Dispel Fears about Mutual Funds – Invest & Earn Handsome Profits

Are you afraid of Mutual Funds? If your answer is no, then you belong to the minority 10% of Indian household who invest in it. However the majority of Indians (the rest 90%) do not invest in them because they fear that it is a highly risky option. We agree that mutual funds are a risky business, but most of its risk is exaggerated by those who clearly do not understand about what it really is.

Understanding Mutual Funds

A Mutual Fund is a pool of investments from many people looking for high returns. These pools of investments are managed by professionals called Fund Managers who are experienced and knowledgeable persons about the various markets and its performance. These Fund Managers decides where all to invest this pool of fund so that maximum profit is made avoiding risks as much as possible.

The investors are given units or shares proportional to the amount they have invested in the fund. The Fund manager passes on the gains and the loss of the fund to the investors through these units. When the fund profits on its investments the value of the fund  increases, consequently increasing the value of the units (NAV: Net Asset Value) or shares held by the investors. The opposite happens when the fund faces a loss.

Where Does Mutual Funds Invest?

The risk of a Mutual Fund depends on where it decides to invest. Most Mutual Funds are considered risky because the fund managers invest mostly in equities and commodities, which are considered high risk assets. However, investing in these risky securities is the only way a fund manager could make the kind of gains that brings a broad smile on the investors’ face.

There are mutual funds that invest in less risky assets such as government bonds, debentures, company bonds, and also money market instruments. These funds are a whole lot safer but they do not yield as much as you would like to. After some time you may think it is better to invest in a bank fixed deposit than in a low risk mutual fund.

Ways You Get Income from Mutual Funds

So, just how exactly are you supposed to get income from investing in these funds? Well there are three usual ways.

The first way is from the dividends and interest from shares and bonds. You are aware that the Fund Manager invests our money in equities and bonds which he thinks will bring in the profits. The companies whose shares our fund manager bought give dividend to its share holders occasionally. In addition, the bonds also give returns to the bond holders – our mutual fund in this case- in the form of interest. Our Fund Manager transfers these incomes to the investors of the fund.

Sometimes Fund managers decide to sell the securities for a profit, when its price has increased. The fund manager gives the gain the Fund receives by selling these securities to the unit holders or investors of the fund.

At other times the fund manager decides not to sell these securities and thus the value of fund keeps increasing, which means that the units or shares has increased in value. If you need income you can sell these units and cash in on the increased value of the funds.

Why Do We Recommend Mutual Funds

When we say to invest in something that seems risky it could either mean we are out to ruin you or it might mean we have seen something special in it and wants you to enjoy it as well. Anyway, you decide for yourself why we recommend investing in Mutual Funds by going through these points.

Managed By Experts: The first and foremost thing, which makes investing in mutual funds worthwhile is that this fund is managed by experts in the field, whose reputation and future lies in making profits for you.

Unless you are a fund manager yourself you never can gain the insight and knowledge about the diverse markets like those who run a Mutual Fund. They are updated about everything pertaining to the markets. Therefore if you need to make money you got to face risk. And if you are ready to face risk, the only place that lowers the risk and maximizes your profit is a Mutual Fund.

High Returns: The gain from a Mutual Fund is more or less than what is received from directly investing in equities. Moreover, the risk is lowered because experts manage your fund. The fund manager makes sure to invest in low risk instruments as well, to lower the risk. Imagine the amount of risk and stress you will be taking if you decide to invest in equities directly. With such volatility in markets it is highly likely that you cannot withstand the onslaught unless you are really experienced.

Diversification: Another advantage of Mutual Funds is that the fund manager invests in diverse instruments. This helps to spread the risk and maximize our profits. By diversification the risk is considerably lowered. Only a fund manager knows how well to diversify across different instruments and markets to maximize the gains.

Need Less Capital: If you are a small time investor, it would be difficult to enter the market and still more difficult to last in the volatility of the markets. However, Mutual Funds allow you to invest in markets with a far less capital than is usually required when directly investing in these markets. This helps even those who have lower income to enjoy the benefits of investing in equities and bonds. Additionally, many mutual funds offer systematic investment plans, through which you can invest through monthly installments.

Regulated by SEBI: Every Mutual Fund is regulated strongly by SEBI. The SEBI has stipulated many guidelines about how a Mutual Fund should function so that the interests of the investors are paramount. This blocks any effort from the part of the fund manager to take unnecessary risks and jeopardize the investors’ money. The transactions are highly transparent and you can easily know where your money is invested. This gives credibility to the Mutual funds that you invest in.

Option to Choose: Mutual funds are of many types and fund managers provide many schemes from which to choose. You can choose a mutual fund according to your preferences for risks, financial instruments, withdrawal etc.

From reading these points, we bet you have come to the conclusion that Mutual Funds are not as bad as it is portrayed out to be. Anyway, before investing in any mutual fund, read instructions carefully and understands the risk involved and the many options available to you. Invest wisely!

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