Best Mutual funds to invest

“Mutual fund investments are subject to market risks. Please read the offer document carefully before investing.” You all would have probably heard this disclaimer at the end of Mutual fund advertisement. But rarely, someone try to understand what does it mean? Or rather people are not aware about this. 

Most of the time, Mutual funds are marketed as safe bet, who wish to invest in Stock market, as this is presented with a tag that mutual funds have expertise or the access to resources, which a common investor does not have.

But have you ever tried to answer below questions?

• Are all mutual funds being good?
• Are all investors making profit in mutual funds?
• Are all mutual funds being risk free?
• Can mutual funds give you good returns than market?

Today, we are going to find answers to these questions.  Mutual fund is pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments. Every Mutual fund has investment Objective, which describes what will they do with the collected money. Hence, before making investment in any mutual fund, please read the offer document carefully, which describe their objective. Let us now try to answer above questions.

Are all mutual funds being good?

Depends. As we explained, every mutual fund has investment objective. Its just like how we do our financial planning with a goal. Hence, we always have goal to achieve with the investment we do. For example: - Parents have objective to provide for their child’s education, their daughter’s marriage, their new car, their new home, steady monthly returns, capital appreciation etc. Therefore, before we choose any mutual fund, we must ensure for what reason or objective we are making this investment. One more important point to check before such investment is duration. How much time we will provide to this mutual fund to achieve our target. Taking the same example: Child’s higher education would be due after he completes his 18 years. Daughter’s marriage would be at 25 years later. New car could be in 1 year. New home could be in 5 years and steady returns with capital appreciation after 10 years. Hence, every objective have different timelines, therefore, before you make investment in any mutual fund, you have to make sure, you stay invested for that tenure. Mutual funds take time reap benefits. Hence, holding that mutual fund for long time is more important than choosing the right mutual fund.

Are all investors making profit in mutual funds?

Mutual fund is a long term bet and making investments regularly in mutual fund is more important. Most of the investors make investment in lump sum at time. They never know, if they are making investment at peak or at bottom of the stock market and no wonder, most of the time, it is at peak. Hence, when market starts to fall, they get fearful and this make them worried, eventually they sell their mutual fund at loss. Hence, instead of lump sum money, it is always better to invest in SIP manner (Systematic Investment plan) where investor decide specific amount monthly, for example 2 Or 3 thousand per month, which gets deducted every month and same is invested in mutual fund. With this strategy, small investors need not worry to time the market. As they keep investing at peak and bottom too, which average out their cost of mutual fund units and in longer term, their mutual fund portfolio turns positive.

Are all mutual funds being risk free?

It is a myth that mutual funds are risk free, as mutual fund eventually invest in stock market, which is risky, as it can go up and down. Therefore, mutual funds are not risk free. It involves certain amount of risk. Mutual fund manages this risk by diversification of their portfolio. They invest in more than 100 stocks. So, if one of them is not performing, it is compensated with the one which is performing. It should also be noted that Mutual funds do a in depth research before they buy stock. Small investors can manage their risk my making SIP in mutual funds. Investment involves risk, hence with diversification, risk can be managed. Therefore, doing SIP in mutual fund over a long period can be a good idea.

Can mutual funds give you good returns than market?

As an investor, we should first decide, how much return is considered as good return. To understand this, we have to compare current interest rate which is offered by Banks. Fixed deposits are always considered to be a safest investment option, where there is no volatility and we always know in advance, how much amount we will receive on maturity.  Say for example: Fixed deposit offer 7% p.a. interest rate and mutual fund provide 12% p.a., then investor should be happy with such returns, because if they would have invested in fixed deposit. They would have received 7% p.a. but for the risk that they took with their money, it yields them 5% more than fixed deposit. Therefore, always compare your percentage return (%) with Fixed deposit.  If you want to evaluate your mutual fund is performing good or not in mutual fund category, then you have check market return. Market return is nothing but % increase in Sensex and Nifty. In a year if Nifty has given 10 % return, then your mutual fund has outperformed market returns, but if it yields 8% return, then it can be considered as underperformance of the fund. If you wish to get returns equal to market return, then you can invest in index fund, which invest only in index stocks and yield returns as good as market.

Therefore, before investing in any mutual fund, always consider these points.

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Our next topic would be “Types of Mutual Funds”.