An Investment expert or a mutual fund company will collect money from several people who are willing to invest their money but do not have much knowledge about investment.
The mutual fund company will split that money and invest into different sectors where the experts believe it will generate returns.
If someone promises you that they will give you good returns for your money then you should ask, how they are generating money? How they will give you such returns ? What they will do with your money? what will be the profit for that mutual fund company?
A mutual fund company will receive money from the investors who are willing to invest. Which means they will get Money from hundreds or thousands of people. They usually have more than hundreds or even thousand crores of money to invest. So they will split the money and invest into different categories
Equity Funds
Equity funds are nothing but an investment in share market. The mutual fund companies will do fundamental analysis of a stock. They will split your money and invest into various companies from different sectors such as Automobile, IT, Banking sectors etc. They will select best companies from every sector and invest the money.
Bond Funds
The mutual fund company will lend a part of money to a private or a public sector company for a period of time. In return the company will give you some interest every month and pay the entire principal money after the bond's maturity date. This is called Bind funds. I will write a detail article about Bond funds and how it works
Index funds
Instead of investing on some companies in share market, they will invest a part of money in index funds like NIFTY 50, Bank NIFTY etc. Index funds usually gives the investors some consistent returns and a the risk level is very low. So investing in index funds are considered to be a safest option.
Money market
They will invest your money in money market. Investing in money market is a low risk, low reward type of investment. They usually invest in Treasury bills, Certificates of Deposits etc. In future, I will write a detail article about money market.
I understand that many people may not have much knowledge in finance. I am going to give to some basic tips about how to conduct a research and what are the things you should consider before investing in mutual funds.
First thing you should consider, on which category your mutual funds falls? The mutual fund company will tell you how much risk involved. I will give you an example.
The above example taken from grow.in. It will tell you on which category, you mutual fund falls and how much return they have generated for last 1 year, 3 years and 5 years
Once you selected the mutual fund, you must check the total funds and rating. Click on the mutual fund you want to do analysis and check the total funds. see the below image
If the fund size is larger, the other people or investors are investing their Money on that mutual fund. On the other hand, if the fund size is smaller then it is considered to be red flag.
Once you researched that, scroll down and you must check in which instrument and the sector, they hold your money. see the below example.
After that, you should check on which category they have invested your money. As I fold you earlier, they will invest in equity, index fund, Bond fund, money market etc. So you need to check on that. see the example below
And finally you must check who are managing the funds. There are 2 or 3 fund managers will be allocated for a mutual funds. The fund managers will make all the calls. So if your funds are managed by the quality fund managers, you will get good returns. To analyse about the fund manager, you should check their names in google, social media or any other expert advice about the particular fund manager and try to know about them.
Once you did these basic research, you should see some reviews especially negative reviews about the particular mutual fund and then you should make the decision.
The is the most significant advantage in mutual fund. If you invest in mutual fund, you are investing your money in various stocks from different sectors which gives you the balance for your risk vs reward. Since you have wide variety of stocks in your portfolio, even if one or two stocks failed to perform, it won’t hurt you so much.
Mutual funds are managed by the fund manager who are doing this as their profession for years. So they will have proper practice how to manage money. They will conduct a proper research and do fundamental analysis. They have proper plan about where to invest the money and when to invest the money and most importantly when to sell the stock.
As a beginner or a middle class people, you might not have a large amount of money to invest. So you can start investing mutual funds with small amount like Rs 1000 every month and invest like an SIP. If you have some bulk amount in between, you can also invest them in mutual funds so you will have some great accessibility.
Mutual funds are required to disclose their holdings, performance, and fees regularly to their investors. Investors can review the annual reports, and other regulatory filings to assess the fund’s performance, holdings, and expenses which makes mutual fund considered to be safer investment
Since mutual funds have so many advantages, It also had some disadvantages. Let’s discuss all the disadvantages one by one
This is the most irritating part in mutual funds as they charge various fees such as management fees, operating expenses, and sales charges (loads) and these charges will minimize your returns overtime. So investors should understand the fee structure of the fund before investing
As I told you earlier, your fund will be handled by experts which is an advantage but if your money went in to the low skilled fund manager, it will be a disadvantage for you. You don’t have control to your portfolio and to your money as you provided all the access to the mutual fund company. So selecting a correct mutual fund is necessary for consistent growth.
We knew this famous term in advertisements known as “Mutual fund investments are subject to market risks. That is true. All the investments involve high element of risk. So before you invest in mutual funds, you should research where they are your investing money. As I told you in the previous category how to choose mutual funds, you should conduct proper research before you invest.
Conflicts occurs naturally with your fund manager. When you are a complete beginner, you don’t have much knowledge in finance. After a year or two, you may developed skill in finance and economy. So after that when you check your portfolio, you may see that your fund manager invested your money in some loss making sectors or companies but when you contact them, they will not listen to your advice which ends in a conflict. So you should remember you are giving access to your money to the fund manager to invest. If you think you have enough knowledge, you can withdraw your funds and start investing by yourself.
When you are conducting research, you may see some mutual funds are doing very well. Some mutual funds give you very good returns. But have you ever wondered, what is the advantage for mutual fund company and how they are making money?
Since the mutual fund having potential risks, they will invest only the investors money and they will not invest their own money. Which means even if they face any loss, it will affect their investors, not the mutual fund company.
When you see the fund size, they are collecting more than one thousand crores which means even if they get fees of 1-2% per year, they company will generate 10-20 crores revenue per year. A mutual fund companies will have several mutual fund schemes where they are collecting money from investors. And investors will hold their funds for 3-5 years on average.
Even if they withdraw the funds earlier, they will charge some additional fees. So imagine how much revenue they can generate within 3-5 years. This is how the mutual fund companies are making money.
If you are from middle class or lower middle class, before investing in to any funds, consider to buy a term insurance. For me, term insurance considered to be the best insurance among all. Once you got term insurance, save some money as 100% percent pure gold like gold coin as an emergency fund. Once you did the above steps, you can start to invest.
When you start checking reviews, most of the reviewers get money from the bank and put fake reviews like it will give 20% returns or 30% returns. It will make you millionaire within 5 years like. But don’t believe them. You should understand, no one in this finance world could give you more than 15% returns. You should take some huge risks in order to make 15% returns or higher. So don’t be greedy and don’t believe in fake reviews, investment calculators. If they promise you to give 9-10% returns consistently and it would be an ideal return and you can consider them. Anything above 10% means, you must know you are taking risk.
When you start searching about mutual funds, you may receive calls from bank and sales executive will tell you anything they want. Because on the end of the day, you are just a lead for them and they have to finish the sell. Most of the sales executive will try to brainwash you to sell their products but it is your responsibility not to fall on their trap. Even after you start investing, they will call you and try to upsell some of their products, they best option is not to listen to them. If possible, connect with fund manager and speak with them about the plans.
Location : Chennai, Tamil Nadu India
Email id : author@thefundamentaltimes.com
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