MUTUAL FUND, IPO AND EQUITY SHARES

MUTUAL FUNDS – NOT AS COMPLICATED AS THEY SOUND

1.0 INTRODUCTION

Stock markets have been around for ages. What started as a tool for corporations to raise money for expansion, has become a full-time profession for many.

It also became a method for opportunistic investors who can foresee industry growth to make money by investing in thriving businesses without having anything to do with its operations.

Then came the traders, who started capitalizing on the short-term fluctuations by trading large volumes and started making quick money out of it.

The question that lingers in the mind of a first-time investor is, how should I operate in the stock market? Should I invest long-term, or should I do trading? Should I manage my portfolio myself, or get some professional help to do that?

How much money should I keep aside to invest every year? What should be the proportion of the equity shares in my overall investment portfolio?

2.0 WHO CAN INVEST IN MUTUAL FUND?

Let’s start by addressing an important question? How much time can you allocate daily/weekly to the stock market? If you’re trading, you’ll have to sit in front of the screen for the entire day.

If you’ve bought stocks for the long-term, you’ll have to keep track of the reports and news related to the companies whose shares you’ve purchased.

Do you have the scope for that? If not, then mutual funds are the right tool for you. Through Mutual Funds, you’ll invest in equity that gives higher returns than traditional deposits but, it’s hassle-free as a company manages your portfolio for you.

If you feel that equity investments are too risky, there are other options available.

3.0 WHY TO INVEST IN MUTUAL FUND?

Although conventional FDs and RDs remain the safest form of investment, the returns barely match the rate of inflation. These days just conserving the family wealth is not enough.

The college fee charged today will not be the same when your kids go to college. The cost of elderly healthcare today will not be the same 3-4 decades later. While it makes sense to keep some money in the conventional deposits as you can put it to use whenever needed, one has to look beyond those to create wealth.

Now, as mentioned above, if you can manage an equity portfolio yourself by studying the market, and have a knack for it, nothing like it. But if your work doesn’t give you enough space to manage your funds, that’s where you need mutual funds.

If you’re someone who has a high-risk appetite and expects high returns from their investments, equity funds are the best match for you. Experts consider them as the best suited mutual funds for young professionals who want to build a strong portfolio over a long period.

These are diversified equity funds that’ll invest your money proportionally in different sectors. You can go for either sector-specific funds where your investments will be limited to a specific industry.

Another option is index-specific funds where your investment gets bifurcated in the same proportion in shares that the index follows. You don’t need a fund manager for these funds and the returns mirror the returns given by that index.

If you don’t have the appetite for equity funds, you can go for fixed income funds that’ll invest your money in debt instruments or hybrid funds that’ll have a mix of both debt & equity. Consult a wealth manager to understand what fund suits your requirement the most.

4.0 TYPES OF MUTUAL FUNDS

4.1 Equity/Growth Funds

These are the most popular ones. They carry the highest risk amongst all kinds of mutual funds, but also give the highest returns. Suited for young professionals who want to build a strong portfolio over a long period.

There are diversified equity funds that’ll invest your money proportionally in different sectors. Then there are sector-specific funds that are comparatively high risk as they invest your money in companies belonging to the same industry.

Usually, people choose this fund when they’re sure about the growth prospects of a particular sector.

And then there are Index Funds wherein instead of diversifying your funds over a range of stocks or investing in a specific industry, you buy shares belonging a particular index following the same proportion that the index follows.

You don’t need a fund manager for these funds and the returns mirror the returns of the index.

4.2 Fixed Income Funds

These funds invest in instruments that promise a fixed income like Bonds, Debentures, Bank Certificates, Treasury Bills, Commercial Paper, etc. These funds are for people with low risk who’re looking for assured returns more than anything.

4.3 Hybrid Funds

As the name suggests, these funds are a mix of both: equity & debt. Your money gets invested proportionally in shares that have high return potential and debt instruments that assure lower but assured returns.

Suited for people who want to balance out the risk associated with equity with assured return on investment. The income potential is less than equity funds, but it’s perfect for those who don’t have the risk appetite of putting all of their money in shares.

Leave a Reply