what would your answer be? Banks, right. Now what if I told you that your money parked so safely in bank might be losing its value?
The money you left in the bank to ‘grow’ might just be losing its value with inflation.
So what is a better alternative to get inflation-adjusted returns on your money? The answer is simple—equities. Surveys show that over the 14 years between 1999 and 2012, your investment in Nifty would have grown by 397%. You heard me right.
All that is true, but it’s also true that not everyone is equipped to invest in direct equities. Most of us have no time or knowledge for that. But we have a betterand safemethod to invest in equities—i.e. through Mutual fundsDoes the term sound familiar to you? Do you hear ‘mutual funds’ and think of the hundreds of advertisements you saw on TV but never cared to investigate into? If your answer is ‘yes’, it is high time ‘Mutual Fund’ stops being just another ad film and starts fetching youpotential returns.
Surprised? Well, get ready for a whole lot of surprises because school’s in session!
What is a Mutual Fund?
Simply put, mutual fund is an investment programme where investors like you and me, with some capital and no time or experience, pool their money together and let an expert invest it in the best way possible.Most of us don’t have the resources or the understanding of the market to buy/sell individual shares and bonds, but that should not stop anyone from investing, should it? This is where Mutual Fund comes in because here you have the option to invest as little as Rs. 500 and yet have your investment handled by professionals. It’s like when you don’t have enough money to get lots of toppings on your pizza and have to settle for a plain margarita,so you pool in money with your friends and buy a bigger pizza with all the toppings available and share it with them.
How does mutual fund work?
The company that floats a mutual fund scheme known as an Asset Management Company (AMC) handles the investor’s money.
From there, a qualified professional called the Fund Manager invests your money to create a portfolio consisting of stocks, bonds, money market instruments and other securities. Unlikethe traditional stock market, investors don’t have to analyse the rise and fall in the market. It’s the Fund Manager’s job to invest the money in a way to maximise profits and minimize the losses which in turn is shared among all the investors proportionately.
So the obvious question arises “How does one keep track of their money?” It’s simple. An investor can track their losses or gains by keeping an eye on the fund’s per-unit market value.
When an investor puts money in the fund, they are allocated units as per the amount they invested. The value of each unit is called Net Asset Value (NAV) which reflects the current market value of the fund’s holdings.
Understand NAV as the smaller piece of the cake you had bought earlier. You get a certain number of pieces based on the amount you added in the pool.
Thus, by the end of a certain period, if the NAV is more than what it was when the securities were bought, the investors have a net profit. However, if the NAV falls the investor can also suffer loss.
Why should you invest in a mutual fund?
On a very basic level, mutual funds are very convenient andare relatively safe. A professional fund manager invests in both high risk-high returns equity funds as well as low risk-low return debt funds. Spreading out the money protects it from fluctuation in individual securities. Another great thing about mutual funds is that the low cost of investment enables almost anyone to invest and helps to gain profit from the scheme at the same time they can get their money back quite promptly. An open-ended scheme allows for anytime liquidation while a closed-ended investment has a lock-in period of usually 3 years. But the most compelling reason to invest in Mutual Funds is that in the long run, they could earn reasonable returns. For instance, Sensex data for a 30-year period from September 1979 to 2009 shows that holding an investment for 297 months i.e. around 25 years would have fetched returns in excess of 10,000% !Wouldn’t you like to be the person whose story becomes an inspiration to other investors?
The next time you start feeling like an adult because you have a bank account, keep in mind that there’s a better way you could be managing your money- by putting it in a Mutual Fund and sitting back to watch it grow.
Mutual fund investments are subject to market risks, read all scheme related documents carefully.