Asking this question, when investment in Equity Mutual Funds in 2017 far exceeded what was done during 2000-2016, may seem as irrelevant to many. And, the answer is obvious…‘Kyunki Mutual Fund Sahi Hai.’ And, it’s precisely this reason, mouthing the words from an advertisement campaign run by the industry that should worry us. Especially when the follow up campaign sounds like a qualifier…‘Lekin patience is required.’
This reminded me of the first and last Wealth Manager I met who sold me an ULIP and MFs way back in 2006 or should I say conned me into it. But, then one can’t blame the individual when the entire industry was scamming left, right and centre. And, the mistake is all mine because I had entered a market that has a huge sign-board, hidden in plain sight, that says ‘Caveat emptor-Buyers beware’, but I missed it. But never again, not me, not anyone I can reach.
Since starting MoneyWorks4me, 10 years ago, I am a committed investor in Direct Stocks. Before that I made all the mistakes Retail Investors make. The biggest mistake is not understanding the difference between ‘Putting your money into stocks and Mutual Funds’ versus ‘Investing in it.’ When you put in money, you also take it out and one does it with very little commitment. It’s still happening! It appears that every month about 3% of investors exit from a fund. This means in a short time most of the investors in a fund are new. More than 50% seem to hold a fund for less than 2 years, most seem to hold it for 1.5 to 2 years. Perhaps, they came into Mutual Funds for the wrong reasons, lured by high returns, influenced by very good marketing or a sales person, the ease of buying Mutual Funds, peer pressure, feeling they have missed the bus etc. These are not the reasons, ‘Why you should invest in MFs?’ So, first let’s understand, ‘What is a Mutual Fund?’and ‘How does it work?’
How do Mutual Funds work?
A Mutual Fund (MF) is an investment vehicle that pools money from many investors and invests in different assets like stocks, bonds etc. A MF is managed by a Fund Manager who is required to follow the mandate or the stated objective of the fund and of-course all statutory regulations.
So, Equity MFs invest in stocks and investing in an MF is an alternate route to investing in stocks. The most compelling reason for investing in stocks through MFs is that you don’t have a large amount to invest. You need to buy a min of 15-20 stocks to ensure you have a diversified portfolio, and hence, lower risk. You can’t buy this directly unless you have a reasonable amount of money say 5 -10 lacs. However, you can buy a well-diversified MF having even 50 stocks with as little as Rs. 500. So, MFs certainly make sense for Retail Investors with a small Investable Surplus. But, what if you have a large amount to invest, would you still invest in MF or prefer to invest in stocks directly? To answer this you need to answer the next question.
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