Why mutual funds are good Investment?

mutual fund investment

“Don’t save what is left after spending; spend what is left after saving.”, this quote coined by one of the Greatest Equity Investor speaks about habit of saving, but do miss out on an important point i.e. if your savings are kept idle it will deteriorate its value. So, we should employ our savings to maximize it worth or value.

Now, the question arise is “How can we maximize worth or returns from our savings”? Answer is simple, By investing your savings to make the efficient use of money to attain financial goals.

However, there are plenty of investment instruments available in the market, selecting one of the best is a very important affair. The criteria for selection of the good investment should consider not only investment return but also inflation.Let’s first talk about Inflation as it is important to understand it, before stepping into investment world.

Inflation is like termite which slowly degrades the value of your money with respect to time. We will show you with a real situation: Lets considered that you have saved Rs 10,000 in 1997 and didn’t make any investment with it. Now as inflation is in play. So purchasing power of Rs. 10000 in the year 1997 has increased to Rs. 32,220 in the year 2017. It means whatever you could have bought in year 1997 with 10,000, in year 2017 you have to pay 32,220 for the same.

how-inflation-works
How inflation works

It can happens because of no investment plan was in place. So invest your savings to appreciate their worth in long run.

So, what we are going to discuss here is for those people who still find stock investment is not their cup of tea. But still, want to invest their surplus cash in this kind of investment, which can simulate similar healthy returns. Answer to your request is Mutual funds.

 Mutual fund, We hears this name in every advertisement of the mutual fund disclaimer saying;

“Mutual Fund investments are subject to market risk. Please read the offer document carefully before investing”

This blog aims to drain out all the confusion which revolves around this disclaimer. So buckle up, let’s start…

What are Mutual Funds?

A mutual fund is a trust that pools the savings of a number of investors who share a common financial goal. The reason for highlighting thecommon financial goalis one should first decide a goal which requires a handsome sum of money in future. Few choices we have listed below:

financial goals

Anyone with a surplus of as little as a five hundred rupees can invest in Mutual Funds. It means you can start investing money from a small amount which is much less than the minimum balance of most bank’s saving account. Ironic, isn’t it…

The money thus collected is then invested by the fund manager in different types of securities. So by investing in mutual funds, you can gain the services of professional fund managers, which handle your money in much more efficient way.

Why invest in Mutual Funds?

Equity-like returns without any skill:

When you invest in a mutual fund, your money is managed by finance professionals.  So its better for Investors who do not have the time or skill to manage their own portfolio can invest in mutual funds. By investing in mutual funds, you gain access to services of professional fund managers, a service,  which would otherwise be costly for an individual investor to afford.

Fund comparison with BSE Sensex 100 - 5 years Return
Fund comparison with BSE Sensex 100 – 5 years Return

I the figure above, we are showing the returns percentage of Mutual fund with respect to the Nifty 50(Market Index) over the period of 5 years, the performance of the fund is much similar to that of  market index(BSE 100). After a period of time mutual funds returns beat the market index returns, here market generate the return of 105% whereas mutual funds are able to generate 125% of return.

Let play with your curiosity a bit . Now, what if, if we stretch this graph to 10 years:

Fund comparison with BSE Sensex 100 - 10 years Return
Fund comparison with BSE Sensex 100 – 10 years Return

Now our motive with the figure above is to show two things: More the number of years you invest more is the return on investment or ROI . Also longer the period, lesser the risk .

You can also opt for the video version of Benefits of Mutual fund Investment in Hindi:

Extra Topping of Tax Benefit:

Investments in Equity Linked Savings Scheme (ELSS), a kind of mutual fund qualify for the tax deduction of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act.

No other equity-related investments qualify for tax deduction. So we can say it is a kind of extra topping on our returns as it provide the tax benefit.

Short lock-in-period and best gain (over the longer duration) among all the investment option eligible for tax
rebate. So do check ELSS in our upcoming blogs.

Benefits of Equity Linked Saving Scheme (ELSS)
Benefits of Equity Linked Saving Scheme (ELSS)

Risk-Return Tradeoff:

By investing in a particular stock of the company, the risk-return can be high or investment in the banking instruments gives you the lower rate of return.

In case of the mutual fund it balance out the situation, your money is invested in the multiple companies which mitigate risk. If one company in that sector has a bad performance , it can be balanced by other companies or other sectors that are performing better.

This lowers the risk and creates the diversified portfolio without investing a large amount of money, as in an individual direct equity portfolio.

The best part is the fund mangers regularly discloses their portfolio allocation publicly to their investors.

diversified portfolio with percentage allocation

SIP is a good EMI:

Investors can benefit from the convenience and flexibility offered by mutual funds to invest in a wide
range of schemes. The option of systematic investment plan (SIP), which means a small amount of investment at regular intervals.

SIP Return over 10 years
SIP Return over 10 years

Investment of Rs. 5,000 per month over the period of 10 years doubles the invested sum or returns 100% on invested amount . A word of caution: The power of SIP can only be experienced if you keep investing even when market returns are negative, as purchasing at regular interval helps in averaging the overall risk. Believe us, It is the hardest thing to invest when market is bearish or down trends.So, “keep calm and invest” is the mantra.

Live the Retirement King Size:

What if your retirement looks something like: you are going for the world trip or having your own farmhouse. In short, you can fulfill your dreams.

Who doesn’t want this type of retirement life?

We know already you think we are lying , but wait . We will decode the situation for you.

As we all know these things requires money but it can be fulfilled by the right investment approach.The mutual fund has its biggest importance if we see retirement as a long-term financial goal.

If you have invested Rs. 10,000 as a SIP till your retirement, starting at the age of 25. Find in below summary for the total amount you get at the age of retirement assuming 60 year with 15% compounded annual return. Your invested sum increases to 15 crores!!!

35_years_SIP_investment
35_years_SIP_investment

If we also take inflation into account on an average rate of 6% , the invested amount in the above case will still equate to 13.5 crores.

Now, suppose if you start investing at the age of 40, and assuming the same rate of return percentage. The return summary would be: The invested sum will increases to only 1.5 crores and inflation gets decreased it to 1.05 crores considering same rate of inflation as mentioned above.

20_years_SIP_investment
20_years_SIP_investment

So there is a massive difference of around 10 times return if you start investing at an early age. So start your mutual fund investment early to reap the more benefits and gift you a retirement of your dreams.

Conclusion:

These are some key points to consider to benefit from mutual funds. If you invest for a long time and with the goal-based approach and maintain the investment during down trends of market, certainly, Mutual funds will reap the benefits.

So don’t wait for the right time to invest in, start investing at an early age to get most rewards.

In the end, I can only say this… Mutual fund Sahi hai  !!!

 

Disclaimer: I have also invested in multiple mutual fund schemes based on my expertise and financial goals. You can connect with me on my social profiles or comments below for any suggestion regarding this topic. I am not an investment advisor or a mutual fund agent, I can only guide you all as our beloved reader.

 

Hope you like it!! Please try to share as much as possible.

Thanks & Regards.

Financial Freedom Enthusiast

Spend 6 years in learning Stocks & Mutual funds Investment. A traveler from soul, finance is passion, Investment is hobby.

4 thoughts on “Why mutual funds are good Investment?

  1. Hi Mayank Nice Article. Appreciate your hard work and a step towards spreading awareness for Investment. I would like to get in touch with.Request you to kindly share your email id.

  2. Wonderful Mayank appreciate your input and article on mutual funds. I would like to get in touch with you. Do let me know your mail id to get in touch would love to have a line of conversation with you.

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