In a busy world, the priority is often to career or profession. We keep running around all our life to attain professional satisfaction and accumulate material wealth. In that process, many of us excuse ourselves in managing our own money. As a result, just like an unattended garden, unattended investments get crowded with weeds and our portfolio deteriorates.
If the portfolio size is meaningful, probably you could engage a professional investment manager to manage your money. But this talent to manage money is mostly concentrated in metro cities. Hence, even if you could afford it, sometimes it becomes difficult to engage their services. And on many occasions, we confuse fund managers with our accountants.
That draws us to the need to find ‘someone’ to manage our money professionally. And mutual funds which are managed by highly qualified money managers fit the bill. Since mutual funds pool investors money and invest in various investment options like bonds, equities, alternate assets – as per pre-determined mandate — it becomes affordable and economical for vast majority of investors.
For an investment of Rs.10 lakh – the annual fund management cost is :
· Rs.7000/year or Rs.583 / month in a bond fund.
· Rs. 20,000/year or Rs.1667/month in an actively managed equity fund.
· Rs.10,000/year or Rs.833 / month in a passively managed equity fund.
And most of these fund managers come with rich education background like IIT/IIM and with rich experience of over 20 to 30 years. Engaging such a talent at these low cost is a blessing in disguise for every investor.
All MFs are not risky
It is a myth to assume all mutual funds to be risky. Many think that mutual funds invest only in the stock market. In reality, money is pooled from investors and invested in a pre-determined portfolio of securities. If the mandate is to invest in bonds, it is called as Bond Funds. If the mandate is to invest in equities, then they invest in the stock market. And if they invest in a mix of both equities and debt, it is called as hybrid funds. Within each of these broad categories, there are numerous varieties of funds – depending on the product mix in which they invest.
Hence, if an investor has got a shorter duration – the ideal choice would be to invest in short duration bond funds – preferably liquid funds or money market funds. These funds invest in a mix of government treasury bills called money securities. As a result, the risk is negligible in these funds.
On the other hand, if the investor has got a reasonable duration of say five years to seven years and is in his mid-40s or so, then he can invest in a mix of hybrid funds, asset allocation funds and equity funds. By doing so, the probability of generating an above-average return is high, of course with associated market risks. To minimize this risk, investors need to adopt suitable investment methods like SIP, STP etc.
Mutual funds in India are registered as trusts, whose mandate is to manage public money. And it is strictly monitored by SEBI – the watchdog for Indian securities markets. In India, there are 40+ mutual funds – each with dozens of funds. To choose the right funds, we need to understand the entire spectrum of funds. We will cover them comprehensively in the next article.