Wednesday, March 9, 2011

Mutual Funds, the way to wealth

Mutual funds are investment instruments wherein funds from individuals are collected by companies, pooled, and are invested in various stocks and debt options, managed by professionals who are known as Fund Managers.  Let us shed some light on few points about why mutual funds are key to one’s investment portfolio in today’s world.

Professional Management
Unless one has a keen eye on a company’s details and the share market, he is tend to lose his hard-earned money by investing in equities (shares of companies listed in share market).   Now by investing in mutual funds, we leave that worry to a professional fund manager who studies the market and can buy or sell stocks as and when need arises.   He has real time access to market information and can churn the portfolio according to the negatives and positives of the market.           

A Mutual fund has numerous stocks in its portfolio diversified across various sectors, so the market fluctuations across sectors are well handled.  Mutual fund unit-holders can benefit from diversification techniques usually available only to investors wealthy enough to buy significant positions in a wide variety of securities.   

Ease of Use/Liquidity
Mutual funds can be bought online from the AMCs (Asset Management Companies) or from a third party online vendors like Fundsindia, Sharekhan etc.  You would need a PAN card and an online transfer enabled bank account for online purchases.  Offline, they can be bought through various agents after completing minimal paperwork.   These funds can be redeemed any time with a click of a mouse and the redeemed amount will be credited in your account with 3 days.  Some funds like ELSS (equity linked saving schemes) have 3-year lockins to inculcate investment discipline.   Money can be invested lumpsum or the SIP route, while the latter is the thing to do for long term wealth creation.

Another great mode to invest in MF schemes is the systematic investment plan or SIP which is the darling of the investors.  This is simply setting aside a predetermined sum for a specific time period, say 1000 rupees for a period of 36 months.   This can be done through ECS (electronic cash transfer) facility available through banks.  The beauty of SIP is that when the market is on the rise, the NAV (net asset value) of the scheme is high, so the investor gets less units and when the market is low, the NAV is low, and investor gets more units.  So over a longer period of time, we tend to average out the fluctuations of the market and acquire profits.  This is called as rupee -cost- averaging.   SIP can work wonders over longer term and some funds have given staggering 75% returns!

Variety is no dearth when it comes to MFs, as we have lot of funds like aggressive funds, balanced funds, large cap, multi cap, sectoral funds, gold funds etc. tailor made to suit each investors’ risk appetite and goal.  There are debt funds in which money is invested in government securities, money market instruments etc., which are risk free but give low albeit stable returns.

Tax Benefits
Mutual funds invested in ELSS schemes are entitled for tax rebate under 80c section of IT and are subject to a lock-in of 3 years.   This option gives twin benefits since the money is locked in and can reap profits in the longer run while giving tax benefits simultaneously.

All mutual fund houses or AMC’s are governed by SEBI and are relatively safe instruments, (doesn’t apply to Sensex fluctuations!).  Every transaction made by customer is tracked online and he gets periodic updates via statements on his invested amount.   Most AMCs like HDFC, DSP Black Rock, UTI etc. which offer Mutual funds are pedigreed fund houses with long term track records for managing money.

Mutual funds are the only instruments which can beat inflation which is rising alarmingly at 6% to 8% per annum.  When you factor inflation in fixed deposits or PPF schemes, the return you get is nullified.  So investing in equities through SIP mode in mutual funds is the only investment which can beat inflation.  Though they are subject to market risks, they are historically known to beat market fluctuations.  End of the day, MFs are the essential tools for long term wealth creation and should be a large part of anyone’s investment portfolio. 

 Vaz - 03/10/2011