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Why invest in funds

Mutual funds bring you the best in the investment world. Here are six reasons why you can't afford to give them a miss.

By Kamya Jaiswal | Print Edition: August 23, 2007

You want high returns. You want low risk. You want the best minds on your money. You want a finger in every pie. And you want all this as easy as they can come. That’s why mutual funds. There’s all this and more, dirt cheap now. Not only can you start investing with something as small as Rs 50 a month, fund houses charge the tiniest fee for access to the best money churners in the market.

You probably wouldn’t even know about the “big opportunity” that shot up your returns. Mutual funds do and that’s why the extra zeroes. They automatically spread risk by distributing the pooled money in various investment options. One bet goes wrong, two others do better. What’s more, spreading risks across asset types takes care of your diversification needs. Still unsure and hesitant? Read on to know why mutual funds are the investment today. It’s a win-win situation for all.

Big and safe returns

Stocks can give bigger returns than mutual funds. Fixed deposits give bigger safety. But if there is one instrument that combines the best of both worlds in the risk-reward matrix, it is mutual funds. So while it is rare to equal a phenomenal gain, it is commonplace to avoid phenomenal losses. You are forgoing less in terms of returns and gaining more in terms of security. On the face of it, this might look as a compromise. The best stocks outclass any fund. So why not go after the biggies outright?

Because it is difficult to spot star scrips. In a space where the spotlight never swings beyond the Infosyses and Reliances, who would know a Northgate (yes it’s a company name) jumped 28.14% between 18 June and 18 July? But who is to tell if Northgate price won’t fall next month and if it does, should you sell its shares or stay invested? A fund manager will have the answers to these questions.

Best minds at work

Invest in a mutual fund and you hire professional punters. Known as fund managers, they handle the money pooled from reservoirs of rich and small investors alike. And these pros do not make investment decisions over cappuccino or based on sound bytes on a TV business channel. Fund managers do it for a living. Their morning read is company financials, top corporate management are on fast dial and number crunching is the favourite pastime.

What might be a chance bonanza for you is a result of in-depth research and analysis for them. But not every manager has a sterling record. There are many mediocre funds and the brains at the helm are to be blamed. The reason? Not everything is in black and white. There’s hardly a company balance sheet that can accurately predict what the future looks like. At the end of the day, every fund manager’s call is based on his judgement. So when Ambani brothers separated, some managers pulled out of Reliance, others ploughed in more. Of course, only one of the decisions was right.

Financial flanning

For every need, for every time period mutual funds fit in all strategies. There is something for both aggressive and conservative investors, short- and long-term goals, all wallet sizes and all age groups. Choose equity-diversified funds for an aggressive approach early in your career. If you are investing for a retirement corpus, pick growth funds. The best of the lot make ideal core funds. Build a diversified fund portfolio around them that feeds your needs at different time intervals. For safe returns, funds with an index as benchmark work best as they spread the risk most. For the “couchpotato” investor, mutual funds are the easiest way to smart financial planning.

Starting small

Systematic investment plans (SIPs) allow investors to periodically contribute small amounts in mutual funds. Don’t have much cash at your disposal? Commit a few thousands to an SIP and you don’t miss the bus. This also controls the impulse to push the envelope when markets peak. Through a concept called rupee-cost-averaging, SIPs help you sleep easy in a volatile market.

If you invest in lump sum, a bear day can wipe out profits. With SIPs, the hit impacts a smaller amount. Moreover, once investments are staggered over a few months, the bear and bull days average out total cost of the fund making you a net gainer. Some equity funds have lowered the minimum SIP limit to just Rs 50 a month. That’s all you need to save every month to taste the wealth creation on the stock markets. This is not denying that it is best to buy more when prices are low and the markets are poised for a boom. But who can predict that?

Easy in easy out

Unlike many things in life, the best in investment is not exorbitantly priced. You can kick start mutual fund investments with just Rs 250 a month. Compared to the hassles of other instruments, it is easier to invest in them too. The entry fee ranges from 0-2.5% depending on the fund type and the amount invested. And except for close-ended funds, you can start anytime. How do you buy them? Online if you have a netbanking account, from agents or directly from mutual fund companies.

If it’s easy to get into, selling mutual funds is literally instantaneous. Since mutual fund NAVs don’t usually fall with the intensity of an individual stock, you don’t have to worry about choosing a wrong day to book profits. A clear advantage over liquidating stocks whose value swings wildly in a matter of hours. You might have to wait long before getting the price you want.

New horizons

You don’t know anything about them. Except that they make good money. That’s about all you need to know too. With mutual funds, you can invest in the most exciting and exotic investment type, no matter that it is beyond your area of expertise. Have foreign equities caught your eye? Just choose a good fund that has invested in overseas stocks.

If gold is your fancy but storage a problem, gold exchange traded funds show the way. Many investors want to participate in the property boom; only, they do not have chunky surpluses. With real estate funds, you can actually access most prized projects of the best developers in the business.

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