Not Yet Invested In Mutual Funds?

Mutual funds have proved to be an ideal investment option for investors the world over. In India, the popularity of mutual funds has been growing over the years, albeit at a very slow pace. There are a number of reasons why investors haven’t warmed up to the idea of investing in market-linked products offered by mutual funds. Over the years, investors have got used to investing in traditional investment options like fixed deposits, bonds and small savings schemes as they get guaranteed returns. While doing so they end up ignoring the need to earn positive real rate of return i.e. post-tax returns minus inflation. No wonder, most Indian investors struggle to make their long-term investments grow at a healthy rate.

If you are one of those investors who have stayed away from market-linked products, it’s time for you to rethink your investment strategy as these products have the potential to provide higher and tax-efficient returns. You must know that investing in mutual funds is not a risky proposition as is generally perceived by investors. No doubt, market-linked products have the tendency to be volatile from time to time. However, if you select the right fund in keeping with your risk profile and time horizon and follow a disciplined approach, the risk of volatility can turn into an opportunity and enhance overall returns.

It is also important for you to understand that mutual funds themselves are not risky as they are only a medium to invest in different asset classes. Therefore, to strike the right balance between risk and reward you must select the right asset class and then invest in funds that have a consistent long-term performance track record. In fact, being a diversified investment vehicle, mutual funds minimise the risk that you may face if you were to invest in individual securities on your own. Mutual fund managers are full time professionals who make investment decisions based on their own understanding and knowledge as well as that of the research team of the fund house.

It is a proven fact that mutual funds are an ideal investment vehicle for investors as they offer benefits such as professional fund management, variety of schemes, tax efficiency, flexibility, and transparency. However, many investors find it difficult to make the transition as they face certain dilemmas about mutual fund investing. Here are some of the dilemmas and how these can be tackled:

Can I take the risk of investing in mutual funds?

Though over the years mutual funds have expanded their product line to suit just about any and every type of investors’ needs, many investors still feel that mutual funds invest only in equities and hence are a risky proposition. The fact, however, is that mutual funds offer many options for conservative investors too. There are income funds, liquid funds, floating rate funds, capital protection funds, arbitrage funds and fixed maturity plans (FMPs). Therefore, it is wrong to think that mutual funds are meant only for those who can take risk.

Will my money be safe in mutual funds?

Investors often feel that it is much safer to invest in banks, insurance or bonds than in mutual funds. The fact, however, is that the mutual fund industry is a very well-regulated one and that should be a big comfort for them. The regulations governing the industry are well-defined and also the SEBI is doing a great job of monitoring and ensuring that the schemes are managed on a day-to-day basis in the interest of investors. Besides, there are trustees who have the responsibility of safeguarding mutual funds’ assets on behalf of the unit-holders.

One of the major benefits of investing in mutual funds is the wealth of information that they provide to existing as well as prospective investors. Taken together, the various reports provide investors with vital information regarding the financial status and the manner in which the fund is managed. To a new investor, all this information may seem overwhelming. However, regulations governing the industry have standardised the reports. Once one knows where to look for information, the location will hold true for all the funds.

Do I have enough money to start investing in mutual funds?

One of the hallmarks of mutual fund investing is that an investor doesn’t have to start investing with a large sum of money. Mutual funds are accessible to investors of varying income levels. One can begin investing through a Systematic Investment Plan (SIP) with as little as Rs 500 or Rs 1,000. However, one must invest in mutual funds with a defined time horizon to benefit from their true potential.

As is evident, mutual funds have a lot to offer to investors with varying risk profile, time horizon and investment goals.