> In terms of liquidity it almost matches a bank account.
> It is top-rated in terms of tax-efficiency.
> The risk-reward is perhaps the best.
> From shortest of the short-term needs to the longest of the long-term requirements, it caters to all.
And yet — despite being in existence for now a shade over two decades — a vast majority of the investors do not invest in it.
A tiny, only a tiny percentage of investors, buy mutual funds.
Mutual funds are probably the "most-misunderstood" and "least-invested" of all products.
It is indeed tragic, that due to ignorance, a huge population of this country is deprived of the immense benefits which a mutual fund brings to the table. This, therefore, is an attempt to de-mystify one of best investment products available in the market.
One. Mutual Fund, per se, is not an investment strictly in the direct sense. Rather it is a Trust that collects small amounts from a large number of investors and creates a pool of money called a 'mutual fund scheme'; which is then invested under the guidance of an expert fund manager.
Two. Since this pool of money can be invested in a vast array of products — shares, debt and / or gold — Mutual Fund is NOT a 'single' or a 'distinct' investment product. Rather Mutual Funds should be looked upon as a whole bouquet of products. So, depending on your need, you can buy equity mutual funds, debt mutual funds, gold mutual funds and hybrid funds.
Three. And within these broad categories you have multiple schemes viz. large-cap equity funds, mid-cap equity funds, sector funds, short term debt funds, long term debt funds, liquid funds, gold ETFs, gold FoFs, so on and so forth. So you get many many types of mutual fund schemes suited to varying kinds of needs.
Four. Investing in shares is a specialized job and requires extensive monitoring. An average investor lacks both. I, therefore, wonder why does an aam amateur equity investor believes he can do a better job than a team of professional fund managers and skilled research staff? When he takes recourse to a doctor, CA, Tax consultant or a lawyer, I wonder why he is averse to competent fund managers to invest his money in equity? [Read 'I am fed up with equity. It has given 'nothing' in last 5 years'].
Five. Debt mutual funds will give high tax-paying investors a much higher post-tax returns than other debt products such as fixed deposits, post-office schemes, non-convertible debentures, bonds, etc. [Read 'Why Debt MFs score over Bank FDs?']
Six. Gold mutual funds enjoy a lot many advantages over buying physical gold. [Read 'Gold ETF scores over Jewellery']
Seven. Hence, depending on your requirement, you have to first identify the relevant categories of schemes, where you can take exposure. And within these relevant categories, you can choose the best schemes based on their performance, portfolio characteristics, risk parameters and other features (such as expense ratio, exit loads, etc.)
Eight. Net Asset Value (NAV) is merely an average of the various securities in the portfolio. It has NO - I repeat, ABSOLUTELY NO - relevance to its future performance. Do NOT equate it to the 'price' of an equity share. Therefore, DO NOT base your investment decision based on the NAV. [Read 'Did you know that NAV of a mutual fund has 'zero' impact on your returns?']
Nine. Similarly, the dividend in a mutual fund scheme is not the same as dividend of an equity share. In MFs, dividend is merely a distribution of part of the NAV of the fund. Hence the NAV will drop to the extent, dividend is taken out and given to you. Therefore, DO NOT base your decision based on the dividends declared by a mutual fund scheme.
Ten. And last but not the least, SEBI and AMFI have, over the decades, admirably monitored and regulated the mutual fund industry making it among the best in the world.
Apart from the above blog and links, those interested in expanding their knowledge about mutual funds can refer to
- 'Millionaires don't eat cakes...they make them' for an introduction to various categories of funds
- '10/10 Now control your money perfectly' for Ten rules to selecting a Mutual Fund
- 'Your Guide to Finance and Investments' for a comprehensive analysis of 20 different types of mutual fund schemes.
