We have been seeing many advertisements of mutual funds, about their safety, their ease of use, etc., but have we really understood what a mutual fund does or how it operates? Mutual Funds are considered to be safer than most other forms of investments for a host of reasons. They are also comparatively easy to pick and invest in as compared to shares and other investments. The reasons are quite simple.
Mutual Funds are investment houses that focus exclusively on a certain industry or a set of companies. For example, a fund may focus exclusively on public limited companies operating in the IT space or the cement manufacturing space. They may choose companies according to their industry, their market capitalization, their size/ scale, the market they cater to, the technology that they use, etc. The Mutual Fund house will decide which companies it wants to invest in and will sell units of these to the general public. They will basically invest in these companies and hedge their bets that at least a majority of these companies will do well. They are primarily betting on the industry or the factor unifying these companies to do well.
Investing in one company is risky as a share as it may or may not do well, but when investing in an industry, predicting its future course is much easier. That is the reason why Mutual Funds are considered to be safer than shares. The shares of some companies may give you a lot of returns, over 100% in some cases, but that is due to the high amount of risk that is taken by you as an investor. The same share may also be devalued by a 100%.
Mutual funds are a safe bet when investors have a low risk appetite. Mutual Funds are known to give consistent returns over a period of time. Mutual Fund houses have Fund Managers who manage the total amount of funds that investors have lent them. The Fund Managers are the ones who do the industry research, do a deep dive analysis of all the companies and their board of directors that they invest in. The Fund Manager’s compensation is directly related to the fund’s performance. The major component of the Fund Manager’s salary is the bonus that is dependent on the growth of the Mutual Fund. It may based on the percentage growth achieved or on the value of each asset or unit.
Learning about Mutual Funds is in some ways similar to the share market. One needs to understand multiple industries and companies to invest and make money. Networking again is of a lot of help. Understanding the complex details of Mutual Funds is difficult and professional courses help a lot. BSE Institute Ltd has a detailed 4 day course that helps investors understand the intricate details of the Mutual Fund industry.
There are various types of Mutual Funds – open ended, close ended, interval funds, etc. Due to their complex nature, Mutual Funds are heavily scrutinized by the Securities & Exchanges Board of India (SEBI) and the Association of Mutual Funds of India (AMFI).
Mutual Funds are a safer bet than shares, but they too are subject to market fluctuations as the funds are finally investing in the shares of companies listed on bourses. History has shown that fund houses have helped investors multiply their investments at a steady rate and have helped them reduce their risks. Most investors who bet on the stock market swear by the formula “You win some, you lose some”, but Mutual Fund investors go by – “You always win”!