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(Precious) Words of Wisdom : "Wall Street makes its money on ACTIVITY, you make your money on INACTIVITY." ~ Warren Buffett

Do you fear Mutual Funds and bank on Banks?

Conceptually speaking, there is simply no difference between a bank and a mutual fund. Both 
(a) function in the same manner and 
(b) towards the same objective.

Want to know how these two, apparently different entities, are essentially alike?

The concept behind banks and mutual funds is the same
What does a bank do?

It takes money from you and I (i.e those who have the surplus); and lends it to companies (i.e. those who need money for their business). In this process...
... it charges a certain interest to whom it lends money
... keeps a small portion of it, to meet its expenses and earn profits, and
... pays the balance amount to you as interest on your deposits.

What does a mutual fund do?

It takes money from you and I (i.e those who have the surplus); and invests it in companies (i.e. those who need money for their business). In this process...
... it makes profits on the money that it invests
... keeps a small portion of it, to meet its expenses and earn profits, and 
... pays the balance amount to you as profits on your investment.

In other words, both banks and mutual funds are essentially an intermediary. They act as an agent between us and the company. Their objective is to invest our money and give us a return on the same.

You are not a smart investor, if you are afraid of investing in mutual funds.

We need them to manage our money
You and I cannot do what they are doing. We do need an intermediary.

Suppose a company needs Rs.1 crore. But you have only Rs.1 lakh. This is where a bank or a mutual fund comes into picture. It collects small deposits from numerous people like you and me, to build a huge corpus. Accordingly, it accumulates the big sums that the companies require.

Secondly, you and I are not trained to give money to companies. Banks and mutual funds have well-qualified and experienced professionals to deploy our money with the companies... appropriately.

Thirdly, you and I do not have the risk appetite to expose ourselves to one or two corporates. Banks and mutual funds are able to diversify our money across many companies, thereby reducing the risk.

Sure, there is a difference between the two
The difference is only in the approach or the strategy on how they manage our money.

Operationally, they are different as...
... Banks give money to a company as a "loan" and earn a "fixed interest" on it.
... Equity Mutual Funds give money to a company as "equity capital" and earn a "profit" on it.

But, both have to be careful and give money only to good companies.
Both have to constantly monitor the operations and profitability of these companies.
Both have to exit from the company at the right time.

So, even if the form in which the money is given differs, taking care of it remains the same, whether it is a bank or a mutual fund.

It is important to grasp this perspective of similarity
In India, we still predominantly trust the banks with our money. Mutual funds get only a tiny fraction of our available surplus.

Logically, it should be the opposite.


... Excessive dependence on fixed deposits will not protect us from the risk of inflation
... Debt mutual funds, which are similar to bank deposits, are lot more tax efficient than FDs
... Equity as an asset class cannot be ignored, where equity MFs offer an excellent option

Must Read : Why Do Rich Have Zero Money In Bank Accounts?

Thus, it is vital that we realize that both banks and mutual funds are caretakers of our money. 

Secondly, just as banks are well-regulated by the Govt. through Reserve Bank of India (RBI), mutual funds too are well-regulated by the Securities and Exchange Board of India (SEBI). This gives us a lot of comfort that these intermediaries will not swindle our money. And if they do anything wrong, they would be punished.

Last, but not the least, mutual funds have delivered exemplary performance over the last two decades.

Concluding... mutual funds are critical to our prosperous future. By ignoring them — whether out of mistrust or ignorance — we are only hurting our financial well-being.

An Investment In Knowledge Pays The Best Interest ~ Benjamin Franklin

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